Ren’s back to tell us how Huawei is starting to ditch the US

Huawei founder Ren Zhengfei appears to be little more than a celebrity spokesperson nowadays, but a recent interview suggests the vendor is just fine with its US shunning.

Speaking to the Financial Times, Ren has once again been called into action to address the tensions between China and the US, as a result of which, Huawei has become a prime target for anyone hoping to inflict damage on the worlds’ second largest economy. The message from Ren is relatively simple; we’re doing OK and we’ll move away from US suppliers.

Such comments will certainly set off alarm bells in the offices of some US semiconductor firms, but it should hardly come as a surprise. The ‘Made in China 2025’ strategy might be unpopular with the US and Europe, but it is by no-means a secret.

‘Made in China 2025’ is an initiative set into action by Chinese Premier Li Keqiang during 2015. Through this initiative, the Chinese Government wants to evolve the perception of the country, ditching the ‘world’s factory’ tagline and moving up the value chain towards higher value products and services. The Government will be contributing $300 billion to the project to enable China to compete with the US.

This plan has been heavily criticised by the US for a number of reasons, but ultimately it all boils down to one; this is a genuine threat to the technological domination of the US on the global scene.

Of course, there are plenty of reasons not to like the idea. Some have suggested it violates the World Trade Organization (WTO) rules on self-sufficiency. Others have said trade secrets have been stolen from foreign companies or unfairly obtained through forced joint-ventures. For ‘Made in China 2025’, companies have to move up the value chain, targeting growth industries such as AI or medicine, and these smarts have to come from somewhere.

However, you always have to bear in mind the end-result irrelevant of path taken to get there. If ‘Made in China 2025’ succeeds, the US will no-longer be the dominant force in the technology world, and other economies could be shattered if China replaces imported goods with domestic.

In the latest interview, Ren is suggesting that even if there is a reprieve from President Donald Trump following the G20 summit last weekend, Huawei will continue to move its supply chain out of the US. Perhaps this is the catalyst which was needed to kick the ‘Made in China 2025’ concept up another gear.

“The US is helping us in a great way by giving us these difficulties,” said Ren. “Under external pressure, we have become more united than ever.

“If we aren’t allowed to use US components, we are very confident in our ability to use components made in China and other countries.”

Although there has been a concession from Trump with regard to the ban facing Huawei, some might view this pardon with scepticism. The President’s opinion seems to change more often than the tides so why would any organization pins its hopes and aspirations on the door of the Oval Office. Instead of a power demonstration, the US seems to have pushed the Chinese further towards autonomy.

While it is far from confirmed, we strongly suspect the huffing and puffing from the White House was little more than a demonstration of power. Huawei’s entry onto the Entity List might have been an aggressive move to gain the upper-hand in trade talks with the Chinese; look what we did to ZTE last year, the US appears to be saying, so play nice or we’ll do the same to Huawei.

But it doesn’t seem to have worked; Huawei is still alive and still OK, if you listen to Ren.

How OK Huawei actually is remains to be seen. Ren has been wheeled out to put a positive spin on the situation, but the picture is rather gloomy. Smartphone shipments are set to decline by 40-60% over the remainder of the year, Google hasn’t said it is once again on friendly terms with Huawei despite Trump’s amnesty, and some have questioned whether China is capable of filling the semiconductor hole created through the China/US vacuum.

Huawei has done a lot to add diversity to its supply chain in recent years, while also moving numerous operations to its own fabless semiconductor company HiSilicon, but can it satisfy its appetite for more specialised components? Huawei works with a number of US firms who have niche operations, Qorvo supplies radio-frequency systems and solutions for Huawei for example, and when it comes to specialised components, the US rules the world.

For certain segments of the semiconductor industry, field programmable gate arrays as another example, and China has not been able to replicate the US success just yet. Despite what Ren says about moving Huawei’s supply chain out of the US, it will still be reliant for some incredibly important cogs.

One way of viewing this situation is that there is a short-term demonstration of power. Without the likes of Xilinx, Qualcomm, Qorvo, NeoPhotonics and numerous other semiconductor businesses, Huawei cannot produce the products it is promising customers. Not yet at least.

But long-term, perhaps this approach is simply forcing ‘Made in China 2025’ to accelerate and eroding the control the US has globally over some very high-value, highly profitable segments. Prior to the trade war, US companies were inside the tent. Admittedly conditions were not perfect, but they were inside not outside.

Perhaps this is the watershed moment; companies are going to be forced out as companies like Huawei increasingly look for domestic suppliers, and once they find them (by luck, convenience or necessity) there is no coming back.

Indian companies to be punished for Huawei business

India is the latest country to be dragged into the US/China conflict as the threat of punishment is directed towards any companies who work with Huawei.

According to the Economic Times, any company found to be supplying components or products to Huawei, or any affiliated company on the US Entity List, could face regulatory penalties. Although the White House has focused on crippling Huawei through placing limitations on US companies, it seems the US Government feels it needs to spread its wings further.

“Any Indian company which will act as a supplier of US-origin equipment, software, technology to Huawei and its affiliates in entity list could be subject to penal action/sanction under US regulations,” said Telecoms and IT Minister Ravi Shankar Prasad in Parliament this week.

Although Huawei’s entry onto the Entity List, a list of companies which US firms are banned from working with, has had a notable impact on the Chinese firm’s business, it seems the consequences have not gone far enough. Huawei has suggested smartphone shipments will certainly take a hit, but the company is still functional, seemingly much to the distaste of US officials.

Last year, the US dropped an economic dirty-bomb on ZTE and it almost destroyed the firm. ZTE’s supply chain was unhealthily concentrated in the US leading to the distress, though as Huawei’s supply chain is much more diversified, the same action has not brought the same result.

Perhaps this is another step to add further distress to Huawei. If the US Government places restrictions on the companies who supply Huawei, irrelevant to their nationality, it might have a better chance of hurting the Chinese vendor.

That said, the impact on Huawei might just be a pleasant by-product of a dispute between the US and India. Like China, Mexico and Canada, India has got its own tensions with the US this time concerning data localisation.

Last month, rumours emerged that India would be the latest target of the US. India currently has laws in place which force foreign companies to store data on Indian consumers and businesses within the borders. There are other countries who have similar laws, but the US does seem to have some leverage over India.

H-1B work visas allow an individual to enter the US to temporarily work at an employer in a specialty occupation. Although there are no official quotas, it is believed Indian citizens account for as much as 70% of the H-1B work visas which are handed out each year. If localisation rules are not relaxed, the US has threatened to curb the flow of visas into India.

What will interesting to see is whether this is a strategy which is rolled out globally for the US Government. If it holds all of Huawei’s suppliers who use US components, products or IP in their products to account, there will be a varied list. This might be a strategy to further cause distress to Huawei, though we suspect it could also be used as a bargaining chip in the larger trade discussions.

Understanding the collateral damage from Trump’s trade aggression

President Donald Trump might be back on friendly terms with China’s President Xi Jinping, but his efforts to kill Huawei’s business produced friendly fire, hitting companies based in allied nations.

This is the unintended and unavoidable consequence of a targeting a single company or country with sanctions and tariffs, the US’ version of an economic dirty-bomb; such are the complexities and wide-spread nature of today’s global supply chains, you are going to cause damage to innocent parties. We suspect Trump does not care, as long as his objectives are achieved, but here we’re going to have a look at the indirect friendly-fire.

The Nikkei Asian Review has broken down Huawei’s latest smartphone, the P30, listing off the individual components of the device and also giving an estimation of cost. Japan supplies the largest proportion of components for the device, 53.2% or 869 parts, while the US supplies 0.9% of the components and South Korea provides 34.4%. Interestingly enough the costs tell a slightly different story.

The financial output from Huawei is an interesting split. It is estimated that a P30 costs $363.83 to manufacture, with 38.1% of the expenditure remaining with Chinese suppliers. The 15 parts supplied by US firms account for $59.36 per device with Micron Technology collecting $40.96 for its DRAM chipset. Japanese suppliers gain $83.71 for every device manufactured, while $28 heads to South Korea and $28.85 to Taiwan.

What is important to consider when you are assessing the friendly-fire is the direct and indirect impact of Trump’s actions. The direct impact is easily measured; by banning US companies from working with Huawei you can see the financial detriment of losing a customer. If you go one stage further, you can see the indirect impact. By taking a shot at Huawei, less devices are being sold, therefore less cash is being paid out to every supplier.

The table below gives an overview of some of the international organizations which have been impacted by Trump aggression towards China:

Company Country Component Supplied Cost
Micron Technology US DRAM $40.96
Samsung South Korea NANDflash memory $28.16
Sony Japan Rear camera $15.15
Sony Japan Front camera $12.16
Skyworks Solutions US Communication semiconductor $8
Sony Japan Rear camera $7.6
Qorvo US Communication semiconductor $3
Alps Electric and Alps Alpine Japan Touch panel $3
Corning US Cover glass $2.7

Estimates courtesy of Nikkei Asian Review

What is worth noting is the aggression towards Huawei is temporarily on hold. At the G20 Summit this weekend, the US and China have made positive statements about getting trade talks back on track, though this would mean Trump would have to stop his campaign of terror against Huawei. Suppliers to the firm will be relieved, but you have to wonder whether the damage has already been done to the smartphone business.

Just like the telcos for networking equipment, consumers will want assurances the devices will continue to work over the lifetime of the product. As Google is a US firm, and therefore subject to the Entity ban, consumers were much less likely to buy a Huawei device when there is no guarantee Android will work as effectively and securely as it should.

The statements from the two Premiers are all well and good, but considering Trump’s opinion seems to change as often as the tides, how can anyone guarantee the effectiveness of the Android operating system over the course of the device’s lifetime? There are other factors to consider here, Huawei’s homegrown OS for example, but this is an unknown factor and consumers rarely trust the unknown en-masse.

This is where we believe the damage has already been dealt; it takes a lot to earn consumers trust but not much to lose it. Huawei has been gathering momentum in the smartphone market for years, and entry onto the Entity List might have set it back to the beginning. Rumours have emerged suggesting the company is preparing for a 40-60% decline in shipments for the remainder of 2019; how long will it take the firm to recapture these customers?

Apple considering a Chinese exit amid international tensions

It seems Apple does not consider itself immune from collateral damage, as whispers about a China exit are becoming louder and more plentiful.

For China, and those Chinese citizens who are dependent on Apple for their livelihood, the news will come as a shock, but this is a development which some have been expected for a while. According to the Nikkei Asian Review, Apple is considering moving 15-30% of its production capacity out of China.

This is a trend which we are starting to see pretty much everywhere. Supply chain management is a very difficult aspect of an international business, and while it might have looked attractive to take advantage of cheap labour in developing markets during yesteryear, it seems a concentration of operations is getting Apple executives twitchy today.

The quoted sources are suggesting diversification of the supply chain is a sensible way to manage some tensions floating back and forth across the Pacific Ocean.

In terms of the clues this development was on the horizon, it is worth looking back a couple of weeks. Foxconn executives have already said 25% of production is already located outside of China, and there is enough capacity to meet the demands of Apple as a customer should tensions have a negative impact on the Apple business. This appeared to be a largely unprompted statement, but perhaps the conversations were already happening behind closed doors.

What is also worth noting is that Foxconn certainly has some incentive to bend to the will of Apple executives; if it doesn’t have the capacity, a smart idea might be to spend some cash buying a company outside of China sharpish. Although not confirmed, Apple supposedly accounts for roughly half of Foxconn total revenues. If Apple wants to move production capacity out of China, Foxconn should quickly learn the moves to the new dance.

For the Chinese employees in the supply chain, this will be a very worrying time. Five million workers rely on Apple’s presence in the country, with Apple only employing 10,000 directly. Interestingly enough, there are now more named suppliers in China than in the US (41 Chinese firms vs. 37 US suppliers). What is worth noting is that China will remain the centre of Apple’s supply chain for the foreseeable future; shifting such a complex and monstrous operation would take a considerable amount of time, investment and planning.

Other countries would of course want to woo Apple, but China is a very attractive base for the iLeader. Not only does it have the necessary infrastructure, it has the skilled workers in place. 90% of Apple’s products are currently manufactured in China and replicating this successful operation will not easily be done elsewhere.

Although this would be a precautionary move from Apple, the threat is genuine. Huawei and ZTE have already shown there are heavy consequences if supply chains are too concentrated in a single market, and due to the aggressive actions of the White House it would surprise few to see retaliation from the Chinese Government.

On the supply chain side of things, Apple has been making other efforts to shift around operations. The firm has been working to move the production of some premium handsets to India in an effort to avoid the 20% import duties in the country. Apple has continued to struggle in India, partly due to the price conscious nature of consumers. Anything which can be done to reduce the price of handsets will be explored to improve market share.

Whatever your thoughts of President Donald Trump, you cannot argue the Oval Office is having a much more profound impact on the technology industry than previous administrations. Perhaps his actions will lead the Chinese semiconductor market grow, while the manufacturing and assembly operations will be spread into other Asian markets. Another couple of years and the segment could almost look unrecognisable.

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.

Security discussion needs to be bigger than Huawei – Vodafone UK CTO

Huawei is an obvious risk when you are assessing the vendor landscape, but to ensure supply chain resilience and integrity, focusing too narrowly on one company poses a bigger risk, according to Vodafone.

It might be easy to point the finger at China, but according to Vodafone UK CTO Scott Petty, this is a dangerous position to take. Despite a lack of evidence to suggest backdoors are being built into Huawei products, the world is determined to find one, but in reality, there isn’t a single company in the vendor ecosystem which can justifiably state they are 100% secure. This is the world we are living in; risk is everywhere.

“The discussion about Huawei is all managing the risk appropriately,” Petty said at a briefing in Central London.

Risk is a big topic at Vodafone UK right now, and this is clear when you look at how the vendor ecosystem is being managed.

On the radio side of the network, of the 18,000 base stations Vodafone has around the country, Huawei equipment accounts for 32% of them, Nokia 12% and Ericsson taking the remainder. Interestingly enough, Nokia equipment is being phased out in favour of Ericsson. For transmission, this is split between Juniper, Cisco and Ciena, while Cisco is responsible for the core. With this blend of vendors, and appropriate security gateways between each layer of the network, Petty feels Vodafone is managing the risk very appropriately.

And while some might suggest having this much exposure to Huawei might be a negative, Petty argues radio is such low risk it shouldn’t dictate play. You have to take into consideration the risk/benefit equation.

When assessing risk, Vodafone (working with the National Cyber Security Centre) considers two possible scenarios. Firstly, what is the risk of a nefarious actor leaching data from the network, and secondly, taking down the network. On the radio side of things, the exposure is very low.

Firstly, Vodafone has 18,000 base stations throughout the UK. Should one of these base stations be compromised, only the traffic going through that base station would be at risk. This will be a fraction of the total, devices will be handed off to other base stations as people move around, while the clear majority of internet traffic is encrypted nowadays. The likelihood of a nefarious actor trying to bleed valuable insight in this manner is low.

Secondly, even if one of these base stations is taken down by the external wrong-doer, this is only one of 18,000 base stations. To have a material impact on Vodafone’s network, hundreds or even thousands would have to be impacted simultaneously. This is not inconceivable, but highly unlikely. As Petty mentioned, its all about evaluating and minimizing risk.

This is where the discussion becomes incredibly complicated. Huawei is one of the leading names (if not the leader) in the radio segment, ignoring such a vendor is a difficult decision to make as a technologist; you always want to use best in class.

For transmission, another area Huawei would be considered a leading name, the risk has been identified as medium. You would still need a lot of compute power to crack the encryption software, but Vodafone have decided to steer clear of Chinese vendors here.

Finally, onto the core, the most important part of the network. Petty pointed to O2’s issues last year, where a suspect Ericsson node effectively killed the entire network for a day, to demonstrate the importance of this component. Cisco is the vendor here, but this leads us onto the dangers of a such a narrow focus on security.

When looking for signs of a telco vendor assisting a government for intelligence activities, there is arguably only one piece of concrete evidence to support such claims. Edward Snowden produced this evidence, proving Cisco was aiding the NSA for its own spying agenda. This is the reason we suspect the US is so convinced China is spying on the rest of the world; the US government is doing the same thing and therefore knows it is technologically possible.

We are of course not accusing Cisco of aiding the US government in this manner at this moment, but such is the sophistication and technological capabilities of those on the dark web, no company should consider themselves 100% secure. They have their own supply chains which could be vulnerable at some point. The complexities of this ecosystem mean nothing is 100% secure, therefore it comes down to risk assessment, and also the mitigation of risk through layers of security, gateways and encryption.

For Petty, the establishment of Huawei’s European cyber-security centre is a step in the right direction, though he would want the European Union to play an active role in its operations and for the net to be cast wider, considering all vendors. As mentioned before, too much of a narrow focus on one area heightens the risk in others.

However, the talk of a Huawei ban would be a disaster for everyone involved.

“We don’t think a complete Huawei ban would be a proportionate response,” said Helen Lamprell, Vodafone UK’s General Counsel & External Affairs Director.

If risk is appropriately managed and mitigated, business can continue as usual. Policy decision makers have to realise there is no such thing as 100% secure. A broad-sweeping ban on Huawei would be disastrous not only for Vodafone UK, but everyone in the connected economy.

Firstly, you have to think of the cost of removing all Huawei equipment. This would cost hundreds of millions and take a considerable amount of time. This would delay the introduction of 5G and fundamentally undermine the business case for ROI. It could set 5G back years in the UK, not only for Vodafone but the whole industry.

The supply chain review is currently working its way through the red maze of UK government, and while the certainty needs to arrive sooner rather than later, getting the review right is better than speed.

The message from Vodafone this morning was relatively clear and simple; the Huawei risk can be managed, but an outright ban would be disastrous.

Competition is a problem, removing Huawei could be disastrous – Vodafone CEO

With all eyes in directed towards Mobile World Congress this week, Vodafone CEO Nick Read took the opportunity to vent his frustrations.

Competition is unhealthy, accusations are factually suspect, protectionism is too aggressive, the trust with customers has been broken, collaboration is almost non-existent. From Read’s perspective, there are plenty of reasons the 5G era will be just of much of a struggle for the telcos as the 4G one.

And of course, it wouldn’t be a telco press conference if there wasn’t a reference to Huawei.

“I would like a new contract for the industry, I want to go out and build trust with consumers and businesses,” said Read. “This will require us to engage government and build the vision of a digital society together.”

Read has reiterated his point from the last quarterly earnings call, there needs to be more of a fact-based conversation around the Huawei saga. There is too much rhetoric, too much emotion, and perhaps, too much political influence.

Huawei is the punching bag right now, but any ban or heavy-handed response to US calls for aggressive action would be a consequence for everyone.

As Read points out, Huawei is a significant player in almost everyone’s supply chain, controlling roughly 28% of mobile infrastructure, while Nokia and Ericsson also have market share in the 20s. Removing one of these players from the market will further compound a problem which plagues the industry today; the supply chain is too concentrated around a small number of vendors.

There simply isn’t enough diversity to consider removing a key cog to European operations.

Of course, you have to consider the status quo. The US is happy to ban Huawei as it has never been a significant contributor to its infrastructure. Should the same ban be enforced in Europe, negotiations would be de-railed, and operations disrupted. Read suggests this would set 5G plans back by two years across the bloc.

The issue here is of confidence to invest. Why would telcos enter into deep negotiations when future conditions have not been set in stone. This is already evident in Vodafone’s decision to pause work on the core with Huawei; delaying these important initiatives could push Europe further behind global 5G leaders. Telcos need confidence, certainty and answers. The longer reviews go on, the more precarious the situation becomes.

This is one of the many challenges the industry is facing. There is an ‘us versus them’ mentality when it comes to telcos. Read is referencing the relationship with regulators and government, suggesting a lack of collaboration which is negatively impacting the ability to operate, but it is also evident in the relationship with the consumer and competitors. Collaboration is a key word here.

One example of collaboration is in the UK where the National Cybersecurity Centre effectively monitors Huawei equipment. This model could be rolled out across Europe, though Read’s stressed the point that there would have to be a harmonised approach. Fragmentation is the enemy here, and it would stifle progress. If there is a European level of monitoring, or even if it is taken down to nation states, it doesn’t actually matter as long as it is consistent.

The Huawei ban is set to become one of the talking points of this years’ MWC, that is not necessarily an idea anyone will be surprised about, but what we are not sure about is the disruption. Will it slow 5G development? Has the uncertainty already slowed 5G development? Will the anti-China rhetoric, dilly-dallying and confusion kill Europe’s ambitions in the global digital economy?

Our supply chain won’t tread the ZTE path – Huawei CEO

One of the biggest stories of the year, and one of the major catalysts of the US/China trade war, was ZTE’s brush with extinction, but Huawei thinks it’s robust enough to withstand the US economic dirty-bomb.

During the Summer, ZTE was caught violating US trade sanctions with Iran and subsequently was banned from using any US products or IP within its supply chain. The move from the US almost destroyed ZTE, with the company ceasing operations for a couple of weeks, but Huawei’s Rotating CEO doesn’t think his firm would be under the same risk.

“We all know the ICT industry highly depends on a global supply chain,” said Hu. “And Huawei is no exception. Today we have 13,000 suppliers in our supply chain. Companies coming from Japan, US, Europe, China and many other countries in the regions. Take this year for example, our annual procurement spend would be 70 billion dollars.”

With CFO Meng Wanzhou currently on bail in Canada, Huawei is facing questions it probably doesn’t want to answer. The connection with Skycom looks to be much closer than some US financial institutions were led to believe, suggesting Huawei has been violating US trade sanctions with Iran. Should the US take the same action as it did with ZTE earlier in the year, Huawei could face the same ban on US exports.

The issue with ZTE was its dependence on the US for its supply chain. Huawei will also have the US feature prominently through its own supply chain, but Hu is confident it would stand up to any potential punishment dished out by the US.

“We take a diversified supply strategy,” said Hu. “That means we have a multi-sourcing strategy.

“We look at multiple choices in terms of technology solutions, and we also have multi-location supply networks. At the same time, since we’re working together with hundreds of telecom operators in the world, and also, we are serving a significant number of enterprise customers, so we look at the full lifecycle support that is needed and build up our stock of spare parts and components to ensure support across the product lifecycle.”

The company is also working to produce its own alternatives to some technologies which might not be able to be replicated elsewhere. A prime example of this is the Android mobile operating system.

As it stands, should the US impose a ban on Huawei its smartphones and wearable devices would be relegated to the role of doorstop. With this in mind, Huawei is attempting to create its own mobile operating system. It will probably be no-where as good as what the Android OS can offer, others such as Samsung have tried and failed, but it is certainly better than nothing.

Being banned from using US components and IP would certainly be a negative for Huawei, and it certainly isn’t a scenario which is out of the question, but Huawei seems to be in a better position than the suspect ZTE.

Telcos fighting back against vendor strangle hold

The balance of power has been firmly in the hands of the vendors for years, but now we are witnessing the telcos aggressively pushing back and wrestling for control of their own fate.

This is not a battle which can be won over night, it is a war of attrition which will be fought quietly. There will of course be passive aggressive comments, you can expect bold statements and it wouldn’t be the telco space without hollow promises of evolution, but what we are now witnessing is the slumbering telcos emerge from the shadows.

Throughout the keynote sessions and pre-conference workshops at this year’s Big Communications Event in Austin the battle lines are being drawn. The Open Networking Foundation spoke about a reconstruction of the supply chain, AT&T’s Melissa Arnoldi talked up the telcos white box dream, Reliance Jio’s President Mathew Oommen boasted about in-house developments, while Telstra’s Jim Fagan cooed over the benefits of open source. All of these comments indicate the telcos are trying to wrestle back control of the industry.

This is the complicated situation the telco industry has evolved to. For years the operators have found themselves searching for innovation externally. The likes of Huawei, Intel or even Ericsson on occasion held the trump cards, dictating the terms of the relationship. This is still the case as it stands, but the telcos are seemingly not going to sit quietly and do what they are told anymore.

Open source projects are key here, as is the disaggregation of software and hardware, alongside a operational model which allows for innovation and experimentation in-house. This is not to say proprietary solutions will disappear, but they will have to settle into their own place. Another critical factor is the attitude of the operators. Slowly we are starting to see a backbone emerge, challenging the status quo, and wrestling the balance of power back into the buyside camp.

Of course it will not be the smoothest of roads. The separation of software and hardware is an excellent example of where we are likely to see some resistance. The status quo leans towards vendor lock-in, and subsequently guaranteed business for the vendor. The new world of disaggregation offers flexibility and empowerment for the operators, and an entirely new business model for the vendors. The question is who will embrace the change and who will resist. Samsung has been making encouraging comments, but how much substance there is remains to be seen.

A healthy industry is one where the balance of power is evenly distributed through the ecosystem. This is not the case in telecoms, but the right noises are certainly being made. Hopefully there will be action to back-up the claims and power-plays being made by the operators.