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China tech

Huawei and ZTE slow down China 5G rollout as US curbs start to bite

'De-Americanization' adds to Chinese carriers' cautious investment stance

China's leading telecoms providers are taking a cautious approach to the rollout of 5G technology.   © Reuters

TAIPEI/HONG KONG -- Huawei Technologies and ZTE, China's two largest telecom equipment providers, have slowed down their 5G base station installation in the country, the Nikkei Asian Review has learned, 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 can redesign products and change some equipment to remove as much U.S. content as possible. It is part of a "de-Americanization" effort by China after the Trump administration tightened export controls on Huawei, multiple sources said.

The move by the two homegrown telecom 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 U.S. decision on Monday to broaden sanctions to try to squeeze Huawei out from the American tech supply chain may further slow 5G infrastructure building. It is getting harder for Huawei to even buy standardized chips and components from non-American companies.

Huawei has been stockpiling key components this year, especially for its telecom 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 as Washington tightens its grip on the Chinese tech group.

Torrential rains 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 U.S. and China. The technology could empower futuristic 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 telecom 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, told reporters 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," he said. Indeed, the company kept the annual capital expenditure plan unchanged at 179.8 billion yuan ($26 billion) from the beginning of the year.

Yang also stuck to earlier guidance on dividends. The company declared 1.53 Hong Kong dollars ($0.20) per share for the interim results, keeping the same level from the year before, despite a 0.5% drop in net profit to 55.765 billion yuan 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% to HK$3.25 per share. There is a certain balancing act in play between 5G capex and shareholders' returns, as Chinese telecom operators have been under direct pressure from the government to keep their tariffs under check over the years.

The sense of saving is more apparent in the two smaller peers, which have been engaged in 5G investment burden sharing through a "co-built, co-share" framework.

China Unicom Chairman Wang Xiaochu revealed last Wednesday on an online conference call that its alliance with China Telecom has saved over 40 billion yuan 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 Wang. The two carriers are expanding 5G cooperation into existing 4G network cost-sharing, for example, to maintain transmission facilities.

Ke Ruiwen, chairman of China Telecom, on Tuesday echoed 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, 70 billion yuan for Unicom and 85 billion yuan for Telecom.

The 5G investment savings in China will go further as China Mobile and the new-coming fourth carrier China Broadcasting Network have agreed on their version of "co-built, co-share" and are in talks to nail down 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% 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 materialize, 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 Wang said. "We could then go ahead to widely promote 5G services."

Li Zhengmao, president and chief operating officer at China Telecom, told reporters on Tuesday that the company takes a multi-vendor approach on infrastructure equipment procurement, but acknowledged that Huawei is supplying about half of the company's telecoms equipment this year. "We are carefully following the situation on Huawei," he said.

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 is 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 will take time and affect their 5G base station installment.

"For the necessity of supply chain continuity, the Chinese telecom equipment suppliers have to make some adjustments in response to the rising geopolitical risks," Chiu said. "However, the slowdown is expected to be only temporary, as 5G infrastructure is Beijing's key ambition this year that 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

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