April 20, 2018

Network Infrastructure - U.K. Warning May Hurt ZTE Across Europe

000063 CH, 763 HK, CSCO, ERIC, NOK
By Paul Ridgewell
The U.K. government's warning on doing business with Chinese network infrastructure vendor ZTE because of security concerns could reverberate across the continent and potentially provide an opening for Western vendors to build out next-generation networks, according to European network operators.

ZTE May Retreat To Asia
In response to this week’s warning by the U.K. government’s National Cyber Security Centre (NCSC) on the use of gear from Chinese network infrastructure supplier ZTE Corp. (763 HK), OTR Global contacted three sources at major network operators across Europe to asses the immediate impact of NCSC's warning. One major operator source said, "ZTE is done in the U.K.; I would be laying everyone off today.” He added, “It’s hard to see where ZTE goes from here. It wouldn’t surprise me if they retreated back to Asia for a while -- let the noise die down and got their house in order. Then, in three or four years’ time, try again.”

Another large carrier executive said while ZTE was unlikely to win much business in the United Kingdom, the warning had the potential to hurt the vendor’s business across Europe. “I think in Western Europe it will be tough for ZTE. In slightly less modern Eastern Europe, it might still be an option, but a lot of that is owned by Deutsche Telekom [AG], Orange [SA] and the Nordic organizations, and that might hamper it,” he said. A carrier source with wireless assets in Eastern Europe said, “Security is a concern for all vendors. We comply with all the national regulations.” The directive warned specifically that using the Chinese state-owned enterprise’s wireless infrastructure gear “would present risk to U.K. national security that could not be mitigated effectively or practicably,” and comes amid signs of a wider reassessment of risk following increased tensions between Western nations and Russia, as well as U.S. trade disputes with China.

Good News For Western Vendors
Such a shift has the potential to affect not only ZTE but also Huawei Technologies Co. Ltd., which has a large wireless footprint across Europe. According to a source, “Huawei has a couple of big European core networks, but [national] security challenges around mobile core networks are such that it will find it hard to retain that business. There are a lot of government alarm bells ringing.” While the U.S. government has long prevented carriers from buying Huawei network equipment, in Europe, and particularly the United Kingdom, where Huawei is a major provider of network equipment, authorities have taken more of a risk-mitigation approach. With signs that this is now changing, a large source said European vendors such as Nokia Oyj and Ericsson LM could benefit. “Decisions that were made at the start of 4G would be very different in today’s context. Radio is fine, but there is a lot more concern about core and optical. That is good news for Nokia and Ericsson, and Cisco [Systems Inc.] also to some extent. But I think Nokia is the big winner out of this, as Ericsson’s core network is not great,” he said.

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