Huawei says ‘unfounded’ lockout by US costing its own consumers US$20 billion

While Huawei and ZTE have seen their network equipment sales flourish across the world, US security concerns have kept the two companies from selling infrastructure products to American telecoms operators

PUBLISHED : Thursday, 05 July, 2018, 7:03pm
UPDATED : Thursday, 05 July, 2018, 7:43pm

Huawei Technologies said “unfounded” allegations by the US government that the company is a security risk has kept it out of the country’s telecommunications equipment market, costing American consumers US$20 billion in lost savings from the country’s development of mobile networks.

Both Huawei and ZTE Corp, however, are expected to languish on a US blacklist because of US security concerns, according to analysts.

That outcome would primarily stem from a Federal Communications Commission (FCC) proposal to prohibit the purchase of equipment or services for a government-subsidised programme, the US$8.5-billion-a-year Universal Service Fund (USF), from any company that poses as a national security threat as a way to safeguard US networks.

Huawei, the world’s largest telecommunications equipment supplier and No 3 smartphone brand, said in a filing to the FCC on Monday that blacklisting the company because of “unfounded allegations and suspicions” about its alleged ties with the Chinese government would mean higher infrastructure costs and less innovation in the US market.

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That argument, however, is not expected to deter the administration of US President Donald Trump from pushing its agenda.

“The FCC will unlikely change its mind because various investigations conducted by US authorities have concluded that China has been a major source of cyberattacks that target the US government and American companies,” Jefferies equity analyst Edison Lee said.

“While most of these investigations have not cited concrete examples, the conclusions made in these reports are driving the direction of US government policies at the moment.”

Apart from the FCC proposal, the US House of Representatives approved last week a defence spending bill that bars the Pentagon from buying goods and services from Chinese telecoms equipment suppliers Huawei and ZTE.

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“Huawei has always been treated by certain elements in the US with suspicion,” said Paul Haswell, a partner who advises technology companies at international law firm Pinsent Masons. “While this seems to be part of escalating trade tensions between the US and China, Huawei’s FCC filing is proof that the company is dealing with US concerns thoroughly and sensibly.”

At stake is a vast North American telecommunications equipment market, which the GSM Association has estimated to be worth around US$136 billion in total carrier capital spending by 2020.

While privately held Huawei has seen its network equipment and smartphone sales flourish over the past few decades across the world, US concerns about the company’s alleged ties with Beijing has stymied its efforts to sell its infrastructure products to large US telecoms operators.

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Security concerns were widely reported to have prompted US carrier AT&T to walk away from a smartphone distribution deal with Huawei ahead of the Chinese firm’s launch of its flagship Mate 10 Pro handset at the CES trade show in Las Vegas in January this year. Later it was reported that Verizon Communications also abandoned plans to distribute Huawei’s smartphones in the US.

Security concerns have extended to Hong Kong-listed ZTE, which recently had parts of a US export ban temporarily lifted by the Trump administration under a new settlement over its failure to punish those responsible for covering up the firm’s illegal sales to Iran and North Korea.

In its filing to the FCC, Huawei said American consumers were already paying “a high cost in lost opportunities and reduced competition” because of the company’s exclusion from many network procurement deals in the US. It said those effects “would be magnified” by a prohibition from taking part in network development projects under the USF.

Huawei has always been treated by certain elements in the US with suspicion
Paul Haswell, partner at Pinsent Masons

“Allowing Huawei to compete freely could yield savings of at least US$20 billion in building US mobile infrastructure between 2017 and 2020, which would likely be passed through to consumers,” the company said.

In addition, it said “banning existing users of Huawei equipment from obtaining replacement parts or services, or adding to their networks, would impose disproportionate costs on them in the

hundreds of millions of dollars”.

“These high costs, which would particularly harm Americans in remote and low-income areas, cannot be justified by the supposed national security benefits of the proposed rule, because these are speculative.”

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The move to exclude Huawei and ZTE from network projects in the US involved “very complex political and policy issues”, according to David Cho, a partner at global law firm Dechert.

“Whether the proposed rules are for national security or a form of protectionism is still being debated,” Cho said. “Because the FCC is part of the executive branch of the US government, the US president’s agenda is likely to be advanced.”

He said Chinese companies seeking to sell their products in the US “will have to become more multinational and move manufacturing operations to the US, [like what] Japanese and Korean car makers have done over the years”.

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Being excluded from the US telecoms equipment market, however, is not expected to derail the operations of Huawei and ZTE, both of which sell plenty of their carrier infrastructure products in China and other developed and emerging economies.

“There will be no significant impact because the current revenue stream from network sales in the US is limited to both Huawei and ZTE,” Jefferies’ Lee said.