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 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 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.