Nokia Left Out of China’s 5G RAN – Another Sign of Growing Polarity in the Global Ecosystem

Ed Gubbins – Principal Analyst

Summary Bullets:

• Nokia has been excluded from the latest wave of 5G RAN rollouts by major Chinese mobile operators

• Though Nokia has strategies to overcome this obstacle, the underlying trends of geographic polarization don’t bode well for the industry.

Reporting its Q1 2020 earnings today, Nokia acknowledged that it has essentially been shut out of the Chinese 5G RAN market – the largest such market in the world.

This news didn’t come as a shock to anyone who had seen recent reports that – despite a fresh deal to supply China Unicom with a 5G core platform – Nokia was not named as a supplier in the latest wave of 5G RAN contracts awarded by China’s three major mobile operators. As usual, these procurements went mostly to China’s two major equipment vendors, with Huawei earning the lion’s share, and ZTE’s much smaller share still towering over that awarded to Sweden-based Ericsson.

The news also wasn’t very surprising to anyone who has been paying attention to Nokia’s public comments on the subject of 5G RAN contracts in recent quarters. The vendor had been consistent in both predicting a challenging process and in maintaining that Nokia would be judicious – not just in China but broadly – in protecting its own profit margins. For example, on an earnings call late last year, Nokia’s CEO pointed out that although China represents more than 60% of the global RAN market in terms of base station units, the country’s share of global RAN revenue is more like 30%, and its share of global RAN profits is, in the medium term, “negligible.”

Recall that Samsung opted not to participate in China’s massive LTE rollouts, nor its 5G bids, despite its lofty ambitions to become a top-three RAN player. That decision looks wiser in light of this week’s developments.

It’s easy to speculate about the factors that may have influenced Chinese operators’ decisions regarding Nokia: tensions between China and other nations regarding 5G security, problems the vendor had with 5G RAN chip development in 2019, Nokia’s aforementioned determination to protect its margins, etc.

On a call with analysts Thursday morning, Nokia’s CEO said it could return to the Chinese 5G RAN market in the future. And in the meantime, the vendor remains committed to China, which contributed $1.8 billion euros to Nokia’s business in 2019, or about 8% of the company’s total net sales. Nokia’s new strategy in China will focus on three opportunities:

• Provide operators with fixed, IP routing & optical gear

• Provide large enterprises such as railways with a range of communications solutions

• Supply webscale companies, especially with optical solutions for data-center connectivity.

The fact that Nokia has been demonstrating growth and success in its enterprise vertical strategy in recent quarters bodes well for its new China strategy. In addition, being left out of China’s 5G market could allow Nokia to avoid the expense of building China’s requirements into its RAN portfolio. That could free up resources, allowing Nokia to be more competitive in other markets. At the same time, Nokia’s competitors, through their position in China, will benefit from greater global influence on how mobile technologies evolve, and while they may be saddled with investing in the fulfillment of China’s market requirements, they’ll also, as a result, be able to demonstrate to the world’s operators a broader set of capabilities, some of which may be applicable beyond China. In addition, it’s not clear what fate awaits Nokia’s Shanghai Bell Labs, a significant investment created in 2016 and owned jointly with investor China Huaxin.

On a broader level, it’s hard not to see this news in the context of a growing polarity in the global mobile telecom ecosystem, following the UK’s decision to limit the 5G footprints of Chinese vendors, the U.S. funding the replacement of China-sourced RAN gear in smaller, rural networks – and related developments. In the near term, this dynamic erodes market competition in ways that aren’t helpful to operators. It could add fuel to the growing movement to use open and virtual RAN architectures to foster greater competition. In the longer term, however, this trend toward greater separation between China and the West could lead to greater fragmentation in the technology itself, which could have much more far-reaching consequences than the closing of a single market to a single vendor.

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