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As Huawei goes to war with the US, is it too big to ban? Assessing the impact on global 5G roll-out

Not only is Huawei a major smartphone manufacturer, but it’s also one of the big four mobile network equipment operators – meaning its ongoing battle with the United States government could have ramifications for the global 5G roll-out

Huawei is in the middle of a titanic battle with a United States government that wants the Chinese electronics giant banned – but it may be too late.

Having risen from seemingly nowhere just a few years ago to become the world’s second largest smartphone manufacturer behind Samsung, the company known for its product innovation has become embroiled in escalating tensions between the US and China, with an ongoing trade war.

Having banned Huawei from operating in the US due to fears its telecoms equipment for introducing 5G connectivity could be used by the Chinese government for spying – something the company strongly denies, saying it gives nothing to Beijing other than taxes – Donald Trump’s administration is now trying to encourage other Western nations to draw up similar sanctions.

But tech analyst Malcolm Rogers, of data analytics company GlobalData, believes the £69bn turnover firm’s presence in the US is so entrenched – along with fellow Chinese tech conglomerate ZTE Corporation, which has also faced previous sanctions – that the ban is already impacting on key telecoms infrastructure projects.

Mobile radio transmitter, 5G roll-out, Huawei United States

“Huawei is one of the few vendors with the horizontal and vertical integration necessary to provide an end-to-end 5G ecosystem in 2019,” he says.

“In an already concentrated mobile networking market, the absence of Huawei and ZTE will negatively impact competition as mobile network operators negotiate to build out their 5G networks.”

And there’s a bigger issue at play for decision-makers, as Mr Rogers adds: “While governments question Huawei’s connections to the People’s Republic of China and politics spills into the telecommunications world, there is a question many have not considered – is Huawei too big to fail – or rather, in this case, ban?”

We sum up what’s happened so far and look at the challenges faced by the US.

 

Why is Huawei banned in the United States?

While an investigation into Huawei was opened by the US Justice Department in April 2018 due to the company’s trading agreements in countries such as North Korea, Syria and Iran, it wasn’t until December that saga really took off.

Huawei vice-chairwoman and CFO Meng Wanzhou, daughter of company founder Ren Zhengfei, was arrested in Canada at the request of US authorities on charges of violating sanctions against Iran, and later released on bail.

The following month, she and her company were charged with 13 counts of bank and wire fraud, obstruction of justice, and industrial espionage – with the US formally requesting Ms Wanzhou was extradited to the States. Both deny the charges.

Huawei founder Ren Zhengfei

ZTE, meanwhile, had a ban that was imposed in April last year for illegally exporting US technology to Iran and North Korea reversed three months later after major internal changes.

Huawei in particular has continued to make headlines across the world as other countries have implemented or publicly pondered partial or complete bans of 5G mobile network equipment from both Huawei and ZTE, citing equipment security concerns and potential ties to the Chinese government.

Along with the US, these include Australia, Canada, New Zealand, Poland, Norway and the UK – although experts are split on the subject.

Britain’s Defence Secretary Gavin Williamson admitted in December he had “very deep conerns” about Huawei being involved in rolling out 5G infrastructure, while the head of foreign intelligence service MI6 said the UK faced decisions on Chinese ownership of tech.

But the UK’s National Cyber Security Centre said any risk can be managed, with a government review due to be published in March or April that will decide whether Vodafone, EE and Three can use Huawei technology.

 

What impact has the Huawei United States ban had on the company?

Despite the negative press and legal troubles, GlobalData’s Mr Rogers says Huawei has continued to push forward with its business, announcing new products and innovations around its 5G chipsets, devices and trials with operators.

“Furthermore, particularly on the consumer device side, Huawei continues to push marketing into countries like the US and Australia, where traditionally its smartphones have failed to capture as much market share compared to regions like Europe, Latin America, or Asia,” he says.

Huawei office, growth of Huawei
Huawei’s headquarters in Shenzhen, China (Wikipedia/Brücke-Osteuropa)

“Huawei has grown rapidly over the past ten years and expanded into many vertically and horizontally integrated sectors from its beginnings in networking equipment.

“The company has grown to be the global leader in mobile networking equipment and to the number two spot in the smartphone market by shipments.

“Moreover, its silicon chip manufacturing subsidiary, HiSilicon, is growing market share in more than just smartphones – the company is also gaining share by powering Internet of Things (IoT) devices, including security cameras, smart TVs, set-top boxes and more.

“Huawei has built a telecoms and technology empire that is now woven into the normal business operations of enterprises, and the daily lives of consumers in almost every market on earth.”

 

Domino effect of the Huawei United States ban – including global 5G roll-out

Mr Rogers believes the impact of bans on Chinese equipment is already being felt in some markets.

In Australia, discount fixed market challenger TPG Telecom won licences to become the country’s fourth mobile network operator, a move the Australian regulator hoped would increase competition.

But the TPG has scrapped plans for the network installation, which would have been carried out alongside Huawei, because it said the ban will increase costs.

Mr Rogers says the mobile network equipment sector is “highly concentrated globally”, with 80% of the market share controlled by four companies – Ericsson, Nokia, Huawei and ZTE.

“The removal of two of the top four players only exacerbates the market concentration as operators try to negotiate terms to build out 5G,” he says.

While the current US sanctions against Huawei only ban government organisations from procuring the company’s networking equipment than preventing consumers from buying its products, many government analysts are predicting further bans or a full trade embargo could be on the horizon.

5G

This could have significant ramifications on the global 5G roll-out, as Huawei is one of the only manufacturers with 5G-enabled devices ready to be launched in the near future.

Apple isn’t expected to release its own version until 2020 at the very earliest.

Mr Rogers adds: “Existing projects may not be the only thing at risk given Huawei’s precarious situation with the US government.

“Consumers and enterprises alike wait in anticipation for the 5G era to begin. However, despite 5G network roll-outs beginning in markets like the US and South Korea, one major bottleneck exists – a lack of 5G-capable devices.

“Banning Huawei devices may only exacerbate this, as there are currently no other companies that can provide a true 5G ecosystem, from standalone radio systems to consumer-grade 5G devices.”

 

What should the West do about Huawei?

Perhaps the best course of action is to “keep friends close and keep Huawei closer”, according to Mr Rogers.

He says: “If the US, Canada, UK, Australia, New Zealand and Japan are concerned with China having undue access and influence to the future 5G networks of the world, banning Huawei from their domestic markets may only serve to make it even stronger elsewhere.

“With no means to compete in places like Japan or the US, Huawei can focus resources on regions like Latin America, Africa, the Middle East and South-East Asia, where it is already strong with 4G customers.

“In order to ensure no untoward Chinese influence, it may be better to keep Huawei close and work with the leading player to ensure future products are secure.”

Huawei P20 Pro, growth of Huawei
Huawei P20 Pro

“While there are many legitimate concerns being raised by governments around the world about the security of their 5G networks – and while any company needs to follow the rule of law and abide by ethical business practices – the consequences of banning Huawei may be more significant than at first glance.”

With Huawei and ZTE encountering difficulties in important markets like the US and Japan – and a list of countries with bans seemingly growing weekly – Mr Rogers believes there’s a big opportunity for new players to enter the mobile network space.

“Nokia and Ericsson stand to gain where Huawei is barred, but players like Samsung and Cisco, which have traditionally very small mobile networking businesses, can also grow market share,” he adds.

 

And what does Huawei need to do about its negative perception?

Huawei has a “PR problem”, admits Mr Rogers with a hint of understatement – but he also thinks the company must overhaul its own corporate culture and practices “to ensure that future indictments and lawsuits do not impede its progress again”.

He adds: “Allegations of unfair practices, corporate espionage, and trade violations still plague Huawei today.

“If the company wants to be truly successful on a global scale, it needs to root out the cause of toxic practices that led to its current predicament.”

Growth of Huawei, Huawei smartphone
Huawei is now the world’s second largest smartphone manufacturer, behind Samsung

Perhaps the easiest starting point would be to separate its networking and handset divisions to keep momentum going in those markets.

The handset division has grown rapidly in recent years, with revenue rising from £2.3bn to £27.3bn between 2009 and 2017, and Mr Rogers even suggests rebranding this business.

He adds: “The current focus of government bans on Chinese vendors is the mobile network segment, but Huawei is also very strong in handsets.

“Huawei should consider fully separating its device business from its carrier and enterprise business so as to avoid any potential bans on handsets as well.”