ZTE leaving Ericsson, Nokia in its 5G dust

Chinese telecom giant’s stock price surging while European rivals’ shares plunging as the 5G gap between China and the West widens

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 has risen by 61% over the past year while rivals Ericsson and Nokia’s have dropped 30% and 22% respectively.

This surge-plunge comparison can be attributed to China’s greater commitment to building 5G base stations and its focus on the technology’s industrial application, of which China is the world-leading pioneer. 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 dependence on the consumer market in an inflationary and rising interest rate environment.

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

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

Both companies have been laying off workers and otherwise cutting costs in response to weak demand and excessive inventory, primarily 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 newly consolidated investments and changes in foreign exchange rates) and a 62% decline in operating profit (net of restructuring charges) in the three months to June.

Management said this 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% decline in operating profit in the three months to June.

Neither company expects much improvement in the second half and both are now hoping for recovery in 2024. India and Southeast Asia are bright spots in their otherwise generally dismal performance.

ZTE, on the other hand, reported a 28.5% year-on-year increase in operating profit on a 4.3% increase in sales in the first quarter of 2023. R&D spending was up, but the cost of goods sold was significantly reduced. As of this writing, ZTE had not yet announced second-quarter results.

At the Mobile World Congress held in Shanghai at the end of June, ZTE introduced its method of building “smart” automated factories connected with 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 works with hundreds of industrial companies on energy-saving, emission reduction, operational efficiency improvement through digital infrastructure and the construction of low-carbon supply chains. 

Last February, the company posted on its website an analysis of what is required 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 the core operation and improve efficiency.

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

Simplified operation and maintenance: To lower the barriers of 5G private network operation.

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

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

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

Last March, MIIT set a target of 2.9 million 5G base stations to be installed in China by the end of 2023. At the end of June, the total was 2.94 million – the target reached six months ahead of schedule with about 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 steadily increasing.

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 accomplished since October 2019, when the first 5G services were introduced.

China’s state-run Global Times reports that 5G industrial parks have been set up in Shanghai, Dalian and many other cities. The first 5G IoT industrial park in the 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 is pursuing the same strategy as ZTE but on a larger scale. It is not publicly traded so its performance cannot be assessed by stock price performance.

However, Asia Times has reported: “Huawei claims 6,000 contracts to build standalone 5G networks for Chinese businesses, vs. 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 vehicles and consumer electronics will provide nearly a quarter.

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

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

“With strong takeup of 5G among consumers, the focus of operators is now increasingly shifting to 5G for enterprises. 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, has seen its share price rise over 25% in the past year, supported by a 28.6% boost in operating profit on a 9.9% increase in sales in the fiscal year ended March 2023 and management’s guidance for higher sales and profits this year.

NEC management says, “The impact of 5G will be felt not only by consumers using 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 real-time processing of a series of actions possible based on linkage between cameras and robots, namely capturing minute defects in articles flowing on the production line with high-definition cameras, identifying their characteristics in real-time with an AI engine and picking up the 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 never abandoned manufacturing.

On the contrary, it has led the world in factory automation and is making a major contribution to China’s automation as its leading supplier of industrial robots and is now likewise equipping its factories with private 5G networks.

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