You don’t need a crystal ball to predict where the Canadian government is going to come down on who should build the country’s 5G wireless networks. Or rather, who shouldn’t.
It’s all but a certainty that Ottawa will ban Huawei Technologies Co. Ltd from supplying equipment for the next generation of wireless, following the lead of the United States, Australia and New Zealand. How can the government do otherwise? In December, Canada’s top spy, David Vigneault, director of the Canadian Security Intelligence Service, used his first public speech to warn of the potential for state-sponsored espionage on 5G networks. On Monday, U.S. acting attorney-general Matthew Whitaker alleged Huawei executives are “criminals and bad actors” as he brought charges of stealing trade secrets, money laundering, bank fraud and obstruction of justice against the company.
Against this backdrop, it’s clear the Liberal government would be taking a political gamble if it allowed the 5G to happen in Canada with Huawei gear. It’s far less clear how Telus Corp. and BCE Inc., both currently significant customers of the Chinese company, will cope with life after Huawei.
Before Monday’s revelation of U.S. criminal charges, Telus and BCE were aggressively lobbying federal regulators to keep Huawei as a supplier, warning that a ban on the company would translate into higher customer costs and a slower 5G rollout. In contrast, rival Rogers Communications Inc., never a big Huawei customer, has announced plans to rip out the Chinese company’s equipment and run its 5G network on gear from Ericsson, which is based in Sweden. Major European telecom companies are also starting to steer clear of Huawei as they prepare for a 5G future.
Telus, which made the largest investment in Huawei equipment, has been running a spirited campaign in favour of retaining ties. Earlier this month, Telus executive vice-president Eros Spadotto sent a memo to the company’s 30,000 employees that reaffirmed the Vancouver-based company’s commitment to its long-time supplier. Mr. Spadotto said: “Clearly, Huawei remains a viable and reliable participant in the Canadian telecommunications space."
What can Telus say now? “Yeah, the U.S. government called them criminals and bad actors. But their equipment is good and cheap!” That won’t fly.
BCE and Telus need to change the conversation. Rather than fighting for the right to include Huawei in their futures, the country’s second- and third-largest wireless providers need to find the smoothest possible path to networks built with someone else’s gear. Because no companies have more to gain from the transition to ultra-fast telecom platforms than Telus and BCE.
The migration to 5G is taking place right now in markets such as the United States and South Korea and begins next year in Canada. The early beneficiaries will be businesses in data-heavy sectors such as health care, retail, education, transportation and education. Which telecom company has a major health-care business? That would be Telus. Who is the market leader in supplying wireless services to domestic businesses? That’s BCE.
“We believe it is increasingly difficult to refute the view that BCE and TELUS ... are best prepared for 5G,” analyst Drew McReynolds at RBC Capital Markets said in a recent report. The potential marketplace is huge: U.S. tech company Qualcomm, which admittedly wants to sell new equipment, estimates the global 5G “value chain” will generate up to US$3.5-trillion in revenue by 2035, and support as many as 22 million jobs.
Telus and BCE can exploit their first-mover advantage in 5G only if they are working with suppliers that can deliver the goods, and steer clear of political sanctions. Rather than lobbying federal regulators to preserve ties with Huawei, Telus and BCE should recognize the larger geopolitical forces at play – and quietly make the case for some government support as they retire existing equipment and migrate to new suppliers.
For the two telcos, there’s nothing but downside if they choose to fight the tide, and the U.S. government, to preserve their relationship with Huawei. The two telecom companies would risk what RBC’s Mr. McReynolds called “a worst case scenario, where a rip and replace of 3G and 4G equipment would be required, a scenario that has little international precedent."
Ripping out existing Huawei gear could cost the Canadian telecom companies up to $2-billion, according to Mr. McReynolds' estimates. Shifting to new suppliers opens the door to multibillion-dollar opportunities. This shouldn’t be a difficult decision for Telus and BCE.