As Huawei Retreats in Europe, Ericsson Expands in China--Heard on the Street
17 Juli 2020 - 3:57PM
Dow Jones News
By Stephen Wilmot
Washington's war on Huawei eventually seems bound to help the
Chinese giant's leading Western rival, Ericsson. But it hasn't yet,
leaving the Swedish company dependent for 5G-equipment sales on --
of all places -- China.
Ericsson's shares jumped 11% Friday morning after it posted
second-quarter results, but this had more to do with modest
expectations than stellar growth. Sales were flat at constant
currencies, though the gross margin on those sales -- a closely
watched measure of pricing power in a market dominated by Chinese
competition -- rose slightly from a year earlier.
Thanks to its investments in technology, Ericsson's core
networks business, which sells equipment for mobile towers, has
been steadily recovering from the crisis days of 2016, when the
company ousted its chief executive and issued a big profit warning.
But the long-awaited bonanza of 5G spending has yet to materialize.
The same goes for the anticipated geopolitical dividend as Huawei's
global advance is reversed.
One of the places where 5G investments are getting under way is
China. This spring Ericsson won big contracts for a rollout with
China Telecom, China Mobile and China Unicom -- the country's "big
three" state-owned carriers. These boosted its second-quarter sales
but weighed on profits: Contracts tend to involve an upfront margin
hit, and Chinese operators were able to get a particularly good
deal given their scale and early adoption of 5G. Ericsson calls the
Chinese market "strategic."
Only this week, the U.K. moved to ban Huawei from its network
completely, reversing an earlier compromise to allow its equipment
in areas deemed less sensitive. But Ericsson's bet on China at a
time when its home region is moving to push Huawei out isn't as
crazy as it sounds. China has an interest in keeping an eye on
Western 5G technology, and Ericsson's contract wins only give it a
small slice of the market, which is otherwise dominated by Huawei
and ZTE.
The most notable aspect of this year's Chinese contract bidding
was the failure of Ericsson's European rival Nokia to win any. The
Finnish company, which changed chief executives earlier this year,
seems to have fallen behind technologically. This has been a much
more important driver of Ericsson's recovery over the past three
years than Washington's warnings about Huawei.
So far, the Huawei saga has mainly held back network investment
as operators have waited for clear rules before splurging vast sums
on new gear. Yet the U.K. delivered greater clarity this week, and
other U.S. allies may follow. The European Union talks a lot these
days about "digitalization" and "strategic autonomy," which would
appear to favor Ericsson in a speedier European 5G rollout. The
company's "digital services" unit that develops software to run
networks -- a particularly sensitive area -- may benefit even more
than the networks business itself.
Investors seem reluctant to give Ericsson much credit for these
likely gains before they actually hit the accounts, perhaps because
of the industry's poor record of delivering shareholder returns
over the past decade. Even after Friday's jump, Ericsson's
enterprise value is less than 12 times prospective operating
profits, compared with 22 times for the wider European technology
sector, which has surged during the Covid crisis.
5G may be fast, but building mobile networks isn't. The rollout
of the new network technology will play out over years rather than
months, but for investors with patience, Ericsson is still a
likely, and inexpensively priced, winner.
Write to Stephen Wilmot at stephen.wilmot@wsj.com
(END) Dow Jones Newswires
July 17, 2020 09:42 ET (13:42 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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