Vodafone and EE 5G tariffs point towards a new form of digital divide

If the technology industry wants 5G to change the world, placing prohibitive pricing on data tariffs is a strange way to go about it.

The count-down clock to 5G is heading towards the small numbers, and now Vodafone customers will be able to pre-order 5G-ready devices and decide on what tariffs they are able to afford. Unfortunately for some, the prices might prove to be too much of a premium for wallets to stomach.

Devices and various different tariffs are now available for pre-order through the Vodafone website.

Tariff Samsung Galaxy S10 5G Xiaomi Mi MIX 3 5G
5 GB Red Extra £149 upfront, £58 monthly £99 upfront, £50 monthly
15 GB Red Extra £99 upfront, £62 monthly £99 upfront, £54 monthly
30 GB Red Extra £49 upfront, £66 monthly £49 upfront, £58 monthly
60 GB Red Extra £49 upfront, £70 monthly £49 upfront, £62 monthly
25 GB Red Entertainment £99 upfront, £69 monthly £49 upfront, £61 monthly
50 GB Red Entertainment £49 upfront, £73 monthly £49 upfront, £65 monthly
100 GB Red Entertainment £49 upfront, £77 monthly £49 upfront, £69 monthly

All contracts set at 24 months

What is missing from the above table is a nod to Huawei. Vodafone has hit the pause button on devices from the under-fire Chinese brand. As with EE, Huawei’s 5G phone will not be sold through the Vodafone website for pre-order. It would appear this will be the case until the difficulties with the operating system and ecosystem are ironed out.

Despite these complications, the prices are what the prices are.

“Given its high-profile battle with EE to lead in 5G, I expected Vodafone’s initial tariffs to be punchier,” said Kester Mann of CCS Insight. “The entry £50 offer includes just 5 GB of data; on a 5G network, customers could quickly burn through that.”

Mann is absolutely correct; 5 GB will not last long given the promise of the 5G ecosystem and the usecases envisioned. However, upgrading to bulkier tariffs is perhaps cost prohibitive, potentially creating a new digital divide.

As it stands, the price is prohibitive for some. £52 as a starting point is a high barrier to entry. It seems only the privileged will be comfortable with spending so much on a connectivity contract, creating a society of ‘haves’ and ‘have nots’ and another potential digital divide.

Although there have been promises 5G tariffs will be priced on similar levels to 4G, the premium should come as little surprise. People will be prepared to pay for bragging rights.

It should also be noted EE has priced the connectivity options at the same levels. Vodafone have slightly undercut EE for 5G tariffs, but not by much. This is perhaps a situation which we should have expected. Until all four MNOs are on the market with a 5G proposition, threatening to steal valuable postpaid subscriptions, the price will remain lofty.

Tariff OnePlus 7 Pro 5G Samsung Galaxy S10 5G Oppo Reno 5G
30 GB, one swappable £64 a month, £50 upfront £74 a month, £10 upfront £59 a month, £50 upfront
30 GB, two swappables £69 a month, £50 upfront £79 a month, £10 upfront £69 a month, £50 upfront
60 GB, two swappables £74 a month, £30 upfront £84 a month, £10 upfront £69 a month, £30 upfront
60 GB, one swappable £69 a month, £30 upfront £79 a month, £10 upfront £69 a month, £30 upfront
120 GB, three swappables £79 a month, £10 upfront £89 a month, £10 upfront £74 a month, £10 upfront
100 GB, two swappables £74 a month, £10 upfront £84 a month, £10 upfront £69 a month, £10 upfront
10 GB, two swappables £59 a month, £170 upfront £69 a month, £130 upfront £54 a month, £170 upfront
10 GB, one swappable £59 a month, £70 upfront £69 a month, £30 upfront £54 a month, £70 upfront
10 GB, two swappables £64 a month, £70 upfront £74 a month, £30 upfront £59 a month, £70 upfront

All contract set at 24 months

As you can see, the prices are not consistent with the overall rhetoric of the industry. For many years, the industry has preached of democratizing connectivity, while 5G was supposed to be a technology which benefitted the masses.

At the moment, the risk of a digital divide is very apparent. The rich will get the benefits while the poor remain in the 4G-era. While the genuine 5G usecases are yet to emerge, this is not necessarily an issue. 5G offers little more than increased speeds right now, a premium which isn’t really needed with the applications and services which are currently on the market.

Over the next 6-12 months, Three and O2 will enter the fray with their own networks. This should cause the price of 5G connectivity to tumble. Hopefully at least, as the current state-of-play is a connectivity world which has been designed for the privileged.

Huawei CEO pressures US President Trump via Chinese media

Ren Zhengfei, Founder and CEO of besieged telecoms vendor Huawei, chose sympathetic Chinese media for his latest publicity initiative.

He invited the People’s Daily, CCTV and Xinhua News Agency, which are directly controlled by the Chinese Communist Party, as well as a bunch of other media not known for challenging the party line, for a bit of a chat at Huawei towers in Shenzhen. Conspicuously absent was the relatively neutral and objective South China Morning Post.

While the choice of media ensured a sympathetic line of questioning, Ren (pictured, photo taken from report) still served up some interesting answers. The current line from Huawei, in response to all the aggro it’s having to deal with from the US, seems to be to be as friendly as possible towards US companies, while at the same time demonising US politicians.

“What the US will do is out of our control,” said Ren. “I would like to take this opportunity to express my gratitude to the US companies that we work with. Over these 30 years, they have helped us to grow into what we are today. They have made many contributions to us. As you know, most of the companies that provide consulting services to Huawei are based in the US, including dozens of companies like IBM and Accenture.

“Second, we also have been receiving support from a large number of US component and part manufacturers over all these years. In the face of the recent crisis, I can feel these companies’ sense of justice and sympathy towards us.

“The US is a country ruled by law. US companies must abide by the laws, and so must the real economy. So you guys from the media should not always blame US companies. Instead, you should speak for them. The blame should rest with some US politicians.

“US politicians might have underestimated our strengths. I don’t want to say too much about this, because Ms. He Tingbo, President of HiSilicon, made all these issues very clear in her letter to employees. And all mainstream newspapers inside and outside of China have reported on this letter.”

Everything Ren said was accurate, but it’s intriguing that he made such a point of exonerating US companies from complicity in this whole affair. Huawei is, of course, a fully globalised company and relies heavily on good relationships with companies everywhere, so it makes sense to protect those relationships.

But looking under the surface of those comments two things spring to mind. Firstly it’s tactically sound to try to drive as much of a wedge as possible between the US private and public sectors. Presumably US companies like Google aren’t happy at being forced to stop doing business with one of the world’s largest technology companies and will be pressuring the US government to wind its neck in behind the scenes. They could yet be vital allies in Huawei’s bid to resolve this situation.

Secondly Ren seems to have scored a bit of an own-goal by conceding how powerless companies are to resist the will of politicians in their home countries. Since the central accusation levelled at Huawei by the US is that it is compelled to assist the Chinese state in espionage activities when asked, a call for private sector defiance may have been more cunning.

There was more talk of component autonomy but the Arm situation, which could scupper many of those plans, wasn’t directly addressed. Apparently Huawei was nearly sold to a US company in 2000 but it fell through at the last minute and they decided against trying to sell it to anyone else. Ren said Huawei has been preparing to ‘square off against the US’ ever since. The core message is that Huawei is fully prepared for this situation and will handle it just fine, but the Android situation was also conveniently avoided.

In response to a question about how long this current situation will last Ren replied “You are asking the wrong person; you should ask President Trump this question. I think there are two sides to this. Of course, we will be affected, but it will also inspire China to develop its electronics industry in a systematic and pragmatic manner.”

Hilariously the piece concludes with the statement “Huawei contributed to this story,” implying some degree of editorial veto. Nonetheless it’s worth reading the whole thing for the considerable insight it offers into the thinking behind the company. Huawei seems to have used this benign media gathering as an opportunity to put pressure on US politicians, or at least encourage US companies to do so. While this is a sound tactic there is currently little evidence of any progress being made in the geopolitical spat that Huawei has found itself in the middle of.

EE 5G hits the ground running

Sneaking in-front of Vodafone to debut on May 30, EE’s 5G proposition will be launched across six cities in the UK with a range of different devices and interesting bundling options.

While the launch of the network was announced last week, BT Consumer CEO Marc Allera gave much needed colour to the deployment plans at a media event in London and to be fair to BT and EE, it does look pretty impressive.

From today, customers will be able to pre-order bundles from EE as well as choose from multiple devices. The Samsung Galaxy S10 5G will of course be one of the options, though customers will also be privy to exclusive deals with the Samsung Fold, Oppo Reno 5G and the LG V50 ThinkQ, as well as Huawei’s FWA device and the HTC 5G Smart Hub.

While all of the devices certainly promise a lot, the LG approach is perhaps the most interesting. The device itself is pretty much as you would expect, though a separate module is also included, allowing the device to be clipped in to add an extra screen (as you can see below). Head of LG Mobile UK Andrew Coughlin said the product has been designed with multi-taskers in mind, with each screen working independently of the other.

The device also has the potential to open up entirely new experiences when it comes to gaming.

LQ Images

What you will not see over the next few months is a Huawei device launched in partnership with EE. Allera suggested the pause button has been hit on this relationship, due to the difficulties the firm is facing with its Android licence. If EE cannot guarantee performance of the device throughout the customers mobile contract, it will not partner with Huawei.

But onto the launch itself, six cities will experience the 5G euphoria on Day One, with another 10 added to the mix over the remainder of 2019. Building on the already completed work, EE plans to upgrade 100 base stations to 5G a month, taking the total to 1500 by the end of 2019.

“Today is Day One of our 5G journey, we are going to be the first in the UK and one of the first in Europe to bring our customers 5G,” said Allera.

qrf

Always connected is not a new concept from EE, though it would not be a surprise to see the message ramped up over the next couple of months. With 4G, broadband, wifi and, soon enough, 5G, EE has a lot of connectivity assets to shout about. When you combine these different segments with the largest geographical 4G coverage of all the UK MNOs, this is a selling point which would genuinely interest our internet-obsessed society.

That said, advertisements will need a bit of ‘sexing up’ if they are to catch the attention of the mass market.

On the speeds side, it does look like EE will be launching its 5G network with the ambition of reaching 200 Mbps. However, the message will be more focused on reliability and consistent experience as opposed to peak speeds.

“Peak speed might be the headline, but it is not the story,” said Allera.

fznor

Creative tariffs and bundling are where EE might be able to attract the most attention. 5G customers will not only gain access to faster download speeds and more reliable connections but will get the option to choose from various different zero-rating options to make the most of the connectivity euphoria. These options can be swapped out as the customer desires.

Finally, EE will be also be the exclusive partner of Niantec for the highly-anticipated follow-up to Pokemon Go; Harry Potter, Wizards Unite. Although Pokemon Go was a bit of a sham when it came to delivering on a genuine augment reality experience, the Harry Potter game looks much more immersive and truer to the definitions of AR. Considering the popularity of Pokemon Go, Niantec could certainly be onto another winner should it be able to nail the AR experience with this new title.

fznor

What is worth noting, is this is only the first phase of the EE 5G strategy. The aim will be to have 5G present in 50 cities across the UK by this time next year, though in the first phase it will only be in the busiest areas. Although the geographical rollout will be quite limited, 8% of base stations will be 5G, these assets will deliver 25% of the total traffic running across the EE network.

The second phase of the deployment, starting in 2022, will see the rollout of EE’s brand new 5G core, as well as the introduction of new spectrum. This will be when the UK will be able to experience a genuine 5G network, with the prospect of cloud gaming, AR and immersive content living up to the promise. The final phase, 2023, will see the introduction of mission critical applications focusing on the low-latency angle of 5G.

Interestingly enough, despite all the criticism faced by Huawei in the press, EE will be launching its 5G proposition with Huawei at the core of the network. This is unavoidable and will only be temporary, EE will gradually phase out Huawei from the core, but it is a fact which has seemingly been overlooked or cleverly managed out of the public domain by the BT PR team.

5G is about to become very real for the consumer and soon enough there will be a battle between the MNOs to fight for attention. EE and Vodafone might be scrapping for the 5G lead right now, but this approach from EE looks very promising.

US suspends Huawei export ban for three months to help operators adapt

The US Department of Commerce has given Huawei a three month license to buy US goods in order to lessen the disruption to US companies.

The decision follows the news that a bunch of US companies, including Google, were going to stop doing business with Huawei. Not only would this do severe damage to the desirability of Huawei Android smartphones sold outside of China, but would have caused major disruption to any US companies that rely on working with Huawei.

The DoC therefore decided to grant a temporary licence allowing Huawei and US companies to buy stuff from each other for 90 days starting 20 May. Any US operator that use Huawei gear now effectively have three months to swap it out for equipment not made by anyone on the US shitlist. Any still flogging Huawei smartphones might want to take that time to return them to their source too.

“The Temporary General License grants operators time to make other arrangements and the Department space to determine the appropriate long term measures for Americans and foreign telecommunications providers that currently rely on Huawei equipment for critical services,” said Secretary of Commerce Wilbur Ross. “In short, this license will allow operations to continue for existing Huawei mobile phone users and rural broadband networks.”

Huawei responded with its now familiar defiance, telling Chinese media that none of this is remotely surprising and that it doesn’t even need the temporary license because it saw all this stuff coming ages ago. Additionally a UK Huawei exec told the beeb he reckons Huawei is just collateral damage in the broader trade war between the US and China, which is hard to argue with.

If you’re really into that sort of thing you can read the full temporary license decision here. This doesn’t seem to represent any softening of the US position, just an attempt to cushion the blow for US companies and consumers. It may, however, also represent a diplomatic window for US and China to try to resolve their differences and prevent the ban kicking in on 19 August. Time will tell but further escalation seems more likely than a truce at this point.

FCC Chairman convinced by T-Mobile/Sprint concessions

FCC Chairman Ajit Pai has publicly stated he believes the concessions made by T-Mobile US and Sprint are enough to ensure the merger would be in the public interest.

Over the course of the weekend, rumours emerged over concessions the pair would have to make to get the support of the FCC, though rarely are sources so spot on. The merged business will now have to commit to a nationwide 5G deployment within three years, sell Sprint’s prepaid brand and promise not to raise prices during the rollout years, if it wants the greenlight of the FCC.

What is worth noting is this is not a greenlight just yet. Pai has said yes, though he will need a majority vote from the Commissioners. Commissioner Brendan Carr has already pledged his support, and we suspect Michael O’Reilly will in the immediate future also. The Democrats might want to throw a spanner in the works, but this would be largely irrelevant with O’Reilly’s support.

“In light of the significant commitments made by T-Mobile and Sprint as well as the facts in the record to date, I believe that this transaction is in the public interest and intend to recommend to my colleagues that the FCC approve it,” Pai said in a statement.

“This is a unique opportunity to speed up the deployment of 5G throughout the United States and bring much faster mobile broadband to rural Americans. We should seize this opportunity.”

As you can imagine, T-Mobile US CEO John Legere certainly has something to say on the matter.

“Let me be clear,” Legere stated in a blog entry. “These aren’t just words, they’re verifiable, enforceable and specific commitments that bring to life how the New T-Mobile will deliver a world-leading nationwide 5G network – truly 5G for all, create more competition in broadband, and continue to give customers more choices, better value and better service.”

The first commitment made by T-Mobile US and Sprint is a nationwide 5G network. Considering Legere has been claiming his team would be the first to rollout a genuine 5G network for some time, it comes as little surprise the FCC will want to hold him accountable.

Over a three-year period, presumably starting when the greenlight is shown, the new 5G network will cover 97% of the population. 75% of the population will be covered with mid-band spectrum, while the full 97% will have low-band. This is a very traditional approach to rolling out a network, as it meets the demands of capacity and efficiency, though there is a sacrifice on speed.

Perhaps more importantly for the FCC, the plan also covers objectives to bridge the digital divide. 85% of the rural population will be connected during this period, increasing to 90% after six years. This is not to say all the farmers fields will be blanketed in 5G, though it does help provide an alternative for the complicated fixed broadband equation in the rural communities.

Moving onto the divestment, selling Sprint’s Boost prepaid brand seems to be enough to satisfy the competition cravings of Pai. What is worth noting is this will not be a complete break-away from the business as it will have to run on the T-Mobile US network. Unfortunately, MVNOs in the US are not as free to operate as those in Europe, as switching the supporting network would mean have to change out all the SIM cards.

This becomes complicated as you do not necessarily know who your customers are in a prepaid business model. The situation certainly encourages more competition, it will after all not be part of the T-Mobile US/Sprint family anymore, but it is far from a perfect scenario.

Finally, Legere has promised tariffs will not become more expensive during the deployment period, another worry for the FCC should the duo want to meet the ambitious objectives to compete with AT&T and Verizon. However, it does appear Legere is promising 5G tariffs will not include a premium either.

And now onto the other side of the aisle. Commissioner Jessica Rosenworcel has tweeted her opinions on the concessions and it appears she is not convinced.

“We’ve seen this kind of consolidation in airlines and with drug companies. It hasn’t worked out well for consumers. But now the @FCC wants to bless the same kind of consolidation for wireless carriers. I have serious doubts.”

Rosenworcel has also suggested the decision should be put out for public consultation. We suspect Pai will want to avoid this scenario, as it would be incredibly time-demanding; the Chairman will want the merger distraction off his desk as soon as possible.

Commissioner Geoffrey Starks is yet to make a comment, but DO NOT, I repeat, DO NOT go on his Twitter page if you haven’t watched the latest Game of Thrones episode.

We understand the Democrat and Republican Commissioners are going to be at each other’s throats over pretty much every decision, however trolling any innocent individual with a GoT spoiler is a low blow.

Starks and your correspondent are going to have some issues.

US supply ban threatens to cripple Huawei’s global business

Another day, another escalation as Google heads a stampede of US companies apparently refusing to do business with Huawei.

As escalations go, however, this is a pretty big one. Reuters was the first report that Google has suspended some business with Huawei in response to the company being put on the US ‘entity list’, which means US companies need explicit permission from the US state before they’re allowed to sell anything to them. It seems that permission has been denied.

For Google this means denying access to those bits of Android Google licenses – mainly the Play Store and Google’s own mobile products such as the Gmail and Maps apps. Huawei can still access the core Android operating system as that has an open source license but, as companies such as Amazon have discovered, that’s pretty useless without all the other Google goodies.

We recently wrote that Huawei’s addition to the entity list is the most significant consequence of Trump’s executive order and here we have an immediate illustration of that. It looks like pretty much all other US companies are also rushing to comply with the new regulations, with Bloomberg reporting that Qualcomm and Intel are among others cutting of business with Huawei and others will presumably follow. Nikkei even reckons German chip-maker Infineon has joined the stampede.

Huawei already has an extensive chip-making operation of its own, so arguably it can cope without the likes of Qualcomm, but what about the millions of other bits and bobs that get crammed into a smartphone such as screens, cameras, memory, sensors, etc? A lot of these could be supplied by non-US companies like Samsung and, of course, Chinese ones, but there must surely be some areas in which Huawei is entirely reliant on the US supply chain.

But Google’s licensed mobile products and services are unique. An Android phone that doesn’t provide access to the Play store is massively diminished in its utility to the end user and Google Maps is the market leader. Google also has a near monopoly with YouTube and millions of people are reliant on things like Gmail, Google Pay, Play Movies. When there are so many great alternative Android smartphone vendors, why would anyone now buy a de-featured Huawei one?

In response to these reports Android moved to stress that it will continue to support existing Huawei Android phones in the following tweet.

Meanwhile Huawei issued the following statement. “Huawei has made substantial contributions to the development and growth of Android around the world. As one of Android’s key global partners, we have worked closely with their open-source platform to develop an ecosystem that has benefitted both users and the industry.

“Huawei will continue to provide security updates and after sales services to all existing Huawei and Honor smartphone and tablet products covering those have been sold or still in stock globally. We will continue to build a safe and sustainable software ecosystem, in order to provide the best experience for all users globally.”

Huawei has reportedly been working on its own smartphone OS in anticipation of this sort of thing happening but, as Microsoft, Samsung and others have found, there seems to be little public appetite for alternative to Android and iOS. Huawei may be able to sell a proprietary platform in China, where the Play Store is restricted anyway, but internationally this move will surely see Huawei smartphone sales fall off a cliff.

“If the US ban is permanent, we predict Huawei’s global smartphone shipments will tumble -25% in 2019,” Neil Mawston of Strategy Analytics told Telecoms.com. “If Huawei cannot offer Android’s wildly popular apps, like Maps or Gmail, Huawei’s smartphone demand outside China will collapse.

“If the US ban is temporary, and lifted within weeks, Huawei’s global smartphone growth will return to positive growth fairly swiftly. Huawei offers good smartphone models at decent prices through an extensive retail network, and it should recover reasonably well if it is allowed to compete.”

“We still don’t have a clear understanding of what Google has told Huawei and what elements of the Android operating system may be restricted, so it remains unclear what the ramifications will be,” said Ben Wood of CCS Insight. “However, any disruption in getting updates to the software or the associated applications would have considerable implications for Huawei’s consumer device business.”

There have been very few official statements on the matter from US companies, so Wood is right to tread carefully at this stage, but it’s hard to see this news as anything other than catastrophic for Huawei. Its consumer business, which is the most successful unit in the company, relies largely on Android to run its products and will surely be severely diminished by the Google move.

And there’s no reason to assume the damage will be contained there. Last year Huawei’s contemporary ZTE was almost driven out of business by a ban on US companies doing business with it. Huawei may have hedged its position regarding networking components suppliers more effectively than ZTE but it will presumably suffer greatly once those companies follow suit.

Huawei is one of the biggest companies in the world and has become so in spite of being largely excluded from the US market. The Chinese state will do everything it can to support Huawei, but at least some of its US suppliers offer unique products. At the very least this puts Huawei in a weak negotiating position with potential replacement partners and international customers, but the implications of this latest development are potentially existential.

US influence on Europe failing as France resists Huawei ban

The White House might have felt banning Huawei was an appropriate measure for national security, but France does not agree with the drastic action.

Speaking at a conference in Paris, French President Emmanuel Macron has confirmed the country will not ban Huawei. This is not to say it won’t in the future, but it appears Europe is remaining resolute against the demands of the US. The burden of proof might be a concept easily ignored in the US, but Europe stands for more.

“Our perspective is not to block Huawei or any company,” Macron said. “France and Europe are pragmatic and realistic. We do believe in cooperation and multilateralism. At the same time, we are extremely careful about access to good technology and to preserve our national security and all the safety rules.”

President Donald Trump is most likely a man who is used to getting his own way, and upon assuming office as head of the most powerful government worldwide, he might have thought this position of privilege would continue. However, Europe is being anything but compliant.

In direct contradiction to the Executive Order banning Huawei from supplying any components, products and services to US communications networks, Macron has declared France open is for business. France won’t use the excuse of national security to beat back the progress of China but will presumably introduce mechanisms to mitigate risk.

Germany has taken this approach, increasing the barrier to entry for all companies, not just Huawei. Vendors will have to pass more stringent security tests before any components or products can be introduced to networks, though Chancellor Angela Merkel has also made it clear she intents to steer clear of political ties to the decision.

“There are two things I don’t believe in,” Merkel said in March. “First, to discuss these very sensitive security questions publicly, and second, to exclude a company simply because it’s from a certain country.”

The UK is seemingly heading down a similar route. Alongside the Huawei Cyber Security Evaluation Centre (HCSEC), run by GCHQ with the objective of ensuring security and privacy credentials are maintained, the long-awaited supply chain review is reportedly going to place higher scrutiny but stop short of any sort of ban. The official position will be revealed in a few weeks, but this position would be consistent with the UK political rhetoric.

Over in Eastern Europe, governments also appear to be resisting calls to ban the company, while Italy seems to be taking the risk mitigation approach. Even at the highest bureaucratic level, the European Commission has asked member states to conduct an assessment for security assessments. Unless some drastic opinions come back in October, we suspect the official position of the European Union will be to create higher security mechanisms which offer competitive opportunity for all vendors in the market.

For the moment at least, it appears the Europeans are immune to the huffing and puffing making its way across the Atlantic. That said, the trade war with China is set to escalate once again and it would be fair to assume more US delegations will be attempting to whisper in the ears of influential Europeans. At some point, the US will get tougher on Europe, but it does appear those pesky Europeans are stubborn enough to resist White House propaganda and pressure.

Don’t ignore Huawei’s ban on buying US components

While everyone is focusing on the ban on selling in the US, the ban on buying US components is a much more interesting chapter of the Huawei saga.

President Donald Trump has dropped the economic dirty bomb on China and it’s dominating the headlines. Although Huawei, or China, are not mentioned in the text, the Executive Order is clearly a move to stall progress made in the telco arena. China is mounting a challenge to the US dominance in the TMT arena, and this should be viewed as a move to combat that.

There are clearly other reasons for the order, but this should not be ignored. The security argument, albeit an accusation thrown without the burden of concrete evidence, is a factor, but never forget about the capitalist dream which underpins US society.

However, although most are focusing on Huawei’s inability to sell components, products and services in the US market, there might be an argument the ban on purchasing US components, products and services is more important, impactful and influential.

“This action by the Commerce Department’s Bureau of Industry and Security, with the support of the President of the United States, places Huawei, a Chinese owned company that is the largest telecommunications equipment producer in the world, on the Entity List,” said Secretary of Commerce Wilbur Ross. “This will prevent American technology from being used by foreign owned entities in ways that potentially undermine US national security or foreign policy interests.”

While we will focus on the ban on purchasing US components, products and services for this article, it is worth noting the ban on Huawei selling in the US will have an impact.

Rural telcos in the US have mostly been against any ban on Chinese companies. In October 2018, Huawei made a filing with the FCC arguing its support for rural telcos is underpinning the fight against the digital divide and a ban would be disastrous for those subscribers. Michael Beehn, CEO of MobileNation, was one of those who argued against the ban, suggesting the cost-effectiveness of Huawei allowed his firm to operate. Without the advantage of nationwide scale, these organizations will always struggle when the price of networks is forced north.

While the US is a massive market, with huge opportunities to maximise profits, not being able to sell in the US is not going to have a significant impact on Huawei. Its customers are the rural telcos not the national ones. Huawei has not managed to secure any major contracts with the big four, therefore it is missing out on something which it never had. Huawei has still managed to grow sales to $105 billion without the US, therefore we believe this ban is not going to be a gamechanger.

However, it is the ban on purchasing US components, products and services which we want to focus on here.

Huawei is not outrightly banned from using US technologies and services, however, those companies who wish to work with the dominant telco vendor will have to seek permission to do so beforehand. The US can now effectively how strategically it wants to twist the knife already dug deep into Huawei’s metaphorical chest.

Although we’re not too sure how this will play out, Huawei’s business could be severely dented by this move.

Huawei recognises 92 companies around the world as core suppliers to the business. It will have thousands of suppliers for various parts of the business, but these 92 are considered the most important to the success of operations. And 33 of them are US companies.

Some are small, some are niche, some are more generic, and some are technology giants. The likes of Qualcomm, Intel and Broadcom all have interests in keeping the US/Chinese relationship sweet, though more niche companies like Skyworks Solutions, Lumentum and Qorvo have much more skin in the game. Firms like NeoPhotonics, who are reliant on Huawei for 46% of its revenues, might well struggle to survive.

Huawei will be able to survive this move, it has been preparing for such an outcome, but you have to wonder what impact it will have on its products and credibility.

HiSilicon, the Huawei-owned semiconductor business, has been ramping up its capabilities to move more of its chip supply chain in-house, while the firm has reportedly been improving the geographical diversity of its international supply chain. According to the South China Morning Post, not only has Huawei been moving more operations in-house, it has also been stockpiling US components in the event of the procurement doomsday event.

A similar ban on procuring US components, products and services was placed on ZTE last year and it almost crippled the firm. Operations were forced to a standstill due to the reliance on US technology. Huawei has never been as dependent on the US, though it seems the lessons were learned from this incident.

The big question is what impact a ban would have on the quality of its products.

Huawei might preach the promise of its own technology and the new suppliers it will seek/has sought, but there is a reason these 33 US companies were chosen in the first place. Either there is/was a financial benefit to Huawei in these relationships, or they were chosen because they were best in class.

Huawei is a commercial organization after all, it wants to make the best products for the best price. There will certainly have been compromises make during these selections, either paying more for better or sacrificing some quality for commercial benefits, and having to make changes will have an impact. Huawei, and its customers, will have fingers and toes crossed there is no material impact on the business.

The other aspect to consider is disruption to operations. ZTE found out how detrimental dependence on a single country can be, and while Huawei has mitigated some of this impact, it remains to be seen how much pain could be felt should the ban be fully enforced. Might it mean Huawei is unable to scale operations in-line with customer deployment ambitions? Could competitors benefit through these limitations? We don’t know for the moment.

The ban on selling in the US might sound better when reeling off headlines, but don’t forget about Huawei’s supply chain. We think there is much more of a risk here.

A look at how US suppliers have been hit by Huawei news

President Trump’s Executive Order and the decision to place Huawei on the US ‘Entity List’ is going to dominate the headlines over the next couple of days, but what will be the impact on US suppliers?

During the ZTE saga last year, where the firm was banned from using US components in its supply chain, several US firms faced considerable difficulty. With Huawei potentially facing the same fate, the next few days will certainly make for uncomfortable reading for some.

Although the main focus of the news has been on the Executive Order banning any Huawei components or products in US communications infrastructure, the entry onto the ‘Entity List’ should be considered as big. This is effectively the commerce version of a dirty bomb, and some might suggest it is being used to disrupt Huawei’s supply chain and dent its ability to dominate the telco vendor ecosystem.

But what is the impact of losing a major customer? What are the realities these US firms will face if the Secretary of Commerce turns down their application to work with Huawei?

Speaking to members of the financial community, it could be pretty severe.

Losing a customer which accounts for 2-3% of total revenues would be a concern but nothing major. For 5% of revenues, this is a headache, but something the spreadsheets could most likely tolerate. When you start getting to 10% the panic button needs to be hit.

A customer which accounts for 10% of total revenues is a major prize. Losing this revenue would result in a complete rethink in how the business operates, as this could effectively wipe out any profit for the year. If you are in the services industry, it isn’t as much of an issue, but when it comes to manufacturing and components, there are so many different implications.

For example, in the first instance you have to consider how this hits budgets, forecasts, resource allocation and manufacturing strategy.

Sales staff are probably the safest here, as the lost revenues will have to be replaced as soon as possible with new customers, but what about the marketing strategy? Do you want to replace the lost capacity with short-term customers (i.e. quicker) or long-term customers which may offer larger orders?

On the R&D side, does a company have dedicated resource working on projects for that customer? What will these staffers do now? Can those projects be re-orientated for another customer?

Finally, on the manufacturing side, there are all sorts of issues. How will the loss of revenue impact the resource recovery plan? How are the manufacturing facilities configured – do you have to close plants?

Another consideration is on your own supply chain and procurement strategies. When supplying products to said customer, you will have to source your own raw materials. Will the loss of this customer result in contracts with suppliers having to be re-negotiated? Will this mean quantity discounts are now impacted?

These are all the considerations when you are losing a customer worth 10-15% of total revenues. Anything above this and you would have to question whether the company can survive, or at least face a major restructure.

Share price of US suppliers to Huawei
Company Share price
Qualcomm -3.18%
Xilinx -4.1%
Western Digital -1.12%
Marvell Technology +0.5%
Seagate Technology +0.43
Texas Instruments +0.045
Skyworks Solutions -4.56%
ON Semiconductor -0.99%
Qorvo -5%
NeoPhotonics -12.9%
Flex -1.13%
Finisar -2.05%
II-VI -2.86%
Maxim Integrated -0.99%
Analog Devices -2%

All share prices at the time of writing (UK: 16:20) – in comparison to market close on 15 May 2019

Looking at Qorvo, executives at semiconductor supplier might certainly have something to worry about. Huawei is features in the ‘top three’ customers for the firm, while on the most recent earnings call, the team discussed the success of Huawei’s smartphone division and in particular the ‘P’ series as a contributor towards a successful quarter. Some have suggested 11% of Qorvo revenues are dependent on Huawei.

Skyworks Solutions, another semiconductor company, has been suffering in recent years. With large parts of the business reliant on smartphone shipments, the global slowdown has been tough. The team work with Huawei on both the mobile and infrastructure side, and while it does work with many tier one firms in both segments, the market is clearly worried about a competitive field and an inability to work with one of the largest telco vendors worldwide.

Both Qorvo and Skyworks supply radiofrequency chips to Huawei, which might have an effect on the Chinese vendors ability to manufacture devices. That said, the supply chain disruption will not be anywhere near as damaging to Huawei as it was to ZTE as it has HiSilicon which manufacturers many of its components.

Xilinx is another which seems to have worn the news quite negatively. The team work with Huawei’s enterprise business unit, helping with video streaming challenges. This might be the smallest business group at Huawei, though the 5G euphoria is set to offer considerable opportunities. Xilinx share price has been recovering after a 17% drop in April, though this has proved to be another set-back.

NeoPhotonics is a company which should be seriously concerned. As a customer, Huawei accounted for more than 46% of the total revenue across 2018. The executive team is relatively open with investors regarding this fact, and this might have been factored into any decision to invest, though this is a massive loss for the business to absorb.

Lumentum is another business which is somewhat reliant on Huawei. While we were not able to nail down specific numbers, the firm supplies fiber optic components to Network Equipment Manufacturers (NEM) and considering there aren’t many of them to supply to, losing Huawei will be a headache.

At Finisar, Huawei described as one of the company’s major customers, though it has seemingly been diversifying its customer base in recent years. In 2017 and 2016, Huawei accounted for 11% and 12% of the annual total respectively, though the percentage is not listed for 2018. This is because the percentage has dipped below 10%, though we were unable to ascertain what the figure now is.

We might have to wait a few weeks to understand the full extent of the impact, and how stringently the US will enforce Huawei’s entry onto the ‘Entity List’, but we suspect there will be some very stressful meetings taking place in numerous offices throughout the US.