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Summary:

There are only so many companies left that can build a decent mobile network. Banning Huawei from the U.S. seriously skews the competitive balance in an already off-kilter industry.

Huawei has taken quite a political beating lately. Not only are U.S. lawmakers calling for sanctions against the Asian infrastructure maker due to its ties to the Chinese government, but Sprint and Softbank just brokered a deal with the federal government that could ban Huawei’s gear from their current and future U.S. networks.

Recently a frustrated Huawei EVP and co-CEO Eric Xu took a rather flip position on the matter, saying his company was no longer interested in the U.S. market and had essentially stopped paying attention to the controversy surrounding it here. Xu was obviously posturing. No global equipment maker would just simply ignore the world’s largest telecommunications market.

But there is a bit of truth to his words. Huawei has done quite well for itself without landing a single major U.S. infrastructure deal. Domestic operators may have resisted Huawei’s allure, but carriers in Canada, Europe, Asia, Latin America and Africa certainly haven’t. By some measurements, Huawei has already surpassed Ericsson as the largest telecom vendor in the world.

What’s more, there might even be a veiled threat in Xu’s statement. Huawei may not need the U.S. to be successful, but the U.S. needs Huawei if it wants to keep the telecom equipment market competitive.

Pickings are slim

I’ll be the first to admit that I’m in no position to judge the national security implications of Huawei operating in the U.S. (My colleague Stacey Higginbotham does a great job examining the controversy, though). But I do know the competitive situation of the U.S. mobile industry. If Huawei gets banned, then one of the key industry forces keeping equipment prices low suddenly disappears. That’s not a situation U.S. mobile industry wants to see.

There has been a lot of consolidation in the telecom equipment market in the last several years. In many ways, Huawei was directly responsible for that consolidation, driving smaller players out of the market or into mergers through its aggressive pricing. A decade ago there were about a dozen companies that could sell you a cellular base station. Today there are really only three or four dominant mobile players, and Huawei is one of them.

Huawei R&D facility Shenzhen

Huawei R&D facility in Shenzhen

Huawei has evolved from a mere vendor of cheap telecom gear into a technology powerhouse that can throw enormous engineering and research resources at its product lines. But it still enjoys huge cost advantages due to China’s cheap labor and engineering pools. The dwindling competitive landscape is particularly evident in the U.S. where historical reliance on CDMA technologies has led two companies to dominate: Ericsson and Alcatel-Lucent. No U.S. operator relies solely on a single network maker, so AT&T, Verizon Wireless and Sprint all use both vendors as primary suppliers.

But Alcatel-Lucent is suffering, and it might not be long before Alcatel-Lucent finds itself broken up and sold for parts. If that happens, there will be a big vacuum, and there aren’t that many companies capable of filling it. There’s Nokia Siemens Networks and Huawei, and that’s pretty much it. Smaller network players like Samsung have been asserting themselves of late, but they’re still small fish in an ever-shrinking pond.

Huawei’s hidden influence

Over the last few years, U.S. mobile industry has undergone a big transformation, building its next generation of LTE mobile networks. Typically the relationship between carrier and vendor is rock solid, but whenever a big generational shift like this comes along, the mobile operators get to re-evaluate their partners. Contracts are suddenly up in the air, presenting the perfect opportunity for a new equipment maker to penetrate the U.S. market.

Huawei engineer equipment factoryHuawei bid on all of those contracts, but except for a WiMAX deal with Clearwire and a few minor networks with regional providers, it failed to win any of them. Every analyst and industry insider I’ve talked to, however, said that Huawei’s presence was felt during those negotiations.

Established vendors were forced to underbid Huawei or risk losing key contracts. A deal with a nationwide U.S. operator is a marquee deal, involving billions of dollars and tens of thousands of cellsites. To lose a nationwide U.S. contract to Huawei would be a major black eye for an Ericsson. In the case of Alcatel-Lucent, its contracts with AT&T, Verizon and Sprint are the main things keeping its wireless business afloat.

All of the major U.S. operators have already named their LTE suppliers, so there won’t be much opportunity to disrupt the market for years to come. And when that time does come it will take a lot to pry those carriers away from their current suppliers. But the presence of Huawei would at least gives those operators leverage.

Look at this way: AT&T loves Ericsson and Alcatel-Lucent. It probably will never leave them. But if I’m AT&T, I want Huawei around to keep those two vendors honest. And if Alcatel-Lucent suddenly goes belly up, I’d rather have more than one choice to replace them than NSN.

Feature photo courtesy of Flickr user minghong

  1. Your Analysis is Off !

    In case of Wireless Base station Market, you forgot Samsung, who controls lots off LTE Base Station IP, there is NEC, Fujitsu and Others. So point out ALU is weak, Nokia Siemens is done is not correct! Wow BTW there is ZTE. Go do Research before talking, not just Google one !

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    1. Kevin Fitchard Friday, May 31, 2013

      Hi RK,

      I figured this would be controversial stand, and I’m sure there are many people like yourself who would disagree with me. But in my defense, I pointed out NSN is one of the dominant players. Samsung, is really just branching out of Asia. And NEC and Fujitsu are non-factors in the North American infrastructure market. As for ZTE, like Huawei they’re being blackballed from the U.S. well.

      The point I’m trying to make is that you can’t have a competitive infrastructure market with only three big infrastructure suppliers. It might work in other industries, but U.S. carriers like Sprint routinely select three providers. If that’s the case, then who’s the competition?

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      1. Kevin, your POV is understandable if suppliers and regulatory controls are ethical. The Chinese vendors thrive in regions that are not market-based or highly corrupt.

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  2. The author ignores the whole PRC subsidy issue, which the EU is battling now. But no, let’s reward Huawei for cheating in every direction. Even with state support, they cheat in every possible way. Some of their execs were sentenced in absentia by Algeria for bribery, along with some ZTE execs. By the looks of the author, I would suggest he relocate to you-know-where.

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  3. Keyser Soze Friday, May 31, 2013

    We all would prefer an open competitive environment, but at what cost? It does not make sense to embed a trojan horse into your infrastructure just because you want to save a buck. The cost in the long run is far greater and it’s best to err on the side of caution when it comes to this company.

    Reading their history, activities, their “innovation” through sleight of hand by lifting bits from Nortel/Cisco, and what appears to be the worst media strategy in the world, Huawei isn’t able to or doesn’t want to break away from being just a Chinese company which will continue to limit their acceptance in any market where people actually care about their future.

    If Huawei can continue to be successful by taking market share in countries that either don’t understand the potential risk or don’t care about it, then so be it and good luck to them. The USA and our network operators will survive and thrive just fine without them.

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  4. anil bhandari Saturday, June 1, 2013

    I agree with your analysis that more vendors are required to maintain competitiveness. This is an opportunity for 2nd tier vendors like Samsung, NEC, Fujitisu who have been traditionally focused on their home countries to step-up and deliver in a large market like US.

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  5. Cold War paranoids will ignore reason and commerce. That’s true whether they’re Tea Party nutballs in the House of Representatives – or just the run-of-the-mill conspiracy freaks who inhabit an inordinate amount of space online.

    Whether you’re a libertarian or not, economics freak or not, the marketplace does resolve bad behavior. So, liars and xenophobes find their arguments make little commercial sense over time. That most of the world’s competitors in the wireless space continue to spend infrastructure dollars and euros with Huawei and ZTE is sufficient argument for me.

    Proving once again just how incompetent Congress has become.

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    1. E-dude, chill on the political mud slinging. This is a telecom geek blog not MSNBC.

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  6. Krugman, the guy you’d vote for if he ran for office, has often accused China of mercantilism.
    Massive subsidies for healthy outfits like Huawei are mercantilism. Krugman supports free markets, but only so far. If he thought free markets resolve the mercantilism problem in a timely manner, he wouldn’t bother.

    Your problem is that you can’t come up with a consistent, well thought argument, and instead put out stale generalizations.

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  7. Free market never has been!!!! Fantasy

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  8. vividh siddha Sunday, June 2, 2013

    I strongly believe that infrastructure companies, in this case wireless infrastructure should be public companies with boards elected by the investors. Until Huawei becomes a public company, I wouldn’t bet my infrastructure on Huawei unless cost is the only factor.

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  9. Disagree with your points. Huawei offers low pricing through Chinese gov’t incentives and other non-transparent terms. I’ve dealt with HW in many regions outside the US and know their mode too well. The US is better off enforcing ethical business practices and limiting foreign political influences in our telecom market.

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  10. I am a chinese. I know nothing about those IT or tech stuff. but, i do know Huawei has a really deep connection with the chinese government. considering the terrible records this evil regime ever had, the US should seriously be careful.

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    1. US says Iraq had WMD, and launched the war, and now , WHere is WMD?
      now says Huawei hardware has threats, WHERE is THE Evidence?

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