Category Archives: Financial Performance

Ericsson and Nokia are nearer to the endgame in China

Börje Ekholm does poker face with masterful Swedish inscrutability, but the Ericsson boss could have treated himself to a telling smile in 2020 when his company reportedly scooped more than $1 billion worth of 5G contracts in China. There may have been some bonus schadenfreude at the misfortunes of Finnish rival Nokia, denied any winnings by a 5G hand then stacked with bum technology cards. 

The tables turned during round two last year when Nokia enjoyed a mini revival and Ericsson was punished for its government’s decision to ban Huawei and ZTE, two Chinese vendors, from Sweden’s 5G market. Yet both Nordic vendors are on a downward Chinese spiral. 

Ericsson’s sales to Chinese customers tumbled from 18.7 billion Swedish kronor (US$1.7 billion) in 2020 to about SEK10.1 billion ($900 million) last year as it complained about a loss of market share. Nokia made €1.5 billion ($1.5 billion) in revenues from Chinese business last year, up from less than €1.4 billion ($1.4 billion) in 2020. But sales have fallen from nearly €2.7 billion ($2.7 billion) in 2016, when Nokia completed its €15.6 billion ($15.4 billion) takeover of Alcatel-Lucent. And the prognosis is gloomy.

Both companies are feeling the impact of the technology war being fought by China and the West, one that is likely to result in dual ecosystems for the products the Nordic vendors make and sell. The latest US salvo involves tougher restrictions on the sale of chips and semiconductor technologies to China. While the emphasis this time is on factory equipment, much of which is provided by US companies or has US origins, experts think there is more to come. 

“I would not be surprised to see the scope of limitations in terms of chip sales into China being expanded as has happened in capital equipment,” said Richard Windsor, an analyst with Radio Free Mobile who previously worked for Nomura Securities, in a blog. “Anyone who sells silicon chips, equipment or software for making chips to China needs to be thinking about contingency plans.” 

This would include both Nordic vendors. A massive chunk of Ericsson’s R&D spending – which last year came to more than SEK42 billion ($3.8 billion) – goes into Ericsson Silicon, an in-house division that makes chips for radio units and baseband computing. Nokia designs the same types of chips in partnership with US semiconductor manufacturers including Broadcom, Intel and Marvell. 

Pekka Lundmark, Nokia’s CEO, believes the direct impact of the latest US sanctions on his company is small. But he is still weighing the knock-on effects. “There could be a longer-term indirect impact that could affect the competitiveness of different players,” he told Light Reading. “It is too early to get into details as to what those effects would be.” Over at Ericsson, Fredrik Jejdling, the head of the networks business that accounts for more than 70% of sales, sounds equally unsure about the ramifications of the latest rules. 

The death of globalization

But the technology conflict is not just about semiconductor embargoes and the blacklisting of specific companies. There have even been signs countries may ban access to components made in a certain country, or insist products sold within national borders are also manufactured inside them, according to Dexter Thillien, an analyst with the Economist Intelligence Unit. “Fragmentation is here to stay,” he said at Network X, a show held in Amsterdam last week. “We are not going back to a globalized world.” 

Ericsson started building dual ecosystems when the US first began to clamp down on ZTE, which stood accused of selling US componentry to Iran. “We need to be proactive in the way we build resiliency in our supply chain, end to end,” said Jejdling. “That doesn’t take away the importance of China, but it is also a realization of the geopolitical environment we are in.” Ericsson’s moves include setting up a highly automated facility in Lewisville, Texas, to make all the equipment it sells to US customers. 

Nokia has also been drawing attention to the “resilience” of its supply chain. Its last annual report included a breakdown of manufacturing by location (29% of it is in China, it said). But the incentive for both Nordic vendors to keep using China as the workshop of the world is weaker than ever.

Besides the decline they have seen in China sales, and Western nervousness about procuring equipment made in China, automation and the emergence of a growing Chinese middle class have eroded China’s cost advantage. China’s zero-COVID policy, which means putting entire cities into lockdown at the merest hint of the virus, is a further deterrent. 

Ericsson still employs thousands of people in North East Asia, but the number fell by 853 last year, to 13,091, after hundreds of sales and delivery jobs were cut in China. Those layoffs were prompted by its loss of market share and subsequent decision to combine three separate customer units – one for each of China’s three big operators – into a single unit for mainland China. 

The drop at Nokia has been much sharper. In 2016, bolstered by its Alcatel-Lucent takeover, the Finnish company had 18,929 employees in China, according to that year’s annual report. Last year, there were 12,244 remaining. Yes, the numbers have also fallen in other markets as Nokia has slashed jobs globally to restore profits. But China’s share of the total is down as well – from 18.4% of roles in 2016 to only 13.9% last year. 

Neither one of the Nordic vendors has had the same sales exposure to China that Huawei has had to the West. As Huawei is unceremoniously evicted from European networks and parts of the Asia-Pacific, Ericsson and Nokia perhaps have more to gain in revenues at its expense than they have to lose from the decline of their Chinese interests. But they would still rue being excluded from the world’s biggest 5G market. 

“It’s an important market for us from the perspective of capabilities and competencies,” said Jejdling. “We learned a lot from the 5G standalone evolution because there is a lot of development on top we see in China.” Just as China is losing access to the West’s expertise, so the West could be losing access to China’s.

Intel plans thousands of job cuts in face of PC slowdown

Intel is planning a major reduction in headcount, likely numbering in the thousands, to cut costs and cope with a sputtering personal computer market, according to sources with knowledge of the situation.

The layoffs will be announced as early as this month, with the company planning to make the move around the same time as its third-quarter earnings report on Oct 27, said the sources, who asked not to be identified because the deliberations are private. The chipmaker had 113,700 employees as at July.

Some divisions, including Intel’s sales and marketing group, could see cuts affecting about 20 per cent of staff, according to the sources.

Intel is facing a steep decline in demand for PC processors, its main business, and has struggled to win back market share lost to rivals like Advanced Micro Devices.

In July, the company warned that 2022 sales would be about US$11 billion (S$15.8 billion) lower than it previously expected. Analysts are predicting a third-quarter revenue drop of nearly 20 per cent. And Intel’s once-enviable margins have shrivelled: They are about 15 percentage points narrower than historical numbers of around 60 per cent.

During its second-quarter earnings call, Intel acknowledged that it could make changes in its business to improve profits.

“We are also lowering core expenses in calendar year 2022 and will look to take additional actions in the second half of the year,” chief executive Pat Gelsinger said at the time.

Intel declined to comment on the layoffs, and whether Singapore would be affected.

Its last big wave of layoffs occurred in 2016, when it trimmed about 12,000 jobs, or 11 per cent of its total.

The company has made smaller cuts since then and shuttered several divisions, including its cellular modem and drone units. Like many companies in the technology industry, Intel also froze hiring earlier this year, when market conditions soured and fears of a recession grew.

Samsung’s earnings plummet in warning sign for global demand

Samsung Electronics Co has flagged a worse-than-expected 32 percent drop in quarterly operating earnings, as an economic downturn slashed demand for electronic devices and the memory chips that go in them.

Estimated profit fell to 10.8 trillion won ($7.67bn) in July-September – the first year-on-year decline in nearly three years – from 15.8 trillion won a year earlier, the company said in a preliminary earnings release last Friday.

The result was 8.5 percent below an 11.8 trillion won SmartEstimate from Refinitiv.

Samsung’s memory chip shipments likely came in below already downgraded expectations and prices could fall further this quarter, analysts said, as customers react to rising inflation, higher interest rates and the effect of Russia’s invasion of Ukraine.

Samsung, the world’s top maker of memory chips, smartphones and televisions, is a bellwether for global consumer demand and its disappointing preliminary results add to a flurry of earnings downgrades and gloomy forecasts.

Companies and consumers have tightened their belts, with memory chip buyers such as smartphone and PC makers holding off on new purchases and using up existing inventory, driving down shipments and ushering in an industry downcycle.

“Memory chip business is worse than expected, DRAM chip shipments may be down by higher-teens percentage versus second-quarter,” said Park Sung-soon, an analyst at Cape Investment & Securities.

“Price negotiation trend seems to suggest customers’ demand rapidly worsened during the quarter.”

Analysts expect memory chip prices to continue to plunge in the current quarter, causing a further dip in Samsung’s fourth-quarter profits. Demand is not expected to recover until early next year.

US SEC Penalises Oracle for FCPA Violations by Foreign Subsidiaries

Oracle subsidiaries in Turkey, the UAE, and India used slush funds to bribe foreign officials in return for business between 2016 and 2019.

Oracle agreed to pay the U.S. government $23 million to settle allegations its subsidiaries in Turkey, the United Arab Emirates (UAE) and India bribed officials in those countries in exchange for business.

According to the U.S. Securities and Exchange Commission (SEC), the alleged conduct took place between 2016 and 2019 and violated the Foreign Corrupt Practices Act (FCPA). In addition to paying bribes for business, Oracle was also accused of paying for foreign officials to attend technology conferences in violation of the company’s own policies. Money for these acts allegedly came from so-called slush funds created by the subsidiaries.

Oracle did not admit wrongdoing, but inked a settlement deal to close the SEC probe. As part of that arrangement, it agreed to an $8 million disgorgement fee to repay illegal gains and a $15 million penalty.

Charles Cain, head of the SEC’s FCPA unit, said in a statement the case “highlights the critical need for effective internal accounting controls.”

“The creation of off-book slush funds inherently gives rise to the risk those funds will be used improperly, which is exactly what happened here at Oracle’s Turkey, UAE and India subsidiaries,” he stated.

In a statement sent to Fierce, Oracle’s VP of Corporate Communications Michael Egbert said “The conduct outlined by the SEC is contrary to our core values and clear policies, and if we identify such behavior, we will take appropriate action.”

This is the second time in the last decade Oracle has settled a slush fund-related SEC investigation. In 2012, it agreed to pay $2 million to settle charges its subsidiary in India used a slush fund to pay fake invoices between 2005 and 2007.

Oracle posted revenue of $11.4 billion in its fiscal Q1 2023 (ended August 31, 2022), a figure which was up 18% year on year. Of that total, $2.7 billion was generated by its EMEA operations and $1.6 billion by its Asia Pacific business. The vast majority of its revenue, $7.2 billion, came from the Americas.

Xiaomi fires over 900 employees after weak revenue

More than 900 employees have reportedly been let go by Chinese smartphone manufacturer Xiaomi. The South China Morning Post reported that due to the economic downturn, Xiaomi fired close to 3% of its workforce. However, Xiaomi has not yet made this confirmation.

As the largest smartphone market in the world shrank as a result of stringent COVID regulations, the company reported a sharp decline in second quarter revenue. Xiaomi’s sales missed estimates and declined more sharply than expected in the previous quarter, when the company reported its first revenue decline since going public. Year-over-year sales dropped 20% to 70.17 billion yuan ($10.31 billion). The manufacturer of smartphones reported net income that was 67% below analyst expectations at 2.08 billion yuan.

The resurgence of the pandemic in the Chinese market caused difficult and weak demand, according to Xiaomi president Wang Xiang during an earnings call. Additionally, Wang noted that rising fuel costs, input costs, and inflation had an impact on export sales. Due to pressure to use sales and promotions to move inventory, net profit decreased.

More than half of Xiaomi’s total revenue comes from sales of smartphones. Sales of smartphones decreased 29% in revenue.

After taking market share from rival Huawei Technologies Co Ltd in 2021, whose ability to source components was hampered by U.S. sanctions, Xiaomi experienced a spike in sales. However, the boost was fleeting, and the company’s stock price has fallen by almost 40% since the beginning of 2022 as a result of the weakening global economy and the slowing Chinese economy.

The effects of lockdowns in Shanghai and other cities during the first half of 2022 have made it difficult for China’s consumer consumption to recover. According to data, the second-largest economy in the world unexpectedly contracted in July as it struggled to recover from the COVID restrictions that slowed growth in the first quarter, which led the central bank to lower interest rates.

According to research firm Canalys, unit shipments in China’s long-stagnant smartphone industry were down 10% year over year in the second quarter.

Xiaomi has faced government investigations in India, its biggest market outside of China, for allegedly evading tax authorities.