Can Ericsson Make Meaningful Progress In China’s 5G Market?

Ericsson (NASDAQ:ERIC), one of the largest network equipment manufacturers, has been turning around its business over the last several quarters, driven by a stabilizing radio access network equipment market and aggressive cost reductions. Now, the company is counting on next-generation 5G technology to drive growth after two years of revenue declines. While 5G deployments have started in earnest in the U.S., with other developed markets expected to begin commercial deployments shortly, it is likely that China will be one of the biggest drivers of 5G-related infrastructure spending. Major Chinese carriers are expected to begin commercial operations of 5G by 2019 or 2020, and the country is expected to represent more than half the 1.3 billion global subscribers on these next-generation networks by 2023, per research firm CCS Insight. In this note, we take a look at what Ericsson could do to address the Chinese market.

View our interactive dashboard analysis on what to expect from Ericsson over 2018.

Ericsson Working With Major Chinese Carriers On Field Trials

While Ericsson has long had a presence in the Chinese market, its market share has declined due to weaker LTE deployments in the country and also due to a lack of products tailored to the Chinese market. However, the company has been addressing these issues, focusing on the features and functionalities favored by the market, while also working with all three major Chinese carriers – China Mobile, China Unicom, and China Telecom – on 5G field trials.

While demand for 5G-related equipment is likely to be significant, the market could prove tricky for Western companies to navigate considering the strong competition from local behemoths Huawei and ZTE, who have been gaining market share while building a significant amount of intellectual property. For instance, on the R&D front, Huawei spent about $13.8 billion in 2017, while Ericsson spent just about $4.5 billion. Companies such as Huawei and ZTE have been increasing their share of patents underpinning the global standards. Meanwhile, the deteriorating relations between the West and China and the ongoing trade war between the U.S. and China could also cause some uncertainty for companies such as Ericsson. Carriers in the U.S. and Australia have been banned from buying Chinese 5G equipment, and the U.S. is reportedly persuading its allies to also stop using Chinese networking equipment. These developments could increase the risk that the Chinese government will retaliate with similar moves, reducing access to its own market while doubling down on procurement from homegrown players.

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