Article

Impact of UK's decision on Huawei and 5G

Implications of the UK Government’s decision to allow Huawei access to the UK 5G and fibre networks on the telecoms equipment market

02 March 2020

The UK’s decision1 on the use of Huawei equipment in 5G networks has brought a new spotlight on China’s dominance on the global stage. This article focuses on the impacts of the decision on the telecoms sector with regard to competition, future development and potential of new entrants or processes.

Background

The focus on Huawei has resulted from the company’s alleged closeness to the Chinese Government alongside Huawei’s equipment being installed as part of particularly sensitive infrastructure, leading to a variety of national security concerns. The UK decision has gained prominence as it is one of the closest allies of the USA and has become a balancing act between threats from the USA Government of withholding intelligence and threats from the Chinese Government to suspend and withdraw investment in the UK if Huawei is banned.

The decision

On the 28 January 2020, the UK classified Huawei as a high-risk vendor but gave permission for its equipment to be installed in each operator’s 5G network. Several limits have been applied to limit the identified risks:

  • Huawei equipment must be kept to the periphery of the network and will not be included in the core network
  • No more than 35% of the equipment in the network will be allowed to be provided by Huawei and this may not have more than 35% of the total traffic across the year passing through their equipment (this is for both the mobile and fibre networks)
  • The equipment will not be allowed close to military bases or nuclear sites1.

Short term impacts

This decision will have a fundamental impact on the UK in the decades to come but initially telecoms operators are most likely be relieved. Despite large costs for the industry related to the restrictions, these will be far lower than if the UK Government had applied an outright ban on Huawei equipment, since a high proportion of the 4G network as well as 5G equipment currently being installed utilises Huawei’s technology. However, some operators will be impacted more than others, with BT incurring costs of £500 million over the next five years2. It also appears Three will be worst affected since Three appointed Huawei as its sole 5G RAN vendor and is in the process of swapping out its Samsung 4G RAN equipment to ensure backwards compatibility. To remain under the imposed limits Three will have to conduct an overhaul of its network as it was planned to have 40% of the network consisting of Huawei by the end of 20213. Further delays are inevitable due to negotiations and testing required to assign a new vendor for the remainder of the network.

All these added costs to the major UK operators, alongside delays involved in the rollout, will likely have a detrimental impact on consumers and the quality and coverage experienced since network deployment will take longer.

We discuss the impact on equipment vendors in the Figure below.

Figure 1:
Short term impacts on vendors resulting from the UK Government's decision

Longer term implications

A more recent focus of countries is to try and increase the supplier diversity as the market has largely consolidated to three major players, Huawei, Ericsson and Nokia leading to these companies controlling 80% of the market share in 20185. By limiting Huawei’s participation in the UK network, alongside being banned in several other nations, the number of suppliers has been further squeezed.

As a result of the market situation, OpenRAN has received a renewed focus with this seen as a viable method to try and limit the dominance of any particular company. OpenRAN is an initiative to develop standardised and decoupled hardware and software so that equipment from each of the suppliers can be interchangeable8. The aim of this is to improve quality and lower costs by creating greater supplier diversity, however there are issues related to legacy technologies for 2G, 3G and 4G and integration with these in order to maintain backwards compatibility. The complications likely to be experienced due to the complexities involved in an open system means this will likely take longer than expected to be commercially available. This will likely benefit the existing large players and the success of the initiative will determine on the progress made but the legacy compatibility issue will become more limited as time passes as older technologies will eventually be switched off and the bands re-assigned.

There could be greater opportunities for smaller players, such as Samsung who had 3% of the global market share in 20179. New opportunities provided by 5G, coupled with the security concerns involving Huawei, would make companies like Samsung a much more attractive proposition. This can be seen in South Korea which has utilised Samsung’s 5G equipment to become a world leader in 5G and allowed the company to showcase its credentials as a viable alternative to the existing players. Samsung delivered 53 000 5G base stations giving it a 62% market share on the total number of sites10. Furthermore, there were 5 million 5G subscribers in South Korea by the end of 201911, making it the world leader for 5G service adoption. Outside of South Korea the beginning of Samsung’s move to becoming a major player could be seen as it has been selected as a partner for both Verizon and AT&T in the USA in 2018.

Conclusions

Many countries’ decision on Huawei will depend on their national security concerns alongside their current exposure to Huawei equipment in their networks and their financial constraints. Limiting or excluding Huawei from a network will lead to costs related to the replacement of equipment and only two major suppliers bidding for contracts.

In the short-term, the decisions benefit Ericsson and Nokia and also provide an opportunity for some of the smaller equipment manufacturers to attract some share of the global market, as demonstrated by Samsung, which has benefitted from a first-mover advantage in South Korea and its partnerships in the USA.

This, alongside initiatives such as OpenRAN, could, in the longer-term, create a more competitive market place in telecoms equipment supplier market in the long term, particularly with regard to 5G and even 6G.

References

1 UK Government, 'New plans to safeguard country's telecom network and pave way for fast, reliable and secure connectivity', 28 January 2020, available at the GOV.UK website.

2 BT Group, 'Trading update', 30 January 2020, available at the BT website.

3 J. Davies, 'Three UK in a spot of bother as senior execs head for the exit', 03 February 2020, available at the Telecoms.com website.

4 K. Buchholz, 'Which countries have banned Huawei?', 30 January 2020, available at the Statista website.

5 A. Holst, 'Market share of telecom mobile infrastructure comapnies worldwide from 2017 to 2018', 26 July 2019, available at the Statista website.

6 R. Milne, 'Ericsson should court US takeover, says big investor', 07 February 2020, available at the Financial Times website.

7 Samsung,'Persistence pays off for Samsung Networks in becoming a major 5G radio access network vendor', 22 October 2019, available at the Samsung website.

8 Telecom Infra Project, 'OpenRAN', available at the Telecom Infra Project website.

9 R. Gupta, 'Are Huawei’s Woes Creating Openings for Samsung?', 03 January 2020, available at the Market Realist website.

10 J. Waring, 'Samsung dominates Korea 5G deployments', 10 April 2019, available at the Mobile World Live website.

11 J. P. Tomás, 'South Korea to reach 5 million 5G subscribers by end-December', 04 December 2019, available at the RCR Wireless News website.

Contact for more information

Sam Levy

Business Analyst

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