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20 July 2020

Huawei supporters fear domino effect after UK U-turns on 5G ban

The pressures continue to mount on Huawei. The latest blows are a decision by the UK government to toughen its stance, announcing a complete ban on Huawei equipment in 5G networks rather than the previously agreed 35% cap in 5G and fiber access networks. There are rumors that Italy will adopt a similar approach, while TSMC, the world’s largest chip foundry, has confirmed that it will not longer supply chips to Huawei after September 14.

The last of these setbacks was revealed last month. The USA had stepped up its campaign to exclude Huawei from 5G networks in allied countries, and barred component makers which use US software from selling to the Chinese vendor – US software is ubiquitous in chip companies for functions such as electronic design automation (EDA). TSMC was, in effect, forced to choose between its second largest customer, Huawei, and its US customers which include Apple (its largest, accounting for about 23% of its revenues in 2019) and Qualcomm.

The Taiwan-based foundry opted for its US business, and plans to build a new foundry in the country. It remains to be seen how the loss of Huawei impacts its financial results, which were strong for the quarter ended on June 30. Revenues were up almost 29% year-on-year to NT$310.7m, while net income was up 81% to NT$120.8m.

Meanwhile, the UK has given its operators until 2027 to replace Huawei equipment in their 5G networks (see lead item), making a U-turn on its previous decision to allow 35% of a 5G or fiber network (but none of the 5G core) to come from the Chinese vendor. BT and Vodafone both have significant amounts of Huawei RAN equipment and Three UK had planned to procure all its 5G network from the vendor, to replace its 4G supplier, Samsung.

The official reason for the change of heart is that, since the original decision, the USA has introduced the FDPR (Foreign-Produced Direct Product Rule) barring Huawei from using chips made with US equipment, software or design expertise. The UK National Cyber Security Centre (NCSC) said this was a “game-changer” because  “no-one, anywhere in the world, can send Huawei-designed chips to Huawei if US technology was used in the design tools or manufacturing process”.

The NCSC’s technical director, Ian Levy, said: “We think that Huawei products that are adapted to cope with the FDPR change are likely to suffer more security and reliability problems because of the massive engineering challenge ahead of them, and it will be harder for us to be confident in their use within our mitigation strategy.” He said it could be harder to get the same level of information about the new products or to understand the new tool chains which would have to replace the well-understood global ones in current use.

This shows how determined the US administration is to push its allies to bar Huawei. This attempt has been only partially successful so far. When, last May, the country placed Huawei on its entity list – which meant no US firm could sell to it without a special licence – it clearly wanted to trigger a domino effect, but only Australia introduced an outright ban on Huawei kit in 5G. After over a year of uncertainty about how forcefully the entity list restrictions would be enforced, the FDPR represented a significant escalation.

A spokesman for Huawei UK said: “This disappointing decision is bad news for anyone in the UK with a mobile phone. It threatens to move Britain into the digital slow lane, push up bills and deepen the digital divide. Instead of ‘leveling up’ the government is leveling down and we urge them to reconsider. We remain confident that the new US restrictions would not have affected the resilience or security of the products we supply to the UK. Regrettably, our future in the UK has become politicised; this is about US trade policy and not security.”

China’s ambassador to London, Liu Xiaoming, said the UK “will have to bear the consequences of making an enemy of China”, adding: “When you get rid of Huawei, it sends a very wrong message. You punish your image as a country that can conduct an independent policy.”

With the UK giving in to US demands, against the backdrop of looming post-Brexit trade talks, all the members of the ‘Five Eyes’ group of intelligence partners – the USA, UK, Canada, Australia and New Zealand – appear to be turning away from Huawei. US Secretary of State Mike Pompeo had implied, when the UK stopped short of a ban and opted instead for caps, that the sharing of intelligence would be jeopardized if any partners kept Huawei in their 5G networks. Australia and New Zealand have banned Huawei, and while Canada has not, all its three main operators – Bell, Telus and Rogers – have announced other suppliers for their current rounds of 5G deployment.

In Europe, most countries have resisted pressure for an outright ban, at least until they can conduct full security reviews, and the European Union has said it would prefer a tougher security regime, with which all vendors would have to comply, than sanctions against one vendor and, as a result, less competition in the supply chain. However, Huawei will be fearing that the UK sets a precedent for others.

Although Germany has not come out against the Chinese company, Italy is said to be veering towards sanctions. Last week, Italy’s TIM said it would not accept 5G tenders from Huawei in its home country or for its Brazilian subsidiary.

An industry source told Capacity: “There is an existential fear that this is a contagion that will spread across Europe – that it will be replicated. There could be a domino effect.”

In France, the government has stopped short of an outright ban, and like its German counterpart, is less positive towards the Trump administration in the USA than the UK is. However, its computer security agency, ANSSI, now has to authorize use of Huawei kit, and it has made it clear it will not welcome Chinese suppliers into new 5G build-outs. From this week, operators that have not received an explicit authorization to use Huawei equipment for 5G network can assume their request has been rejected.

Guillaume Poupard, head of the agency, told French newspaper Les Echos that requests to use Huawei equipment will be subject to refusal. He said operators which do not have Huawei kit installed will be encouraged not to switch to the vendor, although it is likely to authorize existing customers to keep their equipment. In another interview, however, he indicated that those authorizations could just be temporary, potentially to give MNOs time to replace Huawei base stations.

“For those that are already using Huawei, we are delivering authorizations for durations that vary between three and eight years,” Poupard said.

Some French MNOs are playing it safe so far. Orange has already selected Ericsson and Nokia as its 5G vendors and Iliad’s Free has chosen Nokia in both France and Italy. However, the second and third MNOs, Altice’s SFR and Bouygues Telecom, both have Huawei kit in their LTE networks, so face the same rip-and-replace dilemmas as their counterparts in the UK and other markets. They have indicated they will seek state aid for the cost and time taken for the replacement process if Huawei is excluded, since they argue they will be put at a competitive disadvantage to their rivals. Huawei is reported to provide about 50% of Bouygues’ 4G RAN, with Ericsson supplying the rest; and just over half of SFR’s base stations.

The US government also appears to be looking beyond Huawei as its broader political, trade and technology wars with China intensify. Recent reports said the US was preparing new rules that would prevent any government departments or agencies from buying goods and services, from any company that uses products from one of five Chinese companies – Huawei, ZTE, Hytera Communications, and two surveillance camera makers, Dahua or Hikvision. In recent months, US authorities have also

delicensed Chinese network operators from the country; and prevented money awarded to operators from the FCC’s $8.3bn-a-year Universal Service Fund being used to buy equipment or services from the five Chinese firms.

For now, Huawei’s financial results remain robust, with growth in all key metrics – though not the kind of growth rates it used to enjoy. For the first half of 2020, it reported a 13% year-on-year increase in revenue to RMB454bn ($64.9bn), with leaps in all three of its divisions – carrier, enterprise and consumer (mainly devices). Net profit was up nearly 20% to about RMB41.8bn ($6bn).