U.S. Markets closed

Huawei Crackdown Exposes Europe as Laggard in Global 5G Race

Thomas Seal and Stefan Nicola
1 / 5
Huawei Crackdown Exposes Europe as Laggard in Global 5G Race

(Bloomberg) -- When U.K. Prime Minister Theresa May flew to China last February looking for business deals to cushion the fallout from Brexit, Huawei Technologies Co. delivered with a multibillion-dollar commitment to help keep Britain “at the very forefront of the digital age.”

A year later, the U.K. is among European nations weighing restrictions on the Chinese tech giant that phone carriers say could delay the fifth-generation mobile networks needed to connect driverless cars and automated factories.

Their lobbying exposes a weakness: Europe hasn’t been at the forefront on 5G, even before the Trump administration began pushing allies to block Huawei over concerns that the Chinese government could use its equipment for spying, which the company has repeatedly denied.

“The risk is that it puts Europe further behind the curve,” said Neil Campling, an analyst at Mirabaud Securities in London.

The U.K. has been considering whether to block Huawei from 5G or keep managing it through dialog and oversight. While no decision’s been made, the country may be headed toward a softer approach than the bans in Australia and New Zealand.

The country’s cybersecurity watchdog has determined the risks can be managed, people familiar with the matter said on Monday. That follows Britain’s spy chief last week saying that barring Huawei might not be right. Last month, a British official speaking on condition of anonymity said a ban was unlikely.

While Europe led the way with earlier mobile technologies, China, South Korea, Japan and -- to a lesser extent -- the U.S., are ahead on the next rollouts.

Despite beating the drum for 5G, which promises gigabit-per-second download speeds -- 10 times faster than 4G and at a lower cost to carriers -- European telecom executives are expected to be relatively slow to invest for fear the spending won’t pay off for a long time.

European carriers are generally less profitable and regulators have blocked mergers that would allow a patchwork of operators to scale up. The spectrum needed for 5G hasn’t all been assigned yet and governments are set to tap them for billions of euros at auctions in the coming year.

Huawei is deeply embedded in Europe’s telecom networks, so restrictions could be more disruptive than in other places. In the U.S., the industry has generally avoided Huawei under government pressure. The Chinese government, far from limiting its telecom vendors facing global scrutiny, may dictate a faster 5G deployment to back Huawei and ZTE Corp., analysts at New Street Research said last month.

“The U.S. and China are actually in a good place, because one has never allowed Huawei and one is agnostic to it,” said Guy Peddy, an analyst at Macquarie.

Huawei has come from almost nowhere in Europe a decade ago to supply about a third of telecom systems. It’s positioned itself to be a critical provider of antennas, switches, routers, small cells and network slicing gear for 5G by conducting trials with carriers. The company has been helped by security agencies that opened the door while closely monitoring its equipment.

That cautious acceptance is now in question as governments realize how hard it will be to police 5G. With 4G networks, data is usually channeled through a central core, or “brain,” whereas in 5G, it will be processed and sent between multiple points in a more scattered arrangement that could make it harder to spot weaknesses and hacks.

To avoid bans on Huawei, telecom executives are suggesting software fixes, tighter monitoring and excluding its gear from sensitive parts of their networks. BT Group Plc has been highlighting its policy of keeping the company out of its wireless core -- including a program to rip out and replace pieces of the EE network it acquired in 2016. Vodafone Group Plc last month said it had paused buying Huawei core gear.

In Germany, one idea considered last month at a meeting of network operators and government officials was to give state security full access to the source code of suppliers including Huawei, Ericsson AB and Cisco Systems Inc., according to a person briefed on a meeting, who asked not to be identified as the deliberations were private.

If the oversight proposals fail and Huawei is banned from 5G, Deutsche Telekom is predicting a two-year delay, according to an internal paper written in recent weeks. A person at another major European phone company, asking not to be identified, said barring Huawei would delay its 5G launch by 18 months.

With the outlook murky, carriers in the region don’t appear ready to abandon Huawei. BT is ramping up building its 5G network assuming Huawei will be involved, while studying contingency options that could include relying more on other suppliers, said a person involved in the planning. A spokeswoman for BT declined to comment.

One concern is the testing and costs tied to making 5G gear from Huawei’s European rivals Nokia Oyj and Ericsson compatible with its 4G kit. Carriers also see Ericsson and Nokia as being about a year behind on 5G product development, said Macquarie’s Peddy.

Nokia and Ericsson say Huawei doesn’t have a product edge and that they both are already deploying 5G equipment. Ericsson Chief Executive Officer Borje Ekholm, in a blog post, said Europe isn’t moving as quickly as other markets because of the lack of spectrum, high spectrum fees and heavy regulation. Eric Mangan, a Nokia spokesman, said the Finnish company can upgrade 4G equipment from any vendor to 5G.

The nightmare scenario for phone companies would be if they have to remove existing Huawei 4G gear. While some analysts see that as unlikely, Deutsche Telekom has flagged the risk: In its internal note, it put the cost of a retroactive ban at many billions of euros.

That “would seriously disrupt the whole mobile ecosystem,” Stockholm-based consultant Bengt Nordstrom said in an interview.

(Updates with Britain’s cybersecurity watchdog view on Huawei in sixth paragraph.)

--With assistance from Angelina Rascouet and Niclas Rolander.

To contact the reporters on this story: Thomas Seal in London at tseal@bloomberg.net;Stefan Nicola in Berlin at snicola2@bloomberg.net

To contact the editors responsible for this story: Rebecca Penty at rpenty@bloomberg.net, Thomas Pfeiffer

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.