It looks like Vodafone and BT have some challenges other operators don’t have

Dear Colleague,

Today’s hearing Science and Technology Committee in the UK parliament featured Huawei employees who appear to have the right to their own opinion but not the courage to share it. None would reveal their views on Hong Kong.

During the hearing Andrea Dona, Head of Networks, Vodafone UK and Howard Watson, Chief Technology and Information Officer, BT Group, claimed that a ban on the use of Huawei equipment would cost them billions of pounds. They said a Huawei ban would be expensive, create service technical outages, and prevent the roll-out of 5G in the UK. The hearing is such that the members of Science and Technology Committee take a face value the comments by Andrea Dona and Howard Watson.

If what they said is right, then both companies should be forthright with their shareholders. They should tell shareholders about the economic impact of a Huawei ban in the UK and other countries. Shareholders can then impute the risk into the share price for Vodafone and BT.

Strand Consult does not agree with Vodafone or BT.
It is hard to take today’s statements from Andrea Dona from Vodafone and Howard Watson from BT seriously. Indeed they directly contradict statements made to investors in January and February. In any event, one can determine the truth by reviewing the following facts:

1. Operators must upgrade their networks if they want 5G, regardless of whether they use Huawei. That is to say that there is a sunk cost to network upgrades which must be subtracted from the total cost of using Huawei. Most of Europe’s networks are already 3-5 years old and are ready to be replaced.

2. 70–80 percent of the existing RAN equipment must be replaced, regardless of the political decision or the choice of vendor.

3. In the last 3 years mobile operators have bought radio access network (RAN) equipment for $8.75 billion (about $2.9 billion annually). Forty percent of this equipment has been purchased from Huawei and ZTE. A conservative estimate suggests that replacing the Huawei and ZTE equipment purchased since 2016 (which “probably” can be upgraded to 5G) will cost $3.5 billion. This amount compares to 14 months of total European radio access network (RAN) purchases, a small number both for Europe and the world.

4. At year-end 2017, 85 percent of the population in Europe (465 million people) subscribed to mobile services. The actual cost to replace the Chinese equipment is $3.5 billion for the non-upgradeable equipment. The cost is equal to a “one-time cost” of $7 or €6.5 per mobile subscriber.

5. If you examine the financial statements of mobile operators which have ended their Huawei contracts and switched suppliers. If it were true that not using Huawei would increase costs, we would see the CAPEX increase.  However, we can see from Denmark’s TDC and Norway’s Telenor and Telia that costs did not go up for the same investment when these operators chose to replace Huawei with Ericsson. The same can be said for KPN in Netherlands which switched from Ericsson to Huawei.

6. Strand Consult´s new report The real cost to rip and replace Chinese equipment from telecom networks debunk Vodafone and BT story and explains how a proper economic analysis must be prepared to examine the impact of restricting Huawei and ZTE. In practical terms, hardware and software within the network are constantly being upgraded and improved as the standards evolve from 2G to 3G to 4G to 5G, and in many cases, operators may offer a blend of different standards in the same network as they upgrade. In general, European operators are facing an upgrade of 4G networks built between 2012 to 2016, This goes for Vodafone and BT.

What if Vodafone and BT are right?
If that is true, as Vodafone and BT have said, then an analysis should be made based on what they have said. It would look like this:

1. There is some evidence that BT and Vodafone and their shareholders have not taken into account the economic consequences related to the restrictions that may come in relation to the use of Chinese equipment in the UK as well as a number of other countries. In practical terms, a discount should be factored into the share price that Vodafone and BT are trading at today.

2. If other operators such as TDC, Telenor, Telia KPN and Bell Canada do not experience the same costs as BT and Vodafone claim they will experience, then the other operators’ technical staff are more skilled than those in Vodafone and BT.

3. If other operators such as TDC, Telenor, Telia, KPN and Bell Canada do not experience the same delays as BT and Vodafone claim they will, then the other operators’ technical staff must have some skills Vodafone and BT lack.

4. BT said bans would result in blackouts with switching equipment. However mobile operators around world are switch out equipment every day without blackouts. Why is BT the only operator with this problem? Apparently it needs to improve its technical staff.

Let’s assume that what BT said today is true. Then it doesn’t match what BT’s CEO Philip Jansen and BT’s CFO Simon Lowth said at their Q3 2020 Earnings Call on January 30, 2020.
Let’s assume that what Vodafone said today was true. Then it doesn’t match what Vodafone CEO Nick Read and

Vodafone’s CFO Margherita Della Valle said at their Q3 2020 Sales and Revenue Call on February 5, 2020.
There is much to suggest that Vodafone and BT tell one story when talking to shareholders but another to the Science and Technology Committee in the UK parliament.

Strand Consult’s conclusion is that Vodafone and BT took a calculated risk to buy Huawei, and it backfired. It appears increasingly that the companies must live with the consequences of their decisions. Vodafone and BT should combine a rip and replace of their Huawei equipment with a rip and replace of their technical management. This should include. Andrea Dona, Head of Networks, Vodafone UK and Howard Watson, Chief Technology and Information Officer, BT Group who were witnesses in today’s hearing.

Contact Strand Consult today to get your free copy of the report Understanding the Market for 4G RAN in Europe: Share of Chinese and Non-Chinese Vendors in 102 Mobile Networks. If you have any questions please, send me an email on js@strandconsult.dk.

We have one goal: to create transparency so that decisions are made on an informed basis.


Sincerely,
 
John Strand
About me www.understandingmobile.com