Editor's Note: This assessment is part of a series of analyses supporting Stratfor's upcoming 2019 Third-Quarter Forecast. These assessments are designed to provide more context and in-depth analysis of key developments over the next quarter.
The United States and China are in the midst of a tech war, and Europe's caught dead center. In its push to stem Beijing's expanding global influence, Washington has pressured its European allies to sever their ties with Chinese telecommunications giant Huawei, which it accuses of being a Trojan horse for Beijing's government to spy on other countries. But while some members of the European Union have been more receptive to U.S. pressure, none so far have succumbed fully to the United States' plea to ban Huawei from participating in the development of their 5G networks.
That's not to say EU countries haven't taken heed of Washington's concerns about the Chinese company, or that U.S. accusations haven't marred Huawei's reputation among European consumers and companies. But Huawei's already sizable presence in EU markets — combined with its expertise in the 5G space — will make it a tempting option for European countries looking to capitalize on the next-generation technology as quickly and easily as possible.
Several European countries are slated to auction off licenses for the development of their national 5G mobile communications networks this year. This includes Germany, France, the Netherlands, Austria, Belgium, Greece, Hungary, Ireland and Portugal — with many more to follow in 2020. The United States' crackdown on Chinese telecommunications giant Huawei, meanwhile, is forcing these countries to reconsider whether to include the company in their lineup of potential 5G partners.
Concerned but Not Convinced
Most EU member states share at least some of the United States' concerns about allowing a Chinese company to participate in the development of technology as sensitive as 5G, which could theoretically give Beijing access to personal data from EU users and, in extreme cases, expose their critical infrastructure to sabotage. In response, several European countries are taking steps to gauge the potential security risks of partnering with Huawei.
A March report by the United Kingdom's Huawei Cyber Security Evaluation Centre Oversight Board warned that "significant technical issues" associated with some of Huawei's equipment could create security vulnerabilities for British companies. However, the report did not find any evidence that Huawei was deliberately carrying out any kind of espionage on behalf of the Chinese government. A recent report by Belgium's center for cybersecurity also found no evidence that Huawei equipment could be used for spying. The Netherlands' national intelligence agency is currently investigating whether Huawei is using secret back doors to access customer data, though the results remain outstanding. But despite Europe's many concerns about Huawei, no country has yet to automatically side with the White House and outright ban the Chinese company.
Germany: When it comes to individual countries, Germany's government has pledged to introduce higher and stricter standards for foreign telecom vendors. However, Chancellor Angela Merkel said that no companies will be preemptively excluded — a position that Germany's Federal Network Agency later confirmed in April, stating that "no equipment supplier, including Huawei, should, or may, be specifically excluded" from the ongoing 5G auctions.
France: The French government has taken a similar approach. With the goal of launching its commercial 5G network in 2020, France will hold its auctions later this year. Economy Minister Bruno Le Maire said that the decision will be made based on security, price and performance and that no companies will be excluded from the process. Deputy Economy Minister Agnes Pannier-Runacher later added that Huawei will be subject to the same technical rules and regulations as any other supplier. Most recently, however, France's National Cybersecurity Agency announced that Huawei's equipment will not be used in those parts of the network where sensitive data from users (such as their locations and encryption keys) are kept. The agency also said it was looking for ways to restrict using equipment from "high-risk countries," which France already does for 4G networks.
The United Kingdom: The dispute between the United States and China places the United Kingdom in a particularly sticky situation, since London hopes to keep good political and economic ties with both superpowers — especially after it leaves the European Union. In May, the U.K. National Security Council stated that Huawei could participate in the development of some parts of the country's 5G networks, but left the final decision in the hands of the British government. London was expected to make a formal announcement before the summer, with officials suggesting that the government may allow Huawei to supply only "non-core" technology to British phone companies. But mounting U.S. pressure — combined with Brexit-related political chaos following Prime Minister Theresa May's resignation on June 7 — will likely now delay that decision, adding to the current uncertainty among telecom operators. That said, some of the contenders vying to replace May have stressed that the United Kingdom would not do anything that could weaken its ties with the United States, which presumably, would include working with Huawei.
Italy: The Italian government, for its part, remains internally divided on Huawei. One of the two parties that make up Italy's governing coalition, the populist Five Star Movement, supports developing closer economic ties with China, which explains why Italy became the first major European economy to join Beijing's Belt and Road Initiative this year. But the other ruling coalition member, the right-wing League party, is much more skeptical of deepening ties with China and has expressed concerns about the security implications of working with Huawei. In May, the League's party leader Matteo Salvini warned that Italy should remain in full control of sensitive data to prevent Beijing from compromising Rome's internal security — believing that China "has a certain spirit of imperialism and control." After a strong performance in the elections for the European Parliament, the League will seek to increase its influence on the Italian government, which could lead to somewhat colder ties with China (and, by proxy, Huawei).
Central and Eastern Europe: The United States' feud with China is also putting governments in Central and Eastern Europe in an uncomfortable predicament as they try to find a balance between preserving their ties with Washington (one of their key foreign partners) without closing the door on Chinese investment (a potential key driver for economic growth). Some countries in the region have defended their ties with Huawei. Hungary, for one, recently defined the company as a "strategic IT partner." Slovakia has also said it does not consider Huawei a security threat. Poland, on the other hand, had a small diplomatic spat with China after Polish police arrested a Chinese Huawei employee and a Polish national over espionage accusations in January. A few days later, Poland's internal affairs minister said that the European Union and NATO should work together on a common position on whether to exclude Huawei from European markets. The governments of Lithuania and Latvia have made similar arguments as well, stating that the two Western institutions should agree on a common stance on Huawei.
However, the European Union so far has failed to agree on a continentwide position on the Chinese tech company. In March, the European Commission said that individual member states should make their own decisions. Brussels is expected to issue an assessment of the risks connected to Huawei in October, which could include guidelines and best practices for member states to mitigate cybersecurity risks. But while the European Commission will probably urge member states to update their security requirements for network providers, and to increase their cooperation and the sharing of information on their telecommunications sectors, Brussels will probably refrain from trying to impose a rigid and universal position on Huawei, thus leaving the predicament for national governments to hash out.
Clearing the Path for Europe's Rivals
The White House has not been successful in getting either the European Union or any of its member states to completely sever their ties with Huawei. However, there are signs its anti-Huawei campaign is hindering the Chinese giant's access to the European market. Huawei's smartphone sales have reportedly dropped in countries such as France and Spain since Washington blacklisted the company in May. British telecom companies EE and Vodafone also recently announced that they no longer plan to introduce Huawei's first 5G phone into the U.K. market. Meanwhile, Dutch telecom firm Royal KPN NV has also said that it will select a Western supplier to develop its 5G mobile network.
The many EU countries that already use Huawei's equipment for 4G may ultimately decide that the easiest, cheapest and fastest route is to continue using the Chinese company for their 5G networks.
This push against Huawei has, in turn, created opportunities for European firms — including some of the original cellphone goliaths from decades past. Finland's Nokia, for example, is now trying to position itself as a transparent and reliable company that countries can trust to develop their 5G networks. This rebrand — which essentially depicts the company as the antithesis to the United States' image of Huawei — has already garnered some success, with Japan's telecom giant SoftBank Group recently choosing Nokia as the main vendor for its next-generation wireless network. In March, the Danish telecom group TDC also chose Sweden's Ericsson over Huawei (which was its previous provider) for the development of its 5G network.
Is Huawei the Only Way for Europe?
Naturally, costs and expertise will be key factors in these kinds of business decisions. Huawei is already a key player in existing 4G wireless networks across Europe, and replacing the company with new providers for 5G could be expensive and lead to delays in the implementation of the technology. Germany's Deutsche Telekom recently warned that if Huawei was barred from participating in the development of the country's 5G networks, the implementation of the technology could be delayed for years — and as a result, Germany would lag behind its competitors in the development of "connected" factories.
But on a larger scale, Huawei is also one of the world's most cost-competitive and experienced telecommunications companies. Thus, many countries that already use Huawei's equipment for 4G may ultimately decide that the easiest, cheapest and fastest route is to continue using the Chinese company for their 5G networks. But even then, they'll probably still introduce some restrictions, or at least additional controls, on the company — both to appease the United States, and to address domestic concerns about the security implications of such a crucial technology.