Ericsson in the second quarter experienced a sales dive in mainland China, where it’s bracing for a loss of market share as tensions between the vendor’s home market of Sweden and China appear to be having an impact.
Ericsson’s sales in mainland China were down about SEK 2.5 billion ($288 million) in Q2 2021, 60% lower than in Q2 2020. Declines in network revenues in China accounted for SEK 2 billion of that, while digital services revenues were SEK 500 million lower than the same quarter last year.
Speaking during Ericsson’s second quarter earnings presentation, CEO and President Börje Ekholm said the vendor doesn’t yet know the definite outcome of ongoing tenders in China but told investors “it’s prudent for you to already now plan for a significant reduction in market share, both in networks as well as digital services.”
The Q2 losses are not something Ericsson anticipates coming back, but that depends on how China awards its next round of contracts, which could be influenced by Sweden’s move to ban Chinese vendors from 5G networks. Ekholm did not explicitly blame declines in China on Sweden’s decision, but said the outcome on sales was clear.
“It’s very hard to say. We know the geopolitical tension with Sweden, we know what goes on there,” Ekholm said during the presentation. “So what we see here is a reduction in the China volumes and we can speculate and we can have hypotheses, but the consequence is very clear on our sales volume.”
Ericsson had already warned on multiple occasions of potential negative impacts to its business over Sweden’s earlier plan to exclude Chinese vendors like Huawei from the country’s 5G buildout. In May, it updated risk factors, particularly around the trade relationship between Sweden and China, citing increased risk of significantly less market share than Ericsson currently has.
In Q2 Ericsson wrote off SEK 300 million in its digital services business (which includes 5G core) related to precommercial product development for the Chinese market as it prepared to compete for contracts and capture 5G opportunities. According to Ekholm, trouble in China could hold up Ericsson’s goals for that business segment.
“We can see that the material loss in market share in China, mainland China, would lead to a delay in reaching the targets in digital services,” Ekholm said. The timeline to reach break-even for digital services would also be pushed out, and lower volume would lead to a limited loss in the segment in 2022.
China accounted for 5.4% of Ericsson’s digital services sales in 2020.
Ericsson is making R&D investments in its cloud-native 5G portfolio but said it will take a year or two before digital services R&D product developments are converted into revenues.
In Q2 digital services brought in SEK 7.9 billion (an 8% drop year over year) on total net sales of SEK 54.9 billion.
The segment did see double-digit growth in North America and Europe, and Ekholm said it expects over time to compensate for digital services decreases in China with wins in other markets.
Ericsson also saw Intellectual Property Rights (IPR) revenue decline about SEK 500 million, to SEK 2.3 billion. However, in May it had success in resolving an IPR licensing spat and renegotiated with Samsung.
Networks see sales boost
Despite those declines, Ericsson reported organic sales growth of 8% in Q2, including 11% organic sales growth in its network business.
The networks unit makes up the lion’s share of Ericsson’s business, with SEK 39.9 billion in net sales accounting for 73% of total sales in the most recent quarter. The vendor said increases were driven by growth in Europe and Latin America, South East Asia, India and Oceania, as well as North East Asia (excluding China).
In the U.S. Ericsson just scored a huge win, today announcing a five-year $8.3 billion network deal with Verizon. Ekholm said the contract is the largest in Ericsson’s history. North America made up 33% of group sales, reporting SEK 18 billion in Q2.
“We see the North American market moving very fast with a strong demand for 5G and it will be a key opportunity now as the operators are building out mid-band spectrum that will be lit up at the end of the year,” Ekholm said.
In terms geopolitics impact on overall market share, the chief executive said it’s very difficult to separate the two but that Ericsson is seeing wins both in markets where all vendors are allowed to participate, as well as those that are only allowing Western suppliers.
“Our overall market share gain, sure part will be contributed to geopolitical situation,” Ekholm said. “But I would also say here, it’s the strength of our product portfolio that allows us to be truly competitive against any competitor right now.”
Dell’Oro Group on Friday published a new forecast for cumulative worldwide radio access network (RAN) sales, projecting 5G NR revenues between $150 billion to $200 billion by 2025 to meet a surging demand for 5G.
“Even with the market surprising on the upside, we believe that there is room for expansion over the near term as the early adopters continue to roll out 5G at an extraordinary pace, resulting in a more upbeat 5-year outlook relative to our last forecast,” said Stefan Pongratz, Dell’Oro VP and analyst, in a statement.