Huawei’s EU Friends Will Stay On The Line For Now

Telecom supply-chain bosses can either stick or twist. Now that the United States has added leading telco-kit maker Huawei Technologies to a trade blacklist, European operators like Vodafone Group and Telefonica need to decide whether to pivot to other manufacturers, or hope for the best. On balance, the latter makes more sense.

Ditching Huawei’s smartphones from 5G launches, as BT Group and Vodafone have already done, is the easy part. Those handsets would be useless to Europeans who favour apps from Google, which like all American companies is barred from transacting with groups on the U.S. Department of Commerce Entity List. Divorcing their businesses from Huawei infrastructure equipment like radio masts and servers is trickier.

The argument for doing so is that while Huawei controls 31% of the $33 billion global mobile-infrastructure market, according to Bank of America Merrill Lynch, it still spends one-third of its global parts procurement on U.S. semiconductor products, reckons Rosenblatt Securities. If cut off, founder Ren Zhengfei would struggle to produce the new parts, software and replacement kit that telcos need to keep networks running smoothly.

European players can insulate themselves by switching now, but that would be costly and time-consuming. BT started removing Huawei from parts of its network in 2016 and the process is still ongoing. Europe’s top 10 telcos will already use up 19% of combined sales on capital spending this year, using Refinitiv estimates. Replacing existing Huawei kit with competing products from Nokia and Ericsson would add more costs. Assume capex rises 15%, and operators’ cash flow available to shareholders would be about 20% lower, Breakingviews estimates.

The positive argument for holding fire is that Huawei and telcos alike have already been stockpiling key components to mitigate a U.S. blacklist, according to multiple industry sources. A person familiar with Huawei’s operations told Breakingviews it already has at least a year’s parts supply. Meanwhile, removing Huawei would slow Europe’s march towards superfast 5G networks.

Perhaps the best argument for hesitation is that Donald Trump has a track record of changing his mind. The U.S. president already indicated on Thursday that U.S. complaints about Huawei could be resolved as part of a wider China trade deal. That’s reason enough for European partners to stay on the line.―Breaking Views