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Carriers Take Multi-Vendor Approach to Deter Huawei Dominance

Zacks Equity Research

They say “One man’s loss is another man’s gain”. True to this dictum, telecom operators are seeking to rely on multiple networking vendors rather than a single equipment manufacturer like Huawei to counter its stranglehold in the market and negate the possible adverse effects in case of a supply disruption due to the coronavirus outbreak.

Huawei’s Dominance

It all started in 2009 when Swedish telephone company TeliaSonera teamed up with Chinese telecommunications equipment maker Huawei to establish one of the world’s first 4G networks in major Scandinavian cities. Consequently, it also secured a humungous contract to revamp Norway’s entire network infrastructure, which was previously built by Nordic flagbearers — Nokia Corporation NOK and Ericsson ERIC.

Given its negligible presence in foreign markets except China, this appeared to be a stepping stone for Huawei. With time, its reputation of finishing projects before time and under budget became talking points in the global arena. Apart from its cost advantage, government protection from foreign rivals, seamless supply-chain operations, significant backing from state and technological prowess with a massive local market, contributed to revenue growth. Huawei, being one of the pioneers of 5G technology, gradually established itself as the preferred telecommunications equipment provider across the globe.

Roadblocks for Huawei

The gradual dominance of Huawei proved to be considerably distressful for the United States as it apparently dreaded losing its competitive edge in the 5G race. Time and again, the U.S. administration has considered Huawei to be a high-tech Trojan Horse and requested federal agencies to abstain from using China's ZTE and Huawei products over apparent risk of espionage and security, thereby restricting the firms’ access to sensitive core technology areas. The move did not sit well with various rural U.S. carriers that mostly rely on Chinese imports as Huawei’s equipment components are cheaper compared to the ones provided by its Finnish and Swedish rivals, Nokia and Ericsson.

The Trump administration is also contemplating to back various Nordic firms to deter Huawei’s operations. This is likely to be either achieved through direct funding or through consortium of private American and allied companies, backed by a $1 billion-plus government funding. The government has been encouraging various in-house corporations like Microsoft and Dell to build 5G-centric hardware so that the bulk of 5G architecture and infrastructure is made by U.S. firms.

To add to the woes, the coronavirus epidemic has drastically hampered the deployment of 5G rollout in the communist nation, and is likely affecting the production schedule of Huawei. Originating in the city of Wuhan, the epidemic is expected to severely hurt sales and production facilities based in China, including that of Huawei. The tech giant is likely to suffer a drastic loss in China, particularly in offline sales, due to the closure of numerous retail stores. Domestic sales will also face a huge setback as a lion’s share of its shipments are mainly based in China.

Industry’s Survival Strategy

Keeping in mind the magnum opus standing of Huawei in the global domain, various telecom service providers like Deutsche Telekom AG DTEGY and Vodafone Group Plc VOD are dependent on it. This, in turn, will jeopardize the flexibility of such telecom operators. Hence, they are devising plans to work with multiple networking vendors rather than depending on a single equipment manufacturer with O-RAN (Open Radio Access Network) and TIP (Telecom Infra Project) alliance for establishing a flexible networking architecture.

Vodafone, for example, has started to clinch small contracts from the O-RAN alliance, with an aim to standardize RAN hardware and software and proactively expand its vendor ecosystem in Europe, which is currently being ruled by Huawei. The RAN architecture utilizes virtualized network functions and Nokia is helping e-commerce company, Rakuten, to deploy a virtual network in Japan.

Final Thoughts

Telecommunications has become one of the most dynamic industries in the world with the emergence of avant-garde technological changes. Several technological disruptions including 5G, IoT and edge computing have redefined the broader industry metrics in 2019, and are expected to be the game changers in 2020 as well. The accelerated deployment of 5G across the globe is set to enhance the security, scalability and universal mobility of the telecommunications industry.

With such healthy potential, a steady supply of core telecommunication components is essential for the overall development of the industry. This, in turn, probably justifies the multi-vendor approach of the telecom carriers to avert a possible crisis if Huawei is banned by a particular country or supply is disrupted.

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