As the US ratchets up the pressure globally to ban Chinese vendors in 5G how will this affect operators?
The dispute is centred on US allegations about the security implications of using Chinese sourced equipment in 5G networks. The most recent US move blocks companies worldwide from using US made equipment and software to design or manufacture chips for Chinese vendors.
The British government in particular is under intense pressure to “rip-out and replace” Chinese sourced 5G network equipment in view of its membership of the Five-Eyes security sharing alliance that in addition to the UK and USA also includes Canada, Australia and New Zealand. Unsurprisingly, major UK network operators including BT, Vodafone and 3 are opposed to this, as indeed are a majority of operators throughout the rest of the world, including some in the USA.
Will Townsend, Senior Analyst for Carriers and Enterprise Networking at Moor Insights & Strategy believes that the US restriction on the 5G supply chain could harm the interests of operators as it has the potential to reduce competition: “The impact of US restrictions on the 5G supply chain reduces the number of infrastructure competitors mainly by that in Huawei and narrows the available choices for operators. This might result in higher CapEx for some carriers and service providers and force them to charge higher subscriber prices beyond prevailing market value for new 5G services as they amortize the cost of the infrastructure.”
Furthermore, most industry analysts agree that Huawei has a lead in 5G technology over its main competitors, a view also shared by many operators. BT in the UK for example have stated that it will take 10 years to replace all Huawei equipment in its network and that forcing it to do this sooner could result in service blackouts.
It also flies in the face of market economics to suggest that less competition leads to stable or lower prices. This runs counter to the core principals of US free-market capitalism and should raise serious questions about Donald Trump’s real motives for the ban. These appear to have as much if not more to do with the USA’s response to wider geopolitical issues relating to China and the pursuit of Trump’s protectionist “America First” policy, and to be driven wholly by domestic US political considerations. In other words, this looks simply like a trade dispute.
It is hard to avoid the feeling that telecommunications is being influenced by geopolitics. The key question is how will this harm operators? According to Townsend: “the United States contends that Chinese cellular infrastructure poses a threat to its national security based on security vulnerabilities. The details have not surfaced based on the aforementioned sensitivity, but Huawei in particular has attempted to provide transparency in opening cyber-security centres in China and Europe and inviting third party inspection of its hardware and software development efforts. It is also worth mentioning that Huawei contributes to the open source community through various Linux Foundation networking projects and has also published and made available SDKs (software development kits).”
Excluding the Chinese equipment vendors from the market will inevitably stifle innovation. The production, research, development, improvement and supply cycle requires sales to fund the research and development (R&D) that results in continuing improvement. Many of the most significant developments in recent years have come from China.
It is well known that Huawei alone has invested more in telecoms R&D than the combined spending of other leading vendors. The results of this show in the company’s ownership of a number of the most important patents relating to 5G, including those in areas such as network slicing and microwave and it is widely acknowledged as the company with the broadest portfolio of 5G expertise. Huawei is also a major contributor to the 3GPP standards organisation which benefits the entire global telecom industry.
These improvements have benefited operators worldwide and led to better products and services for business and private customers worldwide. Preventing the participation of Chinese companies in the market inhibits their R&D, which ultimately limits the benefits to customers.
The last forty years - through 1G, 2G, 3G, 4G and 5G - have seen costs driven down and product quality, functionality and availability driven up. This is the result of competition, just as competition has delivered mobile networks to almost every part of the world including many places that were thought to be too remote and poor to ever benefit from network coverage. Monopolies don’t innovate as much as free markets do and duopolies can become too cosy with little incentive to innovate. Cutting the Chinese out of 5G will effectively result in a duopoly.
Given this background, and the strong preferences of most operators to retain Chinese sourced equipment in their networks, it is incumbent upon those seeking to ban Chinese vendors to provide the evidence to support their position. Security experts are comfortable with Chinese equipment and the operators are happy with it. Many politicians in many countries who have examined the detail are confident that any potential threat can be mitigated too.
How will this affect operators? Operators are in little doubt about how they feel. They like the competition for the lower prices and the higher quality that competition encourages, but above all they like the better service that it brings. However, it is becoming clear in this dispute that what operators want is not what matters. For better or worse geopolitical issues look like they will be the key determining factors.