Ericsson has a problem in China and the stock is down. Here is what you need to know.

Text size

Ericsson

has a big problem in China. Geopolitical tensions over 5G equipment have put the

Swedish Telecom

company under pressure in a key market, with a significant decline in Chinese activity in the second quarter of 2021 weighing on otherwise strong financial results.

The shares of the telecommunications equipment company, rival of

Nokia

and Huawei, fell more than 8% in Stockholm. from Ericsson

Nasdaq

-quoted shares have parallel to the decline of the American pre-market.

The comeback story. Ericsson found himself caught in the middle of a geopolitical feud between China and the West over the future of 5G networks.

His home country, Sweden, bowed to pressure from the United States and its allies to ban rival Huawei for national security reasons of giving a company linked to the Chinese regime access to infrastructure. critical technologies. Former United States Attorney General William Barr even suggested that the United States take majority stakes in

Nokia

and Ericsson to stop Huawei’s dominance.

But Ericsson pushed back Sweden’s position on China, which historically contributes around 10% of the group’s turnover. Its managing director and influential shareholder, Jacob Wallenberg, whose family also owns stakes in

AstraZeneca

and the Nasdaq — denounced the Swedish ban.

That’s because China has threatened to strike back at Ericsson in a tit-for-tat move over Sweden’s treatment of Huawei. In May, Chinese state media said Beijing would give Sweden one last chance to reverse the ban before Ericsson was hit in the next round of massive 5G development in China.

Read also : Trade in Nokia stock from Ericsson. Momentum can change.

What’s up. Ericsson on Friday recorded its first decline in quarterly revenues in at least three years, as sales and core earnings fell short of analysts’ expectations.

The group said total sales of SEK 54.9 billion ($ 6.3 billion), down 1% from 2020 levels and below market estimates of SEK 57.3 billion . Profit before interest and taxes was SK 5.8 billion, exceeding expectations by over SK 6 billion, while net profit attributable to shareholders of SK 3.9 billion exceeded expectations by SK 3.6 billion .

China was the critical drag, as sales fell by 2.5 billion Swedish kronor (more than half) in the three months leading up to the end of June. The losses were compounded by a SEK 0.5 billion depreciation linked to inventory and 5G equipment in China for contracts that did not materialize, Ericsson CFO Carl Mellander said. Barron.

“Where we are now is actually a state of uncertainty,” Mellander said, noting that a wave of contracts for the next stage of 5G rollout in China is expected to be announced as soon as this is over. month. “There is a risk here that we will see a continued decline in volumes in China. Our job is to compensate with other geographic areas.

The group’s chief financial officer noted that activity in Northeast Asia as a whole helped offset weakness in China, with organic growth of 1% from 2020 levels. Mellander further added cited an 8.3 billion dollar contract with

Verizon

—The biggest contract in Ericsson’s history, also announced on Friday — as proof of its commitment to the US market. Agreement will see Swedish company deliver 5G solutions to expand Verizon’s 5G deployment in the United States

More: JP Morgan turns bullish on Nokia. Prepare for the upgrade cycle.

Look forward. Ericsson said it was “prudent to forecast significantly lower market share in mainland China for digital networks and services.” This is an understatement. As long as Ericsson remains caught in the midst of geopolitical tensions between Sweden and China, investors shouldn’t be surprised to see the company continue to lose contracts and market share. Hopefully the group can escape wider retaliation against Sweden’s position in China.

On the bright side, Mellander said investors can expect equipment depreciation in the second quarter not to repeat itself in the third quarter.

While it is difficult to look past the problems in China, the situation looks good globally for Ericsson. With the exception of the Middle East and Africa, all of the group’s geographic areas are showing strong organic growth with increasing global demand for 5G.

Ericsson also said it expects the total radio access network (RAN) market to grow 10% in 2021, up from 3% previously. Of that amount, mainland China is expected to grow by 11%, growth Ericsson will certainly not miss.