The UK’s mobile telephony providers have been ordered to strip out Huawei’s existing 5G gear from their networks by 2027 and have been banned from purchasing new Huawei 5G equipment from the end of the year.
The measures will delay the UK's full roll-out of 5G by up to three years and the associated costs could run into the billions, although some believe that the magnitude of the eventual bill is being overstated by the main UK players, as only about two-fifths of the existing 4G radio access network (RAN) kit was made by Huawei and cannot readily be upgraded to a 5G RAN system anyway. The move will certainly slow the transition towards full-coverage 5G, but the mobile providers were faced by substantial capital costs regardless of any political outcome.
What it will mean for consumer bills is difficult to determine, but the O2 network – owned by Spain’s Telefónica (BME:TEF) – could be an unintended beneficiary, as it does not have any Huawei equipment in its set-up.
Both Vodafone (VOD) and BT are set to pay the price for underestimating the political risks associated with a company that has always struggled to convince foreign governments of its genuine independence from China’s ruling Communist Party, particularly in the realm of state-sponsored technology theft and sabotage.
It is this last point that has preoccupied policymakers in the US, eventually leading to a move by the US Department of Justice in January 2019, charging Huawei with bank fraud and stealing trade secrets.
This was quickly followed by an executive order from Donald Trump, which gave the federal government the right to block US companies from buying foreign-made telecommunications equipment deemed a national security risk. It was aimed primarily at Huawei and its Chinese peer ZTE, with the result that they could no longer engage with US companies that supply advanced semiconductor equipment. The UK and other western democracies have thus found themselves at the heart of a power struggle between the world's two biggest economies. That's far from ideal when there is also a post-Brexit trade agreement in the balance.
But, it is doubtful whether the UK government has taken a unilateral decision on the issue, as the UK is now placing greater store on the intelligence-gathering capabilities of its so-called “Five Eyes” allies – Australia, Canada, New Zealand and the US.
Huawei has been operating in the UK for around 20 years, but it has never received unqualified support from Whitehall. The fifth annual report for the Cabinet Secretary from the Huawei Cyber Security Evaluation Centre Oversight Board (yes, such a thing exists) identified “significant, concerning issues in Huawei’s approach to software development bringing significantly increased risk to UK operators”. These risks have been exacerbated now that US tech companies have been blocked from providing components for Huawei, a move that dents the UK's ability to vet the Chinese company's equipment.
Whatever the veracity of the charges against Huawei, UK mobile operators will now have to find a replacement supplier. Ericsson (US:ERIC) and Nokia (HEL:NOKIA) have been mentioned in despatches, while Siemens (ETR:SIE) could conceivably provide hardware and consultancy services given it has worked closely with the Chinese company in the past.
Ericsson accounts for a quarter of the 2G/3G/4G mobile network infrastructure with two-dozen international 5G contracts, which include all four tier one carriers in the US – a significant advantage given the political backdrop.
According to market research from the Dell’Oro Group, it has lagged some competitors in terms of 5G penetration, accounting for 14 per cent of the global share by revenue, but this is partly explained by the (unofficial) preferred status afforded to Huawei and ZTE in the domestic Chinese market.
Asia Pacific markets continue as the main drivers of growth in the 5G infrastructure market, but it is perhaps telling that Huawei lost out to Nokia and Ericsson in the contest to supply kit for Singapore's main 5G networks, while the Australian government has banned Huawei and ZTE outright.
On the face of it, the UK move is positive for both Ericsson and Nokia, although questions remain over the European providers from a supply chain perspective, particularly if China decides to play hardball. Perhaps Telefónica is the clearest beneficiary at this early stage given the deteriorating political backdrop.
