Effectively banned from the network infrastructure market in the United States, Chinese vendors Huawei and ZTE have turned to Europe and are generating fierce competition, winning large contracts and blocking companies such as Ericsson and Nokia from entering their home market.
The $50 billion wireless telecom equipment business is basically divided between five companies: the European Alcatel-Lucent, Ericsson and Nokia, and the Chinese Huawei and ZTE. Together they control close to 90% of the market. Recently Nokia announced the purchase of Alcatel-Lucent, in an effort to stay in the game and get closer to Ericsson's market share.
Just a few months ago, during the Mobile World Congress 2016 in Barcelona, Ericsson was proud to showcase its leadership on 5G. Everyone was excited to see the first networks working, and collaboration between all players in the industry was celebrated. As Ericsson CTO Ulf Ewaldsson put it, "It is a little bit like Valentine's day in the United States, where everybody sends each other love cards." Now the situation has changed; the love letters have ended and the gloves are off.
Until recently the European share of the worldwide market was much bigger than its Asian competitors. According to figures released by the Wall Street Journal, the three European manufacturers accounted for 66% of the market in 2008, while Huawei and ZTE only had a combined 12%. More than 30% was divided between smaller competitors.
Seven years later the situation has shifted significantly. The total market value of wireless telecom equipment has shrunk about 10%, mostly due to increased competition and price wars. And the Chinese are winning those wars; their share has jumped to almost 40% of the total worldwide market, eating market share of all the competition. While Ericsson is still the biggest equipment manufacturer on the list, Huawei already surpassed Nokia to become the second biggest vendor in the world. Recently, Nokia announced an agreement with China Mobile for the construction of 30% of a new optical network to meet the future needs of subscribers on the world's largest 4G network. This new deal gives Nokia much needed breathing space, as they have been required to lower their margins in order to compete in both the Asian and European markets. Earlier this month, Nokia reported a net loss for the second quarter in a row, blaming tough competition.
How could this have happened? The Chinese takeover of the European market probably started back in 2012 when Huawei and ZTE were accused in a US Congressional report of spying for the Chinese government. At that time, the report argued that the two companies were selling rigged equipment to US companies, including government contractors, that was designed to send information on their networks back to Chinese government agencies. The report conclusions included a recommendation to the industry to avoid products from Huawei and ZTE: "U.S. network providers and systems developers are strongly encouraged to seek other vendors for their projects. Based on available classified and unclassified information, Huawei and ZTE cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States and to our systems."
The claim, supported by several US manufacturers such as Cisco and Intel, effectively banned Huawei and ZTE from the US market, at least in professional products -- both companies are again successfully selling their consumer products, especially smartphones, in the US market.
To compensate for that huge loss of market share both Huawei and ZTE focused on the European market and, according to industry experts, got a lot of "help" from the Chinese government.
What does that mean for the supply chain? Basically US carriers need to pay a premium price for their network infrastructure hardware as they can't access most of the offerings of Huawei and ZTE. That additional cost, and potential problems to timely access to some cutting edge technology, mean that their US customers will pay more --and already are-- for wireless services and the transition to 5G will take longer than in other markets.
At the same time the European Union had been trying to reclaim the world's leadership in mobile wireless technology, lost in the 3G and 4G technologies, and had been encouraging collaboration across the industry through the 5G Public Private Partnership (5GPPP), launched in 2013. American, Asian and European public and private organizations are part of the partnership.
As part of the deal to allow Huawei and ZTE to participate in the European 5GPPP, the Chinese government agreed in 2014 to give equal access to European manufacturers to their internal market. At the same time, the Chinese wanted the EU to drop the threat of import tariffs on gear made by Chinese vendors.
The EU is now arguing that those conditions have not been met. The EU Commission and other government officials complain that large credit lines provided by Chinese state banks to finance exports by Huawei and ZTE are effectively subsidizing their operations, allowing them to compete unfairly both at home and in foreign markets.
The situation has become critical and just recently Ericsson CEO Hans Vestberg was asked to resign after the company's last quarterly earnings report showed significantly less operating revenue. Nokia is not doing any better, and both companies are making a case to the European Commission that, if the situation continues, they won't be ready to deploy the infrastructure for the final phase of 5G trials expected to start in 2018.
What is clear in the industry, however, is that all these companies ultimately need each other to develop the 5G standard. None of them has the possibility to develop the 5G technologies alone, much less to supply the worldwide market. What is key is that they play by the rules, especially when bidding for large contracts.