Networking gear companies have been having a decent year. Ericsson (NASDAQ:ERIC) stock, in fact, recently hit $10 and approached its highest level since 2016.
Despite the slowdown in spending thanks to the novel coronavirus, the 5G mega-trend continues to advance. It’s inevitable that mobile providers will need to offer 5G over the next few years. As there are only a few capable suppliers of networking equipment, this has created a favorable situation for Ericsson and Nokia (NYSE:NOK).
However, Ericsson stock sold back off this week. Traders are reacting to the news that Ericsson may have a security vulnerability in its 5G equipment. Much of Ericsson’s positive momentum has come from governments picking Western suppliers instead of Huawei or other Chinese companies.
Now, however, Ericsson’s 5G equipment may face similar hacking risk due to its reported use of Chinese-produced components. Here’s what you need to know.
Ericsson Runs Into Trouble in Australia
Recently, the Daily Mail reported that Ericsson may be inadvertently using non-secure networking equipment in Australia. The article said that Ericsson’s joint venture with Panda Electronics Group exposes the products to risk.
The U.S. Department of Defense recently revealed that Panda has hidden ties to unsavory governments, including North Korea. Additionally, the Department of Defense alleges that the Chinese government and military has a controlling or affiliated position with Panda.
This makes Panda a risk factor for 5G products. In this case, Panda may supply Ericsson with components for 5G antennas.
An Ericsson spokesperson said that it knew about the Department of Defense’s statement regarding Panda. However, Ericsson felt that it was not a major concern, since 5G antenna don’t fall under a military use category and thus are less vulnerable targets. Ericsson also stated that despite the joint venture, it isn’t currently sourcing components from Panda.
Members of the Australian government disagree with this view, however, and are calling for more scrutiny into the 5G supply chains of European companies in addition to Huawei.
5G Security: Data Theft Is A Vital Issue
The recent issues in Australia highlight a broader point. The supply chains for European and U.S. companies have become reliant on cheap components manufactured in China. As the world becomes increasingly digital, particularly with the Internet of Things, this potentially allows hackers to disrupt vast portions of the world.
A vulnerable component may not have mattered in the old 3G world. But now, with everything online, a security weakness could be exploited to a previously unthinkable degree. It’s already happening more than you may realize.
For example, on Tuesday, FBI director Christopher Wray said:
“The people of the U.S. are the victims of what amounts to Chinese theft on a scale so massive that it represents one of the largest transfers of wealth in human history. If you are an American adult, it is more likely than not that China has stolen your personal data.”
This mass theft of Americans’ personal data has happened even before broad 5G rollout. What happens if Ericsson or Nokia deploy 5G with vulnerable components around the world? It’s a question that lawmakers must grapple with.
ERIC Stock Can Turn This Vulnerability Into Opportunity
FBI director Wray continued, saying that: “Instead of engaging in the hard slog of innovation, China often steals American intellectual property and then uses it to compete against the very American companies it victimized, in effect cheating twice over.”
Ericsson isn’t American, of course, but the same general principle applies for European companies. Ericsson now appears to be a victim of this development. Its trusted partners, such as Panda, may be holding the company back by potentially exposing customers to hidden security risks.
That’s obviously bad for ERIC stock in the short run. However, it highlights the need for Europe and the U.S. to invest heavily in building their own secure technological supply chains for key infrastructure. This, in turn, could give Ericsson a much broader playing field.
Once governments start spending enough money to create robust telecom networks rather than relying on cheap outsourced gear, it should give Ericsson and Nokia room to create top-notch products at correspondingly agreeable profit margins.
After years of telecom picking the cheapest options, regardless of the drawbacks, a new era is dawning. This should allow Ericsson to focus on making better products, instead of just engaging in an endless race to the bottom against offshore competition.
ERIC Stock Verdict
This development out of Australia adds a new twist to the Ericsson story. On the one hand, it’s clearly a negative that the company’s products may be vulnerable to security breaches or hacks. On the other, it emphasizes the sensitive nature of the espionage and data security concerns between China and Western nations.
Momentum seems to be building both in the U.S. and Europe for a complete overhaul of sensitive technological supply chains. Ericsson and Nokia may need to tighten their supplier standards in order to achieve the highest levels of trustworthiness.
That should still work out all right, however. It’s increasingly hard to imagine Huawei regaining significant 5G market share in the U.S. or Europe given the increasing security tensions. Yet, 5G network rollouts need to carry on one way or another.
Despite the bumps in the road, Ericsson will be a major part of telecom companies’ plans. ERIC stock recently reached new highs, and it should continue its upward trend in coming months.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.