Nokia, the second largest telecoms gear maker in the world, has faced an arduous time in the last two months, with the vendor making headlines for all the wrong reasons.
The Finnish company was frozen out of two 5G tenders valued at nearly $10 billion in China, the largest telecoms market in the world which is accelerating its 5G rollout as most other countries pare back deployments due to Covid-19 (coronavirus) restrictions.
Two weeks ago, the company refused to comment on reports it hired an investment bank to fend-off a hostile takeover. In early March, it also announced it would replace its long-serving CEO Rajeev Suri, while a month earlier it warned about its prospects for the year and was forced to deny reports of pending asset sales.
There has been much speculation about what company is behind the takeover rumours (with Cisco, Qualcomm and an unnamed private-equity company at the top of the list) and what specific issues an additional tie-up would address.
Remember, Nokia’s Networks business today is the result of a $16.6 billion acquisition of Alcatel-Lucent completed in November 2016, which came ten years after Lucent Technologies merged with Alcatel; the same year Nokia detailed plans for a networks joint venture with Siemens, which was formalised in 2007 and subsequently taken over by Nokia in 2013. It is perhaps surprising after joining together the assets and brains of four major network companies, Nokia is struggling to be competitive against its top rival Huawei (at least in China).
China accounted for just 6 per cent of Nokia’s total Q1 revenue, after declining 29 per cent year-on-year to €308 million.
Globally, Nokia held nearly a 16 per cent share of the world’s telecoms equipment market in 2019, behind Huawei’s 27.8 per cent and ahead of Ericsson’s 13.6 per cent, data from Dell’Oro Group showed.
Price vs policy
Some analysts believe Nokia wasn’t able to match the price points expected from China’s three mobile operators, while other insiders point to political influence on how the tenders were divided up.
Huawei and ZTE together won 87 per cent of both contracts, while Ericsson was awarded about 10 per cent.
In a Q3 2019 earnings call, Suri admitted the decision to use field programmable gate arrays rather than customer silicon, which offers less flexibility but lower cost SoC technology, in its early 5G products proved costly.
A deal with Marvell Technology in March to develop custom chipsets for its 5G radio products, is aimed at addressing that cost issue.
It also appears its omission from the China tenders did not come as a surprise to the vendor, since in early February the company said in its 2019 earnings call it excluded China from its outlook “given that pursuing market share in China presents significant profitability challenges and the region has some unique market dynamics”.
Peter Jarich, head of GSMA Intelligence, doubts Nokia had high expectations from the recent Chinese network tenders.
“Given the difficulties Huawei and ZTE are facing in some markets, it was natural to expect some added bias in their direction from domestic operators. That doesn’t mean their kit isn’t competitive, just the reality,” he explained.
Duncan Clark, founder and head of BDA China, a consultancy, agreed that given the mounting resistance to deploying Huawei infrastructure in markets such as Europe, it’s a predictable knee-jerk reaction for China to favour local vendors.
He noted there is a big gap in pricing between Western and Chinese vendors and in the ability of their respective governments to enable rapid rollouts.
“Sure, it’s hard for Ericsson, Nokia and Samsung to match pricing by Huawei. This in turn emboldens those in Europe and elsewhere seeking to exclude Chinese vendors.”
Daryl Schoolar, head of Omdia’s Intelligent Networks team, told Mobile World Live that, from his understanding, price was a big issue, adding “Nokia was unable to reach the price point the Chinese vendors wanted, and I certainly think it was related to the Q3 component problems Nokia has had”.
As for Ericsson, he said it obviously has the ability to compete on price in China without hurting margins (based on its financial releases).
While the two big recent China 5G tenders were on the mobile side, it’s important to remember Nokia has other strengths, particularly its fixed business.
Schoolar believes Nokia as a whole is not out of China as it offers other network elements, such as optical, IP, core and software.
“I assume Nokia also has some ongoing LTE work to be done. But 5G will be tough and that is the future growth area for mobile. I don’t know the full extent of the agreements, but maybe Nokia could come back and bid on 5G small cells and mmWave,” he noted.
Suri confirmed that point in its Q1 earnings call today (30 April), saying it would “remain a meaningful player in China” given its 4G installed base and prospects related to 5G in areas including fixed, IP routing and optical networks.
The CEO also made a point of saying it was “quite optimistic” on winning a part of China Unicom’s 5G core contract, with Reuters quoting him as saying “we are the only foreign supplier” for the deal. He added the company was taking a “prudent approach” to pursuit of market share in China.
But he went even further on a call with media, and is reported to have told journalists “a return to 5G radio at some point in the future is not out of the question, but our approach has consistently been prudent”.
The question, given the small slice of projects non-Chinese vendors are likely to be awarded, is how much future effort it wants to devote to bidding for massive and complex Chinese tenders (even if they are non-RAN deals), which also require time-consuming negotiations as well as plenty of testing.
Adding to the complexity, its business in China is conducted through Nokia Shanghai Bell, a joint venture created after the Alcatel-Lucent acquisition. Nokia and government-owned China Huaxin each control a 50 per cent interest in the company, which in 2019 posted a €47 million loss on revenue of €2 billion, down 20 per cent from the previous year.
Now looks to be the time for Nokia to hunt elsewhere for more lucrative business.
The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.