5G – More Expensive and Delayed without Huawei Equipment

Feb 14, 2019
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Canadian Telecom Telus Corporation (TSE:T) in their Q4 results noted that banning Huawei equipment would affect not only the cost of 5G rollout but the timing of it as well.

Telus

Telus and their subsidiary Telus Mobility are the third largest telecommunications company in Canada, behind Bell and Rogers in revenue and users. Telus and Bell (TSE:BCE) have typically shared standards and equipment in their deployments for cost savings and use many of the same towers while both using CMDA technology when Rogers was using GSM before LTE was rolled out. With LTE rollouts much of Telus’ equipment was Huawei in the past. Telus has also noted their successful 5G tests using Huawei equipment in 2018 with a planned rollout in 2019, although they have yet to name a vendor for final deployment.

Huawei

There is no secret that many different regions including the United States and EU are investigating the use of Huawei equipment for their network infrastructure. Citing privacy concerns the Canadian Radio and Telecommunications Commission together with the government of Canada have started to review 5G rollout using Huawei equipment. Huawei has publicly stated to every country they operate in that they are ensuring the integrity and securities of the networks they operate in, including Canada. Huawei noted that hardware bans did not affect their Q4 results, but if more countries continue the bans and investigations Huawei could find themselves in trouble.

Telus Statement Regarding 5G Network Risk

 

Government or regulatory actions with respect to certain countries or suppliers may impact us and other Canadian telecommunications carriers. The Government of Canada is currently conducting a cybersecurity review of international suppliers of next-generation network equipment and technologies, focused on Huawei Technologies, to evaluate potential risks to the development of 5G networks in Canada. A decision on 5G technology in Canada is expected in the coming months. Over the last decade, our partnership with Huawei has allowed us to utilize the most advanced technology in a cost-effective manner in our advanced 3G and 4G networks without any security incidents. In building our 3G and 4G national networks, we have collaborated closely with the Government of Canada for many years to ensure robust protections across all equipment used. This has included complying with a series of security protocols that effectively ban Chinese equipment from our core networks and limit such equipment to the less sensitive radio and antenna portions. We are continuing to work with the government as it conducts this cybersecurity review and we have yet to select a vendor for our 5G network. Given the range of potential outcomes of the cybersecurity review, the impact on Canadian wireless service providers cannot currently be predicted. A decision prohibiting the deployment of Huawei technology without compensation or other accommodations being made by the Government of Canada could have a material, non-recurring, incremental increase in the cost of TELUS’ 5G network deployment and, potentially, the timing of such deployment. In the case of a ban, there is a risk that the Canadian telecom market would undergo a structural change, as a reduction to an only two global supplier environment could permanently affect the cost structure of 5G equipment for all operators. See Section 10.4 Supplier risks. Risk mitigation: We attempt to mitigate regulatory risks through our advocacy at all levels of government, including our participation in CRTC and federal government proceedings, studies, reviews and other consultations; representations before provincial and municipal governments pertaining to telecommunications issues; legal proceedings impacting our operations at all levels of the courts; and other relevant inquiries (such as those relating to the exclusive federal jurisdiction over telecommunications), as described in Section 9.4 Communications industry regulatory developments and proceedings. See also Vertical integration into broadcast content ownership by competitors in Section 10.3 Competitive environment.

Source: (Page 77)

Impact

Just like any telecommunications company having now impositions Telus immediately said that it could harm the consumer by either costing more or delaying the rollout of 5G. The initial 5G tests were done on Huawei equipment so I’m inclined to believe there would be a delay in their rollout if they could not use the vendor. In their risk mitigation section, Telus did not disclose if they had other vendors prepared to help with their rollout as Bell has done with Nokia Networks. Canadians were relying heavily on 5G to have more effective mobile broadband, as the country has a low population density and currently rely on a mix of satellite, 3G and LTE networks to cover their much of their rural populations. Bell and Rogers (TSE:RCI.B) both noted that their deployment would not be delayed, and Rogers publically said they will not use Huawei equipment for their 5G network, using Ericsson instead

From a global perspective, one Canadian service provider does not affect very much, but if other providers start claiming harm to their networks from regulations and investigations than governments may have to take more consideration into the matter and provide either expedience or subsidisation to telecoms. In the United States telecommunications have very strong lobbyists and if they can sway consumers that costs may rise then the regulating bodies may have to review a subsidy model.

There is also an opportunity now for other companies to increase their investment in 5G technology, it will be interesting to see how Ericsson and Nokia Networks stock moves as a result or if they are able to make up for the possible shortage in 5G equipment that will be needed. The less competition for suppliers the higher costs will likely be, especially if there is suddenly a shortage in approved network equipment providers for telecoms to choose from.

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