Huawei Technologies and ZTE, China’s two largest telecoms equipment providers, have slowed down their 5G base station installation in the country, the Nikkei Asian Review has learnt, a sign that Washington’s escalating efforts to curb Beijing’s tech ambitions are having an effect.
Both Huawei and ZTE told some suppliers to slow down shipments of certain 5G base station-related products in June, so the Chinese companies could redesign products and change some equipment to remove as much US content as possible. It is part of a “de-Americanisation” effort by China after the Trump administration tightened export controls on Huawei, multiple sources said.
The move by the two homegrown telecoms equipment suppliers coincides with Chinese carriers’ cautious stance over investing in 5G infrastructure, amid uncertainty over the likely returns despite the hype created by authorities and industries that are keen to profit from 5G deployment.
“We were told by our client to slow down our shipments to them in June, and the shipments almost came to a complete stop in July,” a ZTE components and parts supplier executive told Nikkei. “We have to go through our product verification tests again as the client changed so many of their designs and we don’t know when exactly the client will ask us to resume normal shipping.”
A Huawei component and parts supplier told Nikkei that Huawei had changed some designs and replaced equipment used in the manufacturing process, which had slowed installation of 5G base stations. “On top of that, we also faced order cuts from the client for the rest of this year after a strong inventory-building demand in the first half of this year,” said an executive at the Huawei supplier.
The US decision on Monday to broaden sanctions to try to squeeze out Huawei from the American tech supply chain may further slow 5G infrastructure building. It is getting harder for Huawei to even buy standardised chips and components from non-US companies.
Huawei has been stockpiling key components this year, especially for its telecoms equipment business. However, sources among its suppliers said they felt its demand to build inventory was not as strong as in the first half of this year, even though Washington is tightening its grip on the Chinese tech group.
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Torrential rain and floods across dozens of provinces in China in the past two months have also slowed down 5G base station installation progress, multiple people said.
Huawei and ZTE did not respond to Nikkei’s requests for comment.
5G telecoms networks have become a major battleground between the US and China. The technology could empower technologies such as driverless cars, drones, unmanned stores and remote medical consultation.
While 5G infrastructure installation has been one of Beijing’s top priorities and a key part of the so-called “New Infrastructure Initiative” to drive its economy after the pandemic, China’s state-owned but Hong Kong-listed telecoms carriers, which are key clients of Huawei and ZTE, have remained prudent in their approach to 5G investments.
Huawei and ZTE have shouldered most of China’s 5G push this year, as they secured most orders to build 5G base stations for China Mobile, China Unicom and China Telecom, the country’s three key carriers.
“I have already told all of you at the beginning of the year,” Yang Jie, chairman of China Mobile, the largest carrier in the world by mobile subscribers, said in an interim results briefing last Thursday. “No matter what happens, our overall capital expenditure during this three-year peak investment period of 5G, including this year, will not increase drastically.” Indeed, the company kept the annual capital expenditure plan unchanged at Rmb179.8bn ($26bn) from the beginning of the year.
Mr Yang also stuck to earlier guidance on dividends. The company declared HK$1.53 per share for the interim results, keeping the same level from the year before, despite a 0.5 per cent drop in net profit to Rmb55.765bn during the first half of the year.
“Notwithstanding a slight decline in profit, we are confident to maintain a stable (dividend) for the year,” he said. Even as it entered a peak investment period, the company is intending to increase its annual dividend by 1 per cent to HK$3.25 per share. There is a certain balancing act in play between 5G capex and shareholders’ returns, as Chinese telecoms operators have been under direct pressure from the government to keep their tariffs in check over the years.
The sense of saving is more apparent in the two smaller carriers, which have been engaged in 5G investment burden sharing through a “co-build, co-share” framework.
For the necessity of supply chain continuity, the Chinese telecom equipment suppliers have to make some adjustments in response to the rising geopolitical risks
Wang Xiaochu, China Unicom chairman, revealed on an online conference call on August 12 that the company’s alliance with China Telecom had saved more than Rmb40bn in capex for the duo over the year, on top of other cuts in operating spending, such as tower usage fees, network maintenance costs and utilities charges.
“Both sides have licked the sweet parts of the deal already,” said Mr Wang. The two carriers are expanding 5G co-operation into existing 4G network cost-sharing, for example, to maintain transmission facilities.
Ke Ruiwen, chairman of China Telecom, on Tuesday echoed Mr Wang’s point and said: “The company will continue to deepen the ‘co-build, co share’ framework to reduce network construction costs and operating expenses.”
Both carriers have kept their annual capex plan unchanged for the whole year, Rmb70bn for Unicom and Rmb85bn for Telecom.
The 5G investment savings in China will go further as China Mobile and the fourth carrier, China Broadcasting Network, have agreed on their version of “co-build, co-share” and are in talks to confirm the details.
The three major Chinese carriers’ prudent attitude was well reflected in China Tower, a jointly invested Hong Kong-listed tower builder. Its growth in tower revenue for the first six months was 1.6 per cent from a year ago, even though this was supposed to be the opening year of 5G building in China.
“While 5G build seemed to have accelerated, the market expectation of (China) Tower’s result beat did not materialise, mainly because of telcos’ continued pressure to achieve cost savings,” said Edison Lee, telecom sector analyst at Jefferies Hong Kong.
“We understand that 5G development still needs to wait until the network is ready, while the variety and the price of handsets become acceptable for the people,” China Unicom’s Mr Wang said. “We could then go ahead to widely promote 5G services.”
Li Zhengmao, president and chief operating officer at China Telecom, said on Tuesday that the company took a multi-vendor approach on infrastructure equipment procurement, but acknowledged that Huawei was supplying about half of the company’s telecoms equipment this year. “We are carefully following the situation on Huawei,” he said.
Mr Yang of China Mobile earlier pointed out: “Huawei’s chip issue will undoubtedly affect the company’s development in our network and 5G, including handsets.”
Chiu Shih-fang, a veteran tech analyst with the Taiwan Institute of Economic Research, said it was understandable for Huawei and ZTE to reduce their reliance on American technology in their products amid the escalating tensions between Washington and Beijing, though it would take time and affect their 5G base station installations.
“For the necessity of supply chain continuity, the Chinese telecom equipment suppliers have to make some adjustments in response to the rising geopolitical risks. However, the slowdown is expected to be only temporary. As 5G infrastructure is Beijing’s key ambition this year, the carriers and equipment suppliers will have to do their best to keep up the goal.”
Additional reporting by Nikkei staff writer Grace Li in Hong Kong
A version of this article was first published by the Nikkei Asian Review on August 19 2020 @2020 Nikkei Inc. All rights reserved