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President Donald Trump’s latest attack on Huawei did not come as a surprise.

Earlier this month the US banned American companies from using equipment made by firms that pose a risk to national security. Chinese technology giant Huawei wasn’t named. It wasn’t necessary. Everyone got the hint.

At the same time, the US government asked American firms to withhold technology from those companies.

Google pulls Android Support

In the most dramatic move to date, Google said last week it would no longer supply the proprietary parts of its Android mobile operating system to Huawei.

At the same time American chip makers said they have stopped supplying the company. It turns out Huawei has been stockpiling some parts in anticipation of this move.

There has since been a temporary halt on the parts supply ban for existing Huawei products. Parts for new sales, which for a technology company come around fast, are still banned.

Billions at stake

We don’t know how Huawei’s investors reacted to the news, the company is in private ownership.

We do know that if the ban stays it will cost American firms billions of dollars in years to come. It could shut them out of the world’s largest consumer market. That’s been reflected in the share prices of Huawei’s US suppliers.

Trump, and America in general has been ratcheting up the pressure on Huawei for the best part of a year.

Things kicked-off in earnest months ago. Then, American officials warned the world that Chinese spies might use Huawei’s network hardware and phones.

It’s a story Huawei has denied often since spying accusations first emerged in Australia some years ago. Huawei also denies it has links to Chinese military.

Intelligence threat

More recently America threatened to withhold intelligence material for any ally with Huawei hardware on their networks.

It would be easy to dismiss America’s attack on Huawei as mere protectionism. That’s a clear part of what’s going on. Trump has since suggested he could clear up this spat if China cuts a new trade agreement with the US.

There is no evidence Huawei uses its network to spy on behalf of the Chinese government.

There is no smoking gun. Huawei’s accusers have not managed to dredge up any plausible documented evidence.

That speaks volumes.

Where Huawei is a threat

Still, Huawei represents a risk. That’s because Huawei dominates the telecommunications hardware market like no other company.

Telecommunications is essential, critical and strategic. It is a key infrastructure. Without it commerce and finance grind to a halt. So does almost everything else. Telecommunications touches almost every aspect of modern life.

America has suggested that while there’s no evidence of Huawei spying, it could hold countries to ransom.

Should, say, relations with a country deteriorate enough, China’s government might insist Huawei shuts networks. That would be a crippling blow to any economy.

Trade repercussions

It’s possible, but unlikely. The long-term repercussions for Chinese trade would be disastrous. Even threatening this would be fatal. After all who would trade with a partner who behaves like that?

And anyway, a shut-down would escalate matters. It could even tip relations over the brink with some countries. China can be aggressive, but there is no sign it is looking for a war.

There is more pressing long-term economic risk to America and the West. For the first time in living memory a Chinese company holds the key to an important, must have technology.

5G mobile

Huawei leads the way in 5G mobile telecommunications. Its technology is months, if not years, ahead of its rivals. The company has been the driving force behind the move to 5G for the past four or five years. Until the latest US intervention, it looked like Huawei would stay out in front.

A lot of the words and projections for 5G are hype. Yes it means more wireless bandwidth, but it is no more transformational than 4G or 3G.

Even so 5G is set to become a vital component of every country’s critical infrastructure. It’s not only about voice calls or web surfing. The technology is able to control power networks, sewage and logistics.

Huawei dominating this technology puts it in a very powerful position. By extension this could extend to China. The fear is the country could call in its favours from its home grown technology success story.

Technological dominance

We seen this kind of technology-lead dominance before. IBM was, in effect, the entire computing market until the late 1960s. It stayed in control of the sector until the 1980s. After that time Microsoft Windows and Intel processors defined the PC era.

In part these technologies contributed to America’s economic and technological pre-eminence. They helped America assert and project military power on a hitherto unseen scale.

There’s a fear Huawei and China could do the same1. Older readers may remember America had similar fears about Japanese technology. It appeared to pull ahead during the 1980s. The difference there was that Japan was never a military rival. 

Huawei already accounts for about a third of all telecommunications network hardware. Until recently it was on a growth trajectory. There is no reason to think that without intervention that proportion could climb to IBM or Microsoft levels of monopoly control.

Yet this frightens strategic thinkers in the US and other western nations.

Part of their concern is they worry about what it might mean for their industries if a Chinese company dominates a strategic market. They know how powerful this can be.

Embargoes

The US has often embargoed key technology product sales to out-of-favour countries. Indeed, an early chapter in the current Huawei spat came when the US accused it of violating Iran trade sanctions.

All this means Huawei doesn’t need to install backdoors in its 5G network hardware to be a threat. Not does it need to push out malicious code during software updates. There is no kill switch, but even if there was, it would be unnecessary. 

Huawei prepared for the US action. It stockpiled essential parts. It has its own mobile operating system under development and has worked to decouple its supply chains from the US.

Google that!

It’s hard to see how Huawei can stay competitive in phones without access to new Google software. It needs to offer Google search, Google Maps and other services that are now off limits. Chinese customers might live without them, customers in other markets demand and expect these services.

Huawei may stay competitive in network equipment in markets where it is still welcome. It may need US chips and software. China could, in theory either develop its own or source both elsewhere. That’s assuming the US doesn’t lean hard on other countries.

At this point things can go one of two ways. If it’s about the US putting trade pressure on China, things could blow over, albeit with some damage.

Huawei knock-out?

That’s the optimistic view. A more negative view is that America aimed to knock out China’s most prestigious technology company. It did so either to make a point or to stop Huawei from becoming too powerful.

This can backfire. China is powerful, rich and smart. America may have a more advanced software industry. It’s chip makers may be better, but China could view this as a wake up call to bolster its own industries.

Only a brave person would bet on China not catching up if it puts its shoulder to the wheel. America may have created the monster it had hoped to strangle at birth.

Disclaimer Huawei has flown me overseas three times in the last five years. I aim to take a balanced view of this story, but I’m only human. If you think I’m missing anything important feel free to comment.


  1. This argument forgets the UK government revelation that Huawei’s network software is a shambles. ↩︎

Telecommunications contracts

Once again telecommunications is New Zealand’s most complained about industry. It’s a story we’ve heard over and over. The latest report is MBIE’s New Zealand Consumer Survey 2018.

Almost one in three people buying a home service experienced a problem. That’s according to According to the Ministry of Business, Innovation & Employment.

The most common problem, almost half, is that the product or service didn’t work as expected.

home based telecommunications problems

Fixed line, mobile complaints

It’s not only fixed line home services. One in five consumers buying a mobile service had a problem in 2018.

Even allowing for overlap between the two categories, this is a lot of people. The odds are close to even that you, the reader, are among them. The chance that you know a person who had trouble is close to certainty.

Part of the problem is that telecommunications touches everyone.
MBIE says almost two-thirds, 62 percent, of consumers bought a home service in the last two years.

Even so, the category is a long way ahead of building repairs, the next most complained about sector.

Over a quarter of people surveyed say their most recent consumer problem was with telecommunications.

That’s bad. It’s diabolical. But it gets worse. MBIE goes on to say the poorest New Zealanders get a worse deal from the industry’s bad customer service. These are often the people least equipped to deal with poor service.

It adds up to another digital divide. This one looks harder to fix than lack of access. Sorting this out could do much to improve poor New Zealanders’s telecoms experience.

Telecommunications Forum CEO Geoff Thorn defends the industry. He says the sector has been working hard to improve customer satisfaction.

“We know that New Zealand consumers have access to world-class telecommunications services when measured by coverage, speed and price. However, we recognise there are areas where the telecommunications industry can improve”, Thorn says.

That’s fair enough. Although it’s unlikely outsourcing customer support to an Indian company will improve matters. Vodafone already always ranks last in surveys comparing telco performance.

New service quality regime coming

Meanwhile the TCF is working with the Commerce Commission on a new service quality regime. The two plan to develop this in the next few months.

Thorn has a point when he says the poor showing in the report: “…is not surprising given the number of connections and associated transactions people have, and that, in the case of fibre, it is new infrastructure that is being rolled out across the country.”

One area the TCF could investigate is how New Zealand compares with other countries. A quick, unscientific online search shows telecoms where there are comparable statistics.

It’s possible companies don’t set realistic customer expectations. Consumer magazine runs frequent comparisons of local company support. It’s no accident that the firms that do best are those who promise next to no support.

A Commerce Commission paper released this week reveals likely future fibre network regulation.

The paper is a blueprint for how the industry will work once the UFB roll-out completes in 2022.

There are no surprises.

It is a response to last year’s Telecommunications Act. The Act requires the commission to set up utility-style fibre network regulation.

Competitive market

Among other things the Act aims to make sure there’s a competitive market. That’s hard when fibre networks are monopolies. It also aims to stop fibre companies making excessive profits.

The proposed regulations treat Chorus much like an electricity lines company. It faces price-quality and information disclosure regulation. Chorus will get revenue caps and quality standards.

Enable Networks, Northpower and Ultrafast Fibre, will only be subject to information disclosure. At least at first. The Commerce Commission may impose the other rules on these companies later.

Telecommunications commissioner Dr Stephen Gale says the rules will affect the price consumers pay for fibre.

“We are keen to hear from consumer advocates on our current thinking around how we treat key issues such as the cost of capital and what is included in Chorus’ regulated asset base.”

There’s a good chance the telcos will challenge the asset base calculations.

Anchor service

As expected the Commission is sticking with 100/20Mbps as the anchor service. Fibre companies must provide this service. They can only charge the contract price plus an annual increase for inflation.

The fibre companies have already moved towards providing unbundled services. This is due to begin at the start of next year. For now, the Commission will not regulate unbundled fibre prices. It says it may revisit this later.

That now looks likely. Vodafone and Vocus say they are unhappy with Chorus’s proposed unbundled fibre price.

Fibre regulation includes quality

Broadband quality is also on the regulator’s agenda. The new rules say fibre companies must disclose performance information.

Gale says: “The quality dimensions are based on the stages of the fibre service life-cycle and include customer service, service availability and performance among others”.

The Commerce Commission expects to finalise the rules by June 2020.

There’s a summary of the paper at the Commerce Commission website.

Infratil is among the few companies able to unlock Vodafone New Zealand’s value. There is untapped potential. It may not be immediately obvious to other potential buyers.

That potential didn’t excite enough interest when the company was taken on the road after the Sky TV merger failed. Presumably, buyers looked in the wrong direction.

Most people see Infratil as an infrastructure company. It is that.

Infratil hold TrustPower key

Infratil also owns a little over half of electricity retailer TrustPower. This is the key to unlocking Vodafone’s value.

TrustPower isn’t any electricity retailer. It is also New Zealand’s fourth largest internet service provider.

Number four doesn’t mean big. Last year’s Commerce Commission monitoring report said TrustPower has a five percent market share of broadband connections.

That’s small. Even when added to Vodafone’s 26 percent, the two don’t get close to Spark. That company still has more than 40 percent of all connections.

Small but potent

If Vodafone plus TrustPower doesn’t alter the broadband balance of power, what is disruptive here?

The answer is Trustpower has found how to make more profit from connections. It sells bundles combining broadband and power in a single bill.

Buying Vodafone opens the door to a million Vodafone customers. Many of these will also buy electricity.

It turns out broadband and electricity are a potent mix. They may go together better than, say, broadband and pay TV.

Would you like fries with that?

TrustPower isn’t the only company to find value in the “would you like fries with that?” broadband and power proposition. Vocus acquired a small electricity retail business. It has been selling power to its customers.

Electricity and broadband have worked for TrustPower.

Both services need investment in billing systems. Billing is a large cost for both electricity and broadband retailers. Putting two services on a single bill trims costs. It increases margins by more than you might imagine. A few dollars per month times thousands of customers soon adds up.

Remember Vodafone has struggled in the past with billing.

There are other efficiencies. You don’t, for example, need to run separate call centres for power and broadband customers.

Golden handcuffs

These cost savings are nothing compared with the value Trustpower gets from having customers buy both services at once.

Customers who buy more complex bundles of services are less likely to go elsewhere. TrustPower cuts churn every time a power customer signs up for broadband. This also works the other way around.

A million Vodafone customers have already proved they are creditworthy. There is probably enough data to know which customers are difficult to deal with. It may even be easy to identify homeowners or lead tenants, the people most likely to buy electricity.

Asymmetric information

There’s another aspect to TrustPower’s offer.

You’ll notice TrustPower’s advertising splashes the headline price of broadband. Usually this is so much a month less than other high profile broadband retailers. In some cases, the first months are discounted. A normal rate kicks in a few months into a 24-month contract.

TrustPower sweetens deals by offering Samsung flat screen TVs or other inducements.

It’s easy for consumers to comparison shop for broadband. There aren’t many speed and data options.

Selling photons and electrons

It’s harder to comparison shop for power Both are low margin products. Both are competitive markets. It is often easier to make more profit selling electrons than photons.

Vodafone and TrustPower under a single umbrella means more market power. That’s not helpful when it comes to inputs, companies buy broadband at regulated prices from wholesalers like Chorus and Enable. It is helpful when muscling to the front of a queue with partners.

We haven’t even mentioned TrustPower’s earlier bid to establish a mobile virtual network operator business. If nothing else, the company’s executives would have looked closer at the economics of selling mobile. This is Vodafone’s core business.

Infratil invests in infrastructure

Vodafone was due to float next year. The parent company, the UK-based Vodafone Group, wants to get as much of its New Zealand investment out of the country. It plans to invest in places like India where there is more long-term potential.

One challenge Vodafone faces and would otherwise continue to face is finding funds to invest in 5G. Doing the job properly would cost the thick end of a billion dollars over the next decade. Infratil can cover the spend.

Sure, Vodafone has other attractions. It won’t all be about cross-pollination with TrustPower. Yet the million-plus creditworthy mobile customers who might be persuaded to switch electricity retailer, are an important part of the company’s value.

Getting more New Zealanders online is the government’s goal with its Digital Inclusion Blueprint. The plan is to bridge the digital divide and make sure people don’t miss out as more and more vital services move on to the internet.

Government Digital Services Minister Megan Woods launched the blueprint on Friday.

She says: “Some people can’t easily apply for jobs as many recruitment processes start online. Kids may be prevented from doing their homework.

“Others could feel isolated from more digitally savvy friends and family who communicate using social media. We want to ensure no one is left out or left behind as more and more of our lives move online.”

Life hard without a connection

She is right. It is already hard to do simple everyday things without an internet connection. It will get harder.

Even something as simple as arranging for a council rubbish pick-up or buying insurance is difficult without an internet connection.

We tend to underestimate the number of New Zealanders without internet access. In part that’s because of the way government collects official information. Much of it is now done through the web.

When it isn’t, officials often collect data by phone. The problem here is that people without home internet connections are often the same people who don’t have mobile phones.

More offline than you might think

At the 20/20 Trust, Bill Dashfield says at least 11 percent of the population do not use the internet. This group is likely to include older, poorer, rural and non-Pākehā New Zealanders. That makes for a digital divide.

Woods says: “Access to online service is a key priority is one of my priorities and an area Government has already invested in. For example, the Prime Minister recently announced $21 million funding for Regional Digital Hubs (RDHs) in towns to connect local people and businesses to digital services.

This is a good start. It helps that the government supported ultra-fast broadband programme now extends further into rural New Zealand. Eventually about 85 percent of the country will get fibre. Almost everyone else will have better broadband, either in the shape of fixed wireless or improved copper connections.

InternetNZ Jordan Carter zoomed in on one aspect of the divide in a press release.

Call for action on digital divide

He says; “We welcome, in particular, the development of Te Whata Kōrero. It’s a call to action for tāngata whenua to work alongside the government to provide leadership on digital inclusion”.

Moreover, he nails the biggest problem: funding.

Previous governments managed to find close to $2 billion to build UFB and the other broadband improvement projects. Now it has to earmark money to make sure everyone can reap the benefits of fibre and other fast broadband technologies.

The good news is it won’t cost anything like $2 billion. Even five percent of that will pay for a lot of small local initiatives. Small projects are the best way to get people across the digital divide. It will be a lot cheaper than maintaining offline government services for jobs that are better done online.

Let’s hope there are funds in the budget to pay for this.