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Samsung must spend big on 5G kit, M&A to gain market share, say analysts

Samsung Electronics Co. Ltd.'s bid to become a leading 5G network equipment provider by 2020 could be at risk, according to analysts.

The South Korean firm said in 2018 that it aimed to take 20% of the global market for next-generation wireless equipment by 2020. At the end of 2019, Samsung had a 3% share of telecom equipment revenue. Huawei Technologies Co. Ltd. maintained its lead with 28% despite facing a number of obstacles including U.S. trade restrictions. The figures, from Dell'Oro Group, include older equipment such as 4G.

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Samsung needs to increase its research and development spending and make further acquisitions if it wants to reach its target and capitalize on a potential gap in the U.S. market left by Huawei, analysts said.

It may be too late for the firm in Europe. Finland's Nokia Corp. and Sweden's Ericsson are better placed to take on contracts that may otherwise have gone to Chinese suppliers, said Mark Cash, telecoms equity analyst at Morningstar.

As the first wave of 5G networks are being built on existing 4G infrastructure, carriers are generally expected to use the same suppliers as for their last rollout, analysts said. Nokia, Ericsson and Huawei led the rollout of 4G in Europe, said Edward Gubbins, principal analyst at GlobalData.

R&D spend

Samsung in 2018 pledged to invest $22 billion over the next three years in 5G, artificial intelligence and the internet of things. But most of the $16.51 billion it spent on research and development in 2019 likely went to consumer electronics and semiconductors, according to Jan-Peter Kleinhans, a 5G researcher at German think tank SNV. The two categories made up more than half of Samsung’s $192 billion in full-year 2019 revenue.

Pure networking firms Nokia and Ericsson each spent around $4 billion on R&D in 2019, which Samsung would need to outdo to make headway, Kleinhans said.

Investment could be focused on widening Samsung's range of network equipment, Gubbins said. Whereas Huawei, Nokia and Ericsson manufacture all the hardware a telecom operator needs in-house, Samsung uses third-party suppliers for parts of the network including backhaul, Gubbins said. Backhaul transports data from base stations — which receive radio signals — to subnetworks which in turn connect to devices.

Acquisitions

Samsung could also dip into its net cash reserves of $78.53 billion to acquire companies that can boost the software side of its networking operations, Kleinhans said.

This, in turn, would help its efforts to be active in Open Radio Access Networks, or openRAN, a fledgling technology standard for network hardware and software.

OpenRAN is widely viewed as more suited to smaller players and startups. Those involved in the tech include U.S.-based firms Altiostar Networks Inc., Mavenir Inc. and Parallel Wireless Inc., all of which stand to benefit from a recent bill establishing a $1 billion fund to support openRAN research and development. The measure would force operators to commit to transition to openRAN equipment within seven years if they want to be reimbursed for the cost of replacing kit from suppliers deemed a threat to national security, such as Huawei.

"With the right acquisitions, Samsung could step in as a replacement for Huawei," said Daryl Schoolar, analyst at Omdia, formerly Ovum.

The company's January 2020 purchase of U.S.-based network firm TeleWorld Solutions Inc. will help Samsung achieve its 5G goal, Schoolar said. But it needs to be careful not to duplicate its portfolio when making additional acquisitions, Schoolar added.

OpenRAN skeptics, including Attorney General William Barr, say it could take up to a decade to get the tech off the ground, while the U.S. is in need of a more immediate solution to replace Huawei. Barr suggested the U.S. invest in established 5G firms Nokia and Ericsson.

As of March 11, US$1 was equivalent to 1,187.10 South Korean won.