Another year, another cost-cutting initiative. After Nokia announced its most recent in late 2018, months before it revealed an upset in 5G product development, the Finnish equipment maker was expected to report some hefty layoffs. The carnage is made apparent in its recent filing with the US Securities and Exchange Commission. Based on year-average numbers, about 4,800 jobs disappeared in 2019, or nearly 5% of the total. And the axing was brutal in some markets. One in ten jobs went in North America. About 9% vanished in China.

When it comes to layoffs by equipment makers, Nokia is late to the game. Between 2017 and 2018, following its takeover of Alcatel-Lucent in 2016, its workforce grew 1.3%, to an average of 103,083 employees across the entire business. Over that same period, fierce rival Ericsson chopped 5% of jobs, finishing 2018 with 95,359 employees in total. Battered by US sanctions, China's ZTE went even further, reducing headcount by 9%, to 68,240 employees.

Headcount at Nokia (Source: Nokia)

But the world's largest equipment maker has consistently bucked the trend. In the annual report it published last year, China's Huawei cited staff numbers of about 188,000, up from 180,000 in 2018. Data provided in its most recent annual report, published this week, shows that number grew another 4% last year, to almost 196,000. As Western rivals wither, and its smaller Chinese competitor similarly shrinks, Huawei is muscling up.

In the age of automation, bigger is not necessarily better, of course. Ideally, companies want to maintain or grow revenues with the leanest organization possible, delivering juicier profits to their shareholders. Peter Laurin, the head of Ericsson's managed services business, previously attributed some of the 8,000 job cuts at his own division in 2018 to investments in artificial intelligence. Interestingly, operating profits at managed services more than doubled last year, even though sales were down 1%.

The danger in extreme cost cutting, or even just a pause to recruitment, is that it harms competitiveness. This was illustrated starkly in France several years ago when marketing cutbacks at Altice-owned SFR Numericable led to customer losses. In the vendor world, perhaps the main risk lies in research and development. The industry is increasingly trying to assess Ericsson, Huawei and Nokia on the technical strength of their products. Any sign of R&D weakness could spell trouble.

Headcount at vendors (Source: companies)

Ericsson, accordingly, has ringfenced this crucial department from the program of cuts. Last year, it invested about 38.8 billion Swedish kronor ($3.8 billion) in R&D, about the same as in 2018, and spending was up from SEK37.9 billion ($3.7 billion) in 2017. R&D headcount over the same period has risen from 23,600 to about 25,100, and now represents about a quarter of the total workforce. This strategy, Ericsson insists, partly explains a resurgence in form that has brought an increase in market share, according to data provided by market-research firm Dell'Oro.

Yet Nokia has been heading in the opposite direction. In 2017, it spent more than 4.9 billion ($5.3 billion) on research and development. A year later, the sum had dropped to 4.6 billion ($5 billion), and in 2019 it was down to 4.4 billion ($4.8 billion). It is now easing off the brakes after its 5G product business lost its way and fell behind rivals with high-quality but lower-cost equipment. Unfortunately, this effort to catch up has forced Nokia to jettison its original cost-saving targets. Under the revised plan, it aims this year to spend 500 million ($539 million) less than it did in 2018. Previously, it wanted to cut 700 million ($755 million) off the bill.

Feeling the squeeze

Investors are nervous because profits are already under pressure. Until it reported third-quarter figures last year, Nokia was aiming for an operating margin of 1216% in 2020. It has now lowered this range to 811%, and it does not expect its main addressable market to grow. But as a mobile-only vendor, Ericsson could be in even bigger trouble. The outbreak of COVID-19 will delay Europe's rollout of new 5G networks as regulators postpone spectrum auctions and customers trim capital expenditure. Hold-ups in the virus-stricken US are also a possibility.

Neither one of the Nordic vendors can look for a boost to China, where operators are pressing ahead with ambitious 5G plans. When China Mobile, the country's biggest operator, awarded contracts worth $5.2 billion this week, Huawei and ZTE landed 87% of the work. Nokia came away entirely empty-handed, while Ericsson secured contracts worth about $590 million.

Despite US efforts to cripple it, Huawei must seem even more daunting to Ericsson and Nokia after last year's R&D splurge than it did in 2018. The US campaign is partly responsible, too. Blocked from buying some US components, and determined to become more self-reliant, the Chinese vendor pumped 131.7 billion Chinese yuan ($18.6 billion) into R&D expenses last year, up from RMB101.5 billion ($14.3 billion) in 2018, and its R&D team has grown from 80,000 to 96,000 employees over this period.

That means Huawei has cut 8,000 jobs in other parts of its business  around 7% of the non-R&D total  to support the R&D expansion. But its profits rose last year, albeit at a slower pace than in 2018, and its operating margin held steady, at 9.1%, thanks to continued sales growth.

A strict comparison is unfair. Huawei has a much broader range of activities than Ericsson or Nokia, and it generates more than half its revenues from a handset market the Nordic vendors quit years ago. Nevertheless, the firm's ability to increase spending as rivals are squeezed should trouble the entire industry given the lack of feasible alternatives. This year, Huawei plans to invest as much as $20 billion in R&D, said Ren Zhengfei, Huawei's founder, during a recent interview.

Opponents cry foul. Financially, Huawei is not subject to the same level of scrutiny as Western companies, and China's government continues to prop it up, say critics, dismissing Huawei's claims about independence. Amid recent news stories that China covered up the extent of the COVID-19 crisis, trust in Chinese organizations will probably not improve anytime soon. In the meantime, Huawei seems likely to keep bucking the trend.

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 Iain Morris, International Editor, Light Reading