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CFDs are complex instruments. 72% of retail client accounts lose money when trading CFDs, with this investment provider. You can lose your money rapidly due to leverage. Please ensure you understand how this product works and whether you can afford to take the high risk of losing money.

BT and Vodafone shares: what does the UK ban on Huawei mean?

The UK’s decision to ban Huawei from its 5G network will delay the rollout and increase the cost for major telecoms stocks like BT Group and Vodafone. We have a look at how the ban will impact the UK telecoms market.

BT Source: Bloomberg

UK government bans Huawei from 5G network

The UK government has announced that all equipment in the country’s 5G network made by Chinese firm Huawei, the largest telecoms equipment maker in the world, must be completely removed by the end of 2027.

All UK telecoms providers will have to gradually remove and replace all existing Huawei equipment within their 5G networks over the next seven years, and will not be allowed to purchase any new equipment from the company after 31 December 2020. This gives the industry time to source extra parts to stockpile in case spare parts are needed during the transition.

Why is the UK removing Huawei from its 5G network?

The UK has decided to introduce an outright ban on all Huawei equipment from its 5G network because the US has placed sanctions on the Chinese company that prevents it from accessing US-made technology.

The US is home to some of the world’s largest semiconductor companies that build sophisticated chips that are used in everything from huge power stations to smartphones. The country’s oversized role in the market means most chips contain some form of US-made technology.

However, tensions between the US and China have been rising for years and US President Donald Trump has raised concerns that Chinese companies are stealing US-made technology and that they could be under the influence of the Chinese government – claims Huawei has consistently denied.

This means Huawei will no longer be able to access key technology it needs to make the equipment that many telecom companies use. It also means UK telecoms providers are not able to source Huawei’s equipment without breaking US sanctions. As a result, this ‘has increased the risk to UK networks’, according to the UK government, and prompted the outright ban. Notably, Huawei equipment can still be used in the UK’s 2G, 3G and 4G networks.

The UK’s decision overturns the one it made in January 2020, when it excluded Huawei from supplying equipment to ‘sensitive’ and ‘core’ elements of the network and capped its market share at 35%.

The UK government’s decision was driven by the recommendation of the National Cyber Security Centre (NCSC), part of the government’s intelligence and security unit, GCHQ.

‘Technical experts at the NCSC reviewed the consequences of the sanctions and concluded the company will need to do a major reconfiguration of its supply chain as it will no longer have access to the technology on which it currently relies and there are no alternatives which we have sufficient confidence in. They found the new restrictions make it impossible to continue to guarantee the security of Huawei equipment in the future,’ said the UK government.

Huawei has ‘always been considered higher risk by the UK government’ since it entered the market. It has become a key supplier and partner to the UK telecoms industry and has been active in the UK for two decades.

Still, Huawei’s operations in the UK have been closely overseen by the NCSC since 2010. The Huawei Cyber Security Evaluation Centre in Banbury is owned by the Chinese firm but directed by the NCSC and managed by an oversight board that ensures ‘independence’ and that Huawei’s equipment for the UK telecoms market is secure.

Huawei has always stressed that it is completely independent of the Chinese government and denounced claims that it could pose a security risk or act on behalf of the Chinese government, but it has not been able to allay fears that it could expose countries to cyberattacks.

Plus, the UK government was under pressure to choose a side after the US warned it could find it difficult sharing information and working with the UK on security matters if it continued to use Huawei equipment. And, considering the UK is trying to shape its future on the world stage post-Brexit, it has decided to side with one of its strongest allies rather than jeopardise it by trying to remain a neutral party between the two.

What does the Huawei ban mean for the UK telecoms industry?

The US sanctions mean suppliers to Huawei will be unable to send components or technology to the Chinese firm if it has been built using US technology, and therefore Huawei’s ability to supply chips and other equipment to telecoms companies is severely diminished.

The technical director of the NCSC, Ian Levy, said there is a chance that Huawei will try to find a workaround to the US sanctions but argues this is not likely to change the situation, mainly because the US crosshairs are so firmly fixed on the company that it will simply adjust the rules to block Huawei from trying to get around them. He added that Huawei could design equipment that uses chips that it doesn’t design and make itself, but says this would be ‘a big task’.

‘Assuming you can find someone to design a chip that’s near enough to the original, the integration into the wider product is a very complex job’, he said. Levy also said Huawei could look to build equipment and chips that don’t use any US technology, but said there was little chance of finding an alternative anytime soon.

At the bottom-line, Huawei’s supply chain will be severely disrupted and the UK has deemed the Chinese firm’s inclusion in its new 5G network – which will unlock everything from autonomous cars to artificial intelligence – as too risky.

Huawei ban to delay 5G rollout and add £2 billion in costs

Nearly 100 towns and cities in the UK have some form of access to 5G right now, according to 5G.co.uk, but the rollout is still in its early stages. However, ripping out any existing tech from Huawei, and finding a suitable replacement, will not be cheap. The UK government has conceded that Huawei’s ban could delay the full rollout of 5G by up to two years and add up to an extra £2 billion in costs for the industry.

Telecoms companies face an even more limited choice without Huawei

The telecoms industry will still need the vital equipment it needs to implement their 5G networks, but the exemption of Huawei means it will have less choice. This is significant because their options were already highly limited beforehand. There are only three major suppliers to the UK’s mobile access network and the ban on Huawei will only leave Ericsson and Nokia to choose from. The NCSC admitted that ‘only having two suppliers into all national mobile networks reduces network resilience and security.’

This means the two European outfits are set to be the biggest immediate beneficiaries from the ban on Huawei in the UK and, considering the Chinese firm’s considerable market share, there will be a lot of opportunities up for grabs for both companies. Still, this highlights the market will become a monopoly between the two firms and shows the need for more companies to enter the market. However, that is not a problem that can be solved overnight and will take years to address.

Read more on how to invest in the best 5G stocks

Could the Huawei ban be reversed?

‘By the time of the next election we will have implemented in law an irreversible path for the complete removal of Huawei equipment from our 5G networks,’ said the UK’s digital secretary Oliver Dowden.

The UK’s decision to ban Huawei is significant and shouldn’t be taken lightly, but it is not set in stone. It will have to go through the normal legislative procedure, which opens it up to opposition and gives members of parliament (MPs) the ability to lay amendments. Plus, the deadline set for the end of 2020 is very notable considering this is just after the US presidential election in November.

President Trump has put international trade high-up on his list of priorities, demonstrated by the relentless trade war that started in 2018 and continues to this day. One theory is that Trump, keen to show off his ability to strike major deals, could look to strike a new agreement with China soon before the election to give him a boost among voters.

A deal could involve Huawei and, if the US sanctions are dropped, then technically there would be no reason why the UK and others couldn’t bring Huawei back into the fold if they wanted. The UK has said it has banned Huawei because of US sanctions, not because of its own concerns over the company. Alternatively, Trump could lose the election and a new president could change the game altogether.

However, a U-turn would be hard to explain for both the US or the UK government. Trump would have to explain why Huawei is suddenly safe to use after months of bashing the company around the world.

Plus, the fact many telecoms companies started transitioning away from Huawei’s products as a precautionary measure many months ago suggests the damage could already be done. There would be no guarantee that telecoms companies would resume buying from Huawei if the ban was lifted because they would, understandably, be concerned that the position on the Chinese firm could change again.

What does the Huawei ban mean for BT Group and Vodafone?

There is a slew of companies that provide mobile services in the UK but there are only four mobile networks that everyone else piggy-backs off – BT Group’s EE, Vodafone, Telefonica’s O2, and CK Hutchinson’s Three. The Huawei ban directly impacts these mobile networks because they are responsible for the infrastructure, and all of them will have to reconfigure their networks to exclude Huawei.

The industry has tread carefully. Ultimately, allowing Huawei to continue supplying the UK network would have made things a lot easier as the industry wouldn’t have to take out existing equipment and would continue to have more choice when it comes to sourcing new bits of kit. But they are equally aware of the concerns over security and the long-term viability of using Huawei, and are aware that could come to bite them further down the line.

Plus, the ban means these companies will have to take money away from investing in expanding the UK’s 5G network to adjusting it with new equipment, which will also delay the rollout. Networks are already expected to invest tens of billions of pounds in rolling out 5G and not reap the rewards for many years, and any additional costs and delays exacerbate that problem.

How does the Huawei ban impact BT Group?

BT Group will be the most heavily impacted by the decision considering it owns the largest 5G network and is also the owner of the UK’s broadband infrastructure, Openreach, which will also be affected.

BT Group had warned before the UK decided to ban Huawei that it needed considerable time to adjust. It said it would need no less than 10 years to replace all Huawei equipment within the entire telecoms network, but said that a five-year timeframe just to remove it from 5G was feasible.

The fact the government has given the industry seven years to comply therefore seems reasonable, but there are some in the Conservative party that are still pushing for the deadline to be brought forward to 2023.

The seven-year timeframe gives BT and others longer to adjust and gives them a better chance of managing the increased costs. BT had already warned it would have to spend £500 million in response to Huawei being banned from the core 5G network and having its market share capped in January, but said the timeframe means this original estimate is still intact after the outright ban. That figure would be spread over the next seven years, minimising the annual impact on its financial performance.

The other problem for BT is its market-leading position in broadband and its task of rolling out superfast, the full-fibre network around the UK. Huawei is just as important a supplier to the UK’s next-generation broadband network as it is to 5G, and while the UK government is allowing the Chinese firm to remain a supplier, for now, this position is under review.

The only reason why Huawei is being allowed to continue supplying equipment to the UK’s full-fibre network is that it is one of just two major suppliers, the other being Nokia.

‘The US action also affects Huawei products used in the UK’s full-fibre broadband networks. However, the UK has managed Huawei’s presence in the UK’s fixed access networks since 2005 and we also need to avoid a situation where broadband operators are reliant on a single supplier for their equipment,’ said the government.

As a result, it is only ‘advising’ that companies ‘transition away from purchasing new Huawei equipment’, rather than forbidding it. A technical consultation will be launched to determine when they will have to leave Huawei equipment behind and that could last up to two years, but BT Group and others will be sensible enough to start doing this now.

Find out how to buy and short BT shares

How does the Huawei ban impact Vodafone?

Vodafone will also be impacted, although it will be more concerned with how the stance on the Chinese firm evolves in Europe, where most of its operations are based.

The UK generates less than 15% of Vodafone’s revenue and just 10% of adjusted earnings, with Germany being by far its largest market following the acquisition of Liberty Global’s European assets last year. Europe is debating the role of Huawei in its 5G networks but is yet to announce any firm action like the UK.

Read more about the possibility of Vodafone share price falling further after the Huawei 5G equipment ban

The US is trying to exert pressure on Europe to follow in the UK’s footsteps, but it is a simple fact that convincing a bloc of 27 countries will be much harder than swaying the decision of one. According to the Guardian, the US has had some success gathering support for its stance against Huawei in Eastern European countries like Poland, the Czech Republic and Romania, but the issue still remains firmly up in the air elsewhere.

Its geographical diversification means the bill for Vodafone shouldn’t be as big as BT, although that could change swiftly if European countries introduce bans. Still, Vodafone said it was taking the proactive decision to start removing Huawei’s equipment from its European network in February, and said it would cost around €200 million over five years. It has not provided any update since the UK introduced the outright ban.

Find out how to buy, sell and short Vodafone shares

How to trade Huawei’s ban from the UK’s 5G network

BT, Vodafone and other major telecoms companies already had huge and expensive tasks on their plate. Countries around the world are racing to introduce faster broadband and 5G because this is seen as key to unlocking economic growth and the next generation of technology, but the UK has put itself in jeopardy by removing Huawei from its networks.

The industry already faced several years of high investment and spending and aren’t expected to reap the rewards of investing in new infrastructure for many years. The ban on Huawei simply increases the cost and delays the rollout, and therefore also delays when the likes of BT and Vodafone can generate a return.

BT and Vodafone shares have both lost value this year as the coronavirus crisis hampers the equity markets. Vodafone shares have recovered some of the losses seen when wider markets hit their lows in March but they are still trading 13% lower than the start of the year.

BT Group shares have fared much worse and have barely managed to claw back any of the losses, trading over 42% lower than the start of 2020. Notably, BT Group’s focus on the UK means it now has clarity on its position, but the picture will remain uncertain for Vodafone until Europe decides on how to handle the Chinese firm.

Brokers are bullish on both stocks and believe the decline has been overdone. Both stocks currently boast Buy ratings and target prices that suggest plenty of upside from their current share prices.

Broker ratings

BT Group Vodafone
Strong Buy 5 10
Buy 6 8
Hold 7 2
Sell 2 2
Strong Sell 1 1
Average Rating Buy Buy
Target Price 159.57p 183.86p

Source: IG, with price targets from Shares Magazine

The other main way to trade this event is looking at Sweden’s Ericsson and Finland’s Nokia, which will undoubtedly benefit from the hardening stance against Huawei, which is the pair’s only major competitor in the UK. The UK government has also said it is keen to strengthen ties with the two European firms, although it is also trying to create more competition for the pair.

How to buy and trade telecoms stocks

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  2. Type the name or the ticker/code of the stock you want in the search bar and select it
  3. Choose your position size
  4. Click on ‘buy’ or ‘sell’ in the deal ticket
  5. Confirm the trade

You can also buy and hold shares with IG’s share dealing platform.


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