Huawei’s hopes of global domination have been dashed

Britain’s decision to ban Huawei from the country’s 5G network is a huge blow to the Chinese conglomerate’s global ambitions and hopes of leading the next generation of wireless technology.

Despite the US campaign against the company over the last two years, Huawei has managed to grow its 5G business, securing dozens of contracts with telecom carriers, many of them in Europe.

But the United Kingdom’s reversal — in the wake of increased US sanctions against the Shenzhen-based firm — is a big loss for Huawei, and could spell more trouble ahead. The company’s supply chain has been upended by the latest US restrictions, prompting renewed concerns about the security risks of using its product

Britain’s “decision will prompt a reassessment in European capitals about whether they will be able to mitigate the risk of including Huawei in their 5G networks,” said Carisa Nietsche, a researcher at the Center for a New American Security, a Washington think tank.

An employee works in the customer service center inside the Huawei Technologies Co. store in Brussels, Belgium, on Tuesday, Feb. 4, 2020. Huawei is in talks about investing in European tech startups and contributing to research in a bid to secure its supply chain as tensions with the U.S. escalate, people familiar with the matter said. Photographer: Geert Vanden Wijngaert/Bloomberg/Getty Images

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“The United Kingdom has long been a trendsetter in Europe due to their risk assessment chops,” she said. Now that Britain has banned Huawei, “it’s possible that other European countries may follow,” including France, she said.

Germany could be next

In Germany, where Deutsche Telekom (DTEGF) depends on Huawei equipment for as much as 90% of its network, debate about the Chinese company’s role has intensified in recent months, Paul Triolo, head of geo-technology at Eurasia Group, wrote in a note on Tuesday.

Washington could try to capitalize on the momentum. US national security adviser Robert O’Brien arrived in Paris on Monday for three days of talks with his counterparts from France, Germany, the United Kingdom and Italy. The issue of 5G networks was on the agenda.

Huawei called the UK ban disappointing, saying it was based on US trade policy, not security concerns.

The company would “continue fulfilling our obligations to customers and suppliers,” spokeswoman Evita Cao told CNN Business. She said Huawei would survive “no matter what future challenges the company faces.”

Before the Trump administration began its crackdown, Huawei had set ambitious goals: to overtake Samsung and become the world’s top smartphone maker by 2020, and to be a leading provider of 5G telecom gear.

Huawei said earlier this year that it has secured 91 commercial 5G contracts, more than half (47) are in Europe, 27 are in Asia and 17 are elsewhere in the world. The company declined to update those figures on Wednesday.

But US sanctions have dashed the company’s hopes for global domination.

Last year, Washington barred American companies from supplying tech to Huawei. The ban means Huawei’s latest smartphones can’t run popular Google (GOOGL) apps like YouTube and Google (GOOGL) Maps.

FILE PHOTO: Huawei Chief Financial Officer Meng Wanzhou leaves B.C. Supreme Court following her extradition hearing at B.C. Supreme Court in Vancouver, British Columbia, Canada January 23, 2020. REUTERS/Jennifer Gauthier/File Photo

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In May, the US barred global firms that use American tech from selling semiconductors to Huawei. That move effectively blocked off Huawei’s access to chipsets made by its key supplier, Taiwan Semiconductor (TSM) Manufacturing Company, or TSMC. Without those chipsets, Huawei can’t build 5G base stations.

In recent months, the United States has also been pushing a so-called “Clean Path Initiative” requiring countries and carriers to ensure communications between the United States and US diplomatic and military bases overseas are free of Chinese gear. In Britain, senior US officials “repeatedly warned that US-UK intelligence ties could be jeopardized if the United Kingdom did not take stricter action against Chinese 5G vendors,” according to Triolo.

The UK ban will mean a smaller global market and less profit for Huawei’s 5G equipment business, according to Jefferies analyst Edison Lee.

“But not every European country will necessarily follow the UK’s decision,” he added.

There’s a price to be paid

Some may be worried about retaliation. China has already signaled it will push back on actions taken against its national tech champion. Ministry of Foreign Affairs spokeswoman Hua Chunying said on Wednesday that “the UK has made a wrong decision that severely undermines Chinese companies’ interests.”

“China will view this seriously and comprehensively” she said, adding that the country will “take all necessary measures” to safeguard its interests.

German officials, for example, worry that banning Huawei from its 5G network could “invite retaliation against major German exporters by Beijing,” Triolo said. Germany exported nearly 100 billion euros ($114 billion) worth of goods to China in 2019, making it the country’s second largest export market after the United States, according to government statistics.

There’s another price to be paid. While Britain’s about-face was a big win for the Trump administration, it dealt a severe blow to the country’s rollout of 5G networks. Officials warned the launch of the ultra-fast network could be delayed by up to three years. It could cost billions to swap out Huawei kit.

The same will hold true if other countries follow suit, and will also make carriers reluctant to upgrade now, according to Lee, of Jefferies,

“The UK decision to ban Huawei will give even less motivation for telecom companies to quickly migrate to 5G,” he said.

Choosing equipment from vendors such as Huawei, Nokia (NOK), Ericsson and others is one of the biggest business decisions of any mobile operator, Lee said.

“When they are forced to change the vendor that they have already chosen, and also to rip out equipment that they have been using with no problems in the past five years, this will be a huge disruption to their business plans,” he said.

— Shawn Deng and Isaac Yee contributed to this report.