The news isn't getting any better for Huawei and ZTE. As verbal sabres were being rattled about the arrest of Huawei's CFO in Canada, and her impending extradition to the US to face charges of breaching trade sanctions, the Japanese government slapped a ban on its ministries and defense forces from buying and deploying IT and telecoms equipment from Chinese companies starting in April 2019, citing cybersecurity concerns.
The move, reported by Japan's leading news agency Kyodo, was made following an agreement by Japanese government security officials, and while neither Huawei Technologies Co. Ltd nor ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) were named in any documentation, the ruling cuts them out of any public procurements.
That ruling is likely to influence the 5G procurement decisions of Japan's three main communications mobile network operators -- NTT DoCoMo Inc. (NYSE: DCM), KDDI Corp. and SoftBank Corp. -- and the upcoming 4G (and 5G) challenger Rakuten that plans to launch services in October 2019, though the latter company has not been including Chinese vendors in its network plans, opting instead to go with Nokia.
The news does not come as a major surprise: Rumors of such a ban on Chinese technology deployments had emerged in August, and even at that time it was anticipated that any ban by the Japanese government would provide strong guidance to the private sector, though none of the operators have issued any public statements saying they will not buy Huawei or ZTE network products. (See Could Japan Also Bar Huawei, ZTE?)
However, it seems highly unlikely that any operator would effectively ostracize itself in Japan, and rule itself out of any government communications services contracts, by deploying Chinese technology. The operator set to be impacted most is SoftBank, which already has Huawei and ZTE technology in its 4G networks and has been testing 5G use cases with the vendors: The Kyodo report cites company sources that say the Chinese technology will be replaced. DoCoMo, meanwhile, has been testing 5G capabilities with Huawei. (See Huawei, NTT DoCoMo Achieve Breakthrough in 5G mmWave Long-Distance Mobility Trial Over 39GHz Band, SoftBank & Huawei Demonstrate 5G Use Cases, Massive MIMO Key to 5G, Says SoftBank and Huawei Launches TDD+ With China Mobile, SoftBank.)
According to this Nikkei Asian review report, citing Tokyo-based research company MCA, Huawei's market share for basestation sales in Japan hit 13% in fiscal 2017, up from 4% in 2016, with SoftBank primarily responsible for that growth.
The reaction from the Chinese authorities was swift. During a press briefing Monday, Foreign Ministry Spokesperson Lu Hao responded to a question about Japan's new government procurement rules with the following comment (you can read a full transcript of the press conference here):
- We have noticed that the Japanese government has introduced new regulations on government procurement today. China has previously communicated with Japan through diplomatic channels. In response to a reporter's question, Japanese Chief Cabinet Secretary Yu Yiwei said that the Japanese government's regulations do not exclude specific businesses and equipment.
It should be emphasized that the essence of Chinese companies' investment cooperation in Japan is mutual benefit and win-win. China has consistently encouraged Chinese companies to conduct investment cooperation in Japan in accordance with commercial principles and international rules and in compliance with local laws. At the same time, we have also been asking the Japanese side to provide a fair, transparent and non-discriminatory environment for Chinese companies to operate in Japan. China will pay close attention to the implementation of relevant regulations of the Japanese side. What is important is that the normal business activities of Chinese companies in Japan cannot be treated discriminatorily.
The Japanese government decision heaps additional pressure on both Huawei and ZTE, which are quickly finding themselves the pariahs of the international communications networking technology market: They are now effectively blocked from potentially lucrative 5G deals in the US, Australia, New Zealand (at Spark), the UK (at BT) and now, it seems, in Japan. The efforts of the US to paint Chinese technology companies as security threats appear to be having a significant impact.
For more on the increasingly precarious international position of Huawei and ZTE, see:
- How the West Can Hurt Huawei
- Huawei CFO Committed Sanctions Fraud, US Alleges – Reports
- Nokia Sitting Pretty After Week of Turmoil for Huawei, Ericsson
- Huawei: The Signs Were There
- China Slams Huawei CFO's Arrest, Huawei 'Not Aware of Any Wrongdoing'
- Huawei Cut Out of BT's Mobile Core, Optical & Edge Plans
- Europe's Telcos Fret as Walls Close In On Huawei
- ZTE's Future at Stake as Venezuela Deal Attracts US Scrutiny
— Ray Le Maistre, Editor-in-Chief, Light Reading