Mobile operators in the UK have repeatedly warned that a government ban on the use of Huawei's 5G equipment would cost "hundreds of millions." Now experts at an analyst firm have reportedly weighed in with their own estimate of the damage, and it sounds nasty.
Prohibiting the country's four mobile operators from using any of Huawei's 5G equipment would generate a bill of £1.5 billion (US$1.9 billion), according to Enders Analysis, as reported by the UK's Telegraph newspaper last week. The main problem is not the amount of 5G equipment already deployed but the fact that Huawei's 4G kit would also need replacing, according to the industry. Essentially, that's because the 4G and 5G networks might be incompatible if they come from different suppliers.
At first glance, it's a shockingly big number, spreadsheeted up to make the government think twice about its looming Huawei decision. Under US pressure to exclude the Chinese firm on security grounds, authorities are right to worry about the impact on 5G deployment and competition in the network equipment market. But a £1.5 billion bill should not be what stops them.
It is not the first time Enders Analysis has publicized the figure. In February, the Times newspaper carried a similar story in which the analyst firm warned about the headline cost of a ban. The amount sounds feasible, too. BT, the UK's biggest operator, has already said that complying with a 35% cap on Huawei in its 5G network will cost it roughly £500 million ($627 million). It is thought to use Huawei across two-thirds of its 4G footprint.
BT hopes to spread these costs over a five-year period, however. Do that and the annual fee would equal just 2.5% of BT's capital expenditure in its last fiscal year. As a percentage of annual operating costs, it would nudge 0.5%.
If removing Huawei from about one third of the network costs £500 million, stripping it from the remaining third seems likely to double the bill, leaving BT with the bulk of the costs estimated by Enders Analysis. Even this would represent only 5% of capital expenditure and 1% of operating costs – unpleasant but not unbearable. BT's forecasts already reflect the cost of a ban, according to Jefferies, an investment bank. "Huawei will probably need to be completely cleared out," it said in a research note in May.
All this would present BT's rivals with a £500 million bill. Again, this seems feasible. None relies on Huawei to the same extent as BT, and Telefónica-owned O2 has barely any Chinese equipment in its network. Three, the smallest operator, previously named Huawei its sole supplier of 5G radio gear, but its 5G rollout last year – before the government started to impose restrictions – focused mainly on London, according to analysts at Omdia, a sister company to Light Reading. For its 3G and 4G networks, Three uses Finland's Nokia and South Korea's Samsung respectively.
Most of the remaining bill would probably be incurred by Vodafone, the operator that has repeatedly warned a Huawei ban would cost it "hundreds of millions." At a press conference in March last year, Vodafone said Huawei supplied equipment for about 32% of its mobile sites. Given BT's calculations, replacing the Chinese company at those sites would conceivably cost about £500 million.
While Vodafone does not break out capital expenditure by country in its accounts, its overall capital intensity (capex as a percentage of revenues) was 16.5% last year. On that basis, the UK business, which made about €6.5 billion ($7.3 billion) in revenues last year, is unlikely to have a budget of more than €1 billion ($1.1 billion). Even if Vodafone can spread the Huawei swap-out costs over five years, the annual fee might be more than 10% of capital expenditure – an undeniably painful squeeze for the company.
At a group level, though, a £500 million fee spread over five years would be just 1.4% of capital expenditure and a negligible share of operating costs. Authorities might also be persuaded to help. In the US, funds have been proposed to aid a Huawei rip-and-replacement job by rural carriers. If the UK government decides a Huawei ban is necessary to safeguard the country's security, a bill of up to £1.5 billion would seem like a relatively small price to pay.
As an essential security measure, it would also look far less wasteful to many taxpayers than other public-spending initiatives. Take HS2, a high-speed rail link that seemed anachronistic to many observers even before coronavirus made working from home the new normal. Originally estimated to cost about £36 billion ($40.5 billion), HS2 could eventually land taxpayers with a £106 billion ($119.3 billion) check, according to reports earlier this year that cited leaked government figures.
Operators scouting for Huawei alternatives might also find there are generous deals available from some of its competitors. Sweden's Ericsson, above all, has made no secret of its willingness to sacrifice some short-term profitability to reclaim market share it lost to the Chinese vendor in the 4G era. In Norway, it has promised to build a nationwide 5G network for Telia by 2023, replacing Huawei's 4G equipment in the process. Jenny Lindqvist, the head of Ericsson's business in northern and central Europe, said Ericsson had been "competitive" during that tender.
None of this means a ban is necessarily justified. Scott Petty, Vodafone UK's chief technology officer, insists that security can be guaranteed by keeping Chinese vendors out of the "core," the software-based control center of the network. Only BT uses a Huawei mobile core and it is already switching to Ericsson. But other commentators, including the Swedish vendor, say the lines between the core and the radio access network are blurring with the transition to 5G.
Still others warn that banning Huawei will delay the UK's rollout of 5G networks, with dire consequences for its already beleaguered economy. Today, the UK comes second only to Switzerland in a European ranking of 5G progress compiled by Omdia. If the Huawei ban turns out to be especially disruptive, the UK could easily slide down that table.
The other pressing concern for operators is the current shortage of alternatives to Huawei. Open RAN, a technology ecosystem backed by many service providers, is still immature, leaving only Ericsson and Nokia as major, non-Chinese suppliers. These days, Huawei is rightly seen as one of the most advanced and price-competitive 5G product developers in the market. For those unconvinced by arguments it spies for the Chinese government, losing it would be a blow.
- Huawei avoidance strategy is paying off for UK's O2
- UK in search of Huawei 5G replacements – report
- Huawei befuddled by reports of total 5G ban in UK
- UK opportunity knocks for Ericsson and Nokia
- Telia Norway goes all Ericsson on 5G and dumps Huawei
— Iain Morris, International Editor, Light Reading