Ericsson’s 5G plans hit a snag in China, sales drop after 3 years

Cellular equipment maker Ericsson’s shares fell more than 10% on Friday after it said that it couldn’t rely on previously anticipated contract wins for 5G tenders in China. The company reported a 1.1.% drop in sales to $6.33 billion after sales in mainland China fell by 288 million. The reported drop in sales was the first one in three years. 

In the company statement, CEO Borje Ekholm said, "It is prudent to forecast a materially lower market share in Mainland China for networks and digital services as the earlier decision to exclude Chinese vendors from the Swedish 5G networks might influence market share awards." 

The Sweden-based company is the second-largest cellular equipment maker after Huawei Technologies and has largely benefited from the US-China trade war. Sweden decided to ban Huawei from its 5G wireless networks.

 

Ericsson has asked Stockholm to reconsider the ban. Ericsson believes the fall in sales was due to China’s retaliation to this decision by postponing the deployment of 5G networks. In 2020, Huawei accounted for about half of China’s 5G equipment orders while Ericsson could only grab 12% of the orders.

The U.S. and its allies have restricted the use of Huawei’s equipment citing security concerns, stating that Huawei gear can be used to spy on or disrupt networks on behalf of China.

With the demand for 5G equipment rising, Ericsson witnessed a hike in sales in most regions except China, which has threatened to retaliate by banning Ericsson from its 5G rollout, reported Wall Street Journal. The company also witnessed a decline in net sales in the Middle East and Africa due to lower 5G investments in the Middle East and uncertain macroeconomic conditions in Africa.

The report mentioned that Ericsson gets almost 8% of its annual revenue from China. It won major 5G contracts with Chinese government-owned wireless carriers in 2020. This year Ericsson executives privately expect to lose most of the coming round of Chinese 5G equipment contracts to Nokia because of the Swedish ban, stated the report.

The decline in sales in China affected Ericsson's struggling digital services business, which missed expectations on sales, gross profit, and operating profit. Apart from that it also witnessed a fall in revenues from intellectual property rights from $322.8 million in 2020 to $265.2 million in Q2.

The geopolitical tensions between Beijing and Washington have majorly affected tech companies as, both the Trump and Biden administrations have called on the U.S. allies to join to ban Chinese technology, particularly Huawei.

At 2:21 PM, Ericsson’s shares had fallen 10.38%, trading at $11.88 apiece.

(With inputs from Wall Street Journal)

Picture Credits: Financial Times