USA fails to clarify Huawei’s status adequately to calm industry nerves

President Trump’s decision in late June to relax the ban on US companies selling to Huawei sparked a brief sigh of relief across the global supply chain, especially among component vendors which count the Chinese giant as a major customer. Not all these were US firms. The hasty announcement, by Japan-owned, UK-based ARM, that it would suspend dealings with Huawei while it was on the US ‘entity list’, highlighted how the whole ecosystem would feel the ripple effect of US policy. Vendors round the world could have faced the prospect of continuing to supply Huawei at the cost of US sanctions.

However, most of the uncertainty remains, about Huawei’s precise status in the USA, and whether that will change again. In the meantime, the company has bolstered its efforts to develop its own technology in many key areas from chips to operating systems (see separate item below), which will significantly reduce the addressable market for a whole range of non-Chinese companies from Qualcomm to Google.

The USA last week sought to clarify the situation somewhat. Commerce secretary Wilbur Ross said companies are now allowed to sell components to Huawei as long as those are not deemed a threat to US national security, but the Chinese firm does remain on the entity list. That gives the unwelcome impression that the rigidity of the restrictions on trading with Huawei could change in line with the ebb and flow of US-Chinese trade wars, and the two countries’ ongoing war of words over accusations that China uses national infrastructure to spy on the US and its allies.

Ross said at a conference: “To implement the President’s G20 Summit directive two weeks ago, [the Department of] Commerce will issue licences where there is no threat to US national security. Within those confines we will try to make sure that we don’t just transfer revenue from the US to foreign firms. Huawei itself remains on the Entity List, and the announcement does not change the scope of items requiring licenses from the Commerce Department, nor the presumption of denial.”

This provided some clarity, though it disappointed those who had assumed that Huawei was off the entity list completely – repeating last spring’s saga when ZTE was subject to a supply ban, which was reversed after a few weeks, though only after the second Chinese vendor had been forced to suspend most of its operations because it could not access US parts.

Huawei is far less reliant on US components, but both it and its suppliers will need a clearer picture of how the Department of Commerce will decide which components  are a potential threat to national security. Meanwhile, while Ross gave a clear indication that the new policy was indefinite, White House economic advisor Larry Kudlow told news channel CNBC that the relaxed rules will apply only for a limited time.

None of this will be sufficient to slow Huawei’s efforts, heavily backed by its home government, to develop its own technologies or transfer business with non-Chinese suppliers to local vendors.

But as well as the cost and time that it will take to achieve like-for-like substitutes for some technologies in which US firms remain pre-eminent, including top end 5G modems, Huawei faces another risk – that more bans on it taking part in 5G projects will reduce its addressable market for mobile infrastructure, squeezing its revenues, and the return on its investment in its own new 5G platforms.

The UK has been at the heart of this saga, partly because of its increased dependence, in the face of Brexit, on US goodwill; partly because its operators have been major supporters of Huawei’s networks (and Huawei is a major backer of the national 5G Innovation Centre, the focal point of the state’s 5G activities).

All four MNOs have lobbied hard to be allowed to select Huawei (and ZTE) equipment for 5G if they wish, claiming that a ban on Chinese equipment would add billions of pounds to the 5G build-out bill, and delay full coverage by some years.

Beyond the political statements, in the short term, it is easier and cheaper for operators to stick with their 4G supplier when they deploy 5G New Radio Non-Standalone (which continues to use the existing 4G core). And longer term, when operators move to the more radical migration to the 5G core, they will want the freedom to select the most advanced technology and to maximize price competition among their suppliers.

The working assumption, currently, is that operators will keep Huawei out of the core network but consider it for the RAN. BT, which said last year that Huawei was the only vendor able to deploy 5G now, is also removing the vendor’s kit from the mobile core of its cellular arm, EE (in line with its existing policy, not because of US pressures, it insists).

A report from a confidential government meeting, leaked earlier this year, suggested that Theresa May’s administration was taking a similar line. However, the government has still not made any firm rulings on whether Huawei will be barred from 5G procurements, and with a change of prime minister looming next week, policy could shift again.

Last week, an influential parliamentary committee – the Science and Technology Committee of the House of Commons – recommended that Huawei equipment should be removed from UK core networks, but said there were no technical grounds to exclude it from the RAN and other parts of the network.

The committee’s work was part of an ongoing government review of the telecoms supply chain, which is being framed as a broad assessment of potential security risks rather than specifically a response to US pressures to freeze out Huawei. The UK already has an oversight body – the National Cyber Security Centre (NCSC) – responsible for monitoring Huawei telecoms networks for any security risks, reflecting the reliance of the telecoms networks on the Chinese vendor.

Norman Lamb MP, chair of the science and technology committee, said: “We have found no evidence from our work to suggest that the complete exclusion of Huawei would, from a technical point of view, constitute a proportionate response to the potential security threat posed by foreign suppliers.” He also suggested that the work of the NCSC should be extended to scrutinize all vendors of critical infrastructure.

Huawei’s global cybersecurity and privacy officer, John Suffolk (formerly the UK government’s chief information security officer), testified to the committee, saying: “The challenge always comes in instances where the law is silent on matters, doesn’t it? For example, most laws don’t say, ‘Do not build in backdoors’. We as a vendor have never been asked to do anything that weakens the security of our product for any of our customers in any country.”

He added: “In the UK, any request for lawful interception from law enforcement agencies would be made directly to the relevant telecoms operators, and not to Huawei. Huawei would have no role in an operator’s compliance with such a request. We have never had a request from the Chinese government to do anything to compromise our security position.”

Among many expert witnesses, Alf Zugenmaier, professor at the Munich University of Applied Sciences, echoed the views of many operators and governments, including those of Germany and Canada – that the priority is to maximize protections against security attacks from anywhere, not just to exclude individual suppliers.

He said: “Your supply chain is not just linear … if you really wanted to subvert some function, there are many places where you could do so. … If governments are worried about the security of networks, it would make more sense for them to have requirements on the quality of security than on a label on a box that says ‘shipped from’.”

And Vodafone’s CTO, Scott Petty, warned that bars on specific vendors could actually weaken security protection. He told the committee: “The software code itself may have been written by Huawei, but the compiler that they used to compile that code is a US product. If they were no longer able to use that compiler [because of the US embargo], they would no longer be able to update their software, and that vulnerability would take much longer to be fixed than would otherwise be the case.”

Elsewhere in Europe, the latest front on which Huawei is fighting is Italy, the continent’s fourth largest economy.  There, the government has extended its ‘golden power’, which gives it a say in deals considered nationally strategic, to 5G infrastructure. However, it is only requiring companies to submit purchases from non-European suppliers for scrutiny, which prompted the head of Huawei Italy to call for all vendors to be treated the same. Thomas Miao said it was “very important that 5G technology is neutral” and not affected by geopolitical disputes, and said his firm planned to invest €2.75bn in Italy in the next three years, creating 1,000 direct and 2,000 indirect jobs – partly to compensate for up to 1,000 job cuts planned in Huawei USA, particularly Futurewei Technologies, its R&D arm, which employs 850 people in sites in Texas, California and Washington.

The focus of the debates over potential 5G bans has been mainly on the USA and Europe, as well as Japan, which initially took a pro-US stance but has since softened it, creating confusion in one of the most advanced 5G countries – one with its own important players in the 5G supply chain, such as NEC and Fujitsu, but also with significant operator engagements with Huawei (Softbank was its first non-Chinese Massive MIMO customer, for instance).

However, other major economies are weighing up the options, considering political points to be scored with the USA or China; risks and rewards for their operators and local vendors; and implications for their own 5G targets. These are complicated assessments. Russia, for instance, might politically back China over the USA, but weakening of Huawei could strengthen its own efforts to create a homegrown telecoms supply chain.

Brazil is another country which is not a 5G technology leader, but is a major economy and mobile deployer, and is trying to attract more hi-tech vendors to its shores. It is also the latest country to make a pronouncement about its view of Huawei and – like most of the European nations – it is more positive than the Trump administration would like. Vice president Hamilton Mourao said that Brazil would continue to work with Huawei on 4G and 5G networks – another blow to the Trumpian dream of an international coalition all joining in a ban on the Chinese firm.

“There is no veto of Huawei in Brazil. Huawei has been here for 10 years,” Mourao told journalists. Like many other politicians, he urged governments to work with Huawei to strengthen network security, and to step up safeguards regardless of the vendor. “We are experiencing a moment of instability, of competition between countries, a return to a certain protectionism,” he said.