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Report on Business BCE, Telus cling to Huawei hopes as analysts tally costs of 5G ban

BCE Inc. and Telus Corp. are holding out hope that they will be allowed to use equipment from Huawei Technologies Co. Ltd. for their new 5G wireless networks. That view may no longer be realistic, according to analysts at two of Canada’s biggest banks.

The second- and third-largest players in Canadian wireless are pushing for “no Huawei ban at all,” four analysts from Canadian Imperial Bank of Commerce told clients in a blog post. But at the moment, "that seems like wishful thinking,” the analysts said.

BCE and Telus have so far shared few details, leaving Bay Street to speculate on the financial impact that could come with restrictions on Huawei equipment.

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Both CIBC and RBC expect restrictions would most likely be placed on using the company’s gear for 5G networks, not a “rip and replace” of 3G and LTE (4G or long-term evolution) equipment as well. The latter is a worst-case scenario for the carriers that could cost up to $2-billion, said RBC Dominion Securities analyst Drew McReynolds.

CIBC’s commentary reflects a growing sense in the financial community that Canadian telecom companies will have to plan 5G networks without Huawei, which will mean higher costs -- though it’s not clear exactly how much higher. With quarterly earnings reports due and major investment decisions looming, BCE and Telus are likely to face a series of questions from analysts about that subject over the next two weeks.

The two telecoms have used gear from the Chinese vendor extensively in their wireless radio networks – although not in their network cores, which carry more sensitive information. The Canadian government is conducting a cybersecurity review to determine whether to allow Huawei equipment in next-generation networks, known as 5G. Countries such as the United States and Australia have already imposed bans or restrictions on use of the company’s gear in 5G.

Analysts are expected to press company management on the subject when BCE reports fourth-quarter results on Thursday, followed by Telus one week later.

After weeks of relentless legal, diplomatic and political developments – from the arrest of the Huawei chief financial officer in Vancouver, to the detentions of Canadians in China, to the resignation of Canada’s ambassador to China and, last week, U.S. criminal charges against the company – some have concluded that Ottawa will have to impose restrictions of some sort.

In an interview with The Globe and Mail last week, Huawei chairman Liang Hua waved off accusations that it has stolen trade secrets and denied that the company installs so-called “backdoors” to allow Chinese intelligence services to collect information that travels through its network equipment. Huawei would “never do anything to harm any country, any organization or any individual,” he said.

But in a recent report, Mr. McReynolds said: “In light of the current political climate, we would not at all be surprised to see a Huawei ban in Canada in 2019.”

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The four CIBC analysts – Robert Bek, Todd Coupland, Kulveer Grewal and Amy Dyck – suggested that BCE and Telus could make financial claims against the government if Ottawa denied the right to use Huawei equipment.

“Given that Huawei was a government-approved vendor for the carriers, it is also likely that a complete Huawei ban would bring about claims for assistance from the government,” said the analysts, referencing an existing government program under which all network equipment is subject to third-party security testing and Huawei equipment is not permitted in the most sensitive parts of networks.

“Granted, some of the 5G plans for ... BCE and Telus relied on previously installed Huawei equipment at the 4G level; [but] the cost differential between an outright Huawei ban scenario and a 5G ban scenario is material. We continue to believe that a 5G ban would be an issue, but that spending ramifications are not as extreme,” they wrote.

A source at Telus told The Globe and Mail in December that more than 80 per cent of the company’s radios run software that can be upgraded from LTE to 5G. Using equipment from Sweden’s Ericsson or Finland’s Nokia, the other two major wireless radio providers, would bring additional engineering costs because the 5G gear would not “talk” to the LTE Huawei radios and antennas, some of which would have to be removed.

RBC’s Mr. McReynolds wrote that eliminating the low-cost Huawei from possible suppliers would “increase the risk” of higher equipment prices, but said, “we believe any such cost inflation can be mitigated by each operator altering the pace of what will be a long, multi-year 5G deployment.”

A government decision on Huawei could still be months away, but some investment decisions for 5G must be made soon. An auction for low-frequency spectrum (the radiowaves used to carry communications signals) is set for March.

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BCE and Telus are both expected to report continued growth in wireless subscribers for the fourth quarter owing to population growth and consumers purchasing multiple devices. Analysts say the reports are also likely to show a continuing moderation in monthly billing for wireless customers, as competition from Shaw Communications Inc.'s Freedom Mobile spurred the national carriers to offer bigger data packages and sacrifice revenue from overage fees.

With a file from Nathan VanderKlippe

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