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Huawei exec arrest ups equipment cost uncertainty for some rural US telcos

As the effects of U.S. charges against an executive at Chinese telecommunications equipment supplier Huawei Technologies Co. Ltd. ripple through global markets, representatives of some small and midsize U.S. wireless carriers say an outright ban on Chinese equipment could be cost-prohibitive for their businesses.

While U.S. officials have long cautioned companies against using telecommunications equipment from certain Chinese companies, citing national security concerns, a Federal Communications Commission proceeding indicates that some U.S. wireless carriers rely on Chinese equipment.

In April, the FCC issued a notice of proposed rulemaking that considers new rules barring recipients of the agency's Universal Service Fund from purchasing communications network equipment or services from companies deemed to pose a threat to U.S. national security. The Universal Service Fund is designed to expand access to telecommunications services to underserved Americans, including at public institutions and in rural areas. While the FCC's proposal did not single out any companies by name, it came amid increasing U.S. security concerns regarding the Chinese companies Huawei and ZTE Corp. in particular. ZTE was subject to a U.S export ban for several months earlier this year.

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In a Dec. 7 filing with the U.S. Federal Communications Commission, the Rural Wireless Association, a trade association that represents U.S. rural wireless carriers, estimated that at least 25% of its carrier members use equipment from Chinese suppliers. "Estimated rip-and-replace costs vary by carrier, but are significant across the board," the Rural Wireless Association wrote.

For Rural Wireless Association member Sagebrush Cellular, the cost of replacing its network to remove Chinese equipment would be about $57 million, which the company says would be cost-prohibitive without replacement funding, according to the filing.

Neither the association nor Sagebrush immediately respond to a request for comment.

The majority of Huawei's 2017 revenues came from China with US$45.23 billion, followed by the Europe, Middle East and Africa region, which generated US$24.29 billion. Excluding China, the rest of the Asia-Pacific region accounted for US$11.03 billion of Huawei's overall revenues. The Americas accounted for only $5.82 billion. But the U.S. is not the only country where government officials are mulling a crackdown on the use of Chinese telecommunications equipment, including some that specifically call out Huawei.

In a rare public speech Dec. 3, the head of Britain's intelligence agency said the U.K. should carefully consider whether to include Chinese companies such as Huawei in its 5G network infrastructure. Australia and New Zealand banned Huawei from supplying its 5G equipment earlier this year. Japanese media reports following the Dec. 1 arrest of Huawei CFO Meng Wanzhou, also known as Sabrina Meng, indicate that country's major wireless carriers are following suit and will ban Huawei from its 5G networks and equipment. Canadian officials arrested Meng at the request of the U.S. government for allegedly violating sanctions against Iran.

Japan's SoftBank Group Corp., the majority owner of U.S. wireless operator Sprint Corp. is planning to replace Huawei equipment in its Japanese 4G telecommunications network infrastructure with hardware made by Ericsson and Nokia Corp., according to a report by the Nikkei Asia Review. Elsewhere, U.K telco British Telecom plans to remove Huawei equipment from its core 3G and 4G networks and has banned the company from bidding on equipment supply contracts in its 5G network.

Jefferies analyst Edison Lee said in a recent research note that a U.S. ban on Huawei's business could "significantly raise the uncertainty of China's 5G timing, since any U.S. export ban imposed on Huawei could either delay China's 5G rollout, or significantly reduce the scale near term."

China has had its sights set on being a first-mover in the 5G space, having recently granted permission to state-owned telco China Unicom to use the 3500 MHz-3600 MHz frequency band for 5G trials in mainland China, as well as the two other state-backed operators, China Telecom Corp. Ltd. and China Mobile Ltd.

Lee noted that a ban on Huawei equipment in the U.S. could also damage Huawei's relationships with other tech players.

"If Huawei cannot license Android from Google [LLC], or QUALCOMM [Inc.]'s patents in 4G and 5G radio access technology, it will not be able to build smartphones or 4G/5G base stations," Lee said.