Nikeii: Softbank to drop Huawei LTE equipment in favor of Nokia and Ericsson
SoftBank Group Corp, Japan’s third largest telco, plans to replace 4G LTE network equipment from China’s Huawei Technologies Co Ltd with hardware from Nokia and Ericsson, Nikkei Asian Review reported on Thursday, without citing sources. SoftBank is also expected to place orders with the two European companies for its 5G networks, Nikkei reported. SoftBank is the only telecom carrier in Japan that uses Huawei equipment, according to the news outlet. Nokia and Ericsson are already big suppliers to SoftBank.
The move comes at a time of heightened scrutiny of Chinese tech firms by the United States and some prominent allies over ties to the Chinese government, driven by concerns they could be used by Beijing for spying. The U.S., Australia and New Zealand have already banned Huawei from their countries 5G networks while Canada and the U.K. are considering that.
Last week, British multinational telecoms company BT confirmed it has been removing Huawei equipment from the core of its 3G and 4G networks since 2016, and will be excluding the Chinese company when selecting vendors for its 5G core.
A SoftBank spokesman said the report was “based on speculation and no decision has been made.” It also has the longest running relationship with Huawei among Japan’s top three telcos, but the firm has previously said that the amount of equipment it uses from Chinese makers “is relatively small.”
Replacing the 4G equipment, which Nikkei reported will be done over several years, is likely to be time-consuming and expensive, industry sources have said.
The Nikkei report on the supplier switch comes as SoftBank is preparing to list its telecoms unit in Tokyo on Dec. 19. The report also comes on the heels of Japan issuing a policy document on maintaining cybersecurity during procurement.
While Huawei was not explicitly named, sources have said that the policy document was aimed at preventing Japan government procurement from the company as well as China’s ZTE Corp.
Huawei has already been locked out of the U.S. market, and Australia and New Zealand have blocked it from building 5G networks amid concerns of its possible links with China’s government. Huawei has said Beijing has no influence over it.
Japan’s decision to keep Huawei out would add to the woes of the firm, whose chief financial officer was recently arrested by Canadian officials for extradition to the United States.
“It’s extremely important to avoid buying equipment that includes malicious functions like stealing or destroying information or halting information systems,” Nikkei reported Japanese Prime Minister Shinzo Abe as saying.
Addendum: The Financial Times reports: Huawei spat comes as China races ahead in 5G (on line subscription required)
A leaked memo, apparently written by a senior National Security Council official, revealed as far back as the start of this year exactly how worried the US is about Huawei. The rise of the Chinese company to become the world’s biggest supplier of telecoms equipment has given China a huge boost over the US in the race to introduce and develop 5G, the next generation of mobile communications, the memo complained.
“We are losing,” it said. “Whoever leads in technology and market share for 5G deployment will have a tremendous advantage towards [ . . .] commanding the heights of the information domain.”
Eleven months on, those fears have mushroomed into open conflict between Washington and Beijing, with American officials pushing allied countries to ban Huawei from building their 5G networks, citing concerns over security and the company’s unclear links to the Chinese state. The arrest and planned extradition to the US of Meng Wanzhou, Huawei’s chief financial officer and daughter to the company’s founder, has further exacerbated the spat.
Several countries have begun to trial 5G networks, though the full international standards have not yet been agreed. The shift to the new technology carries profound implications, and countries are wary of being left behind. 5G is “by no means simply a ‘faster 4G’”, the US memo said, describing it instead as “a change more like the invention of the Gutenberg Press”. It will bring higher speeds, lower lag times between network and device, and a much larger capacity to transfer data. Together, these features are expected to underpin self-driving cars, AI and machine-to-machine communications that will transform the way everything from homes to hospitals to factories operate.
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Doors are slamming shut for Huawei around the world
By Charles Riley, CNN Business Updated 5:45 PM ET, Fri December 14, 2018
Huawei continues global push despite setbacks in west. Chinese company inks telecoms deals despite security concerns raised by US
As the furor raged over whether Huawei is a security risk to the west a few weeks ago, a senior executive from the Chinese telecoms supplier gave a speech in London.
“Actions speak louder than words,” said Ryan Ding, a Huawei board member, as he revealed that the company has signed 22 commercial contracts for 5G, the next generation of mobile internet, and is working with “over 50 carriers” on 5G trials.
A few days later, the company revealed another major deal: one with Altice for 5G in Portugal. Last week, T-Mobile launched a 5G network using Huawei equipment in Poland.
Both Malta and Papua New Guinea have in recent days shrugged off the criticism of Huawei from the US and its allies, pledging to continue to use Huawei for their networks.
The deals underline that while it may be a blow to Huawei to see the likes of Australia, New Zealand and Japan pull away from its equipment because of security concerns, it remains a key supplier for huge swaths of the globe.
In a sense, the company has grown from the world’s developing periphery before expanding into its core developed markets — and has managed to generate $92.5bn in 2017 revenue while remaining virtually shut out of the US.
“We started in developing countries as well like Central Asia, Russia and Africa and then we moved into western Europe,” a senior Huawei executive, who declined to be identified, said in an interview.
“We needed to understand customers requirements for our products and then provide innovations and we accumulated that experience in emerging markets before expanding into the sophisticated developed markets.”
The legacy of that strategy means the overwhelming majority of the 170 countries in which the company sells products and services are in the developing world, including China, that account for the lion’s share of revenue.
For example, Huawei set up shop in Africa several years before it won a vital UK contract that was a beachhead to more deals in Europe, and now claims to partner with customers in nearly every country in the continent.
In developing markets, its critics complain that Huawei has the backing of the Chinese state, which provides financing. In September, for example, China’s ExIm Bank lent Nigeria $328m to improve its telecoms infrastructure with Huawei equipment.
“Huawei could not become as giant as it is and as strong as it is without the government’s complete support,” said the former head of a Huawei supplier. “They provided a practically unlimited budget.”
Huawei also wins market share by reliable technology, extensive post-sales service, and highly competitive pricing, say its fans and critics alike.
“We run into them all over the world,” said an executive at one US rival. “And the way they win business is they charge 10-20 cents in the dollar.
“Don’t get me wrong — they are formidable in the marketplace. But we all have to make money somehow and two or three years down the road they are figuring out ways to do it.”
In Europe the dynamics may be more subtle but the methodology is similar. “Clearly there was commercial exigency on the part of certain governments,” said one former diplomat who was among those warning of the risks of adopting Huawei equipment in the UK.
Advisers to Huawei point out to two further pages from its playbook that help cement its position: influence in R&D, and boots on the ground.
Rivals such as Ericsson and Nokia, said one tech lawyer, may be able to sell kit into far flung markets in Africa, but are less willing to have teams of technicians ready to jump into action to fix glitches and maintain the service.
Huawei has also funded universities, including the pioneering University of Surrey 5G Innovation Centre, and standard-setting bodies, as part of its huge research budget. 5G is a priority for China and Huawei has five chairmen and vice-chairmen on the 5G standard setting body, just one short of leader Ericsson.
Huawei’s business model is one of scale that relies on recycling income into research and development — on which it is on course to spend hefty $16bn, or 15 per cent of sales, this year, according to Vincent Peng, president of Huawei in western Europe.
Looking forward, telecoms analysts said developing markets are likely to continue to choose Huawei, especially because of cost. “We do not expect African governments to bow down to US pressure to keep Chinese telecoms players out of any potential 5G rollouts or 4G network upgrades,” said Kenny Liew at Fitch Solutions.
“Operators will definitely be keen to slash costs where possible [for 5G], and one area is to adopt cost-effective Chinese telecoms equipment,” he added.
Nokia posted earnings on Thursday and the figures indicate bans of Huawei’s 5G equipment has increased demand for alternatives.
Over the fourth quarter, Nokia’s profits reached £652 million ($852 million) from £629 million ($822 million) a year earlier. Sales grew three percent to £6 billion ($7.8 billion).
While the growth is not huge, it’s above analyst predictions. This indicates the bans and uncertainty surrounding Huawei 5G equipment is giving Nokia a boost.
Nokia CEO Rajeev Suri expects the company’s performance to improve further this year as “a fast and meaningful shift” into 5G networks takes place.
The rollouts of a next-generation network are often a profitable time for equipment vendors, even more so when a major competitor is being eliminated by national policies.
Some countries like the US and Australia have banned Huawei’s 5G equipment over national security fears. Others, like many in Europe, are still determining whether to implement bans.
‘Opting For Rivals’
Even where bans are not yet in place, some operators are opting for rivals amid the uncertainty to avoid delaying their 5G rollouts and/or the cost associated with switching from banned equipment.
Just this week, Vodafone announced it will stop purchasing 5G core equipment from Huawei across its European operations amid potential bans.
Meanwhile, in Australia, Optus was forced to adjust its suppliers following the government’s ban. The operator conceded this week it’s led to building its 5G network without the best available equipment.
“From a pure technology perspective, Huawei is probably ahead of the other three,” said Optus CEO Allen Lew to The Sydney Morning Herald. “But what we’ve got from the other suppliers will enable us to provide a globally competitive service.”
Barron’s: A U.S. Ban of Huawei Would Reshape the Telecom Market
The next salvo in the escalating battle between the U.S. and China could come through an executive order that bans U.S. telecom companies from using equipment from certain foreign companies. Any order would largely be directed at Chinese telecom giant Huawei Technologies. The ban, based on national-security concerns, could be good for Huawei’s rivals, problematic for foreign telecom operators, and worrisome for those keeping tabs on the deepening rift between the two economic superpowers.
The Trump administration is reportedly preparing an executive order for such a ban. The overall effort is aimed at keeping certain foreign-company equipment out of the next generation of wireless networks, or 5G.
Shenzhen-based Huawei, the world’s largest telecom-equipment maker, is in the crosshairs of the push. It has risen to dominance by often providing more-advanced and lower-cost gear than rivals and is now akin to Apple (AAPL), Qualcomm (QCOM), and Cisco Systems (CSCO) rolled into one. But Huawei has also long drawn scrutiny from U.S. security and intelligence officials, who have warned that its equipment could be used for spying by the Chinese. Privately held Huawei has denied the allegations, and officials have said the U.S. should offer evidence to prove its charges.
Analysts describe a ban on the use of Huawei in U.S. telecom networks as mostly symbolic, given its limited presence here; many major U.S. carriers have said they won’t use Huawei for 5G. But a ban would bolster the case the U.S. has been making to allies to blacklist Huawei from their networks—where its gear is much more prevalent.
The obvious loser from a ban is Huawei, but it would probably try to offset lost sales by intensifying its push into emerging markets, while continuing to reduce its dependence on U.S. companies, says TS Lombard China policy analyst Eleanor Olcott. Huawei didn’t respond to a request for comment about a potential ban.
European telecom operators could be among the losers if governments there ban Huawei from their respective networks. Many telecom operators in Germany and Britain use Huawei’s equipment. United Kingdom–based Vodafone Group has said it is temporarily halting purchases of Huawei gear for the core of its 5G network.
Removing and replacing Huawei gear with other, higher-priced alternatives could cost the industry billions of dollars, analysts say. Three of Germany’s telecom operators use Huawei in their networks. European telecoms have warned that cutting out Huawei could delay the 5G rollout on the Continent by at least two years.
Australia was among the first to ban Huawei, and the companies that took the biggest hit were telecom operators like Singapore Telecommunications ’ Optus and TPG Telecom (TPM.Australia), says Chris Lane, Asia-Pacific telecom analyst for Sanford Bernstein. TPG shares fell 33% from late August to the end of the year.
No one walks away a clear winner from a Huawei ban. But in the near term, Scandinavia’s Nokia (NOK) and Ericsson (ERIC) would benefit by losing their lower-cost rival in wireless-network equipment. Yet Nokia’s executives were hesitant to trumpet the prospects of market share gains in a recent conference call for fear of raising China’s ire and risking their sales in the world’s largest 5G telecom-equipment market, says Krishna Chintalapalli, a telecom analyst at Ariel Investments.
Of the two firms, Nokia has more areas where it can gain share because it also competes with Huawei in its optical and routing businesses. The diversity in its business and a more attractive valuation are among the reasons that Raymond James analyst Simon Leopold favors Nokia, citing the diversity in its business and a more attractive valuation. At a recent price of $6.36, Nokia trades at roughly 19 times earnings-per-share estimate for the next 12 months, slightly below its five-year average, while Ericsson, at $9.38, trades around 23 times, slightly above its average. Leopold has an Outperform rating on Nokia and sees 18% upside for the stock. He has a Market Perform on Ericsson. But any Huawei benefit won’t be immediate. “Any transition is like turning around an oil tanker situation. It can take multiple quarters, even more,” Leopold says.
Samsung Electronics (005930.Korea) is a smaller rival in telecom equipment but could also benefit as telecom operators try to hedge their bets and diversify their equipment suppliers. The company’s deep pockets could allow it to increase spending to fight for some of the market share and close the gap with its rivals.
Huawei also dominates optical equipment, and a backlash against the Chinese company could help its two biggest rivals in that business, Nokia and Ciena (CIEN). The impact may show up more in Ciena’s results since it is a pure play in the optical space, Leopold says.
On the router side of the business, Cisco and Juniper Networks (JNPR) could gain some share if telecom operators move away from Huawei. Carriers’ equipment is the main pipeline for data traffic and therefore most vulnerable to a cyberattack or cyberespionage. Both Juniper and Cisco have the advantage of not having much business in China, insulating them from potential retaliation. Leopold rates both companies at Overweight, with a price target of $28 for Juniper and $52 for Cisco, upside of 5% and 9%, respectively.
For some companies, the threat of retaliation is real, given China’s willingness to boycott products from specific nations. Korean cosmetic makers and tour operators experienced that treatment in late 2017 after South Korea installed a U.S.-made antimissile system.
But when it comes to technology, China may have a harder time with such boycotts. “Maybe Nokia’s market share goes down a bit, but I don’t see them kicking out Western companies completely,” Chintalapalli says.
“Their domestic market is large, but if they become a tech island nation, they can’t see what others are doing and be a fast follower. That stymies the innovation they are trying to get.”
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