Southern Exposure

Last week, the Australian government banned the use of 5G telecom equipment supplied by "vendors who are likely to be subject to extrajudicial directions". No names were mentioned, but Huawei, ZTE and the Chinese government know how to take a hint, making counter statements to the announcement. The news is a blow to China's goal of becoming the undisputed leader in the supply of 5G network equipment.

For Huawei, which by some metrics is the world's largest supplier of wireless networking equipment and the world's second-leading smartphone maker, this is another disappointing development after similar moves by regulators in the US.

This move comes just as 5G market interest is reaching new heights and commercial services are close to launch. Fifth-generation networks are expected to bring more capacity, greater service flexibility, lower cost per bit, faster Internet speeds and extremely low latencies. They will play an important role in enabling several new uses including autonomous driving, smart cities and mobile virtual reality experiences.

The ambitions of Chinese hardware makers have previously been hit by concerns from US government officials about the possibility of security leaks and espionage through infrastructure equipment and smartphones. This was particularly disappointing to Huawei as it was about to make a big push in the country's smartphone market, reaching deals with several major wireless carriers.

Huawei has been virtually absent in the US since a 2012 congressional report said its equipment could be used to spy on Americans. The company has long denied the allegations, saying it's owned by its employees and operates without interference from Beijing. But under Chinese law, companies are required to co-operate with the country's intelligence services, and foreign governments are concerned that their security will be compromised.

There's a possible contagion here. For example, in the UK, mobile operators can still buy infrastructure from Huawei, and the company allows the government to inspect its activities. But earlier in 2018, a report from UK security and intelligence experts downgraded the level of assurance they could provide the government that Huawei's products were safe to use. The Chinese giant is a major supplier of broadband and mobile networks in Britain, with its products used in critical national infrastructure that could be targeted by foreign adversaries. Furthermore, Japan is also reportedly planning to block Huawei and ZTE from bidding on public contracts for building information systems.

Despite these setbacks, Chinese companies have become very important to the global telecom market. Huawei has challenged Ericsson and Nokia to become the largest maker of infrastructure equipment. Although opposition in Australia, the US and potentially other countries will slow their ascent in the telecom world, Chinese companies are still investing heavily in 5G research and development and standardisation efforts.

With trade disputes intensifying and 5G widely seen as critical to economic development and national security, the stakes are high as the race to roll out 5G services heats up. The Australia ban will hurt Huawei and ZTE, but both have the considerable advantage of home-market scale. Indeed, our latest 5G forecast, published today, expects China to become the largest 5G market by connections as early as 2020.

However, the immediate concern is that this development could escalate, with China adopting its own protectionist stance on 5G infrastructure at the cost of international suppliers such as Ericsson and Nokia.

Our forecast of 5G adoption worldwide is available to CCS Insight clients. Reports consist of a PDF file setting out our assumptions and an Excel file with detailed numbers. If you'd like to have access to the forecast, or for any enquiries, please
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