China Warns India Over Potential Huawei Ban

China has threatened to punish Indian companies operating on the mainland. It will take such action if the Indian Government moves to ban Huawei Technologies from selling 5G telecom equipment. As a result, India’s appetite for a ban will be palpably reduced.

The Chinese foreign ministry warned the Indian ambassador in Beijing of “reverse sanctions” on Indian companies operating in China. This will likely take place if the Indian Government ban Huawei Technologies from supplying the country’s 5G telecommunications equipment. With this threat to impose costs on Indian companies which benefit significantly from operations in China, the likelihood of India moving to ban Huawei from participating in the upcoming 5G trials is reduced.

A costly proposition to begin with

To be sure, the expected costs of a ban are significant. This because Huawei is already a deeply entrenched player in the Indian market for telecom gear due to its cost competitiveness. Its equipment is reportedly 20 to 30% cheaper than those of its competitors. It has been estimated that India saved roughly USD 3.5 billion in 2018 by sourcing telecom equipment from China. As such, Huawei is the primary enabler of this saving.

Moreover, the lapsing of the American chip export ban is currently targeting Huawei. As a result, these cost advantages Huawei enjoys will be maintained. As the transition to 5G networks requires far higher capital expenditures, the amount of expected savings will be proportionaly higher. Low revenues and profitability heavily burden India’s telecom operators. For this reason, they would be unwilling to forego these considerable savings while rolling out 5G services.

A ban on Huawei would also cause a delay in India’s 5G rollout. This is because it would entail adjustment and negotiations with substitutes. The country is not quite in the race to secure first movers’ advantage in 5G use, unlikethe USA and China. This is due to bottlenecks in spectrum allocation and reeling telecom operators.

The likely outcome

Consequently, a 5G rollout on par with the developed world is in India’s interests nonetheless. The acclimatisation to the new technology is necessary to participate in the telecommunications standard-setting process at fora. An example of such participation is the 3rd Generation Partnership Project (3GPP). That being so, India may develop an indigenous telecommunications manufacturing base. Failure to acclimate quickly, however, would result in having to play catch-up in subsequent technological transitions. This is something which runs counter to the country’s ambitions.

It is undeniable, therefore, that India faces substantial costs to ban Huawei. Yet, Indian policymakers have, until this point, displayed an unwillingness to make a quick decision on the matter. This has been the function of a relative balance. One the one hand, there are the costs mentioned above of exiting the relationship with Huawei. On the other hand, there are the expected security benefits of excluding them from Indian networks.

Willingness to ban also high

An Indian official has claimed that Huawei cannot be excluded based on it being a Chinese company. Even so, the national security stakeholders taking a decision on Huwaei have likely factored this dimension. Furthermore, Huawei has been on the radar of India’s security stakeholders far before the question of 5G emerged. Importantly, the location of Huawei’s registration is less relevant to India’s desire to exclude it than the company’s purported ties to the Chinese state and army. Moreover, China is a neighbour with which India has a long-standing and potentially destabilising land boundary dispute. This simple fact should make leaks through Huawei’s telecom equipment highly undesirable in its own right.

Nor do there seem to exist adequate technical mechanisms whereby the risk of a leak can be assuredly mitigated. India does not currently employ comprehensive testing procedures for telecom equipment. Nor is testing equipment sufficient to rule out risks of a backdoor which can be created at any time after inspections. Effectively, while the economic costs of banning Huawei are undoubtedly high, so too are the security benefits from prohibiting it. This creates a balance that precludes an easy decision.

China’s threats will nudge India away from a ban

China’s commitment to add to the exit costs could, therefore, dislodge this balance between costs and benefits, and potentially invalidate a ban. At this juncture, there is little reason to believe that this imbalance in favour of costs will be reversed or eliminated. Only persuasive efforts of the USA through carrots or sticks could have that effect – neither appear to be forthcoming. Until now, the USA’s persuasive techniques concerning Huawei have been mainly directed at Europe.

Moreover, they have only involved threats of ceasing intelligence sharing. It is difficult to replicate such threats effectively in the Indian context. This is because intelligence sharing takes place in a limited military context. It is also carried out using communications equipment obtained from the US.

As things stand, therefore, it would appear that the coercive geoeconomics of the Chinese state will aid Huawei in keeping its Indian business. This despite a recent statement from an Indian official that India cannot be seen as “pandering to Chinese (threats).” The Chinese foreign ministry could move to convey additional threats through diplomatic back channels. It possesses significant leverage to do so because India is far more economically dependent on China than vice versa. Ultimately, China’s ability to retain the Indian telecom gear market would have far-reaching portents. It would serve as absolute vindication for its techniques of economic coercion, possibly prompting similar conduct in Huawei-related negotiations with the rest of the world.―Global Risk Insights