May 1, 2019 / 11:37 AM / 3 months ago

Breakingviews - Huawei fracas erodes its European advantage

A woman stands at the booth of Huawei featuring 5G technology at the PT Expo in Beijing, China September 28, 2018. Picture taken September 28, 2018. REUTERS Stringer

LONDON (Reuters Breakingviews) - To err is human. Yet Chinese telecom maker Huawei’s mistakes get much more attention than those of its rivals Ericsson and Nokia. The risk for founder Ren Zhengfei is that this scares off his customers.

Huawei suffered a new blow on Tuesday when Vodafone said it found security flaws in the Chinese group’s kit dating back to 2011 and 2012. The problem affected WiFi routers in Italy, which allowed the manufacturer to communicate with the equipment long after it had been deployed. That feeds into allegations by the U.S. State Department that Huawei may give Beijing “backdoors” to spy on Western countries.

It’s far from a smoking gun. Vodafone says Huawei fixed the issue at the time, and that the Chinese group had simply failed to remove a feature commonly used to diagnose technical problems before routers are sent out. That would make it a matter of incompetence on Huawei’s part rather than malign intent. It comes just a month after a UK-based oversight body criticised the group’s software engineering.

The fracas highlights two big problems for Huawei, which was founded by former military officer Ren in 1987 and last year generated about $30 billion of sales in Europe, the Middle East and Africa. First, Ren’s company will be scrutinised more closely than peers because of its association with the Chinese state. He argues that Huawei is owned by its employees, not the government, but that misses the point: Beijing hardly needs an equity stake to exert influence.

Second, meeting those higher standards is costly. Huawei has already pledged $2 billion to fix problems identified by Britain, at a time when its research costs are surging. Operating cash flow shrank 22.5 percent last year even though sales rose 19.5 percent. The company is no longer the cheapest supplier of much telecom equipment, according to a person familiar with its operations.

Rising costs and constant scrutiny could prove too much for Ren’s European telecom customers, who fear having to rip out his kit if governments opt for a ban. Huawei’s competitive advantage in Europe is under pressure.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below