The is­sues with Huawei

The Saratogian (Saratoga, NY) - - BUSINESS - By Den­nis and Aaron Fagan To con­tact Fagan As­so­ciates, Please call 518279-1044.

This past Wed­nes­day a large Ger­man tele­com com­pany, Tele­fon­ica Deutsch­land (TD), selected the Chi­nese com­pany Huawei along with the Fin­nish com­pany Nokia to build out its 5G net­work. Of note is the fact that this past Spring the Trump Ad­min­is­tra­tion en­forced part of the Na­tional De­fense Au­tho­riza­tion Act (NDAA), which af­ter a pe­riod of time would have for­bade U.S. en­ti­ties from buy­ing equip­ment from Huawei. How­ever, as part of the trade ne­go­ti­a­tions, the ad­min­is­tra­tion has since re­laxed these re­stric­tions on spe­cific and lim­ited cases.

Huawei claims that the ban is un­con­sti­tu­tional as it was en­acted leg­isla­tively and there­fore with­out due process. Iron­i­cally, in a pre­pared state­ment Huawei claims it is also “vi­o­lates the ba­sic prin­ci­ples of free mar­ket com­pe­ti­tion.”

What is 5G? In terms of speed, 5G rep­re­sents a ma­jor step for­ward in the de­liv­ery of voice, video and data from the source to the con­sumer. Es­tab­lish­ing a dom­i­nant po­si­tion in 5G, an in­dus­try viewed as the holy grail of telecom­mu­ni­ca­tions, is highly cov­eted and in­deed trans­for­ma­tional.

In our opin­ion, this re­la­tion­ship be­tween TD and Huawei is fraught with is­sues that are po­ten­tially detri­men­tal to the economies of the United States as well as other Demo­crat­i­cally elected coun­tries.

Ac­cord­ing to their web­site, Tele­fon­ica Deutsch­land “of­fers mo­bile and fixed ser­vices for pri­vate and busi­ness cus­tomers.

With a to­tal of 50.1 mil­lion cus­tomer lines, the com­pany is one of the lead­ing in­te­grated telecom­mu­ni­ca­tion providers.” Huawei, on the other hand, is one of the largest sup­pli­ers of com­po­nents for the telecom­mu­ni­ca­tions in­dus­try, in­clud­ing hand­sets and an­tenna. Ac­cord­ing to a re­port from CNBC, Tele­fon­ica Deutsch­land has selected Huawei and Nokia to build its Ra­dio Ac­cess Net­work (RAN). “This is es­sen­tially the part of the net­work that hooks up your de­vices with the ac­tual 5G sig­nal. It is dif­fer­ent to the so-called “core” which is like the brain of the net­work. The RAN is of­ten seen as less sen­si­tive than the core in terms of se­cu­rity.”

The deal which must pass scru­tiny from the Ger­man gov­ern­ment has been crit­i­cized by many coun­tries, in­clud­ing the United

States, Aus­tralia and Ja­pan. The fear is that if a con­flict were to de­velop be­tween China and an­other coun­try, Huawei may possess data, be able to in­ter­cept data or plant mal­ware that would be ad­van­ta­geous to the Chi­nese cause. With­out the sep­a­ra­tion be­tween the Ex­ec­u­tive and Ju­di­cial Branches in China as we have in the United States as well as other freely elected coun­tries and de­spite Huawei’s claim to the con­trary, we be­lieve this is a valid con­cern.

In the U.S., there is a dis­tinct sep­a­ra­tion be­tween the pri­vate sec­tor and the gov­ern­ment. In China, that line ap­pears some­what blurred as China can ex­ert im­plicit and/or ex­plicit pres­sure on any en­tity, whether pri­vate or state owned.

It ap­pears as if the United States and China have agreed to terms re­gard­ing Phase One of a trade deal, one per­tain­ing to the pur­chase of agri­cul­tural prod­ucts by the Chi­nese and the rolling back of re­cently en­acted tar­iffs by both coun­tries. This was the rel­a­tively easy part. Both coun­tries needed this deal now – Pres­i­dent Trump for his re-election prospects and the Chi­nese to get their econ­omy mov­ing again. We have stated for well over a year that the more dif­fi­cult next phase, is that which per­tains to the forced trans­fer of in­tel­lec­tual prop­erty from Amer­i­can com­pa­nies to those domi­ciled in China. This will take years to ne­go­ti­ate, if it is even at all pos­si­ble.

Over the past sev­eral decades China has ex­pe­ri­enced a pe­riod of rapid eco­nomic growth as it has, for the most part, tran­si­tioned from a cen­trally planned to a mar­ket based econ­omy. How­ever, in our opin­ion they will never be an ally of or trusted by the United States un­til the com­mu­nist gov­ern­ment al­lows for free and open elec­tions. Don’t ex­pect that any time soon.

The Chi­nese econ­omy may al­ready be too big for the United States and its al­lies to ne­go­ti­ate ef­fec­tive and en­force­able trade agree­ments. Time will tell. How­ever, it is for the rea­sons out­lined above that we be­lieve this con­fronta­tion with China will be fought over a LONG pe­riod of time.

Please note that all data is for general in­for­ma­tion pur­poses only and not meant as spe­cific rec­om­men­da­tions. The opin­ions of the au­thors are not a rec­om­men­da­tion to buy or sell the stock, bond mar­ket or any se­cu­rity con­tained therein. Se­cu­ri­ties con­tain risks and fluc­tu­a­tions in prin­ci­pal will oc­cur. Please re­search any in­vest­ment thor­oughly prior to com­mit­ting money or con­sult with your fi­nan­cial ad­vi­sor. Please note that Fagan As­so­ciates, Inc. or re­lated per­sons buy or sell for it­self se­cu­ri­ties that it also rec­om­mends to clients. Con­sult with your fi­nan­cial ad­vi­sor prior to mak­ing any changes to your port­fo­lio.

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