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Wireless-industry experts are warning that Canadian carriers could face higher costs if they can no longer make deals with Huawei Technologies Co. Ltd. as they prepare for major spending to build the next generation of technology.

Public Safety Minister Ralph Goodale confirmed earlier this week that the federal government is conducting a national-security analysis meant to minimize cyberthreats from equipment made by foreign telecom companies, which comes after Australia last month banned Huawei and its Chinese rival ZTE Corp. from supplying gear for next-generation cellular networks. The United States has a similar policy on Chinese equipment vendors.

Canadian providers BCE Inc., Telus Corp. and Rogers Communications Inc. all use Huawei equipment in their cellular networks, and as the Shenzhen-based company has made inroads in the Canadian market in recent years, the carriers have come to rely on it to spur more competitive pricing in an area that requires constant capital investment.

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While analysts say an increase in such costs would be manageable, industry insiders estimate Huawei’s equipment can be about one-third less-expensive than gear made by European rivals Nokia and Ericsson. Huawei is one of the largest makers of radio-access equipment in the world, accounting for almost 30 per cent of the market in 2015 according to a Morgan Stanley report, just ahead of both Nokia and Ericsson. Supplying the domestic Chinese market, where China Mobile alone has more than 900 million customers, helps give Huawei the massive scale it uses to compete on price.

Price pressures will be a major concern as operators begin to roll out 5G networks over the next several years because the technology will require a vast increase in the number of cellular sites to provide a dense web of coverage, and carriers will have to invest in more radios and antennas than ever before. An Accenture analysis predicts there will be about 273,000 small-cell sites – which are roughly the size of a laptop – by 2026, compared with about 33,000 traditional cell towers across Canada today.

The fifth generation of wireless technology is expected to offer much faster speeds with almost no lag time and connect billions of sensors for internet of things (IoT) applications. But observers say there is a limit to how much consumers will pay for the improved service, meaning carriers must look for new business customers, as well as carefully manage cost inputs.

BCE and Telus began using Huawei gear about a decade ago, and an industry source who did not want to be named owing to a non-disclosure agreement said that, at the time, the Chinese company offered prices between 30-per-cent and 50-per-cent lower than European vendors. The source said the gap has since narrowed to about 20 per cent as Nokia and Ericsson have lowered their prices in Canada, while carriers in the United States, where Huawei is already not an option, tend to pay more.

A separate source who also asked not to be named to protect future work opportunities said Huawei’s prices are typically 30-per-cent to 40-per-cent lower than Nokia or Ericsson. That person also noted that labour expenses tend to make up a larger portion of the cost of new builds than equipment.

Rogers long worked with Ericsson for network equipment, but under previous chief executive Guy Laurence, who was fired in 2016, the company upgraded many of its facilities in Western Canada using Huawei technology.

For 5G trials, Rogers is working with Ericsson, and BCE has announced tests with Nokia as well as Huawei. Telus has established a “5G living lab” in Vancouver with Huawei, which has poured billions of dollars into 5G research and development.

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Dave Heger, an analyst with Edward Jones, says if Ottawa were to restrict Chinese equipment, there would be less pressure on the remaining vendors to compete on price.

“There’s more incentive to be price competitive if you’ve got a budget competitor in there – a Walmart or an Amazon tends to bring the prices down,” Mr. Heger said.

He noted that carriers in both Canada and the United States are spreading out the costs of 5G investment by spending steadily but gradually on improvements to their existing networks, including adding more small-cell sites that will eventually be used with 5G technology.

Canadian telecoms already rely on a multivendor strategy, which reduces the risk of losing one particular vendor, Desjardins Securities analyst Maher Yaghi noted in a recent research report. “We believe the overall impact on Canadian telecom companies' future [financial] results from a ban on Chinese vendors should be minimal.”

There is already an unwritten understanding that telecom providers in Canada not use network equipment from Chinese vendors in their network “core," which refers to the routers and switches that make up the network’s backbone and contains reams of software code and sensitive customer information.

Wind Mobile, which is now owned by Shaw Communications Inc. and known as Freedom Mobile, used Huawei equipment when it first built its core network, but later swapped it out in favour of Nokia gear. Shaw spokesman Chethan Lakshman said on Thursday that Freedom is working with Nokia on 5G tests.

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The understanding that carriers have about the core network does not extend to radio-access equipment.

Representatives for Rogers and BCE both emphasized that they make network security a priority. Neither company would comment directly on how Huawei affects costs.

BCE CEO George Cope, speaking at an investor conference last week, said the company had worked with Huawei for years, adding, “We are very cognizant of some of the issues and those are managed appropriately. That’s one of many suppliers we like to deal with.”

Telus did not reply to requests for comment.

Huawei Canada spokesman Scott Bradley said Thursday he would not comment on “hypothetical” situations. A North American representative for ZTE, which has a much smaller presence in Canada, did not provide a comment.

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