In a sudden move, the US Federal Communications Commission (FCC) on June 30 formally designated Chinese telecom vendors Huawei Technologies Company and ZTE Corporation, all their parent and subsidiaries, as well as affiliate firms, as “national security threats”.
The move is expected to put additional pressure on Huawei and ZTE, which have been accused of being close to the Chinese government and spying for them by sharing data of US citizens.
Why has the US banned Huawei and ZTE?
The US-Huawei-ZTE tussle is nearly a decade old now. The first official action on the Chinese telecom equipment maker was taken as early as 2012, when the House Intelligence Committee released a report saying both the companies posed a risk to national security and that US businesses should avoid buying equipment from them.
In its report, the committee had then said that neither Huawei nor ZTE properly addressed concerns raised by members on the companies’ ability to snoop on US citizens or firms.
In 2018, however, US President Donald Trump had said that of the two vendors, ZTE would be able to remain in business in US after paying a fine of $1.3 billion, and providing “high-level security guarantees.”
Trump’s predecessor Barack Obama’s administration had blacklisted ZTE for seven years for violating economic sanction norms imposed on Iran.
The FCC’s June 30 move to re-classify ZTE also as “national security threats” effectively reverses the decision by Trump which allowed the company to continue working in the US.
On all the occasions, the US government had accused Huawei and ZTE of working in ways that were contrary to “national security or foreign policy interests.”
“Both companies have close ties to the Chinese Communist Party and China’s military apparatus, and both companies are broadly subject to Chinese law obligating them to cooperate with the country’s intelligence services,” FCC Chairperson Ajit Pai said in the latest order.
Why is the ban on Huawei and ZTE important?
Huawei is the world’s largest maker of telecom equipment and the second largest maker of mobile phone parts. The company has been at the forefront of innovation that has allowed many companies in developing and as well as developed economies to build large telecom infrastructure at very low costs.
On the other hand, ZTE, another Chinese vendor, has tied up with several big corporations to manufacture their patented equipment in China at very low costs.
A ban on both Huawei and ZTE could mean an increase of up to 30 per cent in cost of telecom equipment across the board, especially when countries all over the world are gearing up to launch 5G services, according to experts.
Apart from hardware, Huawei has also been trying to make inroads into the software and operating systems (OS) industry. In May this year, the company launched a mobile OS called HarmonyOS, which it said could rival Google and Apple’s OS.
Does the Huawei ban impact India?
The US FCC’s decision to classify Huawei and ZTE as “national security threats” could put pressure on friendly allies, such as India, to take similar, if not the same action.
With the reserve price for 8,300 MHz spectrum, including the 5G band kept unchanged at Rs 5.22 lakh crore, low cost equipment from Huawei or ZTE could have provided some relief to domestic telcos. The Chinese vendor was a major equipment suppliers to companies like Vodafone Idea and Bharti Airtel during the initial roll-out of the 4G services in India.
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Over the years, Huawei has made inroads into nearly 25 per cent of the total telecom equipment market in India. While Bharti Airtel uses up to 30 per cent Chinese telecom equipment, including Huawei’s for its networks, Vodafone Idea uses as much as 40 per cent. In December last year, the company had some reprieve when telecom minister Ravi Shankar Prasad said all players, including Huawei, were permitted to participate in 5G trials in the country.
To allay security fears, Huawei India’s Chief Executive Officer had in June 2019 said the company was ready to sign a “no backdoor” agreement with the government. Under the agreement, Huawei would vouch that it did not gain access to any Indian customer’s equipment under any circumstance.
A lot has, however, changed since then.
Following a skirmish at Galwan Valley in Ladakh, during which 20 Indian soldiers were killed, sources from the Department of Telecommunications (DoT) had on June 17 said that 4G network expansion tenders floated by Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) would be reworked to bar global vendors such as Huawei and ZTE from participating.
So far, private telecom operators have neither been officially told nor unofficially nudged to discontinue using Chinese telecom equipment. They have, however, warned of huge economic costs if such a ban is put in place.
One of the most important implications, they said, could be the loss of their cost arbitrage, as barring Huawei and ZTE from even bidding in the 5G auctions could mean equipment as much as 30 per cent costlier.
“Overall, the prices of Chinese gear are up to 30 per cent lower compared to their European competition. That gives us buyers a point to negotiate. With them (Chinese companies) gone, our power to negotiate also goes,” an executive said, adding that taking Chinese vendors out of the equation would result in a duopoly of Ericsson and Nokia.
Reliance Jio, which uses equipment manufactured by Samsung, was recently praised by US Secretary of State Mike Pompeo and FCC Chairperson Ajit Pai as a “clean telco”. The company’s president Mathew Oommen said in a recent webinar that as companies move towards deployment of 5G technologies in their respective countries, they must be wary of vendors which can bring a “digital pandemic”.
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