The issues with Huawei
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.