China’s top two vendors again grew their share of global telco capex in 2015. Huawei and ZTE both saw strong growth in sales to communications service providers (CSPs). Most other vendors saw telco revenues fall, as CSP capex dropped 5–10% globally in 2015 (final numbers pending). China’s vendors face some serious near-term obstacles, though: a slowing domestic market, regulatory barriers to selling in the US and Europe, and relatively weak exposure to non-telco network spending.
Huawei, Nokia, and Ericsson rule the (declining) telco market
Over the past decade, China’s telco-centric vendors have grown steadily while their western rivals have slimmed down and merged. There now is a top tier of three large vendors focused on CSPs: Huawei, Nokia, and Ericsson. Collectively they accounted for over $94bn in sales to telcos in 2015, or about 29% of industry capex. Cisco and ZTE are also important and often included as part of this first tier – Cisco more often, given its prominence in IP infrastructure markets.
In terms of growth, Huawei dominated in 2015: revenues to CSPs grew well over 20% to $38bn based on preliminary reports. ZTE’s CSP revenues increased even faster, up 32% to $12.5bn (also based on preliminary data). Both Nokia (including Alcatel-Lucent) and Ericsson saw reduced sales to telcos in 2015, down 3% and 12% respectively. Nokia, however, made significant strides in 2015, improving its net and operating margins, net debt, and free cash flow. Ericsson’s financial position didn’t make the same strides last year. However, Ericsson continues to use small acquisitions and R&D to grow sales to media and OTT/cloud providers and enterprises of various types. Cisco, Juniper, and IT services providers like IBM tend to already have strengths across these vertical markets.
After telecom’s top five, other significant suppliers in 2015 were services and software specialists (Accenture, Amdocs, IBM, Oracle, SAP), the top few packet/IP vendors (Adva, Ciena, Infinera, Juniper), connectivity vendors (CommScope), and fixed broadband suppliers (Adtran, Arris, Calix). Japan’s top vendors NEC and Fujitsu also did well in certain telco segments, including transmission (both) and IT services (Fujitsu). Across the globe, hundreds of additional vendors sell to telcos, most with a particular geographic or technology niche. Even with a weak capex climate, the absolute level of capex will remain well over $300bn for many years.
The Chinese vendor challenge
Despite their growth in telecom, Huawei and ZTE face some challenges in the next year or two. Among them:
- Slowing China capex: According to Ovum’s latest forecast, domestic Chinese telco capex will fall in 2016–17 by over 10% each year. Both vendors remain highly exposed to the China market, especially ZTE.
- US market opposition: The US Commerce Department recently put restrictions on companies exporting to ZTE, due to apparent violations of US law regarding technology transfers to Iran. Huawei is not involved, but – at the least – this case makes it less likely that either vendor will be selling network gear freely in the US anytime soon.
- Telco concentration: Both big Chinese vendors, especially Huawei, have made strides selling networks to enterprises and Internet companies. But revenues remain highly concentrated in the telco vertical, where capex fell last year and is likely to do the same in 2016–17.
What’s next for Chinese vendors? They certainly haven’t scaled down their growth aspirations; both hope to continue absorbing more of the global telco market. Their rivals have a bit of breathing room over the next one to two years to improve their positioning. Doing so, though, will require both big internal investments and at least some M&A.
“Vendors are making strides selling network solutions to non-telcos,” TE0006-001206 (March 2016)
“Capex jumped in 2015 for Europe’s top telcos, but caution still prevails,” TE0006-001205 (March 2016)
Telecoms Vendor Contract Database: March 2016, TE0006-001203 (March 2016)
“US telco capex flattens to just below $70bn in 2015,” TE0006-001181 (January 2016)
“Industry capex will grow again, and vendors need to be ready,” TE0006-001169 (December 2015)
OTT Communications Tracker: 3Q15, TE0003-000889 (December 2015)
Communications Provider Revenue & Capex Forecast: 2015–20, TE0006-001167 (December 2015)
Communications Service Provider (CSP) Revenue & Capex Tracker: 3Q15, TE0006-001172 (December 2015)
Global Data Center Analyzer: 3Q15, TE0017-000055 (September 2015)
“Telcos’ supply options expanding, even with vendor consolidation,” TE0006-001086 (June 2015)
Matt Walker, Principal Analyst, Intelligent Networks