STOCKHOLM Ericsson expects cut-throat competition between telecoms equipment makers as China prepares to spend billions of dollars on high-speed networks, punishing margins at a time when profitability is already under pressure.
A decade-long price war launched by Chinese vendors Huawei and ZTE has already forced suppliers like Nortel and Motorola out of the market while smaller players like Alcatel-Lucent are mired in losses.
Equipment makers hoping the roll-out of 4G - also known as LTE - networks in China later this year will ease industry problems will be disappointed.
Projects to roll out networks across a country tend to have a higher proportion of hardware to software content and are less profitable than projects to upgrade existing networks, which have the opposite mix.
"It is a new coverage project to deploy LTE and of course we know ... coverage projects have lower profitability," Johan Wibergh, head of Ericsson's Networks unit, told Reuters earlier this week.
China's three mobile operators - China Mobile, China Unicom and China Telecom - plan to spend a combined 345 billion yuan ($56 billion) this year on network upgrades and 4G.
China Mobile plans to plough 41.7 billion yuan ($6.75 billion) this year into 200,000 4G base stations in order to provide services for its 710 million customers - more than twice as many as there are people in the U.S.
Wibergh said such flagship projects would attract fierce competition from vendors, including China's domestic giants Huawei - the world's second biggest vendor after Ericsson - and ZTE.
Outside China, however, Wibergh saw some relief from years of price pressure and said the company had raised its prices in 2012, though not by much.
Struggling vendors have less appetite now for margin-sapping price wars, he added.
"I think the worst is behind us," he said. "I think everyone needs some kind of stability in this industry."
(Reporting by Simon Johnson; Editing by Sophie Walker)