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As Nokia diversifies, Ericsson makes 5G inroads in China

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As Nokia diversifies, Ericsson makes 5G inroads in China

After a challenging few years in China, telecom-equipment maker Ericsson has overtaken rival Nokia Corp. in the country by striking 5G contracts with state-owned cell carriers.

The Swedish firm accounted for 10% of the 5G base stations purchased by carriers China Unicom (Hong Kong) Ltd. and China Telecom Corp. Ltd. in the latest round of tenders held in April, and over 11% of China Mobile Ltd.'s infrastructure buys. Ericsson's China revenue more than doubled sequentially in the second quarter of 2020 to €486 million.

Meanwhile, Nokia has previously said it may resist bidding for such contracts in China as high competition in the market means some deals could take years to reach profitability. The Finnish firm's China revenue has declined since 2016.

While Nokia appears to be making headway in China's data center market, and Ericsson in its 5G base station market, competition from domestic suppliers means gains are far from guaranteed, analysts told S&P Global Market Intelligence.

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Nokia in June announced deals with Tencent Holdings Ltd. and Baidu Inc., two of China's largest web companies, to provide data center interconnectivity, or DCI, infrastructure to help power their cloud services. Nokia said the deals "consolidated" its presence in China's webscale market, with its product now being used by 13 local web companies to host services ranging from online shopping and search to gaming platforms.

Ericsson's recent success in China is largely due to the strength of its wireless offering, including base stations and antennas, which form part of next-generation mobile network 5G.

Industry analysts suggest the Nordic firms may have received a boost from U.S.-imposed sanctions in May on Huawei, in particular its subsequent cut-off from key chip supplier Taiwan Semiconductor Manufacturing Co. Ltd. But they cautioned that competition would remain tough in both the 5G and optical data center networking segments.

"The impact on Huawei via the restrictions on TSMC cannot be understated," said Ryan Koontz, managing director and sell-side analyst responsible for cloud and networking sector coverage at Rosenblatt Securities. "It affects 80% to 90% of the cutting edge strategic products produced by Huawei."

TSMC's nanometer-chip designs are critical for reducing costs and the power consumption of the 5G kit, according to Koontz. In a cost-competitive industry, "these are not factors that customers will want to backtrack on," he said.

Having previously divested its optical and fiber-to-the-home units, Ericsson focused on its wireless business, analysts said. As Nokia struggled to source chips — forcing it to seek partnerships beyond its core supplier Intel Corp. — Ericsson took the lead in China this year courtesy of its robust 5G kit, according to Will Townsend, telecom analyst at tech research and advisory firm Moor Insights and Strategy.

"I believe Ericsson has a broader set of capabilities in AI, automation, and services," Townsend said.

Nokia, which has a more diverse business offering than Ericsson's, is facing additional competition from Huawei in the optical category, he added. Unlike its experienced Chinese peer, Nokia is an emerging optical DCI provider and will ultimately encounter stiff competition from incumbent vendors and alternative networking approaches, 451 Research analyst Mike Fratto wrote in a recent note.

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