When UK regulator Ofcom issues LTE licences to operators sometime in 2012, Chinese firm Huawei is likely to be one of those tasked with breathing fire into UK airwaves. It has been doing just that across Europe. But there appear to be barriers to its entry to the UK. James Blackman reports
Let us pan out for a moment. Investment cycles in this industry turn on the development and life of infrastructure and hardware. The last time the market spun these reels of progress together in coordinated technological revolution, it screwed up.
Early marketing of 3G/UMTS, licensed here in 2000 and launched-proper in 2004, over-promised and under-delivered. Arguably, it took the arrival of the Apple iPhone, a 2G/GSM handset in its first iteration, in 2007 to open consumer minds to the possibility of the mobile internet.
But even as the industry has gained maturity, it has failed ultimately to ease its growing pains. Consumers are better served and service providers are poorer; UK operator profits peaked more than five years ago.
We are approaching a point now where the industry has a second shot.
‘4G’ LTE licences are to be auctioned by UK regulator Ofcom some time in early 2012, and are being issued already by its equivalents across Europe, the US and Asia. LTE promises a mobile data experience comparable to fibre networks, and one that is more efficient for operators, both spectrally and financially.
The shifting ground will create opportunities for new players. Chinese firm Huawei is one. And its recent record suggests it is the one most likely to break the stranglehold of Western powers Ericsson and Nokia Siemens Networks (NSN) in the UK.
Let us zoom in. Huawei was established by Ren Zhengfei, a former military technologist and the company president, in Shenzen in 1988.
Chinese economic liberalisation in the late 1970s saw Shenzen designated as the country’s first ‘special economic zone’. It has grown in that time from a fishing village of a few hundred thousand to a high-tech centre of more than 10 million, and a key manufacturing hub for PC-maker Lenovo, Apple hardware agent Foxconn and Huawei’s local rival ZTE, among others.
China’s new economic power is well told. Its growth in 2009 helped haul the global economy out of recession. It passed Japan in second this year for nominal GDP, a long way from the communist isolationism that preceded its free-market reforms.
Huawei’s story reflects the economic growth of its hometown and its homeland. Established as a distributor of imported PBX products to rural China, its labour resource and engineering focus (it commits 46 per cent of its workforce and 10 per cent of its sales revenue to R&D) has seen it expand into overseas markets and myriad telecoms provision.
It is now China’s premier telecoms equipment vendor, a showcase firm for the new Republic, with an international training centre by architect Norman Foster and a campus with smart staff digs and open spaces marked by palms, ferns and bamboos.
It serves 45 of the world’s elite 50 operators and ranks second only to Swedish-maker Ericsson for global sales and revenue. Its compound annual growth over five years is 38 per cent, hitting revenue of $21.8 billion in 2009. Net profits have kept pace; $2.7 billion in 2009 on a 12.2 per cent margin.
Clearly, infrastructure vendors have little care for the public glare, selling equipment to service providers and not to end-users. But Huawei has little business with UK mobile operators anyway, despite good broadband network supply to BT and TalkTalk.
In terms of UK wireless infrastructure, Ericsson and NSN have it sewn up, running virtually all GSM kit and the lion’s share of UMTS gear.
As if to underline the point, Vodafone last month handed upgrade of all its London and M4-‘corridor’ network, a mid-term HSPA+ modernisation project, to Ericsson, its long-term partner.
What gives? Because such twin vendor dominance is not reflected elsewhere; Huawei is a contender on the continent.
The broader market has consolidated. Six western powers have become two, with the alliances of Nokia-Siemens and Alcatel-Lucent, and the fire-sales of Motorola and Nortel. Huawei has made inroads as progress for these others has stalled.
Since 2005, it has been on the stump as contracts have been issued by operators to swap out legacy GSM equipment, install new UMTS kit and upgrade both. It claims to have won selection on the back of its innovation; it rejects that it has played on price, other than during its salad days and as a function of its R&D work, claiming in fact it lost recent LTE expansion work with TeliaSonera in Norway because it failed to match Ericsson and NSN.
Huawei vice president of wireless marketing Lars Bondelind explains: “Let’s put it this way; we have a cost advantage because of our R&D base in China, which is 35,000-40,000 engineers. That is a big advantage. But, today, we are three-to-six months ahead of most of our competitors in all areas. We are competing with Ericsson and NSN on features and functions and technology. And they are playing catch-up.”
Rivals argue differently, of course. Both Ericsson and NSN claim numerous cutting-edge deployments, and can equally-well spin their own prowess in the vendor space (see below).
Still, Huawei says its technology is genuinely fresh. We are in engineering territory here, but its ‘Distributed Node B’ architecture in the middle of the decade allowed operators to split radio equipment and shorten feeder cables to their antennas, reducing power consumption and improving site performance.
More crucially, its ‘Single RAN’ (radio access network) product, introduced at the back-end of 2008, has afforded operators the chance to integrate GSM and UMTS networks, rather than run them separately; improving network efficiencies and reducing operational expenditure.
And Huawei’s ‘SDR’ (software definable radio) solution has enabled operators to switch transmission technologies across spectrum, as regulation has allowed, without need for new hardware.
Huawei Europe vice director of wireless marketing Pablo Brito says: “Operators need Single RAN solutions so they can have options. You see the data growth; it’s coming. If they go Single RAN, they can be prepared.”
Huawei provides network operators with fixed and IP network solutions as well, leading from Alcatel Lucent in the former discipline and building steam behind Cisco and Juniper in the latter.
It has also carved itself a market-leading position in the manufacture of USB sticks and a stake in a market-defining niche in low-priced Google Android handsets. But its terminals business is a discussion for another day.
Bondelind says of its infrastructure portfolio: “We have mobile, fixed and IP technology solutions, and we combine them to offer an end-to-end all-IP network. There is no one else who can do that. The industry has to go the all-IP way. As soon as we get HSPA and LTE solutions beyond some 7-10Mbps as a throughput in one cell, it requires capacity in the backhaul, which is not economically feasible with traditional infrastructure. It just costs too much. You need an all-IP network.”
Its Single RAN SDR is optimised for LTE, and has been more broadly deployed among launches to date, it reckons. Huawei is involved in four of the six commercial LTE networks that have so far deployed (although contracts are not normally single-vendor affairs, and the ratio appears to shift weekly), including TeliaSonera’s world-first in Oslo, in Norway, in late 2009 and Vodafone Germany’s debut of LTE in the 800MHz band last month.
Brito says: “We were first-to-market with Single RAN SDR and we have continued to invest, and to work closely with operators to have the best LTE solutions in the market. We are the first to deploy LTE in all these frequencies – 2.6GHz in Norway and Sweden, 1800MHz in Poland and 800MHz in Germany.”
Huawei has taken 36 per cent of LTE kit tenders to date, according to research firm Dell’Oro, more than twice the number so far secured by Ericsson – although Ericsson might make argument of the value of the contracts won by each.
Which brings us back to this question of its UK absence. It comes down to industrial development cycles and market idiosyncrasies.
Huawei is a crouching tiger in the UK market, playing a waiting game. UK operators have so far preferred to sweat assets or else to hand upgrade work to old familiars. Issue of 800MHz and 2.6GHz spectrum by Ofcom for operator LTE services remains its likeliest opening.
“Every operator has a cycle of investment with new technology, and very often it is tied to regulators’ release of spectrum. In Europe, there is one chunk of spectrum, and if you don’t jump on it when it’s made available, then you are left out. The investment period is very much determined by the regulator.
“If spectrum gets issued at year zero, say, then by year five operator strategies diverge – some replace kit and some look to harvest their initial investment. Those philosophies are down to individual providers. For us to break in depends on when spectrum is offered and whether operators are looking to renew kit.
And it can be more expensive for operators to work with someone new on expansion of their existing network than to work with the original partner” explains Bondelind.
“But you know, we have been in Europe for 10 years now, and we have been successful breaking in at those points. But it has taken that long; it takes that long. And we are still waiting for opportunities in certain markets.”
And there is an issue with the UK regulatory environment too.
The recent auction of 800MHz and 2.6GHz frequencies in Germany put no restriction on spectrum usage. The Swedish regulator has already refarmed 900MHz spectrum, and is putting pressure on Brussels now for simpler Europe-wide rules on allocation. Hong Kong, meanwhile, is technology neutral.
These markets have led development of next-generation services. The UK has been less free. Bondelind observes: “Ofcom goes more into detail on regulation, it is more restrictive – most others are more open to refarming.”
Rather hesitantly, Ofcom recommended last month O2 and Vodafone should be let run their UMTS networks at 900MHz, currently pegged for GSM only, arguing the creation of Everything Everywhere has removed any competitive threat.
But the regulatory straitjacket on spectrum usage has made deployment of the kind of liberating radio architecture Huawei is selling less urgent.
As well, a ‘chicken-and-egg’ conundrum is in play, which to an extent mitigates UK latency in refarming existing bandwidth and licensing new spectrum.
There are no LTE handsets available from manufacturers at present. The LTE networks that have so far launched are for data transmissions with USB dongles only. GSM handsets still dominate world sales and UMTS devices have only just overtaken GSM sales in mature markets.
So mass-market LTE is a way off, whether or not market regulation is open and licences have been issued.
“That transition from 2G to 3G, and now to a little taste of 4G, or LTE, takes time. To a greater extent, it depends on how quickly you can exchange terminals [within the market]. It can be argued there is no use investing in an LTE network until the terminals are out there. And there are very few,” explains Bondelind.
“TeliaSonera struggled to find just one device to launch LTE in December 2009. It is the same issue with HSPA+ or MIMO; there are no handsets out there. The change of the terminal population decides the pace of the introduction of new technologies.
“The market as a whole doesn’t change handsets that rapidly. There are five billion subscriptions in the world, but closer one billion handset sales. Which means the change-around of terminals is likely to be four or five years.”
That is a frame of reference for mass-market LTE, however, and suggests the UK market has some time on its side.
But new infrastructure will follow on the heels of its spectrum auction, and LTE mobile broadband will be offered to early adopters and business types, affording operators a proper look at the behavioural aspects of future services, as certain of their peers are now getting elsewhere.
First UK contacts
In fact, despite the absence of commercial interaction, there is some exploratory work for Huawei in the UK, to count alongside the BT and TalkTalk contracts.
Bondelind points to its interaction with network strategy groups at Vodafone’s UK headquarters, through set-up of a joint-innovation centre with Vodafone in Spain. He remarks: “Vodafone UK is close to the innovation centre. It has a lot of good ideas about future networks and what is feasible for cities like London.”
Huawei looks to have even closer collaboration with O2 in the UK. It underpinned its trials of LTE in the 2.6GHz and 800MHz bands in Slough during December last year and May this year, respectively, flagging top-line speeds of 150Mbps on the down-link. Huawei supplied radio and core infrastructure, as well as fixed line and IP elements.
As well, it has just opened a cyber security centre in Banbury, Oxfordshire, ostensibly to test its gear against cyber attacks. The company describes it as “like a glasshouse – transparent and open to regulators and customers.” But it is considered to be a move also to dispel security concerns around Chinese vendors in certain markets.
India raised alarm in April over equipment from Huawei and ZTE after operators applied for approval of Chinese equipment. The Indian government subsequently banned import of their hardware until, in August, the pair accepted revised import terms.
Similarly, The Wall Street Journal claimed in November US operator Sprint Nextel had turned down network upgrade bids from Huawei and ZTE because of US government fears over national security.
A Huawei spokesperson explains: “We don’t know where these ‘fears’ come from. Allegations regarding the security of our network systems are untrue and ungrounded. Huawei is 100 per cent privately-held, owned entirely by its employees. No government or government-linked organisations have any ownership stake in the company.”
The UK cyber centre has been established well in advance of the UK spectrum auction, and the essential building contracts to follow.
Huawei is not the only equipment vendor in the wings. Its compatriot ZTE has been on the mark across the globe, particularly with network-building in emerging markets, where price is a leading consideration. And LTE might just afford French firm Alcatel Lucent an expanded part of the UK communications backbone also.
Alcatel Lucent has some form here. It provides Vodafone with UMTS infrastructure in the North of England and O2 with its broadband core.
Last week, it announced an LTE pilot in the Preseli Mountains in rural West Wales, utilising 800MHz spectrum available from the digital dividend, claiming download speeds of 50Mbps at nine kilometres from the transmission site, and playing to the Government’s loose promise of a ‘Digital Britain’.
Nevertheless, operator sources claim, anecdotally, future contracts will be fought by Ericsson, NSN and Huawei only. And Bondelind dismisses the challenges of ZTE on the grounds it “is not really trusted on technology” and Alcatel Lucent because its stronghold remains the US.
“The game in Europe is very much between the three of us,” he says. “And we are pretty happy with that because there is a need for competition.”
Does Huawei expect to take a third of new kit sales in the UK when operators have been parsimonious with new vendor contracts to now? “Well, you know, it is always a gamble to make predictions like that. But, yes, why not? We think we have a good chance of breaking into the UK as a new market.”
In which case, someone else of UK incumbents will lose, right? “Well, that is happening all over the wider market.”
Let us step back again. Network data traffic is increasing, as is its rate of growth. The job for operators in developed markets such as the UK is to manage traffic, improve service delivery and build capacity – without increasing costs.
Bondelind remarks: “Most subscribers are profitable to operators, but we don’t see their revenues increasing in developed markets. They offer new incentives, but what consumers pay is broadly level. It is very hard to draw more out of them. And traffic is going to increase.”
LTE does not guarantee UK operators increased revenues. But its infrastructure is cheaper to build and operate, and its spectrum is more efficient. Vendors like Huawei have expanded roles in the new market order. They are now involved in the nuts-and-bolts of service delivery as well.
“People are coming from internet, where they can do anything they want. Operators have to control consumption and consumers have to pay for the resources they use. I think that’s fair, and it is part of the mechanism we’re offering in traffic management,” Bondlind says, with reference to the net neutrality debate that is presently vexing the US ISP market and will be an issue for this industry as soon as an equivalent wireless service is made real to consumers.
LTE offers a return on capital expenditure for operators in perhaps three years, compared with 10 years for fixed line investment and seven years for traditional wireless. That is the view of Telstra International chief executive Tarek Robbiati, who spoke with this newspaper in May on the building of Telstra subsidiary CSL’s HSPA+ and LTE networks in Hong Kong. Bondelind responds: “Yes, those figures are pretty much in line with what we understand.”
And unlike with UMTS, LTE looks on paper like it might just work as a business model from the get-go, for consumers and operators, although regulatory and legal questions remain around deployment and management of it in certain markets.
Brito says: “You know, this idea of ‘3G’ didn’t exist until HSDPA. I mean, video calling? Come on. It was just horrible. Now with this, things are different from the start. The networks work perfectly – the throughput, the performance, the handover, the call set-up. It is quite incredible.
“And the improvement has happened so quickly for operators that have moved to LTE. I mean 38-39Mbps is real, now, and close to it on the uplink too. From the very beginning, the capabilities the technology has promised are there.”
As is Huawei, whose strategists and engineers in Shenzen are already planning for networks with 500 times the capacity of current data networks, and already showing ‘LTE Advanced’ (5G) data speeds 10 times quicker than brand new LTE networks. In time for 2020.
The case of the competition: Ericsson and NSN
Huawei’s chief rivals in wireless infrastructure provision Ericsson and Nokia Siemens Networks (NSN) dispute absolutely its claims for leadership of the LTE space, and for a six-month lead in R&D.
There is the Dell’Oro research, claiming Huawei is taking 36 per cent of LTE contracts (see chart, page 29), but Ericsson makes the point: “No one seems to have done any analysis so far comparing apples with apples.”
Huawei claims to have been awarded 18 commercial LTE contracts and to have run over 70 LTE trials. But those statistics, its latest, are to October only. They claim its part in four of only six LTE networks to have launched so far, including TeliaSonera’s in Norway, Telenor/Tele2’s Net4Mobility project in Sweden, Aero2’s in Poland and Vodafone’s in Germany.
But LTE networks are deploying fast. CSL in Hong Kong and Verizon Wireless in the US have since launched services, with Huawei’s local rival ZTE taking exclusive honours on the former project and Ericsson and NSN sharing the latter.
An Ericsson spokesperson states: “Different vendors have different ways of reporting LTE sales. Some use trial networks or pre-commercial networks or even 3G products which can be upgraded. We only communicate commercial LTE contracts with operators with licensed LTE spectrum and we don’t count the same operator twice, or talk about pre-commerical set-ups.”
Huawei claims to measure only vendor involvement in operational LTE networks.
But Ericsson says it has eight commercial contracts, although not all appear to be fully-fledged commercial propositions. It names TeliaSonera in the Nordics, China Mobile in Hong Kong, TDC in Denmark, Vodafone in Germany, NTT DoCoMo in Japan, and AT&T, Verizon Wireless and MetroPCS in the US.
NSN, meanwhile, claims it has 20 LTE references worldwide, with 18 of that number covering at least radio equipment and 10 covering at least Evolved Packet Core. It says 13 operators of that number can be named: LightSquared in the US, NTT DoCoMo in Japan, Zain in Bahrain, Deutsche Telekom in Germany, Tele2 in Sweden, Telenor in Denmark, TeliaSonera in the Nordics, Mobily in Saudi Arabia, Elisa in Finland and Estonia, Agri-Valley Comms in the US and Verizon in the US.
However, not all these have made LTE services available to their subscribers yet.
At the same time, Ericsson and NSN refute they are playing catch-up in R&D terms to Huawei also. “Ericsson has been driving open standards and has had the highest impact on the released LTE specifications. Ericsson expects to hold 25 per cent of all essential patents for LTE, making it the largest patent holder in the industry,” says Ericsson.
“Our commercial LTE products are already deployed in large scale, already live in service and demonstrating our readiness in the technology.”
The point about patents appears to contradict Q3 2010 research by the European Telecommunications Standards Institute (ETSI), which puts Huawei in poll for global LTE patents. Huawei says it holds 270 patents with ETSI, ranking fourth overall in the LTE industry and first among vendors.
NSN responds simply: “We believe we are the leading LTE provider.”
NSN points to anecdotal analysis of the TeliaSonera LTE roll-out as a mark of its technology. It also betrays, perhaps, its traditional enmity in the vendor space.
Market consultancy Signals Research compared TeliaSonera’s Gothenburg LTE network, by NSN, with its Stockholm LTE network, by Ericsson, and found the Gothenburg experience to be better – offering 50Mbps download speeds 31 per cent of the time, compared with 14 per cent on Ericsson equipment.
But even where Ericsson and NSN are considered to hold an undisputed advantage over Chinese vendors, Huawei suggests the gap is closer than is perceived.
In ‘managed services’, which covers prescient concepts such as traffic management and quality-of-service, its vice president of wireless marketing Lars Bondelind appears to argue Ericsson is in part trading on everyday maintenance work for its reputation.
Bondelind says: “Ericsson leads on managed services. We are into it as well, but we aren’t as big as Ericsson. Although, actually, Ericsson is not as big as it claims. What Ericsson lumps with ‘managed services’ is a lot of what it has always done.”
A spokesperson for the Swedish vendor restates Ericsson’s case: “Ericsson is the leader in managed services. We have over 100 public contracts. Ericsson is managing networks that together serve more than 750 million subscribers worldwide.”