Ericsson’s 5G march hits wall in China, stocks sink

STOCKHOLM, July 16 (Reuters) – Sweden’s Ericsson (ERICb.ST), caught in the midst of a geopolitical battle between Beijing and the West, said on Friday he was no longer relying on previously anticipated contract wins for 5G tenders in China, sending its shares down more than 8%.

The telecommunications company has previously warned that its operations in China could contravene Sweden’s decision to ban Chinese equipment giant Huawei (HWT.UL) and in the second quarter, its sales there fell by 2.5 billion Swedish kronor ($ 290 million), the first decline. in three years. .

When asked on an analyst call if Ericsson expected to get this money back, managing director Borje Ekholm replied: “No, he won’t be coming back.”

Ericsson currently generates just under 10% of its revenue in China and although the country is gearing up for the next massive 5G development cycle, CFO Carl Mellander told Reuters he was “cautious to forecast a significantly lower market share “in the future. .

European governments have tightened controls on Chinese companies building 5G networks following diplomatic pressure from Washington, which alleges Huawei equipment could be used by Beijing to spy. Huawei has repeatedly denied being a national security risk.

China is gearing up for the second phase of its 5G development and Mellander said tenders expected in the second quarter had not taken place.

The initial contract awards should be announced before the end of this month, according to two sources familiar with the matter.

CONTRAST WITH NOKIA

Ericsson’s austere outlook contrasted sharply with that of Nokia (NOKIA.HE), as well as Huawei, one of its main rivals in the race to upgrade global wireless systems to 5G.

The Finnish group, whose shares were up 0.5%, said this week it would likely raise its outlook for the full year due to a stronger-than-expected second quarter. Read more

Ericsson, which took a roughly 1 billion krone hit last year due to product inventory write-downs in China, wrote down another 300 million kroner in the second quarter.

He said the network’s sales were strong in most of its other markets, and it signed a five-year, $ 8.3 billion 5G contract with Verizon (VZ.N), its biggest deal.

But China’s drag meant the group’s revenue, at SEK 54.9 billion, missed analysts’ consensus forecast of $ 57.20 billion.

Core profits, up to SEK 5.8 billion from SEK 4.5 billion a year ago, also missed Refinitiv’s average forecast of SEK 6.01 billion.

The declines in China also hurt Ericsson’s struggling digital services business, which fell short of sales, gross margin and operating profit expectations.

“The investor base is likely to tire of networks that consistently carry the box for underperforming digital services,” wrote Sandeep Deshpande, head of the European technology team at JPMorgan, in a research note.

“… Questions will arise as to whether an overhaul of the digital services portfolio is necessary, especially since China could (also) remain a brake”, Sandeep Deshpande, head of the European Technology team at JPMorgan.

($ 1 = 8.6613 Swedish kronor)

Reporting by Supantha Mukherjee; additional reporting by Karin Strohecker in London; written by John Stonestreet

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