What Is the Real Cost of Removing Huawei?

In line with recent decisions to ban Huawei infrastructure from cellular network deployments, the U.S. senate decided to create a US$1 billion fund in February 2020 to help rural carriers replace Huawei infrastructure in their networks with vendor equipment that does not pose a national security threat. During the current COVID-19 pandemic, the Federal Communications Commission (FCC) has argued that this amount should be elevated to US$2 billion in order to ensure that these networks maintain the highest quality during a crisis, when telecom networks play a vital role and even become life critical. According to industry research, this bill affects a dozen Tier-3 rural carriers across the United States, which will have to swap out approximately 2,000 Huawei base stations and replace them with either Ericsson or Nokia equipment. However, several executives from these rural carriers have been in discussions with both vendors for several months, citing that equipment costs need to lower even further for this US$1 billion to be enough.

A quick calculation of these two figures concludes that each base station may cost up to half a million dollars to replace, factoring in removal costs, site repurposing, new installations, and, of course, the cost of the new equipment itself. Rural carriers typically deploy very powerful base stations on top of very high masts to cover very large areas but the equipment itself is neither the latest generation nor the most efficient in terms of spectral efficiency. This means that any other operators that are forced to remove Huawei base stations will be subject to billions of dollars of additional network costs at a time when profitability and revenues are challenged. For example, in Europe, where Huawei is dominant with 4G base stations, the cost to remove this would be at least a double digit billion-dollar figure, excluding the added costs attributed to the disruption in network operations and even service disruptions. In other words, most mobile operators in Western Europe cannot afford to replace Huawei.

However, even if mobile operators do manage to replace Huawei from their networks, the market itself will be in a worse position, assuming the 5G value chain develops as it is progressing today. If the 5G market continues to rely on large infrastructure vendors, operators in the Western world will have lesser access to Huawei technology, especially with rumors of the U.S. government assessing whether it should enforce more restrictions to Huawei. These industry rumors indicate that on May 16, 2020, one year after Huawei was officially placed on the entity list, the U.S. government will only allow Huawei products to have a maximum of 10% of U.S.-developed technology, a decrease from the current 25%. This will make the development of Huawei 5G infrastructure and handsets even more difficult, as the Chinese vendor relies on several U.S.-based companies, including Intel, Marvell, Qorvo, Microsoft, NeoPhotonics, Skyworks, and many others.

Huawei has stated in the past that if its 5G business is not sustainable it will move to other business areas, and it is continuing to do so with its Consumer Business Group, focusing on handsets, its Enterprise Group, and its Cloud business unit. If Huawei continues to be restricted in developing 5G technology like it has in the past and cannot replace U.S. components in its products in due time, the company will reduce focus on global 5G and focus on the Chinese market. This may also mean that Huawei may limit its participation in the 3rd Generation Partnership Project (3GPP) and other 5G industry initiatives, decelerating the development of 5G and subsequent generations.

Huawei’s contribution to telecom networks and the supply chain should not be underestimated in the short term or the long term, especially as 5G and subsequent generations will require intensive development to address enterprise requirements and the concept of converged computing platforms. Even with OpenRAN and open networks, the cutting edge of telecom infrastructure will still require heavyweight vendors for Research and Development (R&D) while the implementation of these concepts may be diffused to smaller vendors. For example, massive Multiple Input, Multiple Output (MIMO) systems that are deployed for 5G rely on large vendors and will continue to do so for the next few years.

Banning Huawei in the short term would translate to billions of additional network Capital Expenditure (CAPEX) to rip and replace functioning equipment that has not reached its depreciation period, at a time when telecom networks can be considered as national infrastructure and life critical. However, this would be a drop in the bucket if Huawei (and ZTE) both retract from the 5G market and associated industry organizations, which will slow down the development of 5G in the long term, and potentially cost trillions of dollars in the global GDP domain. Regulators and policy makers should consider these long-term arguments rather than current geopolitical concerns and plan their policies very carefully.