Attorney-general William Barr took America’s tech offensive against China into new territory last week when he proposed a US takeover of Ericsson and Nokia to fend off Chinese giant Huawei. The Swedish and Finnish telecoms equipment companies could be acquired “either directly or through a consortium of private American and allied companies”, he said.
“Putting our large market and financial muscle behind one or both of these firms would make it a far more formidable competitor and eliminate concerns over their staying power,” he added.
The US has banned Huawei from its 5G mobile network, branding it a security risk and has lent heavily on European allies to do the same. Lacking an indigenous alternative, US officials have been exploring ways to bolster Ericsson and Nokia, Huawei’s main rivals. Presumably lending its muscle is meant to make it harder for European governments to claim that completely excluding the Chinese supplier would delay the rollout of 5G superfast data services and push up the price.
Mr Barr’s suggestion that the US government itself could swoop on two European companies was extraordinary. Washington does not go around buying foreign businesses. The White House quickly disowned the idea. Still, it raises crucial questions: do Ericsson and Nokia, with an equity value of $29bn and $24bn respectively, need government help or a much bigger strategic shareholder? And if they do, should it come from the US?
“Both companies have had a fairly torrid time over the last couple of decades,” says John Delaney, telecoms analyst at IDC. “They are not exactly booming but their business fundamentals are sound.”
Telecoms equipment is a scale business and China’s vast and restricted access domestic market gives Huawei enormous advantages, as does cheap finance from state banks. The shift to virtual networks, where software increasingly replaces the functions of hardware, will bring new players into the market. Meanwhile, Samsung is pushing into 5G kit.
Together, Ericsson and Nokia have a similar share of the global 5G market to Huawei. The ban on the Chinese company in the US and curbs in Europe should give the Finnish-Swedish duo more business and pricing power — even if the outlook for 2020 is clouded by delayed government decisions about permitted suppliers in the west and headwinds in China and India.
Ericsson and Nokia are outgunned by the Chinese behemoth on research spending but they are more competitive on 5G patents than sometimes appears. Targeted EU subsidy for research may nonetheless be necessary to keep the Europeans fully in the race for smart networks.
Consolidating both European companies into one group, as Mr Barr also suggested, would reduce competition and create a monopoly in some markets where Huawei is being shunned. It could also stifle innovation in a sector that is open to rapid technological change.
There are no obvious US corporate buyers. Cisco, the US network equipment maker, is mentioned as one. But Nokia — perhaps the more vulnerable of the two Europeans having bet on more expensive end-to-end 5G technology — is a bad fit as it comes with a big fixed-line business of its own. Ericsson tried a partnership with Cisco but bailed out after a few years and has teamed up with rival Juniper. A combination with chipmaker Qualcomm would make little industrial sense.
In any case, Ericsson and Nokia are both regarded as national champions by their home governments, who would balk at the idea of them falling into American hands and becoming pawns in a US technology war with China. They would risk losing business in China. It may be dominated by Chinese suppliers but it is also Ericsson’s second biggest market after the US. Finland could probably block a takeover of Nokia by labelling the company a strategic asset. Sweden has fewer defences but other EU member states could object under the bloc’s new foreign investment screening regime.
An American raid might be an outlandish idea, but it is forcing EU policymakers to reflect on how to assert European technological sovereignty. If they spurn Washington’s “help”, they may need to come up with their own.
