The disconnect between politics and the commercial realities of the telecom market could hardly be more apparent. Governments in Western Europe are reportedly under renewed pressure from US authorities to shut out Huawei, China's biggest maker of network equipment (and, according to its enemies, a major security threat), from 5G network deals. (See Eurobites: US Leans on Germany, UK to Give Huawei the Heave-Ho.)
Huawei, meanwhile, says it has already done 14 deals for new 5G equipment in Europe, and shipped more than 10,000 5G basestations outside China. Talk about trying to barricade the door when suspects are deep inside the bank vault. (See Huawei Has Shipped 10K 5G Basestations Outside China.)
Very deep, in the case of Huawei, which is understood to be providing core network technology for Deutsche Telekom AG (NYSE: DT), Europe's biggest telco. For regulators in the know, the core network is far more vulnerable to a "hack" than any radio gear because it is linked to important IT systems and customer information. Get spyware into the core and a gear maker could run riot.
It is not just Deutsche Telekom, either. Huawei Technologies Co. Ltd. is a major supplier to BT Group plc (NYSE: BT; London: BTA), the UK telecom incumbent, and mobile rival Three UK. It is active in other big European markets such as Spain. The line-up of speakers at its European events typically features executives from the region's best-known telco brands. In some form or another, they are all Huawei customers.
For any of these operators, the spectacle of Huawei's public grilling must be nasty. Huawei's exclusion from the 5G market, following a clampdown in Australia and New Zealand, might force them to abandon trials, ditch contracts and turn to one of Huawei's European rivals instead. That could drive up costs and delay the rollout of 5G services. "With a view to timely expansion and investment requirements … it will be difficult to afford to exclude high-performance suppliers in Germany," said a spokesperson for Deutsche Telekom. Unless rivals also rely on Huawei, restrictions could leave a Huawei customer at a serious competitive disadvantage.
Worse still would be an outright ban on Huawei, with customers made to rip out existing products and replace them with another gear maker's equipment and software. This kind of switch is "absolutely not" easy, according to an executive at a service provider using ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763), a smaller Chinese vendor facing the same regulatory backlash. The difficulty of executing a change probably explains why some customers have stuck with ZTE when US sanctions have threatened its very survival. (See ZTE's Future at Stake as Venezuela Deal Attracts US Scrutiny and Amid the rubble of L'Aquila, ZTE tries to rebuild.)
The issue is now entering the public consciousness. Previously confined to the pages of trade publications and the financial press, it was covered in a BBC report this week. Yet that story fails to point out the biggest potential impact on most readers of a Huawei ban -- not a guarantee their data will be safe from Chinese eyes but higher prices and the tardy introduction of 5G services. Restricting an operator's choice of vendors would inevitably drive up its costs, said executives from Three at a recent press briefing. To guard its profit margins, a telco might then increase service charges. "That wouldn't be something the government would want as a consequence and so we need to make sure this is managed in a sensible way," said Dave Dyson, Three's CEO. (See Banning Huawei From UK Could Drive Up Consumer Prices, Warns Three CEO.)
Spies like us
Are Western governments right to worry about Chinese spying? No doubt -- just as they should worry about Russia's abuse of social media networks to influence Western elections. But excluding Huawei and ZTE would not ensure a country's organizations and people are safe from snooping. Chinese authorities could plausibly insert microchips in equipment Chinese contractors are assembling for Western clients, a scenario described in a recent Bloomberg report. Moreover, the security spotlight that now shines brightly on Huawei and ZTE makes them a risky conduit for Chinese spooks. Why not target Western rivals that manufacture goods in China? (See Huawei, ZTE Charm Offensive Just Got Harder and Chinese Hardware Hack Threatens US Tech Supply Chain – Bloomberg.)
Huawei's European customers are adamant that its gear is already subject to the most rigorous testing. "All network elements are intensively tested before use via a Privacy and Security Assessment (PSA) and their behaviour (e.g. data streams, data processing etc.) is analyzed during operation," said Deutsche Telekom's spokesperson in a written statement. "In addition, there is also an intensive exchange of information and cooperation with the manufacturers during live operation (i.e. after the PSA procedure has been successfully completed)."
Phil Sheppard, Three's director of network strategy, has similarly rejected the security concerns about Huawei. "We have spent a long time … to ensure the security picture is fully covered," he said during a recent press briefing. "We've done more than we've done for any other vendor in terms of ensuring security."
Sheppard also drew attention to the Huawei Cyber Security Evaluation Centre, a government validation facility now several years old. It was this facility that rang alarm bells in July when it said various shortcomings in Huawei's engineering processes had exposed new security risks. But does this mean Huawei is a riskier bet than its Western rivals or simply an organization that has been more eagerly scrutinized? There does not appear to be an Ericsson Cyber Security Evaluation Centre, or one for Nokia. Over in Germany, meanwhile, Deutsche Telekom complains that state departments "have … not provided reliable information on the security-critical properties of components from individual suppliers." (See UK Govt Warns Telcos on Choice of 5G Vendors.)
In the current febrile environment, government authorities may seize on the merest suggestion of Chinese subterfuge, including the recent Bloomberg report, to justify restraints on Chinese companies. Security is just one facet of a looming tech war between the US and China, as each aims to control the technologies that will shape the twenty-first century. Rankled that China has ripped off their intellectual property, US hawks are now terrified by China's growing might in areas like 5G and artificial intelligence. But any punitive measures seem unlikely to halt this. The recent US clobbering of ZTE -- temporarily banned from acquiring US components because of a sanctions breach -- may simply spur China to become self-sufficient in components, for instance. (See ZTE Racks Up $790M Q1 Loss on US Ban.)
In the more immediate term, perhaps the gravest danger is that China answers the campaign against Huawei and ZTE with its own restrictions. "If this is leading to difficulties for Huawei to sell in Western countries that will, of course, have negative consequences for the sector as a whole because the Chinese government may respond," said Bengt Nordström, the CEO of analyst firm Northstream, during a recent conversation with Light Reading. The balkanization of the sector, as equipment makers retreat to regional markets, could set back years of development.
— Iain Morris, International Editor, Light Reading