What Latin America and Europe can learn when it comes to US “rip and replace” of Chinese equipment from Huawei and ZTE

The US Federal Communications Commission (FCC) released a statement that 181 telecom providers submitted applications to its Secure and Trusted Communications Networks Reimbursement Program.  This program was established to cover the costs of removing, replacing, and disposing of insecure equipment and services in US networks. Reimbursement requests totaled some $5.6 billion, almost three times the $1.9 billion budgeted.

Strand Consult Top 5 Takeaways

1. The number of applicants, 181, is small compared to all US operators, some 5500. The 181 applicants largely reflect small providers in discrete locations. Indeed, many of these companies would not be considered traditional telecom operators. For example, one large applicant is Level 3 Communications, now part of CenturyLink/Lumen. There are many smaller operators, schools, universities, and inflight broadband provider Gogo Business Aviation. Notably the major 5G providers (Verizon, AT&T, T-Mobile etc) have not used Huawei or ZTE. See this link for a list of applicants.
2. The requested reimbursement is small compared to what US operators have invested in 5G infrastructure to date and will invest in future.  The US has not suffered by restricting Huawei and ZTE. Indeed, the US is considered a 5G leader by number of base stations, subscriptions, and prevalence of 5G devices and services. Infrastructure rollout policies and spectrum matter more than choice of equipment. Approaching some $90 billion annually in private network investment, the US accounts for one quarter of the world’s total, so the amount of reimbursement requested is small.
3. Not all requests for reimbursement are necessarily eligible. Indeed the FCC subsequently announced that only 162 applicants were eligible. When upgrading to 5G, operators must shed 4G equipment (some of which may be 10 years old), so the FCC will likely rationalize what is legitimate for reimbursement. The budget figure is based upon a detailed FCC study of how much equipment needs to be replaced. The FCC detailed its reimbursement and prioritization methodology here to maintain the reimbursement budget and more information about the program is available at FCC .
4. The requested need for reimbursement is likely inflated. When a regulatory agency offers free money, it is unsurprising that demand exceeds supply. For example, new companies participated in the program which were not expected. Companies also “found” insecure equipment about which they had “forgotten.” Additionally, some companies may overstate their need, using the reimbursement funds to purchase an advanced solution which exceeds their original budget figure. Moreover, most operators did not expect that reimbursement would happen anyway, so when the FCC opened the filing October 29, 2021- January 28, 2022, there was a vigorous response.
5. It is important to remove insecure equipment, and the FCC should be commended for its leadership to develop a comprehensive network security policy. Notably prevention is always better than treatment. As such, with the full support of Congress and the President, the FCC has succeeded to establish a Covered List of entities which pose unacceptable risk to national security and are not eligible for purchase with federal funds (See China Tech Threat’s coverage of the FCC’s effort to ensure secure equipment). These entities include Huawei, ZTE, Hytera, Hikvision, and Dahua. As it is better policy is not to purchase insecure equipment in the first place, equipment authorizations for these companies will likely be denied. Additionally, the FCC has revoked operating licenses for China Telecom and China Unicom and has denied a license to China Mobile. Moreover, FCC Chair Rosenworcel is also stepping up to lead the federal interagency forum on cybersecurity.

Lessons for Europe, LATAM, and other countries

To make meaningful comparisons with the US, the proper parameters must be established. The US a diversity of mobile and broadband networks. Some networks cover the whole of the US, some cover only a portion, some cover just a single state, and others only in major cities. A single state of the US is equivalent in gross domestic product an entire European country. For example, California and Texas would appear on the top 10 GDP of countries if they were counted individually.

Strand Consult has studied the mobile industry globally for 25 years and has deep domain knowledge on individual country markets. It has published multiple studies on actual rip and replace costs in European countries even when no rip and replace mandate was in place. Operators in UK, Denmark, Norway, Belgium and others have already completed vendor phase out and transitions for 5G. The real costs can be studied and validated with financial statements. See Strand Consult’s research The real cost to rip and replace Chinese equipment from telecom networks.

The real cost to rip and replace Chinese equipment from telecom networks in Europe.

There is a global debate about the use of Chinese equipment in mobile networks. It is not a new debate; it has been running for years in the US, the United Kingdom, the European Union New Zealand, Australia and now Latin America. Since 2005, many intelligence officials, militaries agencies, and security analysts have observed risks of using equipment from companies owned or affiliated with the Chinese government or military.

Strand Consult’s analysis shows that the concerns about Chinese made network equipment are not limited to national governments and the military intelligence operations. Nor is the concern confined to telecom operators who build and run networks.  It is the small, medium, and large enterprises that use networks which fear that their valuable data will be surveilled, sabotaged, or stolen by actors associated with the Chinese government and military. It is also the clients of telecom operators who push to restrict Chinese-made equipment from networks.

The question for Latin America and Europe is whether and to what degree its telecom operators can operate their networks without Chinese-made equipment and the financial impact that would be felt if such equipment had to be replaced for security reasons. Strand Consult’s report from September 2019 The real cost to rip and replace Chinese equipment from telecom networks examines the claims about Huawei and ZTE and the larger questions about restricting Chinese-made equipment in networks.

Strand Consult’s report The real cost to rip and replace Chinese equipment from telecom networks critiques claims in the media 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, Latin American and European operators are facing an upgrade of 4G networks built between 2012 to 2018.

To evaluate the impact of restricting Huawei and ZTE equipment from networks, one must include the fact that operators must upgrade their networks if they want 5G, regardless of whether they use Huawei or ZTE. That’s to say there is a sunk cost to network upgrades which must be deducted from the total cost of using Huawei. Most of Latin American Europe’s networks are already 5-8 years old and are ready to be replaced. In any case, 70-80 percent of the existing RAN equipment must be replaced, regardless of the political decision or the choice of vendor.

In the period 2016 to 2019 mobile operators in Europe 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.

That year-end 2017, 85 percent of the population in Europe (465 million people) subscribed to mobile services. The actual cost according to our 2019 calculations in Europe to replace the Chinese equipment was $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.

The financial reporting from operators such as Telenor Norway, Telia Norway, TDC in Denmark, Proximus in Belgium and BT and Vodafone in UK shows that Strand Consult’s calculations are correct. The additional rip and replace cost was limited to the cost of removing upgradeable equipment. Restricting Huawei and ZTE equipment does not increase the cost of networks or 5G.

Most operators across Latin America and Europe must upgrade their networks if they want 5G, regardless of whether they use Huawei or ZTE. That’s to say there is a sunk cost to network upgrades which must be deducted from the total cost of using Huawei or ZTE. Most of Europe’s networks are already 5-8 years old and are ready to be replaced. In any case, 80-90 percent of the existing RAN equipment must be replaced, regardless of the political decision. Indeed, much of Latin America still runs on 2G or 3G.

Most operators in Latin America and Europe are not buying an end to end solution from one vendors like Huawei, Ericsson, Nokia or ZTE. The main part of the networks across Latin America and Europe are build with components from many vendors. The classic vendors are mainly supplying core networks and the radio access network (RAN) part.

Operators like Telenor, TDC, Telia, Proximus, BT and Vodafone have already reported to shareholders that the rip and replace cost are marginally comparable to the numbers some people told the market and much different from US numbers.

Experience from many countries show that non-Chinese vendors can compete on price and specifications. That was what Telenor Norway, Telia Norway, TDC Denmark and DNB in Malaysia told the market.

The US is a special case

Strand Consult supports removing insecure equipment, and it applauds the many operators which put  security first by not buying insecure equipment. Many of the operators which purchased Huawei and ZTE did so knowing full well that it was insecure and an unwise decision. It may also be observed that Huawei and ZTE manipulated these operators to buy market share. In any event, there is a defendable policy view that operators which knowingly purchase insecure equipment should not be rewarded with taxpayer money to reverse their mistake.

It is also fair to observe that the decisions to buy much of this equipment were taken at a time when China was a different country than it is today. Only in 2012 did the consensus begin to form that China is a not a friendly nation and things have worsened since then.

Take Chinese threats seriously.

Strand Consult’s analysis shows that the concerns about Chinese made network equipment are not limited to national governments and the military intelligence operations. Nor is the concern confined to telecom operators who build and run networks.  It is the small, medium, and large enterprises that use networks which fear that their valuable data will be surveilled, sabotaged, or stolen by actors associated with the Chinese government and military. It is the clients of telecom operators who push to restrict Chinese-made equipment from networks.

The Chinese government expects to win global domination in 10 strategic industries by 2025 including information communications technologies, energy, pharmaceuticals, and aerospace. All options are on the table to achieve these goals. While many Chinese firms are sophisticated and innovative. Part of that plan is Huawei establishing data centres and clouds that already cover Latin America.

Strand Consult finds in its consultation with telecom operators across the world that their customers demand greater security. Some of these companies compete with Chinese firms for global markets, and they have experienced their trade secrets, designs, plans, ideas, movies, molecules, and other intellectual property having been stolen through telecom networks.

Contact Strand Consult to get your free copy of the report The real cost to rip and replace Chinese equipment in telecom networks.

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Best regards

John Strand