Ericsson Signs US$1.44-bil. GSM Expansion Deal with Chinese Mobile Operators

Under the framework agreement with China Mobile, Ericsson will be one of the main suppliers of core and radio network equipment, along with related technical support and services, to expand GSM/GPRS coverage and capacity in 19 regions across China. Ericsson will also provide power-saving features that significantly reduce energy consumption in mobile networks and contribute to reducing carbon-dioxide emissions. This follows the "Green Action Program", a Strategic Cooperation Memorandum previously signed between the two parties. Under the agreement with China Unicom, Ericsson will be the main supplier and help expand GSM networks in 10 regions across China, including Beijing, where Ericsson has previously not been a supplier. Ericsson will also supply multimedia solutions for WAP services to help provide attractive new multimedia services and applications. The expansion projects are set to be completed in 2008. Deliveries to both operators have already started.

Outlook and Implications

• Chinese Mobile Operators' Capex Plans: China Mobile and China Unicom together provide mobile services to about 550 million subscribers in China. The network expansion projects will allow both operators to increase their network coverage and capacity, generating revenue growth from expanded subscriber base and enriched data services and enhancing service quality and user experience. The capital expenditures of both operators have been on the rise over the past few years and the trend will continue into 2008. China Mobile expects its capital expenditure to reach around 127 billion renminbi (US$18 billion) in 2008, from 105.1 billion renminbi in 2007. China Unicom plans to lift capital spending to around 31 billion renminbi in 2008, from 25.7 billion renminbi in 2007 (see China: 16 October 2007: Alcatel-Lucent Signs Mobile Network Expansion Deals with China Mobile, Unicom, 22 June 2007: China Mobile Awards US$700-mil. GSM Contract to Huawei, 19 June 2007: China Unicom Selects Ericsson to Upgrade GSM Network in Six Provinces, 11 June 2007: Ericsson Wins US$1-bil. GSM Network Expansion Contract from China Mobile and 17 May 2007: Alcatel-Lucent to Supply Mobile Solutions to China Mobile, China Unicom).
• Ericsson's Competitive Position in China: The new framework agreements have further strengthened Ericsson's position as one of the leading mobile network equipment suppliers in the Chinese market, the largest single market for Ericsson in terms of sales. The Swedish vendor had last year signed a similar GSM expansion framework agreement with China Mobile, valued at about US$1 billion, and a contract with China Unicom to upgrade its GSM network across six provinces. Facing continued weakness in infrastructure spending by the Western European operators, Ericsson has worked hard to gain scale advantages through increased market share in the emerging markets such as China, India, Russia and Africa. However, tough operating margins in winning contracts in developing markets have negatively affected the vendor's profitability. For the year 2007, the vendor reported a 14% decline in its operating income, despite a 4% rise in sales.
• Uncertainty over China's 3G Road-Map: China will continue to be strategically important for Ericsson given the scale of the market. However, price competition in the Chinese network equipment market is further intensifying, particularly with the increased competition from the local telecoms equipment vendors. The country's 3G deployment plan, which could soon be announced by the Chinese government, will be particularly significant for the equipment vendors. Ericsson will be well positioned to win contracts for the deployment of W-CDMA/HSDPA. The Swedish vendor and other Western equipment vendors, however, will inevitably lose some market share to the local vendors, given that China's home-developed 3G TD-SCDMA will play a significant part in the 3G roll-out (see China: 27 March 2008: Where Next for China's Telecoms Industry?).

Find out more about Same-day Analysis