(Bloomberg Opinion) -- You’d think all the pressure on Huawei Technologies Co. would make life easier for archrivals Nokia Oyj and Ericsson AB. In some senses, things have got harder.
The U.S. has intensified criticism of Huawei over the past year, saying its network equipment is vulnerable to exploitation by Chinese state-sponsored actors. That’s led to various bans in Australia, New Zealand and Japan. Carriers in other countries are also starting to think twice about buying the company’s kit.
That creates opportunities for Nokia and Ericsson to swoop in – but at a cost. Concerns about how Nokia will cope with a price war add to existing worries about its profitability. The Finnish company insists that defending its margins is the right move, but it's getting harder to back that thesis as its profitability declines while Ericsson’s increases. The argument is made even more difficult after it posted an unexpected first-quarter loss on Thursday.
Ericsson is trying to steal business from the Chinese firm by offering its products more cheaply, and has warned that such efforts will weigh on profitability in the coming quarters. It hopes that such short-term sacrifices will be rewarded in the long term, as it paves the way to sell more lucrative products to the same customers at a later date.
That’s creating price competition for everyone. Though Nokia is adamant it’s not going to get dragged into a price war, it still says pressure is intensifying and it’s having to invest in order to secure the same long-term benefits.
One problem for Nokia is that it derives a greater share of revenue from hardware, so will feel more acutely than Ericsson any squeeze on profitability from discounting upfront installation costs.
Another is that its software offering, which should be higher margin, can be a tougher sell than Ericsson’s. For one thing, the latter's is simply a lot easier to use, according to Oddo BHF analyst Stephane Houri. It’s worrying that Nokia’s earnings report today showed the division posted a loss on an unadjusted basis.
True, sales of lower-priced Nokia gear can pave the way for further hardware purchases by the same clients. But its lagging position in software limits its ability to adopt the Ericsson playbook.
Chief Executive Officer Rajeev Suri is sticking to his full-year targets, and his insistence on defending short-term margins may yet be vindicated. The fact he had to defer 200 million euros of net revenue to later in the year has made bad news worse, but profit would still have missed estimates without this.
The shares’ reaction – a 10 percent decline – suggests investors’ confidence is waning. The opportunity presented by Huawei isn’t an easy one for it to exploit.
To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.
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