There was no victory lap at Vodafone HQ on February 5th after CEO Nick Read told reports that his company will remove all Huawei equipment installed in critical areas.
The move is likely to take five years and will cost the world’s second largest operates more than €200 million. While Vodafone was pressured into taking this drastic step after London imposed a 35% cap on Huawei equipment, the future for 5G networks in Europe is looking increasingly bleak.
Huawei is the world’s leading 5G tech supplier, largely thanks to the low price tag of its equipment compared to other players (such as Siemens and Ericsson). But the company’s proximity to the Chinese government – and the aggressive campaign waged by the Trump administration on Chinese products – has rattled Western governments who fear not just exposing themselves to Beijing’s cyber espionage but also are worried about their bilateral relationships with the US.
Cooperate or perish
Even if there is no unambiguous proof that Huawei is in the pocket of China’s secret services, London is clearly erring on the side of caution. This is understandable from a political perspective – but hardly prudent for Vodafone from an economic point of view.
The telco reported losses of €7.6 billion for the fiscal year ending in March 2019 and is in dire straits in several key European markets. The joint venture with Huawei seemed to the executives as the only viable option to speed up Europe’s adoption of 5G and catch up with the US and China in terms of mobile internet speeds.
The fact that the deal fell through hits especially hard, considering that in the highly competitive telecoms market, collaborations and acquisitions help to capitalize on pre-existing infrastructure and network reach.
Regardless of which market they are operating in, the extensive fixed costs and investments required to build and maintain effective telecommunications networks makes clear, consistent, and rational regulatory environments indispensable for serving the billions of customers who rely on these networks on a daily basis. When telecoms companies can count on sensible regulatory approaches, consumers ultimately stand to benefit; when governments instead make arbitrary or actively harmful decisions, it’s the average user who ultimately suffers.
Vodafone’s ONO acquisition
For all of its faults, the generally fair and transparent nature of regulations of Europe had previoulsy allowed Vodafone to perfect the delicate economic balance underpinning the sector. That deftness to a great extent accounts for its international reach and leading market position in Europe.
Take, for example, Vodafone’s 2014 acquisition of booming Spanish telecoms company ONO. For $10 billion, Vodafone was able to take advantage of ONO’s existing broadband networks and further capture the market by diversifying Vodafone’s services. ONO had been built from the ground up by CEO Richard Alden, who served as its head for ten years and who made the company the leader on the Spanish market at the time, with 1.9 million customers and connection speeds of up to 20 times faster than other telcos.
That Vodafone would move to acquire ONO was therefore a perfectly undestandable business strategy. As Alden once observed, “To build a telecoms operator you need to build a network (as in ONO) or buy and consolidate existing telecoms operators (as in Blue, the telecoms business we built in Brazil). That’s a very capital intensive and somewhat time-intensive process. If you do it right your absolute returns can be good on a large amount of capital invested.”
This strategy was effective in making ONO into one of the largest telecom operators in Spain, and by attracting huge North American capital investments and making strategic acquisitions, Alden increased both ONO’s market share and revenues. Vodafone was then able to accelerate its own expansion into Spain without significant start-up costs.
A changing market requires bolder strategies
Unfortunately, policymakers and regulatory environments are not always conducive to the functioning of a healthy market. Especially in emerging economies, they can often be counted on to instead throw wrenches in the works. Vodafone’s 2018 merger with rival Idea in the Indian market, for example, cost the company millions.
The merger was designed to turn Vodafone into the largest provider in India, but high taxes, onerous operating costs, and governmental regulations stifled progress and ultimately forced the company to consider a liquidation scenario.
Not that Europe is immune to these and other issues. The winds in the European market are changing, with the entrance of new, low-cost rivals seeking to overthrow the established market order that Vodafone – and a handful of other big network operators – have invested billions into constructing.
In that light, a joint venture of sorts with Huawei would have been critical, not least to maintain technological leadership over a cutting-edge market segment still out of reach for the low-cost competitors. Given that Huawei can afford to offer a collaboration at lower costs, a deal between the two telecom giants would have been exactly the boost Vodafone needed.
Instead, the Trump administration’s global crusade against Huawei, and the Johnson government’s decision to ultimately buckle under pressure from its American counterparts, has left the firm in a far worse position.
Not only has London’s decision to impose caps on Huawei burdened Vodafone with new costs, but it will negatively impact British telco customers as well. With EU countries like Germany as of yet undecided on how far Huawei should be co-opted for Berlin’s woefully delayed digital agenda, the UK’s move might well set a precarious precedent for other countries to do the same – further driving up costs for hundreds of millions of mobile users across Europe.
An opportunity missed?
Mergers, acquisitions and joint ventures always pose a risk, although in the Huawei case, the benefits of being able to deploy 5G in the UK should have outweighed any concerns. Vodafone will surely manage to create a 5G network on its own, but without the Chinese firm’s assistance, the task will take much longer and cost much more than it would have otherwise.