Ericsson and Nokia have displayed a Nordic reserve when asked if difficult times for Huawei spell opportunity for them. Börje Ekholm, Ericsson's boss, has even complained that "uncertainty" regarding the status of Chinese vendors is bad for everyone. But that uncertainty lifted in the UK this week after the government imposed tough new restrictions on China's biggest vendor. As Brexiteers get set for Independence Day celebrations, Nordic equipment makers could be in party spirits too.
Notwithstanding some initial confusion, the government's limitations on Huawei look relatively transparent. Banned from "core" networks, it will not be able to provide more than 35% of the site equipment in any national 5G network or carry more than 35% of a network's traffic (the distinction is important because city sites are far busier than rural ones). Huawei faces similar restrictions in the fixed broadband market as well, though the metric used there is homes passed.
Inevitably, this means some operators will have to cut back on Huawei. BT is the most heavily exposed, having relied on the Chinese vendor to build its 4G network in urban areas. Because operators need to use the same vendor across 4G and 5G -- or risk interoperability problems -- much of this 4G equipment will have to go. If Huawei accounts for about two thirds of the entire network, as reports suggest, BT may have to replace equipment at some 12,500 sites. Earlier this week, it estimated the costs of an overhaul, including fiber replacement, at £500 million ($656 million) over the next five years.
Three, the smallest of the country's service providers, is also in trouble. In 2018, it named Huawei as the only vendor it would use to build a 5G access network. Accordingly, the Chinese company has been replacing old Samsung equipment that supports Three's 4G services. Now, the operator needs an entirely new supplier strategy.
Circumstances are much better for Vodafone and Telefónica's O2, the other two mobile operators. Vodafone has Huawei equipment at about 6,000 of its 18,000 mobile sites and may be not much above the 35% threshold on the 4G side. It has reportedly said it will be compliant with government rules by the fall. O2 counts Ericsson and Nokia as its main radio access network suppliers and is already using only a tiny amount of Huawei gear.
The natural assumption would be that Ericsson and Nokia come in as substitutes for Huawei at BT and Three. To avoid over-reliance on Nokia, which it already uses in areas not served by Huawei, BT may see Ericsson as the obvious choice. Nokia, meanwhile, could be in a good position to land a new contract with Vodafone. Under a strategy developed before this week's government decision, Vodafone has been phasing out the Finnish vendor, which this time last year provided equipment for about 2,000 sites. Even tougher restrictions on Huawei, which remain a future possibility, would leave Vodafone at the mercy of Ericsson unless there is another supplier in the mix.
Continued Nordic reserve would be justified, though. In opposing a Huawei ban, service providers have grumbled it would harm competition and leave them with few alternatives. None will be happy that government intervention has forced it to open talks with Ericsson and Nokia. Attempts by those vendors to sell equipment and services at high prices could backfire. "If Nokia and Ericsson are smart -- which I'm sure they will be -- they will make very competitive 4G/5G RAN offers to UK MNOs [mobile network operators]," tweeted Gabriel Brown, a principal analyst with Heavy Reading. "It will be far better for them to secure volume and footprint than to seek higher prices on low volumes."
If Nokia and Ericsson are smart -- which I'm sure they will be -- they will make very competitive 4G/5G RAN offers to UK MNOs. It will be far better for them to secure volume and footprint than to seek higher prices on low volumes. https://t.co/nFYPxvbdpW— Gabriel Brown (@Gabeuk) January 30, 2020
The other risk is that UK operators look elsewhere. The alternatives are few: Together, Ericsson, Huawei and Nokia account for about 80% of the mobile infrastructure market, and ZTE, another Chinese vendor, is now banned from operating in the UK. That leaves only Samsung as a mainstream choice, and the South Korean firm has a relatively weak presence in Europe's mobile 5G market. Nevertheless, it has an existing relationship with Three, and seems highly regarded by Vodafone's technical experts. When the Telecom Infra Project issued a request for information, seeking more open and interoperable kit, Samsung scored higher than any other respondent, according to Yago Tenorio, Vodafone's head of network strategy.
Alternatively, UK operators may turn to much smaller companies touting these "open RAN" products. Vodafone is already carrying out trials in the UK and Ireland with Mavenir Wireless and Parallel Wireless, two challengers with US headquarters, and it clearly views open RAN as part of its strategy to improve "supplier diversity." The drawback today is that open RAN remains immature and compares unfavorably with traditional products on the technical front. It seems unlikely to secure more than a small percentage of work for the time being.
Shareholders in Ericsson and Nokia seem to have barely registered developments in the UK, which, of course, accounts for only a small percentage of sales at those companies. Ericsson's share price was unchanged when markets closed on January 28, the day of the UK's Huawei announcement, while Nokia's edged up 2% before dropping again the next day. This week's developments could open the door for a bigger UK role, but -- as with Brexit -- any partying at this stage would look premature.
- BT says cap on Huawei's UK 5G role will cost it £500M
- Huawei's brave face is unconvincing in the wake of a UK clampdown
- Tough UK limits on Huawei's role in 5G threaten telco plans
- Short on 5G options, Vodafone gets set for 150K-site shake-up
- Vodafone UK Not Radio Gaga About Nokia
— Iain Morris, International Editor, Light Reading