Huawei to Play a Limited Role in UK 5G

The UK government has decided to allow Huawei a limited role in building 5G infrastructure in the country. The UK has been under pressure, especially by the US, to exclude Huawei from 5G infrastructure deployments. But after a lengthy review, delayed by the December election, it is allowing Huawei to continue as an infrastructure provider, but with the following conditions:

  • Huawei will not be able to provide various core network functions or be used in sensitive geographic areas
  • Huawei’s share of any equipment type will be limited to no more than 35%

The UK government has always considered Huawei a ‘high-risk vendor’, but continues to believe that the risk of using Huawei equipment is manageable, provided its role is limited and that it is not allowed in sensitive parts of the network or country. The UK has, for many years, required Huawei to pay for a laboratory where Huawei’s equipment is carefully tested to assess its level of security threat. It has not been able to find anything that resembles a ‘back-door’ that would allow, for example, the Chinese government to intercept sensitive communications. It has, however, found considerable security vulnerabilities in the quality of Huawei’s software and cyber-security measures. In response, Huawei said it would invest two billion dollars to tighten the level of security. Nevertheless, concerns are less about Chinese government eavesdropping and more to do with the potential for a rogue actor to take down communications networks, partially or completely. Given the fundamental role that 5G will one day play in connecting much of daily life, this poses a threat that needs to be managed.

However while the UK government pondered the decision, three out of the the UK’s four mobile network operators had already started rolling out their 5G networks using Huawei infrastructure. This is unsurprising as Huawei is also a supplier of many 4G networks and there’s a synergy in using the same provider for both systems. Indeed, one of Huawei’s advantages in its approach to 5G is its ability to pair aspects of both 4G and 5G to drive faster and more cost-efficient deployments. Network operators have been vocal in their desire to keep Huawei as a supplier, citing issues of technology superiority and cost. If Huawei would have been prevented from participating in 5G, operators claimed it would have resulted in delays to network roll-outs of several years and substantial increases in cost.

Lobbying from telecom operators has likely been multiplied by lobbying from inside Huawei; several former members of the UK government now serve in various roles within Huawei, including Lord Browne – who is Chairman of Huawei UK.

The decision will have come as a relief for Huawei; other countries were observing the UK and are likely to follow its lead. But the relief is likely only partial because its continued identification as a high-risk vendor means it will struggle for the sort of market position it might otherwise have enjoyed.

And while the decision delivers some clarity on Huawei’s future role, there are aspects that will need to be handled carefully. One being how to define exactly what constitutes the core of the network. To deliver the benefits that 5G promises, more and more of the core functionality of the network will be distributed closer to the edge of the network, where Huawei will likely be allowed to play a role. And mixing different vendors’ solutions may limit the extent to which a network can realize the full capabilities of 5G. In practice, the restrictions outlined will likely limit Huawei to participating only in the radio access network (RAN). And some operators may have already exceeded the 35% rule and will need to plot a course to reducing their dependence on Huawei within the next three years.

Ericsson, Nokia and Samsung will be pleased that Huawei’s hands have been tied, but it’s perhaps less than they might have been hoping for. There is no relief for ZTE, which is effectively banned from the UK.

The UK government has been wrestling with a complex strategic calculation. Its closest ally is the USA, which has been pushing hard for an outright ban on the use of Huawei equipment. The UK has also likely been trying to keep China at least partially on-side. The uncomfortable truth is that it will need to forge trade agreements with both nations following Brexit. It is gambling that this conditional acceptance of Huawei will be enough to mollify Beijing without completely distancing the US. It may not have managed either.

2019 – Another Turbulent Year Ahead for Automakers?

Just two months into the year and 2019 is already turning worrisome for global automakers. China continues to slow down, the United States is threatening to impose additional import tariffs and the clock is ticking towards a hard, and painful Brexit.  These are definite indicators that this year would be yet another tough one for the global auto industry.

Let’s begin with China. The world’s second-largest economy continues to feel the moderating effects of Chinese authorities trying to rein in the country’s rising debt, while ongoing trade tensions with the United States and withdrawal of subsidies in the auto sector are just making matters worse.  Although the government had announced stimulus measures to jump-start automotive demand at the beginning of the year, they’ve fallen short of expectations and lacked detail.

In January, wholesale sales of passenger cars fell by an alarming 17% year-on-year, according to China’s Association of Automobile Manufacturers (CAAM). The fall in January 2019 is the biggest since the market began to slow down in July last year and an eighth consecutive month of deteriorating retail sales.

It is a gloomy outlook for international brands, especially General Motors (GM) and Volkswagen, who have a high dependency on China for their global sales volumes. The troubles in China are compounded amid waning demand for cars in the United States and Europe. In China alone, sales of Volkswagen-branded vehicles fell nearly 3% in January.

However, there is an emergent bright spot as China’s sales of new energy vehicles continue to beat the trend. In January, 95,700 new energy vehicles were sold, increasing 140% year-on-year. Which is why carmakers are continuing to place their bets on electric vehicles amid China’s stringent environmental policies under which manufacturers face severe penalties unless they meet quotas for zero/low emission cars. GM plans to reverse its downturn this year by launching more than 20 new models in China and shifting its focus to electric vehicles.

At the end of a disappointing last year, CAAM gave a conservative forecast of flat sales in 2019. The association predicts sales of 28.1 million units of automobiles in 2019. In the forecast, passenger vehicle sales comprised 23.7 million units, while commercial vehicles are predicted to have a nominal increase of around 1%, at 4.4 million units. However, with these strong headwinds, we can expect significant revisions to the outlook in the months ahead.

Meanwhile, in the United States, developments of a man-made nature are looming large. President Donald Trump is threatening additional tariffs on imported automobiles and auto parts. Quite perplexingly, he describes them as a “national security threat”. Such an action by the United States will surely hit the major global brands operating in the country.

A confidential report by Commerce Secretary Wilbur Ross has been handed over to President Trump this week, investigating whether imports of cars and car parts actually do threaten national security. With 90 days to act on this report, President Trump could decide to impose tariffs of up to 25% on imports of vehicles. This would be highly damaging to companies around the world, especially those based in Europe. Germany, the home of major automakers BMW, Daimler/Mercedes-Benz, and Volkswagen, would be the worst hit. We estimate that German automotive exports to the United States could fall to almost half of the current levels within a decade if President Trump imposes the tariffs.

However, any steps taken to increase tariffs on foreign automobiles and auto parts will also have a negative impact on the American automobile industry. American manufacturers rely heavily on European and Chinese components. In the worst-case scenario, tariffs would result in price increases for American consumers, triggering lower sales, and potentially thousands of job losses in the American automobile industry.

The situation is quite grim in the United Kingdom as well with Brexit knocking at the door. With political debates in London showing no signs of abating, the UK’s withdrawal from the European Union under a no-deal outcome is imminent.  With time running out, automobile manufacturers and suppliers are now warning of the disastrous consequences of a no-deal Brexit. In the worst-case scenario, we can expect heavy tariffs and border checks, which will raise costs and delay deliveries.

In a no-deal scenario, import tariffs on goods from the European Union into the UK will need to be urgently firmed up based on WTO rules.  With 85% of cars sold in Britain being imported, the high interdependency of the UK automobile industry with Europe will be severely disrupted. Automobile manufacturers are being compelled to take severe contingency countermeasures, with most scrambling for warehouse space to stockpile parts. Many are also planning production shutdowns and job-cuts post-Brexit, while some are deferring, if not cutting back entirely, any further investments in the UK.

In a drastic and definitive fallout, Nissan has decided to move assembly of X-Trail crossover vehicle to its global production hub on the island of Kyushu in southern Japan, reversing a 2016 decision to manufacture the vehicle its Sunderland plant. Honda too has stated this week that it will close its Swindon factory by 2021. Honda’s decision appears to be associated with the uncertainties of a no-deal Brexit, as the plant was planned, and designed to serve the European car market.

The business case for the UK-manufactured and assembled cars being shipped to the European Union has been dependent on tariff-free market access. No wonder that automakers’ current frustration and anxiety is palpable as Brexit approaches.

Unfortunately, if these last few weeks are anything to go by, automakers, suppliers, and policymakers need to brace themselves for continued disruptions in 2019. To emerge unscathed out of the disruptions, all stakeholders will have to take a decisive stance and some tough choices.  In North America, Europe, and Asia, signs of a major downturn are growing. Driven by the distress of the automobile industry, the year 2019 could well be a turning point requiring an urgent and unprecedented course of action by stakeholders and governments around the world.

Impacts of a No-Deal Brexit for UK and European Auto Industry

A short-term deterioration to UK and European automotive sales was always anticipated under Brexit.

No-Brexit Deal Looms

While the UK government has a draft Brexit deal on the table and likely to be approved by the other 27 EU member states, it still must be approved by the UK parliament, and this currently looks to be fraught with difficulty. In that case the most likely outcome would be a Brexit on March 29th, 2019 without a trade deal with the EU in place. While some form of transition agreement would likely be established, the UK could be isolated and, by default, have to fall-back on World Trade Organization (WTO) terms.

While even the proposed Brexit deal will cause problems for the automotive sector that relies heavily on parts and sub-assemblies being moved seamlessly around between EU nations, a no-deal Brexit would have a far more severe and far-reaching impacts on the automotive and broader business sectors.

Serious Outcomes Ahead

As a first outcome post Brexit, the no-deal impasse will result in people and goods being in a state of legal limbo, with no provisions for entering or leaving the UK. It will also affect UK’s terms with countries outside Europe, with most of its trade based around EU treaties. With WTO rules as the basis, a 10% tariff will be applied to all cars and parts traded between the UK and EU.  Automakers now need to consider either passing on the extra costs to consumer or otherwise completely/partially absorbing within their businesses. With profit margins in the industry already considerably lower than 10%, it will be a tough choice – choosing between sustaining volumes or profitability. Import tariff rates of goods from other countries into the UK will also need to be urgently firmed-up and will be expected to be based on most-favoured-nation terms, each coming with their own set of diplomatic complexities.

Based on various estimates, and depending on the quantum of vehicle price increases, an overall sales drop of as much as 20% (over 500,000 vehicles) in the UK can be anticipated in 2019 – the first year of exit. With 85% of cars sold in Britain being imported, the highly integrated interdependency of the UK’s industry with the European auto industry, will likely set-off a chain reaction.  As an example, the UK accounts for some 250,000 German vehicle exports alone. This shortfall can impact some 18,000 jobs in the German automotive industry.

Mitigating the Impact

Automakers and suppliers, both in UK and Europe, are looking to maximise their production and sales opportunity within the current short window until March 2019.  They are rushing to grab all available strategic warehousing and parking spaces to stockpile parts and vehicles, mostly at exorbitant costs given the sudden spike in demand for such storage facilities. Some suppliers are also preparing for temporary production shutdowns post-Brexit, in order to balance future production schedules.

The anticipated customs processing and administrative delays on account of such post Brexit ambiguities are also causing further anxiety among automotive manufacturers, as they will adversely affect their just-in-time production schedules and supply chain reliability, adding further costs and inefficiencies to their time-sensitive operations. There is also a growing concern with the realisation that current port capacity and infrastructures in the UK may be insufficient to handle the impending onslaught of imports in the coming months; not just automobiles, but also a host of other manufactured and retail products.

Time Running Out

Evidently, no amount of contingency planning can realistically anticipate all the possible collateral impacts of UK’s withdrawal from the European Union under a no-deal outcome. Time is clearly running out for auto manufacturers and suppliers to hope for an agreement to come through. They will need to, and it looks like most already have, kick-off their contingency plan B, or even C.

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