US authorities investigating whether Huawei violated sanctions against Iran could deliver an unprecedented blow to the global telecom industry by imposing restrictions on the Chinese company. (See US Investigating Huawei for Sanctions Violations – Report.)

The number-one fear is that Huawei Technologies Co. Ltd. will suffer the same penalty as smaller rival ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763). Last week, after it was accused of failing to put its business in order, ZTE was banned from purchasing US-made components for seven years. Its original crime? Violating sanctions against Iran. (See ZTE in Existential Crisis as It Slams 'Unfair' US Ban, Considers 'Judicial Measures'.)

The knock-on effect of that decision has already been dramatic. A report from the Economist indicates that between 80% and 90% of ZTE's products used American components in 2016, according to UBS. With its supply chain in jeopardy, ZTE says its very survival is at stake. Shares in component suppliers such as Acacia, which derives 30% of its revenues from ZTE, have plummeted.

ZTE's customers are also nervously tracking developments. "We use ZTE in Malaysia, Pakistan and Hungary and we are following the situation closely," said Sigve Brekke, the CEO of Norway's Telenor Group (Nasdaq: TELN), when asked about ZTE during a recent earnings call with analysts. "This is something we have been following for the last one and a half years since the first order came out. I cannot comment more than that." (See Telenor's Cost-Cutting Focus Rattles Investors.)

ZTE's main rivals, meanwhile, may be hovering greedily, like carrion crows over a wounded animal. "We come from a strong security background and are trusted from a quality point of view. We have a good chance to succeed in this environment," Nokia Corp. (NYSE: NOK) CFO Kristian Pullola told Light Reading when asked if there was opportunity in ZTE's misfortune. "We will monitor the situation and try to use any opportunity that would present itself in radio, routing or optical." (See Nokia Tumbles on Weak Results, Insists Good 5G Times Lie Ahead.)

While Ericsson CEO Börje Ekholm struck a warier tone during a recent earnings call with analysts, operators are evidently jumpy. "Many customers are asking questions and that is not so strange, but let's refrain from summarizing that yet," he said. (See Ericsson Takes Giant Leap Toward Profitability.)

But if measures against ZTE have caused this much turmoil already, a ban on Huawei could prove even more disruptive. With total revenues of $17.2 billion last year, ZTE remains some distance behind the triumvirate of Huawei, Ericsson and Nokia Corp. (NYSE: NOK), and a marginal presence in some countries. Huawei is today the largest of those industry giants, generating $92.5 billion in sales last year. About $47 billion came from network sales to operators.

Figure 1: Annual Sales in $B (Current Exchange Rates) Source: Companies.

For some of the US component makers, a ban on selling gear to Huawei could be devastating. NeoPhotonics Corp. (NYSE: NPTN) looks the most exposed, generating as much as 40% of its revenues from sales to Huawei, according to Michael Genovese, an analyst with MKM Partners. But Oclaro Inc. (Nasdaq: OCLR), Finisar Corp. (Nasdaq: FNSR) and Lumentum Holdings Inc. are also heavily dependent on contracts with Huawei, deriving between a tenth and a fifth of their revenues from the Chinese company.

Genovese, who monitors optical stocks for MKM, also thinks a ban could translate into an even bigger opportunity for the likes of Nokia than restrictions on ZTE alone. "If Huawei were to eventually be cut off from buying US components, which is not our base case assumption, then the market share gain opportunities for Nokia, Ciena and Infinera would become even greater, in our view," he said in a research note this week.

The optical upside for rivals to Huawei and ZTE could be considerable. According to MKM Partners, Huawei is currently the number-one optical systems player in the world, while ZTE occupies the number-three spot. "We think Nokia has a great opportunity to gain share from ZTE in China and outside of China," said Genovese. "Ciena and Infinera will also likely gain some share from ZTE outside of China."

Next page: Rising tension

Rising tension
But optical systems are only one part of the story. Outside the US, where major US operators are already forbidden from using its equipment, Huawei sells a diverse array of fixed, mobile and core network equipment to many of the world's biggest operators. In Europe, service provider giants including Germany's Deutsche Telekom AG (NYSE: DT), Spain's Telefónica and the UK's BT Group plc (NYSE: BT; London: BTA) all have long-established relationships with the Chinese vendor.

And while Huawei is more self-reliant than ZTE, its product lines still use gear from US companies to varying degrees. Finding alternatives to those suppliers could be a long, arduous process.

As unlikely as a ban might seem at this stage, service providers will be edgy. If they cannot get the equipment they need from Huawei, they will also need to find alternatives. Given the role that vendors now play in managing service provider networks, swapping one for another may not always be a straightforward task.

The disappearance of Huawei as an equipment option could also lead to an increase in prices. That may sound like good news for the likes of Ericsson and Nokia, whose earnings have suffered partly because of price-based competition from Huawei and ZTE. But it would be unwelcome to service providers making costly investments in next-generation 5G networks and the supporting infrastructure.

Tension between operators and vendors is already high. At trade shows and conferences, telcos continue to grumble about the lack of interoperability between different suppliers, especially when it comes to new virtualized network products. Some of the biggest have their eyes on open source technologies and software startups as alternatives. Disruption to the equipment triumvirate could fuel that interest. (See DT Demands Automation, Cloud Tech From Pan-Net Suppliers.)

There is still hope that an investigation by the US Department of Justice will clear Huawei. It denies any wrongdoing, which would appear to include the sale of equipment to Iran. But the clampdown on ZTE and other anti-China measures do not offer encouragement. Politicians are trying to introduce legislation that would make it even harder for both Huawei and ZTE to operate in the US. President Donald Trump has proposed slapping tariffs on up to $60 billion of Chinese imports. (See Trade Warmonger Trump May Slap Tariffs on Chinese Tech – Reuters.)

For all the latest news from the wireless networking and services sector, check out our dedicated mobile content channel here on Light Reading.

Behind all this is deep-seated resentment about Chinese protectionism and the suspicion that Chinese companies have plundered US innovation. That has morphed into anxiety the US could now fall behind China in technologies like 5G and artificial intelligence. (See Huawei, ZTE in the Eye of a Trade Storm.)

But a ban on sales to Huawei could backfire, not least by hurting the US component makers that depend on business with the Chinese vendor. It could also prompt retaliatory measures. Even now there is some concern that Chinese regulators may try to block a takeover of NXP Semiconductors N.V. (Nasdaq: NXPI), a semiconductor business headquartered in the Netherlands, by Qualcomm Inc. (Nasdaq: QCOM), a Californian chipmaker.

Investors and analysts look uneasy, if not panicked. Shares were down this week in components companies, including Nvidia Corp. (Nasdaq: NVDA) and Advanced Micro Devices Inc. (NYSE: AMD), falling as much as 7% in NeoPhotonics on Wednesday. Genovese points out that an investigation could take at least one year and lead to a fine, in the first instance, if Huawei is found guilty.

"It is worth noting that ZTE's sanctions violation case brought by the Commerce Department originally resulted in fines and penalties against management and employees," he said in this week's research note. "Investors are clearly worried that Huawei may eventually be banned from buying US technology. We share this concern, but we do not think this outcome is either preordained or imminent."

Across the global telecom industry, many will pray he is right.

— Iain Morris, International Editor, Light Reading