Ericsson/5G: tough call
The Swedish telecoms equipment maker has more in its favour than market opportunity
Ericsson’s moment has arrived. The Swedish telecoms equipment maker’s biggest rival — China’s Huawei — has been ejected from 5G networks across the globe. Under government orders carriers are ripping out kit made by Huawei and, in several countries, replacing it with Ericsson’s.
Second-quarter results reported on Friday suggest the company is up to the task. Bucking the trend set by most companies in a pandemic-ravaged quarter, the Swedish group lifted sales slightly to SKr55.6bn (£4.83bn) compared with a year ago. Operating income was up 3 per cent at SKr3.85bn. Investors cheered, sending the stock up by a tenth to its highest level in more than a decade.
The group has more in its favour than market opportunity. Without Huawei, the market for radio access networks — which connect devices to the core network — is virtually a duopoly for Ericsson and Nokia. Nokia has a new boss but the same morass of legacy issues — plus a wrong bet on the chips driving 5G technology. Samsung of South Korea commands a far smaller share. It is championing the as-yet untested virtualised RAN — off-the-shelf hardware with customised software.
More crowded, and profitable, is the core network. This has attracted new players as diverse as Oracle in the US and Rakuten, the Japanese group best known for its ecommerce business. Still, Ericsson has been steadily investing in R&D, to the tune of $4.25bn last year — 17 per cent of sales.
It is not a home run. Ericsson has filed just shy of 1,500 5G patent families according to iPlytics, by January 1. Patents are a crude measure, but that is half Huawei’s cache and behind both Samsung and Nokia.
More importantly, the future of 5G is far from assured. 5G has become a political fight and there is currently scant commercial appeal. Vodafone has called for the UK to can its spectrum auction. Carriers, obliged to spend more to rebuild networks face a lag on recouping costs given limited Internet of Things applications. Ericsson is in a better position than the market it is targeting.