The U.S. Government Is Making the Telecom Infrastructure Market Western Again

Ken Hu, the deputy chairman of Huawei, recently stated that the 5G era has stepped into the next phase and is ready. Huawei is leading the 5G market, and commercial deployments have already started in 2018. According to Mr. Hu, the Chinese giant has shipped more than 10,000 5G-capable base stations worldwide, and the company is already testing 5G networks with 154 Mobile Service Providers (MSPs) in 66 countries.

Despite Huawei’s market-leading position (according to vendors’ annual reports, Huawei has a 46% revenue market share from network infrastructure among the top four vendors in 2017) and well-positioned 5G product portfolio, the company is constantly in the spotlight regarding privacy concerns. The U.S. government has persistently been restricting the Chinese vendors for years. As we have discussed in a previous foresight (Huawei and ZTE Ban in Australia Will Affect the Global Market), Australia started the trend this past August and effectively banned Huawei and ZTE from providing 5G technology due to security concerns. In November, New Zealand announced it would take the same measures as Australia, and Japanese media have recently reported that the Japanese government will also ban Chinese vendors from contributing to the upcoming 5G infrastructure. Regardless, BT has made use of Huawei's equipment since 2003; but the UK’s leading MSP has just announced that they will not use Chinese equipment for its 5G core network. Further, the British giant will continue swapping out Huawei equipment from the core of its existing 3G and 4G networks.

“Huawei is the world’s one true 5G supplier.” “The other guys are behind, and they need to catch up. The challenge for other network providers is to learn from Huawei.” These sentences are not from a Huawei catalog; Neil McRae, managing director and chief architect of BT and, generally, an outspoken network executive, has said them. This is the same company that recently banned Huawei from its core network equipment due to serious security concerns. BT and Huawei have had a long-lived relationship. The two companies recently completed several successful 5G trials across London. Since the United Kingdom has been deploying 5G in a non-stand-alone way, these measures will not have a major impact on Huawei in the short term. BT can still consider using Huawei’s highly competitive radio access network 5G equipment as well as its existing 4G network. Chinese vendors have reached a determinant role in the past decade thanks to their enormous Research and Development (R&D) investments and competitive price/value ratio. Nokia and Ericsson—the remaining two Nordic vendors—have lost market share globally; however, security concerns and the political climate have become an even bigger challenge to Huawei and ZTE than ordinary market competition. It seems that Huawei’s key concern for its telecom infrastructure is gaining and keeping a “trusted brand” reputation in the Western world—a task becoming increasingly difficult in light of several countries’ security concerns regarding Huawei and 5G, and those countries’ plans to keep Huawei out of their 5G networks.

This year’s ban by Australia and New Zealand has left Canada and the United Kingdom as the only “Five Eyes” (FVEY) members still using the Chinese network infrastructure. (Australia, Canada, New Zealand, the United Kingdom, and the United States are the members of the FVEY alliance that shares intelligence to combat espionage, terrorism, and global crime.) The United States has been the first among the FVEY countries to encourage sanctions and bans against Chinese vendors, especially from critical core infrastructure. As a further step, it is very likely that Western European and U.S.-friendly Asian countries would also introduce similar measures, as there are rumors that the United States is asking its key allies to start removing Huawei from existing networks due to concerns that the Chinese government is eavesdropping on critical communications among intelligence agencies. In fact, Article 7 in the latest National Intelligence Law passed in China in June 2017 states that:

“Any organization or citizen shall support, assist, and cooperate with state intelligence work in accordance with the law and keep the secrets of national intelligence work known to the public. The State protects individuals and organizations that support, assist, and cooperate with national intelligence work.”

Being Chinese companies, Huawei and ZTE are subject to this law, and, in theory, the government could force any company to cooperate with its intelligence agencies—although Article 8 states that all activities must be legal. Nevertheless, the Chinese central government has not made it clear how this law will be implemented, causing further tensions in the current political climate.

As mobile network infrastructures are evolving, the core network will increasingly become cloudified, and Artificial Intelligence (AI) applications will be more widespread. This increased importance of core networks, in parallel with the escalating global financial conflict and security concerns, will bring MSPs to a hard decision point when choosing infrastructure vendors. MSPs will push multivendor strategies to encourage competition in the highly saturated vendor market, and this will bring a huge opportunity for smaller vendors such as Samsung or NEC Corporation in several markets. This especially applies to the United States, South Korea, Japan, Australia, and New Zealand, where currently the Nordic vendors enjoy a duopoly and high margins.