You might say Ericsson has a big problem in China, but that would be putting it nicely.
The company’s fears of becoming a geopolitical football have largely come true.
Global tensions over 5G equipment have put the Swedish telecom company under pressure in a key market, with a significant decline in Chinese business in the second quarter of 2021 weighing down otherwise strong financial results.
Shares in the telecom equipment giant — a rival to the likes of Nokia and Huawei — fell more than 8% in Stockholm, Barron’s reported.
Ericsson’s Nasdaq -listed shares paralleled declines in the US premarket.
Ericsson, the world’s second-largest cellular-equipment maker behind China’s Huawei, has benefited in much of the world from US-Chinese tensions over technology.
Washington and several of its allies have restricted use of Huawei’s equipment in their respective countries, while sales elsewhere were buoyed by rising demand for 5G equipment, the report said.
But in China, it said it now expects to pay the price of its home government’s decision, which it made last October, to ban Huawei gear from its networks.
Sweden, has bowed to pressure from the US and allies to ban rival Huawei over national security concerns that center on giving a company with ties to the Chinese regime access to critical technology infrastructure.
The US and its allies worry Huawei gear can be used to spy on or disrupt networks on behalf of Beijing, the report said.
Huawei and Beijing have said that worry is unfounded.
Former US Attorney General William Barr even suggested that the US take controlling stakes in Nokia and Ericsson to stop Huawei’s dominance.
No evidence has ever been provided by US intelligence agencies, or the Five Eyes intelligence group to prove the spying allegations.
Chinese officials have threatened to retaliate by punishing Swedish companies doing business in China. They specified Ericsson as a potential target.
Meanwhile, Ericsson lobbied Sweden’s government to reconsider its ban.
Ericsson President and CEO Börje Ekholm has warned repeatedly during quarterly conference calls that excluding Chinese vendors, namely Huawei but ZTE as well, is bad for competition, the report said.
Reports also surfaced earlier this year that Ekholm lobbied Swedish Foreign Trade Minister Anna Hallberg for help in reviewing an order by the Swedish Post and Telecom Authority that operators must remove Huawei and ZTE from existing infrastructure used for 5G by January 2025.
The Wallenberg family, big investors in Ericsson and other Swedish blue-chips, have also criticized the decision amid worries that the fallout from the ban could spread to other sectors.
So far, those impassioned please have fallen on empty ears, ending with a ruling from a Swedish court in June, upholding a ban on using Huawei equipment in the nation’s fifth-gen networks, the report said.
The regulator approved four companies to participate in 5G-spectrum auctions but told them that Huawei and ZTE products couldn’t be used in new installations.
Huawei has appealed the decision in court.
Meanwhile, Ericsson posted its first decline in quarterly revenue in at least three years on Friday as sales and core earnings fell short of analyst expectations.
The group reported total sales of 54.9 billion Swedish krona (US$6.3 billion), a 1% decline from 2020 levels and below market estimates of SK 57.3 billion.
Earnings before interest and taxes was SK 5.8 billion, missing expectations of closer to SK 6 billion, while net income attributable to shareholders of SK 3.9 billion beat out expectations of SK 3.6 billion.
China was the critical drag, as sales fell by SK 2.5 billion — more than half — in the three months to the end of June.
Losses were compounded by a SK 0.5 billion write-down linked to inventory and 5G equipment in China for contracts that failed to materialize, Ericsson’s chief financial officer, Carl Mellander, told Barron’s.
“Where we are now is actually a state of uncertainty,” Mellander said, noting that a wave of contracts for the next stage in China’s 5G rollout is set to be announced as early as the end of this month.
“There is a risk here that we will see an ongoing lower volume in China. Our job then is to compensate with other geographies.”
The group’s finance chief noted that the northeast Asian business as a whole helped compensate for weakness in China, growing organically by 1% from 2020 levels.
Mellander further cited a US$8.3 billion contract with Verizon — the largest deal in Ericsson’s history, also announced Friday — as evidence of its commitment to the American market.
Looking ahead, as long as Ericsson remains caught in the middle of geopolitical tensions between Sweden and China, investors shouldn’t be surprised to see the company keep losing contracts, and market share.
While it’s difficult to look past the problems in China, the picture looks good globally for Ericsson. With the exception of the Middle East and Africa, all of the group’s geographies posted strong organic growth as worldwide demand for 5G increased.
“Networks sales grew organically by 11%, despite lower volumes from delayed 5G deployment in Mainland China,” said Ericsson CEO Ekholm.
“This growth reflects the continued high activity levels in most markets. The North East Asia market outside Mainland China saw strong growth in 5G volumes.”
Analysts fear that this is some of the strongest evidence yet of the full Balkanization taking place in the telecoms and broader tech industry.
China and the US are in a race to become as autonomous as possible when it comes to technology and manufacturing and everyone else is collateral damage.
That’s bad news for globalization, the free market and progress.
Sources: Barron’s, The Wall Street Journal, Telecoms.com, FierceWireless.com, Financial Times, MarketWatch, Reuters