Huawei ban stirs fears of China backlash

Huawei’s future in the Australian telecoms market is all but over after the ban on the Chinese firm from the 5G mobile networks.

Treasurer Scott Morrison

Huawei’s future in the Australian market is all but over after the federal government’s extraordinary decision to exclude the Chinese telecommunication equipment maker from participating in the rollout of 5G mobile networks in the country.

The Chinese company, which has more than 700 employees in Australia, is yet to clarify to what extent its operations will continue in Australia. While it has an enterprise business unit and sells smartphones in the market, the government’s directive will essentially means its carrier equipment business will be wound down.

Meanwhile, ripples from the decision spread beyond the telco sector, with the market casting a shadow on the valuations of local companies with close China ties. Amid concerns over Chinese reprisal, APA Group, Treasury Wine Estates and Bellamy’s were among stocks hardest hit.

Research firm Ovum’s telco analyst David Kennedy warned that excluding Huawei from the 5G network construction process would cost local telcos dearly, with Australia the only country to have taken such a stance.

How yesterday’s events affected China-exposed shares (% change)

“This will push up the cost base of 5G deployment and you are basically taking the player that pushes down prices out of the market,” he told The Australian.

Among local operators, Vodafone was most critical of the ban, saying it could potentially undermine Australia’s 5G future.

Huawei is the world’s largest maker of telecoms network equipment, which is used extensively across the 4G networks run by Vodafone and Optus, and the company has set the tone when it comes to keeping equipment prices low.

Its departure from the Australian market, according to Mr Kennedy, will force the telcos to revisit their numbers as they get ready to invest in 5G spectrum and infrastructure.

Huawei, founded in 1988 by former Chinese army officer Ren Zhengfei, is no stranger to opposition from the federal government, having been banned from working on the National Broadband Network in 2012. This time around the federal government has taken a different approach by setting a criterion that Huawei and its peer ZTE cannot meet.

Rather than spell out the names of Huawei and ZTE, the government’s guidelines are framed within the Telecommunications Sector Security Reforms measures, which are due to go live next month.

Under the TSSR, telcos will be required to “do their best to protect networks and facilities from unauthorised access and interference”, and also keep the government abreast of any changes that could compromise their networks.

According to the guidelines, equipment vendors that are subject to extrajudicial directions from a foreign government that conflict with Australian law may pose an inordinate risk to a 5G network.

“The government considers that the involvement of vendors who are likely to be subject to extrajudicial directions from a foreign government that conflict with Australian law may risk failure by the carrier to adequately protect a 5G network from unauthorised access or interference.

“While we are protected as far as possible by current security controls, the new network, with its increased complexity, would render these current protections ineffective in 5G.”

These directive effectively rules out Huawei and ZTE, which are both subject to China’s national security laws that can be used to compel the vendors to act in accordance with their national security directives.

While equipment provided by Huawei’s competitors, Nokia and Ericsson, is also made in China, The Australian understands they are not subject to the same law.

Huawei operates in the radio access network (RAN) or “edge” layer of 4G mobile networks. It’s not involved in the core network where the more sensitive functions such as access control, authentication, voice and data routing and billing are carried out.

The RAN layer consists of the radios and other equipment used to connect customer equipment (such as handsets, laptops and tablets) to the core network.

In a 5G network, the core and the RAN layers are more closely aligned through software and, according to the government, that introduces new challenges for carriers trying to maintain their customers’ security.

“This new architecture provides a way to circumvent traditional security controls by exploiting equipment in the edge of the network — exploitation which may affect overall network integrity and availability, as well as the confidentiality of customer data,” the government said.

“The government has found no combination of technical security controls that sufficiently mitigate the risks.”

Mr Kennedy warned that the security concerns had lost sight of the long-term damage Huawei’s exclusion can have on the telecoms sector. “For 5G benefits to fully flow through we need to tap into global economies of scale and the best way to do that is to have a healthy, competitive ecosystem of vendors to partner with.

“By taking out Huawei, the government has essentially removed one of the most productive partners for the local industry.”

Vodafone said keeping Huawei out of the market could potentially undermine Australia’s 5G future.

“We have always said that national security is paramount, we always have and always will meet our obligations under Australian law. However, major decisions of this nature need to be made with rigour, accountability and careful consideration of the economic, productivity and social implications for the country. This decision, which has been dropped on the eve of the 5G auction, creates uncertainty for carriers’ investment plans,” the telco added.

Optus said Huawei’s exclusion shouldn’t derail its 5G plans. “Optus has a mix of vendors in its mobile network and we remain well positioned to lead in the delivery of 5G services.”