Replacing Chinese network equipment unaffordable in emerging markets

Replacing Chinese network equipment unaffordable in emerging markets

The US government appears to have vastly underestimated the cost of removing Chinese equipment from domestic networks, raising concerns among operators in emerging markets that the costs will be unaffordable.

Under the Secure and Trusted Communications Networks Reimbursement Programme – colloquially known as “rip and replace” - US authorities have called for operators to remove Chinese-made network equipment supplied by vendors such as Huawei and ZTE from their networks, and has incentivised them to do so by offering the cover the costs of its extraction, replacement and disposal. While the US may be able to provide this support to domestic operators, its campaign against China’s network equipment extends to encouraging its overseas allies to drop Chinese tech – and not all governments can afford the same level of incentives.

The US initiative arose from longstanding US security concerns over Chinese tech, which authorities believe could offer China a backdoor into US communications networks to enable espionage, surveillance, or even malicious attacks that threaten US national security. No evidence for the existence of backdoors in Chinese sourced network equipment has ever been provided by the US authorities and their existence is categorically denied by vendors. According to NSA documents leaked by Edward Snowden in 2013, agents of the US security services have repeatedly attempted and failed to identify hidden pathways in Chinese sourced equipment.

Whether or not backdoors exist in Chinese kit, the US has increasingly sought to focus attention on Chinese law which obliges all citizens and corporations of Chinese nationality to cooperate with investigation requests made by the country’s authorities. While tech firms including Huawei have affirmed that they would not comply with any such requests, China’s notoriously strict online censorship and draconian surveillance laws demonstrate that the country’s authoritarian government already has complete control over the internet and tech sector, to that extent that it is difficult to imagine a Chinese tech firm clashing with the government over data privacy.

That said, the US government appears no less demanding on its tech companies, as demonstrated by the ongoing FBI–Apple encryption dispute. Snowden’s disclosures also revealed numerous global surveillance programmes, many run by the NSA and the Five Eyes intelligence alliance with the cooperation of telecommunication companies and European governments. The fact is that, while subject to the rule of law, US and European vendors still find it almost impossible to resist government demands too.

For Chinese vendors, doing so could well constitute biting the hand that feeds. While Chinese vendors have unfailingly denied it, many international industry-watchers argue that the likes of Huawei and ZTE have been able to undercut their western rivals due to hidden subsidies from the Chinese government. The vendors themselves point to the fact that they invest substantially more into R&D than their western counterparts, and this is undeniable – although again, the more cynical might argue that they’re able to secure this funding by dominating a captive domestic market. The most cynical might also note that their three biggest domestic customers share a common owner – that being the Chinese state.

However they do it, the fact remains that Chinese vendors are able to provide network equipment at very competitive prices – to the extent that the cost of removing installed Chinese equipment from US networks and replacing it with like-for-like equivalents from western vendors has far outstripped the US government’s expectations. The Federal Communications Commission (FCC) has informed Congress that under the ‘rip and replace’ scheme, US operators have requested grants worth a total of USD5.6 billion - three times as much as the initially allocated budget of US$1.9 billion.

Analyst firm Strand Consult has suggested that some operators applying to the US scheme may have exaggerated the costs or submitted false claims, but it is difficult to see this accounting for the huge scale of the discrepancy. More concerning to emerging market operators should be that none of the major US 5G providers (Verizon, AT&T, T-Mobile) have used Huawei or ZTE in their networks and have not therefore participated in the US scheme. Had they done so, the likelihood is that the cost overrun would be significantly greater.

Unlike in the US, most governments in emerging markets are not expected to provide financial assistance for operators to replace Chinese sourced network equipment. Removing installed network equipment will of course bring with it significant costs, but the scale of the US government’s budget miscalculation speaks to the affordability of Chinese equipment in comparison to network gear from western vendors such as Cisco, Ericsson and Nokia.

Reliability, service and affordability are the three factors guaranteed to draw attention from operators in emerging markets, as they routinely face deploying networks for a demanding populace in challenging environments, with limited resources and a tight budget. There may have been a time when Chinese tech was viewed as inferior, but few would now argue that this is the case, with the aforementioned R&D investment accelerating the quality and reliability of Chinese tech.

The fact remains that Chinese tech is simply more affordable, as demonstrated by the huge appetite for Chinese network equipment in emerging markets. Operators in these regions face the prospect of satisfying consumers who are hungry for services on a par with those in developed markets, but who have a fraction of the income to spend on such offerings. In view of this, replacing Chinese network equipment looks unaffordable in emerging markets.

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