EUR 850.00 For Business Accounts Only

Morningstar | Potential Huawei Supply Issues May Aid Others in the CSP Equipment and Networking Spaces

We are maintaining our fair value estimates for leading communication service providers, such as Nokia and Ericsson, despite the addition of Huawei to the U.S. Entity List, effectively banning U.S. firms from supplying into Huawei, the dominant provider of CSP equipment, software, and services. The Chinese firm is also one of the largest sellers of switches, routers, and wireless technology for enterprises, campuses, and data centers as well as an enterprise security vendor. We are assuming that Huawei's addition to the list is more of a short-term leverage play by the U.S. for tariff negotiations rather than a long-term supply chain adjustment. However, we do believe U.S. firms not supplying into Huawei could create disruptions and potential doubts surrounding Huawei's ability to provide products sustainably; in turn, we see opportunities for Huawei competitors in the CSP and networking spaces.

Nokia and Ericsson have the largest potential gains in the mobile and fixed access networks, as telecoms are evaluating their current vendors for 5G rollouts. We believe that most CSPs will continue to multisource vendors, but the two Nordic companies could end up being favored as primary vendors instead of Huawei. Other potential gainers for mobile infrastructure are the smaller players, Samsung and ZTE. Looking at the switches and routers used by the CSPs, Cisco and Juniper Networks could benefit from CSPs evaluating alternative options.

For switches, routers, wireless, and SD-WAN products sold outside of CSPs, Cisco, HPE, Juniper Networks, Arista Networks, and VMware could benefit from Huawei supply chain issues. Any impact to Huawei's enterprise storage and servers could be a boon for Dell Technologies, HPE, and NetApp. Also, Huawei's cybersecurity product sales could be affected, creating upside for firms like Palo Alto Networks, Cisco, Check Point, and Fortinet.

The overall CSP market spending is led by Huawei, with 21% overall market share, followed by Nokia (14%), Ericsson (14%), ZTE, and Cisco in 2018, according to Gartner (any subsequent market share data in this publication is from Gartner and is as of 2018). Dissecting the CSP spending further, Huawei had 28% market share of the mobile infrastructure, CSP routing and switching, and optical transport, collectively. Comparatively, Nokia had 17% and Ericsson had 13% share.

The mobile infrastructure market, which contains the equipment for mobile phone networks and radio systems, was split, with Huawei controlling 30%, Ericsson 25%, and Nokia 20%. As CSPs debate their potential vendors for 5G networks, we expect them to have increased interest in non-Huawei vendors now. Although 5G spending is not expected to start until late 2019 and ramp up in 2020, which gives Huawei an opportunity to recover from any supply chain disruptions, the CSPs are performing their important 5G radio access network, software, and core/edge network equipment evaluations beforehand. We do not believe that Nokia and Ericsson have the capacity to cover any Huawei product shortfalls overnight; however, the rolling nature of 5G trials and contracts should give the Nordics ample time to address capacity concerns if Huawei remains affected.

The market for CSP routers, switches, and optical transport was led by Huawei's 25% share, followed by Cisco's 18%, Nokia, Ciena, and Juniper Networks. As the CSPs update the infrastructure for 5G capabilities, the increased speeds and data flowing through the core and edge networks will need to be upgraded as well. While we believe the radio access decision could be most critical for CSPs, in our coverage, we would expect Cisco’s, Nokia’s, and Juniper's portfolios of switches and routers designed for the next generation of communication speeds to be demanded. If CSPs favor Ericsson for the radio access networks, Juniper would benefit through its close partnership. Huawei was also the leader for the fixed access market. As CSPs look for a broadband access that is not Huawei's, we see Nokia's portfolio as a leading alternative.

From a services perspective for CSPs, Ericsson's market share is slightly ahead of Huawei and Nokia. In that segment, services related to designing, building, and running the networks are split fairly evenly among these three firms. In our view, Ericsson and Nokia market shares in services and support would increase as they win more contracts related to mobile and fixed access infrastructure.

For the enterprise switches market, Huawei had 10% of the market but still lags Cisco as the dominant switching provider with 52% share. Cisco also has a similarly dominant position in campus switching and the data center. IT spending has been strong for switching equipment as firms create more data with more networking touch points, and Huawei disruptions could make the company strongly consider where to focus its resources between CSPs, enterprises, and consumer products. Additionally, the next wave of Ethernet speed, 400Gb, could affect Huawei's ability to be considered for trials in 2019 in places like Europe, Japan, and South America, giving upside potential to Cisco, Arista, and Juniper. Huawei is also far behind Cisco in wireless local area network equipment, and any changes in competitive dynamics in the campus switching market could also weigh on the wireless segment. Huawei could also be affected as enterprises are deploying SD-WAN to connect their branches via Internet access to cloud-based applications and centralized data centers, which would be positive for market leaders VMware and Cisco, as their products could still be used across the entire networking ecosystem.

Any Huawei supply chain issues could also affect the storage and server markets. Huawei's share in storage is much lower than Dell Technologies' 33%. Huawei has been growing at a nice clip, but this speed bump could affect sustainable growth and cause enterprises to favor one of the other mentioned providers. Enterprises continue to migrate to all-flash array storage, and Huawei could be hurt during one of few instances of rapid growth in the storage industry. For servers, Huawei trails Dell and HPE. As companies invest in server hardware, Huawei would be left out of consideration, positively affecting its competitors.

Finally, in enterprise security, Huawei is behind U.S.-based firms like Palo Alto Networks, Cisco, Check Point, and Fortinet. However, Huawei's 5% market share is next in line, and the company was the fastest-growing year-over-year option for enterprise security. With enterprises and governments putting a heightened focus on cybersecurity, Huawei's rapid growth could be stymied as it looks to expand its global footprint, with the other players winning by being able to deliver products. We would expect the other main firewall vendors to be able to win new and upgrade opportunities if Huawei impacts remain, which would also give a boost to cybersecurity subscriptions and services offered.