DT, Orange Prove Europe Remains Hostage to US, Chinese Tech

Stumbling in a digital wilderness
Any Europeans who left in search of a regional alternative would be stumbling around in a digital wilderness. Höttges hit on the crux of the problem when he said the tech giants grow stronger as they continue to amass data. As a relatively nascent business, the market for digital assistants may seem less impregnable. But the tech giants can link their digital assistants to a formidable range of other data-fed services. An Amazon Prime customer, paying an annual subscription for all sorts of physical and online goodies, can use Alexa to shop, play music and control household appliances. For a European telco trying to compete, the main upsell is connectivity. Djingo might help Orange to flog additional telecom services and be more attractive than traditional rivals. But it seems likely to be a poor substitute for Alexa.

A data shortage is not the only problem. European telcos lack any serious heft when it comes to research and development. Orange claims to have spent about €700 million ($793 million) in "research and innovation" in 2017, while Deutsche Telekom stumped up as little as €57.7 million ($65 million), according to its annual report. Facebook's commitment was a gargantuan $7.75 billion. Even if the artificial intelligence that underpins Djingo were superior to Alexa or Google Assistant, any advantage might fast disappear as the tech giants flexed their R&D muscle in response. (See Telcos Still in R&D Shadows as Spending Falls.)

Table 1: R&D Spending ($M)

2013 2014 2015 2016 2017 2018
AT&T R&D expenses 1,488 1,730 1,693 1,649 1,503
As % of sales 1.20% 1.30% 1.20% 1.00% 0.90%
BT R&D expenses 226 116 97 81 79
As % of sales 0.90% 0.50% 0.40% 0.30% 0.20%
Deutsche Telekom R&D expenses 114 112 127 99 68
As % of sales 0.20% 0.20% 0.20% 0.10% 0.10%
Ericsson R&D expenses 3,701 4,172 4,000 3,632 4,356
As % of sales 14.10% 15.90% 14.10% 14.20% 18.80%
Facebook R&D expenses 1,415 2,666 4,816 5,919 7,754
As % of sales 18.00% 21.40% 26.90% 21.40% 19.10%
Google R&D expenses 7,137 9,832 12,282 13,948 16,625
As % of sales 12.90% 14.90% 16.40% 15.50% 15.00%
Huawei R&D expenses 4,632 6,168 9,001 11,536 13,544
As % of sales 12.80% 14.20% 15.10% 14.60% 14.90%
Nokia R&D expenses 3,082 2,292 2,502 5,880 5,784
As % of sales 20.60% 16.60% 17.00% 21.10% 21.20%
Orange R&D expenses 918 861 854 830 824
As % of sales 1.90% 1.90% 1.80% 1.70% 1.70%
Telecom Italia R&D expenses 48 65 61 52 51
As % of sales 0.20% 0.30% 0.30% 0.20% 0.20%
Telefónica R&D expenses 1,231 1,307 1,241 1,066 1,014
As % of sales 1.80% 2.20% 1.90% 1.70% 1.70%
Notes: Nokia's R&D spending jumped in 2016 following its takeover of Alcatel-Lucent that year; currency conversions are based on exchange rates in July, when table was initially compiled. (Source: Companies, Light Reading).

Dependence on Chinese tech is an even bigger geopolitical worry. Huawei has become a go-to vendor for telcos throughout Europe, dislodging Ericsson in 2015 as the world's biggest supplier to communications service providers globally. Agitating at Orange's event, Höttges seemed bothered mainly about Internet companies rather than telecom vendors. But of all Europe's major telcos, Deutsche Telekom is perhaps the most heavily reliant on Huawei. It built a 4G network with the support of the Chinese vendor, and has been testing Huawei's 5G gear, too. Most strikingly of all, Deutsche Telekom's public cloud service has been developed using Huawei technology.

This puts Höttges in an extremely awkward position as he grumbles that so little data is stored on European companies' clouds. Ever since it launched its public cloud offer, Deutsche Telekom has insisted that entrusting data to a German firm compliant with Germany's strict privacy rules is safer than using a company from outside Europe. But what if that German firm's cloud partner is a Chinese technology giant that -- rightly or wrongly -- has aroused security concerns around the planet? (See Eurobites: 'German Cloud' in Demand, Says DT.)

Table 2: Countries Where Huawei Faces Restrictions

Status Country Details Known Huawei customers Other major telcos affected by restrictions
Govt restrictions USA US House of Representatives warned major service providers off using Chinese vendors in 2012, arguing "the risks associated with Huawei's and ZTE's provision of equipment to US critical infrastructure could undermine core US national-security interests." US temporarily banned component sales to ZTE earlier this year None among Tier 1 telcos, but Sprint acquired Huawei gear with its Clearwire takeover and still had this in its network in 2016, as revealed by Light Reading AT&T, T-Mobile US, Verizon
Govt restrictions Australia Both Huawei and ZTE are barred from the 5G market and cannot sell products to NBN Co, Australia's national wholesale network Vodafone Hutchison Australia Telstra, Optus
Govt restrictions New Zealand The government has warned Spark off using Huawei's 5G equipment and by implication would not tolerate 5G deals between Chinese equipment vendors and other telcos Spark Vodafone New Zealand, 2degrees
Govt and operator restrictions Japan Starting in April 2019, Japan's government will ban its ministries and defense forces from buying and deploying IT and telecoms equipment from Chinese companies, citing cybersecurity concerns; SoftBank is reportedly replacing Huawei as a 4G supplier SoftBank NTT DoCoMo, KDDI, Rakuten
Govt warning; operator restrictions UK Security watchdogs have this year flagged vulnerabilities in Huawei's equipment; telecom incumbent BT is stripping Huawei out of its mobile core and optical networks and says it will not buy any of Huawei's mobile edge computing products BT, Three UK O2, Vodafone UK
Govt restrictions Taiwan Ban on equipment developed by either Huawei or ZTE has been in place for the last five years and was recently renewed, according to press reports None Chunghwa Telecom, Taiwan Mobile, Far EasTone and Taiwan Star
Operator restrictions France Orange tells Bloomberg it will not use Huawei as a 5G kit supplier; Orange subsequently confirms to Light Reading that comments were made "in the context of France" Altice, Bouygues Telecom Orange, Iliad
Sources: Operators, regulators, various news sites.

Stripping Huawei out of its networks and data centers would be much tougher than building a walled garden around Djingo. Any government ban on Chinese vendors would drive up costs and impede the rollout of next-generation 5G networks, Deutsche Telekom has acknowledged. In Canada, where operators Telus Corp. (NYSE: TU; Toronto: T) and BCE Inc. (Bell Canada) (NYSE/Toronto: BCE) are under US pressure to sever ties with Huawei, changing vendors would add $1 billion in expenses, according to press reports. Nevertheless, the German operator has said it "takes the global discussion about the security of network equipment from Chinese vendors very seriously" and is "reassessing" its procurement strategy. (See Eurobites: Deutsche Telekom Joins Caravan of Concern Over Huawei and Where Huawei Fears to Tread.)

Can Europe ever develop a vibrant technology sector to challenge the US and China? Even with a huge regulatory and cultural shift, it might be too late. While laudable, the development by Deutsche Telekom and Orange of a home-grown digital assistant seems like tinkering with an existing formula, and it is clearly overshadowed by moves such as the establishment of a $100 billion technology investment fund by Japan's SoftBank. One thing is for certain: Grumbling about the US and China will serve only to raise difficult questions for Europeans tied to their technologies.

— Iain Morris, International Editor, Light Reading

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t.bogataj 12/18/2018 | 2:59:44 AM
Artificial vs Natural "Just 51% of companies in Germany believe in the potential of artificial intelligence, compared with 91% in China and 97% in the US."

This is the best proof of existence of natural intelligence in Europe.

sarcher60555 12/19/2018 | 1:51:36 AM
Tis the Giving season. "A desperate Vincent Peng, the president of Huawei's business in Western Europe, told the Financial Times that Huawei would do "anything" to restore confidence."

Lots of nice gifts to decision makers at work desks around Europe with Huawei bow on top?
jexterjason 1/16/2019 | 11:33:56 PM
DT, Orange team Europe's tech dilemma like the deep and meaningful partnership two of its biggest telcos touted this week. The CEOs of Orange (Stéphane Richard) and Deutsche Telekom (Timotheus Höttges) see more than €120bn a year flow through their combined cash tills. The two were on stage at Orange's innovation showcase in Paris to team up on AI, and they had a mission.
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