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Vodafone looks to optimise supply chain post-Huawei

The government's decision to blacklist Huawei on security grounds could usher in a more flexible supply chain arrangement
June 23, 2021
  • Lock-in contracts in the RAN market are unfavourable for wireless operators
  • The open RAN concept should boost innovation and price discovery

At a time of unprecedented government intervention in the economy, any measures that could stimulate competition are to be welcomed, whatever the industry.

It is a week now since Vodafone (VOD) announced that it had awarded Europe’s first large-scale “open RAN” contract to a handful of alternative suppliers, Samsung Electronics (005930.KS) chief among them. The move follows on from Whitehall’s decision to nullify commercial agreements with China’s Huawei to supply new equipment for Vodafone’s 5G supply chain. National security concerns were at the heart of the decision and the existing kit put in place by Huawei is to be stripped out by 2027.

Political issues aside, the adoption of an open RAN concept by both the UK government and the European Commission could conceivably act as a spur for smaller tech providers across the continent. By disaggregating hardware and software supplies, more capital should eventually find its way to smaller specialist operators in the supply chain, driving innovation in the process.

There are echoes of Germany’s Mittelstand supply chain arrangements in terms of service agility, but a multi-strand collaborative approach should theoretically lower equipment costs, while expanding customer choice and improving network performance. There are potential challenges linked to system integration and, ironically enough, in terms of security risks (more vendors, more exposure), but the decision by Vodafone may be the first step towards wide-spread adoption on the continent.   

And why not? Certainly, existing conditions in the RAN market are neither favourable for wireless operators, nor their customer base. The RAN (radio access network) market is currently dominated by a relatively small number of suppliers which do not design their proprietary equipment and infrastructure to be interoperable.

So, you’re left with a situation where operators are forced into vendor lock-in contracts. This not only stifles competition, but it could place them at a disadvantage in terms of pricing unless some flexibility is built into the contractual provisions. Even though price competitiveness is at the heart of the Chinese business model, total reliance on Huawei’s proprietary technology would have swung the commercial advantage in favour of the vendor – or the Chinese Communist Party, depending on which way you look at it.

At any rate, it could seem slightly perverse that any company would want to enter a single-source arrangement nowadays, when the rest of the corporate world is busy ensuring increased optionality within their supply chains.

Tech minnows may require patience before any open RAN expansion starts to benefit players further down the food chain. Vodafone, understandably, has gone with well-established corporations to fill the void left by Huawei’s departure. Aside from Samsung, it has invited NEC (TYO:6701), Dell (NYSE:DELL) and California–based Wind River Systems to develop the 5G network, though one imagines that sub-contracting receipts will also expand as part of the new arrangements. Vodafone’s decision to opt for suppliers from Asia and the US would not have gone unnoticed in Brussels, given the competing merits of both Ericsson (STO:ERIC-B) and Nokia (HEL:NOKIA).

It’s doubtful whether there was any political element in Vodafone’s choice of vendors, though market access is always a central consideration in the post-Brexit era. But the decision by the UK government to eradicate Huawei from the picture may eventually be viewed as a blessing for the UK telecoms giant, given that it should allow the earliest possible exposure to new technology, while reducing the chances of ill-conceived and unwarranted capital expenditure (apologies to management).

For investors, that might be the salient point about the push towards open RAN: better financial outcomes through increased efficiencies in the adoption of new technologies. Analysts at Berenberg make the point that “[telecoms] revenue has historically shown little connection to data growth, while telecoms companies have proven to be poor in the past at capturing the value chain of new growth opportunities”.

Since 2017, Vodafone has reduced its number of suppliers by one-third, but such is the scale of the business and its ongoing capital expenditure commitments that the employment of the open RAN concept in its 5G expansion might provide a template for other parts of its operations. Group net debt stood at 70 per cent of shareholders’ funds at its March year-end, down 4 per cent on the prior year, and Vodafone is confident of achieving further cost savings through network sharing agreements in its major European markets. But the dividend has stalled since 2019 and it will need to rationalise further to free-up more capital if it intends to complete its transition to a broad-based digital services provider.

Vodafone’s chief technology officer, Johan Wibergh, is in no doubt about the efficacy of the move, and is confident that “open RAN is also reinvigorating our industry. It will boost the digital economy by stimulating greater tech innovation from a wider pool of vendors, bringing much needed diversity to the supply chain”.