Telefonaktiebolaget LM Ericsson (NASDAQ: ERIC) recently signed its biggest deal thus far with an $8.3 billion agreement with Verizon Communications Inc. (NYSE: VZ). The agreement will see Ericsson provide 5G solutions to the US tech giant, helping it roll out the next generation of wireless networks.
The Ericsson, Verizon deal comes in the wake of the Swedish telecoms company facing headwinds from China in geopolitical tensions around 5G.
How the Huawei ban affects Ericsson
Sweden has given pressure from the US to ban rival Chinese companies like Huawei over security concerns. The ban entails giving a company with links to the Chinese regime access to critical national infrastructure. Former US Attorney General William Barr is even remembered for suggesting that the US take a running stake in Ericsson and Nokia (NYSE: NOK) to avert Huawei’s dominance.
Ericsson, however, pushed back on Sweden’s stance on China, keeping in mind that it historically contributes to about 10% of the group’s revenue. In addition, both its CEO and influential shareholder, Jacob Wallenberg – whose family has a stake in Nasdaq Inc (NASDAQ: NDAQ) and AstraZeneca plc (NASDAQ: AZN)- have been against the Swedish ban.
This can be attributed to the fact that China has threatened to retaliate against Huawei’s ban in Sweden in a tit-for-tat move. In a Chinese state media release from May, Beijing gave Sweden one last opportunity to reverse Huawei’s ban, contrary to which Ericsson would suffer in China’s next round of massive 5G build-out.
Ericsson’s second-quarterly earnings, released on Friday, displayed the level of pressure the group is facing in China. For the first time in three years, the group posted a quarterly decline as core profits and sales fell below analysts’ expectations.
Ericsson reported sales of $6.3 billion (54.9 billion Swedish Krona), a 1% decline from 2020 figured and significantly below market estimates of 57.3 billion Swedish Krona. Earnings before taxes and interest were SK5.8 billion, failing to hit the SK6billion expectations. However, net income attributable to shareholders was SK3.9billion, exceeding the SK3.6billion expectations.
China was evidently the critical drug, with sales falling by SK2.5 billion, which is more than half, in the three months preceding the end of June.
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