ZTE leaves Ericsson, Nokia in its 5G dust

TOKYO – Despite campaigns and sanctions against Chinese-made 5G telecom equipment in the US, Europe, Australia, Japan and elsewhere, Chinese telecom giant ZTE’s share price rose 61% last year while rivals Ericsson and Nokia fell 30% and 22% respectively.

This comparative surge-plunge can be attributed to China’s greater commitment to building 5G base stations and its focus on the industrial application of the technology, where China is the world leader. ZTE is China’s second-ranking telecom equipment maker after Huawei.

Sweden’s Ericsson and Finland’s Nokia are paying a heavy price for their reliance on the consumer market in an inflationary and rising interest rate environment.

On July 14, Nokia shares fell 9.6%, the biggest drop in two years, and Ericsson fell 8.7% following the company’s disappointing sales and profit announcements for the second quarter and the rest of 2023.

It was the second sharp drop in shares of Europe’s two leading telecom equipment companies so far this year. The first was in April in response to weak first-quarter earnings.

Both companies are laying off workers and otherwise cutting costs in response to weak demand and excess inventory, mainly in North America. As a result, their customers – mostly telecom service providers – have been forced to cut prices and postpone 5G projects.

On July 14, Ericsson reported a 3% year-on-year increase in sales (-9% excluding new consolidated investments and changes in foreign exchange rates) and a 62% drop in operating profit (net of restructuring charges) in the three months to June.

Management said it was in line with their expectations. However, it was not in line with market expectations.

On July 20, Nokia reported a 3% year-on-year decline in sales and a 16% drop in operating profit in the three months to June.

Neither company expects a big improvement in the second half and both now expect to recover in 2024. India and Southeast Asia are bright spots in their usual underperformance.

A Nokia exhibition stand in Shanghai in September 2018. Photo: Asia Times Files / AFP / Song Fan / Imaginechina

ZTE, on the other hand, reported a 28.5% year-over-year increase in operating income with a 4.3% increase in sales in the first quarter of 2023. R&D spending increased, but the cost of goods sold decreased significantly. As of this writing, ZTE has yet to announce second quarter results.

At the Mobile World Congress held in Shanghai at the end of June, ZTE introduced its way of building “smart” automated factories connected to 5G industrial private networks.

Called “Industrial Field Network + ZTE Digital Nebula,” it includes centralized production and logistics control, energy management, environmental protection and security.

ZTE is working with hundreds of industrial companies on energy conservation, emission reduction, operational efficiency improvement through digital infrastructure and building low-carbon supply chains.

Last February, the company posted on its website an analysis of what it takes to take 5G industrial applications from supporting systems to core operations, namely:

Integration of cloud, network and applications: End customers need a one-stop solution that can solve real problems for core operations and improve efficiency.

Deterministic service assurance: The private network for core operation needs to provide very low latency and jitter, very high reliability and zero packet loss.

Simplified operation and maintenance: To lower the operational constraints of a 5G private network.

“Since the commercial launch of 5G, the application of 5G in vertical industries has developed rapidly, and many application cases with commercial feasibility have been incubated,” ZTE said on its website.

According to the Ministry of Industry and Information Technology of China [MIIT]more than 7,900 5G 2B private networks have been built in China by September 2022, and the impact of 5G empowerment has gradually appeared in many industries such as manufacturing, ports, mines and power grids.”

Product development has been accelerated and production efficiency has been significantly improved, the company says.

Last March, MIIT set a target of 2.9 million 5G base stations to be installed in China by the end of 2023. By the end of June, the total was 2.94 million – the target reached six months ahead of schedule with around 600,000 units installed in the first half of the year.

All urban areas of any significant size in China are now covered, with the breadth and depth of coverage continuing to increase.

China now has nearly 700 million 5G mobile phone subscribers and more than two billion IoT (Internet of Things) connections to industrial sensors and consumer electronics devices. This has been done since October 2019, when the first 5G services were introduced.

China’s state-run Global Times reported that 5G industrial parks have been set up in Shanghai, Dalian and many other cities. The first 5G IoT industrial park in Xinjiang Uighur Autonomous Region is scheduled to be completed this month.

In 2018, ZTE established its Global 5G Intelligent Manufacturing Base in Binjiang, a district of Hangzhou, to develop and set standards for the technology.

Huawei continues the same strategy as ZTE but on a larger scale. It is not publicly traded so its performance cannot be evaluated by stock price performance.

However, the Asia Times reported: “Huawei claims 6,000 contracts to build standalone 5G networks for Chinese businesses, compared to about three dozen in Europe and fewer than 10 in the US.”

Market researcher TrendForce estimates that, by 2026, industrial manufacturing, energy and utilities will account for half the value of the global 5G market. Smart cars and consumer electronics will account for nearly a quarter.

This plays directly to China’s strengths as a rapidly automating industrial economy with a strong position in automobiles and consumer electronics, and a huge need to use energy more efficiently.

GSMA, the global association of mobile network operators, reports that “Mainland China is the world’s largest 5G market, accounting for more than 60% of global 5G connections by the end of 2022.

“With strong uptake of 5G among consumers, operators’ focus is increasingly shifting to 5G for businesses. This offers opportunities to grow revenues beyond connectivity in adjacent areas such as cloud services – a segment where operators in China have recently made significant progress.”

TrendForce data, Asia Times chart

Japan is on a 5G track similar to China’s. NEC, Japan’s leading telecom equipment maker, saw its share price rise more than 25% last year, supported by a 28.6% increase in operating profit on a 9.9% increase in sales in the fiscal year ending March 2023 and management’s guidance for higher sales and profits this year.

NEC management said, “The impact of 5G will be felt not only by consumers who use mobile phones. The real impact will change the way manufacturers design their plants, the way autonomous vehicles travel more safely, and the way healthcare organizations deliver more advanced and safer treatments.”

In factories, “5G makes the real-time processing of a series of actions possible based on the connection between cameras and robots, especially capturing minute defects in articles flowing through the production line with high-definition cameras, determining their characteristics in real-time with an AI engine and capturing defective articles with a robot.”

NEC is transforming its own factories into 5G-enabled facilities, perfecting the technology and selling it to outside customers. Unlike the US, Japan has never neglected manufacturing.

On the contrary, it leads the world in factory automation and makes a significant contribution to China’s automation as its leading supplier of industrial robots and now also equips its factories with private 5G networks.

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