Huawei seeks flight from some key markets

Pressures mount on Huawei as more western countries follow the US lead and call for sanctions or bans. Some operators, most recently Vodafone Group, are also succumbing to government pressure or their own nerves and backing away from the Chinese giant, even though they have been vocal about the risks to their 5G business case if they have only three effective network suppliers to choose from (Nokia, Ericsson and Samsung, if both Huawei and ZTE are blacklisted).

Until last week, Huawei senior executives were still taking an upbeat tone even as they repeatedly denied allegations ranging from spying to breaking trade sanctions to stealing industrial secrets. But now the company has warned of job cuts and possible exits from some European markets, and it no longer seems impossible that it might disappear from Europe’s 5G infrastructure altogether.

Before the holiday, that had seemed a distant prospect. Most operators were keen to keep Huawei and ZTE in play, claiming they could deal with threats like the alleged ‘spyware’ that could be embedded in network equipment. Without the Chinese players, there would be very little price competition, they argued, which would increase the cost of 5G and damage a business case which, for some, is already challenging. And they would be denied access to some of the undoubtedly strong technology advances made by the two Chinese OEMs. And for MNOs which relied heavily on Huawei for 4G networks, migration to 5G could become more complicated and expensive. Some, like Three UK, have even already awarded 5G contracts to Huawei.

Now, Vodafone has “paused” the deployment of Huawei equipment in its core networks in Europe, following in the footsteps of BT in the UK, which – despite having extensive 5G trials with Huawei – has excluded the vendor from its own core, and from that of its mobile arm EE. Vodafone said it would hold fire until western governments have resolved security concerns about Huawei, and decided whether there will be any restrictions on the supplier. This comes after Orange France and Deutsche Telekom also indicated they needed clarity on the situation before making any deals with Huawei for core or 5G.

Vodafone CEO Nick Read said: “We have decided to pause further Huawei in our core whilst we engage with the various agencies and governments and Huawei just to finalize the situation, of which I feel Huawei is really open and working hard.”

The core networks are the most sensitive area, so it may be that operators are still able to buy RAN gear – by far the biggest part of their capex – from Huawei and ZTE while opting for a different vendor’s core.

A Huawei spokesperson said: “Vodafone and Huawei are long term strategic partners that have worked together since 2007. Huawei is focused on supporting Vodafone’s 5G network roll-outs, of which the core is a small proportion. We are grateful to Vodafone for its support of Huawei and we will endeavor to live up to the trust placed in us.”

For 5G specifically, there is some time to think about core network choices, since the standard 5G Core Network equipment will only become commercial later this year, and nearly all MNOs will deploy their first 5G RANs in non-standalone mode, working with the 4G packet core. However, many operators are engaged in other core projects – 4G expansion, a move to virtualized core, or upgrades to the fixed or converged cores.

However, suppliers of RAN-neutral core equipment will see this uncertainty over Huawei as an opportunity. The big barrier for vendors like Cisco, Mavenir and others has been the ability of the large OEMs to sell end-to-end solutions including RAN, core and even backhaul, promising full integration, simplicity and cost-effectiveness. If some MNOs want to use Huawei RAN equipment but are nervous about its core, they may be more inclined to turn to a new supplier – though, of course, Nokia, Ericsson and Samsung will also be fighting hard to secure these deals.

Not that Ericsson is crowing over its arch-rival’s predicament. Its CEO, Borje Ekholm, told CNBC that he fears the political rows around Huawei could reduce operators’ confidence about investing rapidly in 5G at all. The willingness of governments to interfere in supplier choices had sparked “a lot of concern” among operators, he warned, and when MNOs are worried, “that is never good for the investment climate”.

He also acknowledged fears that political and trade tensions between China and the US-led west could lead to standards and technologies evolving separately in two different blocs, leading to competing network architectures as well as competing ecosystems. He said it was “really important” for the industry to protect its global standards model, but said he was hopeful that “ultimately the economics favor a global standard”.

Across the Atlantic, two members of the US National Security Council (NSI) has released a new report calling on the government to take action against Huawei and ZTE over alleged cyber espionage. The report, entitled ‘Chinese Telecommunications Companies Huawei and ZTE: Countering a Hostile Foreign Threat’, was written by Andy Keiser and Bryan Smith, who wrote: “Huawei and ZTE represent a serious, long term national security threat to the US that expands exponentially with the advent of 5G.”

Their recommendations to the government echo some already made in a bill that is currently before Congress, and by various China-hostile lobby and campaigning groups. They include:

  • an investigation by the Department of Commerce into potential trade violations.
  • calls for the Department of Justice to require representatives from the firms to register as foreign agents.
  • calls for the State Department to work with security allies to “adopt protections” as well as to condition the participation of the Five Eyes allies (the UK, Australia, New Zealand and Canada).

Of those countries, Australia has already barred Huawei from 5G deals, even though one of its operators, Vodafone Hutchison (VHA) is a Huawei-only shop. New Zealand looks set to follow, while the UK and Canada, having been supportive of Huawei at the start of the saga, have been showing signs of falling into line with the USA. In both countries, Huawei has strong relations with several operators, and among the MNOs arguing forcefully for the right to choose their own 5G suppliers have been Canada’s Telus and the UK’s Three and BT (which, despite its caution over the EE core, has also said that Huawei is currently the “only” real 5G supplier).

BCE and Telus would face at least $1bn in costs if they had to remove Huawei from their networks, according to a recent Bloomberg report, though it is more likely that the vendor would only be excluded from new roll-outs. In an internal memo, Telus’s EVP of technology strategy, Eros Spadatto, said Huawei was a “viable and reliable participant in the Canadian telecommunications space” and Telus had a “positive, transparent and innovation-centric partnership with Huawei”.

Canada’s government initially resisted US calls to support its stance, saying it had sufficiently good security measures in place to detect any spyware. However, it got drawn deeply into the feud when its officials arrested Huawei’s CFO, Meng Wanzhou, in December, at the behest of the USA, which plans to try her for alleged breaching of US trade sanctions against Iran and Syria.

Tensions have risen higher – Chinese ambassador to Ottawa, Lu Shaye, was reported by local media to have threatened Canada with “repercussions” if tries to bar Huawei from 5G contracts. “I hope Canadian officials and relevant authorities and bodies will make a wise decision on this issue. But if the Canadian government does ban Huawei from participating in the 5G networks… I believe there will be repercussions,” he was quoted by the Globe and Mail newspaper.

Since the arrest of Meng, China has arrested two Canadians on grounds of national security, and sentenced a third to death for smuggling drugs.

Outside the Five Eyes security alliance, Japan and Taiwan have also imposed restrictions on Huawei. According to local newspaper reports in Germany, the country’s security department is exploring stricter security requirements which could prevent Huawei products being used in its 5G network. Germany’s interior ministry had previously said the country opposed banning any suppliers from its 5G network.

All these problems led Huawei founder Ren Zhengfei to warn of possible job cuts and even exits from some markets. In an email to staff, reported by the UK’s Financial Times, he wrote: “In the coming years, the overall situation will probably not be as bright as imagined, we have to prepare for times of hardship … We also need to give up some mediocre employees and lower labor expenses.” Nevertheless, Huawei is still sticking to its guidance for a 20% increase in revenues in 2019, similar to last year’s 21% hike.

And at this week’s World Economic Forum in Davos, Switzerland, Huawei’s chairman, Liang Hua, said the firm might have to leave some countries if restrictions were too harsh. He said, “We would transfer the technology partnership to countries where we are welcomed and where we can have collaboration.”