Would NATO buy fighter planes from China?

Features

John Strand of Strand Consult argues that restricting the use of Huawei and ZTE’s equipment from networks would not harm Europe’s mobile operators, nor meaningfully reduce competition or delay rollout – but it could greatly improve security.

The debate about the use of Chinese equipment in mobile networks has been running for years in countries including the Australia, New Zealand, the UK and the US. Since 2005, many intelligence officials, militaries agencies and security analysts have observed risks of using equipment from firms owned by or affiliated with the Chinese government or military.

The debate is an important one, requiring reason and critique to cut through media pronouncements. Our free report, The real cost to rip and replace Chinese equipment from telecom networks examines the claims for and against actions to restrict Chinese-made equipment. It presents economic, technical and political considerations to evaluate the proposition replacing Chinese-made equipment.

The analysis is not limited to national governments and military intelligence operations. Nor is the concern confined to telecom operators that build and run networks, but also 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. Consequently, it is also the clients of telecom operators that push to restrict Chinese-made equipment from networks.

Those skeptical of the claims that Chinese-made telecom equipment poses a threat to security should ask themselves whether they would be happy for NATO to buy a fighter plane made in China. Why is there universal agreement that military equipment from China be restricted but not telecom networks where vital information is transported?

• To evaluate the impact of excluding Huawei equipment from networks, we need to take into consideration the fact that operators must upgrade their networks for 5G, regardless of whether they use Huawei. Hence there is a sunk cost involved in network upgrades that must be subtracted from the total cost of using Huawei. Most of Europe’s networks are already three to five years old and are ready to be replaced. 


• In any case, 70% to 80% of existing radio access network (RAN) equipment will need to be replaced, regardless of the political decision or the choice of vendor.

• In the last three years mobile operators have spent $8.75 billion (about $2.9 billion annually) on RAN equipment – 40% of which was 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 is roughly equivalent to 14 months’ of all European RAN purchases, which is a small number for Europe and globally.

• At the end of 2017, 85% 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.

Strand Consult argues for proper economic analysis to be prepared to examine the impact of restricting the use of equipment from 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.