.jpeg)
Lex is flying its flag at half mast. We, among others, expected Nokia and especially Ericsson to benefit from the purging of Chinese rival Huawei from many western markets amid espionage allegations. This process began just as the 5G capex cycle took off.
For a time, the thesis held good. The 5G rollout was particularly strong in the US from 2019. And both Nokia and Ericsson gained market share. The stocks rose, too, although Ericsson trailed Nokia. This was partly the result of self-inflicted wounds, such as the fine it received from the US Department of Justice for violations of the Foreign Corrupt Practices Act.
What went awry? The cyclical improvement proved a blip in a market where pandemic disruption layered over long-term structural challenges. The 5G uplift has tailed off in the US. Ericsson’s network organic revenues from the US were down 60 per cent this quarter. Nokia’s sales in the region fell 45 per cent.
India, the world’s second-largest mobile market, is now rolling out 5G technology. That will not make up the shortfall.
Telephone operators — who buy equipment from Nokia and Ericsson — will struggle to increase prices even if the performance of their networks improves. Vodafone makes a return of just over 5 per cent on its capital. Its investors question whether it should pour any more money into its network.
After years of value destruction, operators are becoming more disciplined. Witness the slow rollout of 5G base stations in Europe, and the patchy upgrade of the core. For now, that does nothing for their suppliers.
There is still a long-term bull case for such Ericsson and Nokia. AI, cloud computing, fully automatic drones and self-driving cars will require a lot of data capacity. Networks require upgrading to cope. Equipment manufacturers will benefit.
But, for that to happen, the structure of the telecoms market needs to change. Investors should buy Nokia and Ericsson when phone company profits start turning up, but not before.