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DT's Dinner With Huawei Could Become Dog's Breakfast

Iain Morris
2/12/2019

Of all Europe's major telcos, Deutsche Telekom must be the jumpiest whenever politicians argue for Huawei's exclusion from Europe.

The German telecom incumbent and Chinese equipment giant are entwined like Burt Lancaster and Deborah Kerr on a Hawaiian beach. In Germany, Deutsche Telekom AG (NYSE: DT) counts Huawei Technologies Co. Ltd. as one of its two main suppliers of radio access networks (the other being Ericsson AB (Nasdaq: ERIC)) and uses its core network technology, Light Reading understands. It has already put up 5G antennas from Huawei in parts of the country. (See DT Poised for 5G Launch as Huawei Antennas Go Up in Berlin.)

From Here to Eternity... for the Time Being
Starring Burt Lancaster as Huawei and Deborah Kerr as Deutsche Telekom.
Starring Burt Lancaster as Huawei and Deborah Kerr as Deutsche Telekom.

But eastern Europe has also been fertile ground for that relationship. In Poland, where a former Huawei employee was recently charged with spying, Deutsche Telekom's T-Mobile subsidiary has used Huawei equipment to build a 5G network. Hungary's Magyar Telekom, another Deutsche Telekom business, has been testing 5G services with Huawei, as well. And its optical network was built with the Chinese vendor. Indeed, the list of deals between Huawei and Deutsche Telekom affiliates or assets unfurls like a restaurant bill after a very expensive meal. (See Eurobites: Huawei Washes Its Hands of Arrested Exec in Poland.)

Dining out with Huawei now threatens to leave Deutsche Telekom with a bad case of indigestion. Supposedly worried about the Chinese military's possible use of Chinese network gear to spy on other countries, European authorities are considering a ban on Huawei and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763), its smaller Chinese rival. In Poland, where Huawei is understood to employ about 900 people, exclusion from the 5G market seems likely. The Czech Republic's security watchdog has issued a warning about the risk Huawei poses to critical infrastructure. The European Commission could tweak existing legislation to shut Huawei and ZTE out of the European Union's 5G markets, according to reports. (See Eurobites: BT Investors Nervous as Post-Patterson Era Kicks In.)

Table 1: Deutsche Telekom's Known Huawei Deals

Country Subsidiary Details
Austria T-Mobile Austria 5G RAN, optical transport network
Czech Republic T-Mobile Czech Republic 4G RAN, FWA equipment (CPEs)
Germany Telekom Deutschland 4G RAN, 5G RAN, mobile core
Germany T-Systems Cloud systems
Greece OTE FTTC
Hungary Magyar Telekom Passive optical network
Netherlands T-Mobile Netherlands 4G RAN
Poland T-Mobile Poland 5G RAN
Sources: Deutsche Telekom, Huawei, Light Reading, national operating companies, other.

US Secretary of State Mike Pompeo has now barged in. During a visit to Budapest, he reportedly said Huawei's presence in Hungary, Poland and Slovakia could obstruct US partnerships with those countries. The warning is part of a campaign against Huawei by the US, which accuses the Chinese vendor of fraud, industrial espionage and trade violations in Iran. As Hungary and Poland look to buy military equipment from the US, Pompeo's words could be very persuasive. (See Huawei Hits Out at DoJ Amid Global Backlash.)

Moves to restrict Chinese vendors would be a potential nightmare for Deutsche Telekom. In the worst-case scenario, a full ban on Huawei's sale of radio gear might force the German operator to rip out equipment it has already deployed, spending hundreds of millions in the process. Even if a ban were limited to the core -- a sensitive part of the network that includes important IT systems -- it would lead to considerable disruption. Replacing one vendor with another in the core is a laborious, two-year job, according to BT Group plc (NYSE: BT; London: BTA) and Vodafone Group plc (NYSE: VOD), two other European operators that use Huawei in their networks. (See Huawei Controversy Pits Spooks Against CSPs and Huawei Cut Out of BT's Mobile Core, Optical & Edge Plans.)

It is not only Deutsche Telekom that might suffer. Because it has become so dependent on Huawei across so many European markets, any legislative moves against Chinese vendors could seriously hinder the rollout of 5G services in a region already seen as a 5G laggard. Although Deutsche Telekom has had little to say about its 5G plans outside Germany, last October it pledged to cover 99% of the German population with a 5G network by the end of 2025. A Huawei ban could delay rollout by two years, said the operator in documents obtained by Reuters. (See Deutsche Telekom Targets 99% 5G Coverage in Germany by 2025.)

Table 2: Huawei Heebie-Jeebies: Where We're At

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 and operator restrictions Australia Both Huawei and ZTE are barred from the 5G market and cannot sell products to NBN Co, Australia's national wholesale network. In January, TPG stops building a 4G network with Huawei Vodafone Hutchison Australia, TPG 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 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
Operator restrictions Spain Vodafone CEO Nick Read says he will "pause" the rollout of Huawei products in core networks, deemed to be the most sensitive part of the infrastructure, amid government security concerns. Vodafone, he said, uses Huawei's core equipment in Spain and some smaller European markets MásMóvil, Orange, Telefónica, Vodafone
Govt warning Poland Poland is poised to exclude Huawei from its 5G market, according to a Reuters report citing government sources, after its recent arrest of a Huawei employee on charges of spying Orange, Play, Polkomtel, T-Mobile
Sources: Light Reading, news outlets, other.

But as Pompeo demonstrated this week in Hungary, Deutsche Telekom may have more to worry about than just European regulators. Fast-growing subsidiary T-Mobile US Inc. is waiting for US authorities to approve its merger with smaller rival Sprint Corp. (NYSE: S). In uniting the country's third- and fourth-biggest mobile operators, that deal would produce a much beefier rival to AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ). But not everyone is happy. Despite assurances from Deutsche Telekom, trade unions see the merger as a threat to jobs. Some opponents have argued that Deutsche Telekom's close European relationship with Huawei is reason enough to block the deal. (See Darkness Gathers Over T-Mobile/Sprint Merger.)

That could be an egregious case of the US throwing its weight around. Punishing US telcos because of a parent company's European supply chain would set an unusual precedent. Nor could authorities easily justify tearing up merger plans on security grounds. A government warning has stopped T-Mobile and Sprint from buying Huawei equipment since 2012, and T-Mobile's core network systems are separate from Deutsche Telekom's. Indeed, even in Europe, there would be technical and regulatory obstacles to building a single mobile core network for several countries, according to a reliable source. Most regulators, for one thing, require operators to keep subscriber information within national boundaries.


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But while some European authorities agitate for a Huawei ban, senior German politicians appear less keen on restrictions. They will realize that any delay to 5G rollout could represent a major setback for Germany's Industrie 4.0 initiative, which aims to bring digital technologies into Germany's manufacturing sector. Germany also looks more vulnerable than other European markets to Chinese retaliation. Over the last two decades, manufacturers of German cars and machine tools have grown to appreciate China as one of their biggest export markets. Indeed, those deals opened the doors for Huawei in Germany, according to a source who preferred to remain anonymous, and explain why it has built so many European networks for Deutsche Telekom, a company in which the German government still holds a 31.9% stake. (See Industrie 4.0: Rebooting Germany.)

Asked this week about the Huawei situation, Deutsche Telekom said it took the global discussion regarding network elements "very seriously" and already has other vendors in the mix. "Manufacturers are primarily Ericsson, Nokia, Cisco and Huawei," says a spokesperson for the company. "Nevertheless, we are currently re-evaluating our procurement strategy." Extricating itself from this geopolitical affair could be the greatest network challenge it has ever faced.

— Iain Morris, International Editor, Light Reading

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