MTN Consulting warns of trouble in telco industry

Huawei’s legal troubles roil markets amid mixed 2019 outlook

Chandler, Arizona (USA), April 4, 2019 — MTN Consulting’s most recent analysis of network infrastructure (NI) spending in the telecommunications (telco) sector reveals a number of factors that may point to imminent trouble for the globe’s web of NI vendors, and the global economy, as well.

 SOME QUICK FACTS:

  • Telecommunications network operators (TNOs, or telcos) spend over $600 billion per year on publicly reported capital expenditures and network operating expenses. This spending supports a supply chain of hundreds of vendors across the globe. These network infrastructure companies provide a range of foundational products and services, such as equipment, software, hardware, services, and connectivity products such as fiber-optic cable.
  • Currently, the top vendor in 2018 global share terms is Huawei (22.4 percent), followed by Nokia (11.9 percent), Ericsson (9.5 percent), Cisco (6.7 percent), and ZTE (4.3 percent). Those Top Five companies have captured 55 percent of the global market. The next five places are held by ARRIS, NEC, CommScope, Amdocs, and Samsung.
  • Samsung and Hengtong were the most improved vendors for the year. Samsung’s share grew 0.5 percent to 1.9 percent on the back of early 5G spending, and China-based fiber optic cable supplier Hengtong’s share rose 0.3 percent to 1.5 percent due to overseas sales. Huawei and Ericsson both saw market share unchanged in 2018. Nokia’s share grew by 0.1 percent.
  • Network infrastructure vendor revenues to the telco vertical amounted to $198.3 billion in 2018 — up 1.2 percent from 2017. That growth is an improvement after a 1.4 percent decline in sales in 2017.

 THE BAD NEWS:

  • Despite network infrastructure vendor revenues rising overall in 2018 from 2017, growth weakened towards the end of the year. Vendors’ year-over-year sales growth was 2.5 percent in the first half of 2018, but growth dropped to zero (0.0 percent) in the second half of the year.
  • The outlook for 2019 is mixed. There is an upside from increased 5G spending, but recession warnings are growing. Recessions tend to hit telco revenues hard, often resulting in layoffs and a slower growth rate in 5G spending. In addition, partnerships would take longer to launch; mergers and acquisitions would accelerate; and new technology adoption rates would slow.
  • Huawei is another supply-chain concern. “Concerns have been building in many countries for years, both related to Huawei’s intellectual property practices (and alleged violations), and the Chinese vendor’s dependence on its home government,” writes Matt Walker, chief analyst at MTN Consulting, in a quarterly assessment of telco vendors. Huawei’s legal troubles, he notes, provides uncertainty for network operators, as the Chinese company dominates with 22.4 percent of the market’s revenue. This exceeds the combined share of the second and third ranked vendors, Nokia and Ericsson.

 THE GOOD NEWS:

  • Although telco revenues have been relatively stagnant for several years, the sector showed signs of recovery by growing 1.4 percent in 2017. Modest but positive growth continued into the first half of 2018. This good news is tempered by a second half revenue decline of approximately 2% YoY.
  • Telco network investments rose for the first three quarters of 2018, but a quiet fourth quarter left 2018 telco capex at $301B, just 1.3 percent higher than 2017. Legal tussles around Huawei explain some of the slowness in 4Q18, but recession fears also concern some operators with high debt loads. There remains plenty of room for capex to grow, however. The ratio of capex to revenues, or capital intensity, averaged to 16.4 percent in 2018, a relatively low level which has been sustained for several quarters. Many operators have been scrimping for years, so modest capex increases are manageable, which is a plus for vendors.
  • Telcos are continuing to cut staff, a trend which will likely increase outsourcing rates. That creates new opportunities for IT services providers (ITSPs) such as Accenture and TCS.
  • As they evolve to a slimmer workforce, telcos are increasing their investments in automation and technologies like software-defined networks/networks function virtualization (SDN/NFV). Many vendors are seeking growth in these areas.

 THE CONCLUSIONS:

  • Telcos currently spend nearly as much on their staff as they do on capital expenditures. So, minimizing staff costs with the help of vendors is a focus for many.
  • As part of their return to growth (and overall digital transformation), telcos need to move towards a more flexible network infrastructure and lower network opex. That will require operators to deploy new software-based technologies and disaggregated network elements, for instance. M&A can also lower the network cost base and will be pursued by many operators in 2019.
  • Mobile operators in advanced stages of 4G will need to leverage 5G to scale new IoT services. They will also have to adopt new business models, invest in content, and collaborate with OTT players to roll out differentiated services and enable a broader range of mobile apps. This journey won’t be easy. Operators would be foolish to deploy 5G in a rush if they are not satisfied with current vendor options.

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MTN Consulting is pleased to offer a quarterly, media-friendly report on the market share of network infrastructure vendors such as Huawei, Nokia, Ericsson, Cisco and ZTE — currently identified as the Top Five. MTN plans to examine those companies, along with over 80 other suppliers each quarter, to provide timely and useful “market share” reports to those media groups that might require it.

MTN Consulting prides itself on providing quality independent research and analysis. Our mission is to provide best-in-class data, insight, and strategic support to network operators and their suppliers. The company’s high level of expertise translates into a unique ability to satisfy customers’ research and analysis needs, saving them time, money and resources.

For media inquiries, please contact Matt Walker at matt@mtnconsulting.biz.

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