Clearing the Static for Ericsson
Huawei is transmitting a welcome signal—one that goes far beyond China. The Chinese telecommunications-equipment supplier said Monday it aims to double the pace of sales growth at its network-gear business to 8% this year. That should be a good sign for other big vendors, such as Ericsson and Nokia, which in recent years have struggled to expand revenue at all. Part of the increase at Huawei is expected to come from China, where the company has a big role among wireless operators rolling out LTE services. Carriers' capital spending on wireless projects could rise by one-fifth this year, estimates Credit Suisse. That also is helpful for Ericsson and Nokia; Neither has much of a share of the 3G market in China but each has an 11% share of 4G contracts at China Mobile and 4% at China Telecom. The other bright spot is Europe, where Huawei's success prompted a price war in the mid-2000s. Vodafone's pledge to spend £8 billion ($13.3 billion) on its cellphone networks in Europe by March 2016—£3 billion more than initially planned—has spurred others into action. Telefónica plans to increase capital expenditure by up to 15% in 2014, while Deutsche Telekom is looking to spend an extra 5%. Budget increases don't always translate into like-for-like vendor sales. Over the past decade, telecom operators' capex grew 8% a year on average, far outpacing growth in equipment spending, notes Sanford C. Bernstein. Spending on wireless equipment expanded by just 3.6% a year, on average. But that covered a period when the first 3G networks were being installed, which meant covering costs for civil works, such as building cellphone towers. With many of those towers already up, equipment should take a bigger slice of spending budgets now. And Ericsson stands tall in the industry. Although Ericsson's grab for market share in Europe in recent years diluted profit margins. the company cemented its position as the biggest incumbent vendor. It now stands to get the largest share of high-margin work, such as capacity upgrades. Ericsson has a 35% share of the global telecom-equipment market compared with Huawei's 20% and Nokia Solutions and Networks' 15%, according to Berenberg. Yet, at one times forecast 2014 sales, Ericsson is valued at a 10% discount to Nokia. Discounts on profit multiples are even wider. As more operators fine-tune bigger spending plans, that gap should close.