There are two aspects of the emerging 5G industry in which international geopolitics threaten to make the business case even tougher for operators than expected. One is the race to be ‘first to 5G’, which is pressurizing some MNOs to launch 5G services before they have a credible ROI (return on investment) plan. The other is the escalating tension between China and the USA over cybersecurity allegations and trade wars. This is starting to prompt copycat behavior from US allies, threatening operators with the prospect of being barred from buying 5G equipment from Chinese vendors – which, in turn, will reduce price competition and deny them the ability to use some of the most advanced 5G technologies, where these are being led by Huawei or ZTE.
Both these interlinked themes were highlighted by speakers at Huawei’s annual Mobile Broadband Forum (MBBF) event, which took place last week in London. Operators used the show to balance 5G boasts with warnings about the challenges ahead, while indirectly appealing to governments not to restrict their choice of suppliers at a critical time for network investment.
But the tide is turning against them, as US policy towards Chinese firms gets tougher. While China tries to build self-sufficiency in many aspects of the hi-tech economy, including semiconductors and 5G networks, its companies are very reliant on selling to a global market, and on sourcing components and expertise from abroad, to fill the large gaps which still exist in China’s nascent technology capability.
The ZTE saga, earlier this year, demonstrated the power that the USA has to ruin a Chinese firm by denying it access to US components as well as US customers – but also that the administration can change its mind. A settlement was reached with ZTE over alleged trading that breached US law, but the shadow of uncertainty still hangs over the company, which is seen as vulnerable to the whims of the Department of Commerce.
It is considered unlikely that even the Trump government would apply a similar bar on the far larger Huawei, thus risking potentially irreparable breakdown of trade relations with China (and anyway, Huawei is less dependent on US suppliers than ZTE). But of course, Huawei is barred from selling equipment for anything that counts as critical infrastructure, including mobile networks to tier one carriers.
A critical question for the company is how many other administrations will follow the US lead. Australia has already done so, and Germany and South Korea – both early 5G adopters, both US allies – are among the countries which are reported to be considering a 5G ban on Chinese vendors. The big fear for Huawei will be any consensus policy adopted by the European Union as a whole.
According to reports in the Wall Street Journal, the USA is lobbying its allies to follow its lead and exclude Huawei from critical deals, including 5G. The paper’s sources say that the government has been putting pressure on other administrations, and directly on telcos, in the European Union and Japan, in particular. The USA may also be considering using its aid budget to persuade some other countries to take its line and further weaken China in the hi-tech industry race, or promising to help fund 5G build-outs in some markets, provided they steer clear of Chinese suppliers.
Of course, the official reason for the USA’s actions is the supposed cybersecurity threat from Chinese equipment – even though, in the age of the cloud, many of the supposed trapdoors and spying mechanisms, which are cited as risks, are somewhat old-fashioned. A US official told the WSJ: “We engage with countries around the world about our concerns regarding cyberthreats in telecommunications infrastructure. As they’re looking to move to 5G, we remind them of those concerns. There are additional complexities to 5G networks that make them more vulnerable to cyberattacks. We remind them of those concerns”.
Telcos in countries from the UK to India are fighting against any attempt to reduce their supplier choices even further. With Huawei and ZTE excluded, they would have only Nokia, Ericsson and Samsung in the macro network, and would no doubt redouble their efforts to support emerging alternative vendors, though most of these are focused on small cells or virtualized cores rather than the macro base stations and large antenna arrays which are the biggest capital outlay in 5G.
The UK’s operators have been particularly vociferous in lobbying their government not to bar Huawei – and of course, post-Brexit, any pan-EU decision could be ignored. BT – whose mobile arm, EE, has used Huawei kit for its 5G test sites in London – has issued stark warnings about the dire consequences of a ban.
At MBBF, Neil McRae, MD and chief architect at BT said “Huawei is the world’s one true 5G supplier. The other guys are behind and they need to catch up. The challenge for other network providers is to learn from Huawei.”
The effusion of these words was clearly meant to send a message to the UK government, whose National Cyber Security Centre (NCSC) recently sent a letter – reported by the Financial Times – to mobile operators, urging them to consider their choices of 5G suppliers carefully, ahead of the publication of a review into the security of UK national telecoms infrastructure.
The letter was signed by the NCSC CEO Ciaran Martin and by Matthew Gould, director general of digital and media policy in the Department of Digital, Culture, Media and Sport (DCMS). According to the FT report, the letter warned MNOs that 5G suppliers could be affected by the review, if it led to new regulations about infrastructure procurement being adopted for security reasons.
The review was launched in July to assess the security and resilience of the UK’s telecoms networks ahead of 5G, but no date for publication has been given. Also in July, the UK’s Huawei Cyber Security Evaluation Centre (HCSEC), which was set up in 2010, said in a statement that it could provide “only limited assurance that all risks to UK national security from Huawei’s involvement in the UK’s critical networks have been sufficiently mitigated”.
Meanwhile, in Germany, officials recently told the media that there was rising concern over Chinese involvement in 5G deployment in Europe. “There is serious concern. If it were up to me, we would do what the Australians are doing,” a senior, unnamed German official told news agency Reuters.
So far, the UK and German operators have insisted that the security risk is low and have continued to work with Huawei despite the NCSC’s warnings. For instance, shortly after the HCSEC statement, BT started its London trial with Huawei equipment; while Deutsche Telekom also has Huawei deep in its next generation wireless and wireline plans.
Dave Dyson, CEO of the UK’s fourth MNO, Three UK, has also warned of the consequences of restricting the 5G supply chain. He said this would drive up the cost of equipment and would risk 5G services being more expensive for consumers.
“That wouldn’t be something the government would want as a consequence,” he warned. Three UK was a customer of Ericsson and Samsung for its 3G and 4G networks (and Nokia for the evolved packet core), but has decided to switch to Huawei for the 5G RAN and some of the core.
Hutchison-owned Three UK’s sister company, Wind Tre in Italy, recently blamed poor quarterly results on delays to a network roll-out with ZTE, caused by the period of US sanctions against the vendor, which put the vendor’s survival in question. Wind Tre has been forced to introduce Ericsson as a second supplier. In Australia, another Hutchison venture, Vodafone Hutchison Australia has also reacted furiously to the ban on Chinese equipment since it is a Huawei-only shop. Moving to a different supplier for 5G will be more costly and disruptive than upgrading the current network with the same partner, it says.
Phil Sheppard, Three UK’s director of network strategy, said in an interview: “Competition is valuable and having a range of vendors is healthy from a commercial point of view. There is technology leadership as well, and if you start to remove vendors from the pool you have a smaller selection to choose from.” He rejected security claims about Huawei, telling LightReading: “We have spent a long time … to ensure the security picture is fully covered. We’ve done more than we’ve done for any other vendor in terms of ensuring security.”
There was also support for Huawei, at MBBF, from Manuel Sanchez Malagon, network planning director at Orange Spain, who said the Chinese firm’s global reach meant it was best placed to share a wide range of experience and information – “the essence” of developing technology and use cases. Other European operators are committed to Huawei, including
- Deutsche Telekom (which will source 5G from the Chinese vendor and from Ericsson);
- Switzerland’s Sunrise (which wants to move quickly to replace copper fixed lines with 5G);
- Telecom Italia (which recently turned on its first 5G base station, from Huawei); and others.
Any extension to Europe of US-style restrictions on Chinese vendors will hit the plans of such operators hard. Most MNOs which plan to deploy in the first wave of 5G (between 2019 and 2021) have already selected their vendors and are starting to run live trials and plan networks. And it is important to the EU, and to some individual European governments, to be seen to be advanced in 5G deployment. Forcing operators to rethink their vendor choices, or to pay more for their equipment, will make it hard to achieve that goal.
For its part, the Chinese administation, and the vendors, deny any cybersecurity breaches, and Huawei ridicules the idea that it would risk one of its biggest business opportunities by weaponizing its infrastructure at the behest of its government. It has worked hard to distance itself from its former close ties to the Chinese military, and to offer governments round the world the means to check all its products for spyware.
Huawei used its MBBF event to reiterate calls for a fair trading environment and to warn that, if it were excluded from any markets, that would raise the cost of deploying 5G and lead to delays in roll-out. It said it had held meetings with authorities in several countries to ensure it was meeting all their security requirements, naming Germany, Spain, Italy, the UK, Canada and New Zealand as examples.
It is particularly keen to assuage European fears, since this is its largest market outside China, for networks and enterprise equipment, as well as handsets.
Vincent Pang, president of Huawei in western Europe, said recently: “Western Europe is the most open and level market in which Huawei operates. It’s very open. Its very transparent and we get a lot of very clear guidance on what it is that we are required to do. Local governments in Europe have been incredibly supportive of what we are trying to do. I think that is why Europe is such an important growth market for Huawei.”
And at MBBF, Huawei’s chairman of the board, Dr Liang Hua, said the company wanted to create lasting partnerships with European telcos to speed up the roll-out of 5G and of next generation technologies such as artificial intelligence (AI) and robotics. “Our vision is to bring digital to every home, business and enterprise in Europe. Collaborating on innovation is the best way to do that,” he said, calling for operators to work together on a greater scale to accelerate progress.
Hua said Huawei was looking to launch a new European Cybersecurity HQ in 2019.
“Huawei remains committed to openness, collaboration and shared success. We are currently working with 400 partners in 16 innovation labs around the world on industrial IoT solutions and a range of big data initiatives,” he summed up.
But the fear, uncertainty and doubt remains and will start to affect the risk assessments being carried out by MNOs as they firm up their 5G plans. There is a high awareness that the telcos are getting caught up in a storm that is beyond their control, and is being whipped up by rising protectionism and security paranoia. If Europe, Japan and other advanced mobile regions become affected by the geopolitical stand-off between the USA and Japan, the operators will find it even harder to meet government and shareholder pressures to deploy 5G early, while also finding a profitable business case. Some MNOs say that, without the Chinese vendors in play, they would expect to end up spending 35% more on their 5G networks than planned. That would affect speed of deployment; profit levels for MNOs (and their ability to invest further in 5G); and potentially prices of services for consumers and enterprises. All of which would jeopardize the socio-economic goals which many governments have set for 5G.
And to make matters worse, while Nokia and Ericsson may relish the lack of Chinese competition in North America, if the bans spread to their home turf of Europe, they would almost certainly spark Chinese backlash in the form of doors closing on non-local suppliers to the country’s vast 5G roll-out program. And just as the USA may be trying to influence its friends to support its stance, so China could do the same, persuading its regional neighbors and allies to steer clear of Ericsson, Nokia and Samsung.
Such a domino effect would have very severe consequences for the ability of 5G to meet its objectives, and would tip an already pressurized mobile networks business into crisis.
Canada will not bar Huawei:
One country that has specifically said it will not follow the USA’s lead and ban Chinese 5G vendors is Canada. In September, the country’s Globe and Mail newspaper said the country’s cybersecurity leaders had decided there were sufficiently robust protections in place against hacking or espionage.
Scott Jones, head of the Canadian Centre for Cybersecurity, told government officials that the facilities for testing Huawei’s equipment and software were superior to those of many of Canada’s allies.
He added that Canada has a very sophisticated relationship with telcos, one that is “different from most other countries … We have a program that is very deep in terms of working on increasing that broader resilience piece especially as we are looking at the next generation telecommunications networks”.
Geopolitics are everywhere in the recent decisions and discussions about Chinese vendors. In Australia, a desire to get closer to the USA was assumed to be one motivation for the ban on Chinese suppliers, and to have outweighed the wishes of operators.
By contrast, Canada’s government has recently been keen to assert its independence from its southern neighbour, amid tensions between the Trump and Trudeau administrations. The comments about Canadian superiority in cyber defences will not have pleased US officials, for instance.
The US, UK, Canada, New Zealand and Australia are partners in an intelligence sharing alliance named Five Eyes. The USA has reportedly put pressure on Canada to bar the Chinese suppliers, implying the country would be in breach of its obligations to Five Eyes if it did not impose its own ban. Jones said Canada was trying to explain to its partners how its testing systems work, to allay concerns. The UK and New Zealand have also not introduced sanctions against Chinese suppliers.