With 99% of the vendor market reporting, we can close the books on the second quarter. Vendor revenues in the telco network infrastructure (telco NI) market declined again on a year-over-year (YoY) basis, for the third straight quarter.
Huawei’s unusual first half report skewed the market upwards, to produce a global average decline of just 1% YoY. However, if you exclude Huawei, the rest of the telco NI market dropped by a steeper 5.4%. Removing both ZTE and Huawei would yield a telco NI decline of 6.4%.
The Chinese government’s decision to step on the 5G accelerator was the story of the quarter.
China’s 5G rollouts are also the main thing keeping Huawei afloat right now. The vendor has a huge embedded base of equipment across the globe, true, but large telcos in a wide range of developed and developing markets are turning away from the vendor as they make their 5G decisions. This is not a Trump issue, or a US-China trade war issue. Rather, since the arrest of Huawei’s CFO in December 2018, longstanding concerns about the company’s close links to the government have come out of the shadows. The Chinese government attempts to bully sovereign nations over their communications and national security policies have made things worse for Huawei, not helped. This has given a boost to its rivals across the board, and in the mobile RAN (radio access network) has spurred more telco interest in open RAN.
China’s 5G base station count surges in 2Q
Vendor revenues in the telco NI market have been flat for several years, hovering between $210 billion and $220 billion on an annualized (12 month rolling) basis. Telco spending—both capex and network opex—has followed a similar pattern of limited volatility. Network build cycles come and go at different times across the globe. Even with generational upgrades like 3G to 4G in the mobile RAN, the spending doesn’t happen all at once. China is the exception. Its telecom industry plays a big part in the government’s overall industrial policy, and all key operators are state-controlled through shareholding and other means. Hence, when the Chinese government decides to make a push, global market stats can be affected in a big way. That happened in the recent second quarter.
For all reporting vendors, telco NI revenues in 2Q20 amounted to $53.1 billion, down 1% from 2Q19. That’s an improvement from consecutive 5% declines in the fourth quarter of last year and the first quarter of this year. But the improvement is due mainly to Huawei and ZTE, whose telco NI revenues rose 16% and 11%, respectively, from 2Q19 (in USD terms). Their growth stems from a surge in 5G base station spending in China. The government wanted to establish perceived “leadership” in 5G, stimulate a sagging economy and help out national champion Huawei as its global fortunes sagged. Based on MIIT data, China had a total of 130,000 5G enabled base stations at year-end 2019, added 68,000 in 1Q20 and another 212,000 in 2Q20. That means about 75% of the newly built (or upgraded) 5G base stations in 1H20 were completed in the second quarter, in line with Huawei’s surge.
Relying exclusively on Chinese government (e.g. MIIT) stats in support of an argument is always risky. However, Ericsson also points to a 2Q20 surge in China 5G spend. Ericsson has pushed for a position in China’s 5G rollouts for many years, and that apparently hit in 2Q: China was 4% of Ericsson’s reported revenues in 1Q20, but 9% in 2Q20.
Strangely, China Comservice’s 1H20 report was a disappointment, with telco revenues down 12% YoY. The company points to delayed 5G decisions in China, strange given its big role in network construction projects. My conclusion is that Huawei and ZTE have been doing lots of turnkey 5G upgrades with services included, crowding out (for now) China Comservice.
The figure below illustrates telco NI vendor revenue growth rates over the last few quarters, with and without Huawei.
In the last decade, Huawei has diversified its revenue base across a wide range of global markets, but that may be coming to an end.
Winners and losers
Huawei is just one of over 100 vendors we track. The global telco NI market is spread across vendors of many stripes, some specializing in the telco market, and some in IT services or software across verticals. Products range from fiber optic cables to core routers to OSS/BSS software to digital transformation services. And 5G is only one of many areas attracting telco investment right now. Plenty of vendors other than Huawei had good quarters in 2Q20, despite COVID-19 (and in some cases, because of it). There were also lots of laggards.
Focusing on 2Q20 YoY revenue growth among the largest 20 of the 100+ vendors we track, the figure below highlights the winners and losers. The smallest of the 20 shown is Mastec ($557 million in 2Q20 telco sales), while the biggest is Huawei ($12.9 billion).
Winners in 2Q20 include:
• Intel’s YoY growth outpaced Huawei handily in the telco segment, due to strong demand for its 5G networking solutions, including its 10-nanometer SoC for 5G base stations
• Huawei and ZTE both surged due to 5G spending by Chinese telcos, whose capex in 1H20 totaled $24.2B, up 15% YoY.
• Hengtong and IBM both benefited from acquisitions, of Huawei Marine and RedHat, respectively; organically, Hengtong is pushing overseas via government-sponsored Belt and Road projects while IBM points to RedHat wins related to “modernizing applications” in new accounts
• Ciena saw a “favorable increase in bandwidth requirements” across its telco market, including growing adoption of its WaveLogic 5 800G solution
Vendors facing revenue erosion in 2Q20 include:
• Samsung’s 5G market in Korea has dropped off a cliff after initial rollouts; its recent win with Verizon and new prospects in Europe hold promise for 2H20 and beyond
• CommScope continues to struggle after its Arris acquisition despite good product diversity
• Nokia’s drop stems in part from its choice to stay away from China (smartly, in my opinion)
• Declines at China Comservice, Fiberhome, and Corning are all due in part to fiber network construction slowdowns stemming from COVID-19.
In addition to the top 20, a number of other vendors’ 2Q20 results are worth highlighting. On the winners side of the ledger: Dell Technologies/VMWare (up 28% YoY on rising tide of virtualization and telco cloud native work); Fujitsu and CTC Itochu (up 39% and 24%, respectively, on 5G base station rollouts in Japan); Infinera (up 12% on bandwidth growth and new opportunities arising from Huawei’s struggles).
Vendors who struggled in 2Q20 include Prysmian (down 25% YoY, due to “slowdown in telecom installations” related to COVID-19, especially in southern Europe); and Technicolor (down 14%, on weak video demand in EMEA and currency issues in Latin America).
Open RAN, clean networks, and a rising webscale sector
COVID-19 is not the only mega-trend impacting vendor results in the first half of this year.
The big three webscale/cloud providers —AWS, Azure, and GCP—continue to ramp up their efforts to sell into the telco market. Cash-strapped telcos are increasingly eager to work with them, for a mix of workload shifts, joint development of services and sales partnerships. Early deals seemed more aimed at workload shifts where the telco is essentially avoiding the expense of building out cloud and development capabilities by relying on the webscale partner. Recent deals are more in the nature of service partnerships, involving joint development and customization aimed at specific target verticals. In some cases, what these webscale players offer to telcos is competitive with the offerings of more traditional “vendors” in telco NI, but more often it replaces work that would otherwise be done internally.
Huawei’s ongoing troubles tie into two other big trends:
• Open RAN: with the market’s No. 1 mobile RAN vendor losing access to key components, telcos are concerned about their technology options. That is making them more open to alternative vendors and architectures. Samsung is getting a boost since it’s a full-service RAN vendor with its own component supply chain. More important than Samsung, telcos increasingly see open RAN as a viable solution to avoiding vendor lock-in and opening up their networks to new suppliers. Among big telcos, Vodafone, Telefonica, and others in Europe are on the leading edge of this, out of necessity: they relied too heavily on Huawei for 4G. From its unique greenfield position, Rakuten has illustrated how to build an open network from scratch using a best of breed approach. Jio is working to assemble a 5G solution as well, and pitching the approach to other telcos. Japanese vendors NEC and Fujitsu are positioned well to benefit from this trend.
• Clean networks: the concept of Chinese vendor-free networks is building momentum, under US leadership. This is not limited to the RAN. Huawei is also the number one optical transmission supplier globally, and top 2-3 in many other technology segments. A surprising number of telcos now see benefits from avoiding and/or slowly removing Chinese-built network components. One side effect of this will be a push by telcos’ lawyers for compensation: both for rip and replace costs, and to cover the (assumed) higher cost of building networks stemming from avoiding the Chinese players.
View on the second half market
Considering the steep GDP drops experienced by many countries in the first half of 2020, the telco market hasn’t performed that badly. MTN Consulting estimates that telco revenues and capex in the US fell by 2% and 9% YoY in 2Q20, for instance, relatively good results considering real GDP fell at an annual rate of 31.7% in the same period. Many of the changes in the economy in the first half benefited networks, though, with companies forced to spend on working from home (WFH) support. Telcos attempted to keep 5G and other network projects on track while also having to increase spending in suburbia as WFH exploded. Further, government stimulus packages and extended unemployment insurance provided at least some budget buffer to those hit hardest by COVID-19’s effects. In many countries – even the US, still stuck in the middle of the pandemic – there is no consensus on more government support. The second half of 2020 is increasingly looking like it may be worst than the first.
Ciena’s recent earnings report, which included July in its fiscal quarter, was notably pessimistic about 2H20 – noting a weak order picture in 2Q20 and projecting 3Q20 revenues of $800-840M (from $968M in 3Q19). It wasn’t the only one, though. CommScope, Intel, Dycom, and Mastec also all projected a weak second half. Intel noted a change in seasonality, predicting 2H would amount to 47% of CY20 revenues, down from the typical ~54%. These vendors are more exposed to the US than the average, and the US has dealt with COVID-19 by not dealing with it, in large part. But Europe and South America also face risks in 2H, even if just because of the interconnected nature of the global economy. Even China could see a tough 2H, as the initial 5G buildout surge fades and its local vendors struggle to keep their product pipelines moving amidst supply chain restrictions.
Compared to the cloud, the telco market is known for calm and stability, but lots of change is ahead.
[Note: this column is based upon a forthcoming publication from MTN Consulting, scheduled for mid-September: “Telecom’s biggest vendors – 2Q20 edition.”]
Matt Walker is the founder and Chief Analyst of MTN Consulting, LLC, an independent market research firm. He has over 20 years of experience in telecom industry analysis, consulting and research program management. Based in Asia for most of his career, Matt currently lives in Chandler, Arizona. He can be reached by email at [email protected]. Follow him @mattwtelecom, or LinkedIn
Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by Fierce staff. They do not represent the opinions of Fierce.