Huawei could lose out on 5G in Europe, but outright ban in Africa unlikely

  • Huawei ban intensifying in the US and Europe; extending to India
  • Telcos using Huawei to incur extra costs of phasing out Huawei infrastructure and delays in deploying 5G
  • Africa key Huawei market, but ban unlikely to reach the continent due to heavy cost implications
Huawei could lose out on 5G in Europe, but outright ban in Africa unlikely

And the ban goes on...

The US is working on regulations that will ban its government from working with contractors who use technology from five Chinese companies: Huawei, ZTE, Hikvision, Dahua and Hytera. The regulations are expected to be effective August 2020.

The US Commerce Department had also announced on 15 May that any foreign entity using US chip-making equipment, intellectual property or design software to supply semiconductors would have to apply for a license before shipping chips to Huawei and its affiliates on the entity list. (The entity list is a US publication of businesses, research institutions, government and private organisations, individuals, and other types of legal persons that are subject to specific license requirements for the export, re-export and/or in-country transfer of specified items)

This is negative because Huawei relies on foreign manufacturing for semiconductors required both for the 5G network as well as its smartphones, which contributed 54% to revenues. Huawei's largest supplier is TSMC (Taiwan Semiconductor Manufacturing Company), which manufactures 98% of all smartphone-related chips (according to an estimate by Counterpoint Research). Huawei made for approximately 14% of TSMC revenue in 2019. While Huawei has reportedly stockpiled inventory to tide them for the next two years, this still puts them at a disadvantage in competing in the 5G space.

The Huawei ban is now extending to other regions, with India considering locking the company out of participating in 5G trials. France is also encouraging its telcos to use alternative providers. Companies such as Bouygues Telecom and SFR with Huawei contracts will be given terms that vary between 3-8 years, according to the French cybersecurity agency ANSSI.

The UK is also re-considering its previous guidelines for telcos to reduce the share of Huawei in non-core infrastructure to 35% by 2023. The government is currently considering banning any equipment installed after 2021, with a replacement of older Huawei equipment to be phased out by 2025.

In LatAm, Brazil hangs in the balance, with the US offering to subsidise the cost of 5G rollout provided they use non-Chinese equipment.

Boon for Huawei competitors, but at a cost to telcos

Huawei is the global leader in telecom network equipment, with 35% of its revenue from carrier business services. Regionally, 32% of its revenue comes from EMEA and APAC (excluding China). Competitors Ericsson and Nokia are beneficiaries of the ban, but this will come at a disadvantage to telcos. There will be a delay in network rollouts as governments finalise their regulations on 5G equipment sourcing and decisions on existing Huawei infrastructure. The decision to also replace existing Huawei infrastructure would mean extra expenditure eg British Telecom expects to incur GBP500mn in costs.

Africa a strong Huawei market, but ban unlikely due to cost implications

Globally, key telco companies whose 5G deployments could be hampered by adverse regulations against Huawei are Vodafone, Telefonica, Axiata Group, Deustche Telekom, Bharti Airtel and Etisalat Group.

Telcos in Africa have widespread use of Huawei equipment, with press reports indicating almost 70% market share in the continent. MTN Group , Vodafone (Safaricom), Airtel (Airtel Nigeria), Orange (Sonatel) and Etisalat (Maroc Telecom) subsidiaries have all used Huawei for existing infrastructure. Huawei's restrictions in the US could potentially lead to difficulty in obtaining key network implements in future; this may result in African telcos also looking to other vendors for 5G. However, we still deem an outright ban on Huawei in Africa to be unlikely because eliminating Huawei infrastructure from telcos in developing markets may prove too costly.

According to research from China-Africa Research Initiative (CARI), Huawei and other Chinese vendors such as ZTE benefit from China Exim Bank funding to be able to subsidise offerings in Africa. From a CARI study, over the 2000-2017 period, countries that signed the largest Huawei-related loans were Ethiopia, US$834mn; Cameroon, US$337mn; Angola, US$336mn; Guinea, US$273mn; and Zimbabwe, US$219mn.

As such, the current war playing out in developed markets may see Huawei turning to Africa to expand its reach, and a price war for a continent seeking affordable connectivity would be a difficult deal to ignore.

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