Geopolitics and the 5G Rollout of Developing Countries

The United States is prepared to provide financial assistance to Brazil’s four major operators (Claro, Oi SA, Telefonica Brasil SA, and TIM Participacoes) with their purchases of 5G network equipment. This assistance, however, comes with the precondition that these network equipment purchases are from Ericsson or Nokia and not from either Huawei or ZTE. On the flip side, the United States has also expressed that there would be consequences if Brazil decided to utilize Chinese network equipment for its 5G networks.

The four Brazilian operators are confronting a particularly sticky situation. The allure of much-needed financial assistance for the development of 5G networks is counterbalanced by sacrificing the already existing business relationships that the operators have established with Huawei. Huawei has been present in Brazil for the last 22 years and has already helped the four operators carry out successful 5G trials. The exclusion of Huawei from Brazilian networks could potentially increase costs and delay 5G deployments by multiple quarters if not years. In the case of U.K. operators, BT and Vodafone are estimating that it will take five to seven years to remove legacy Huawei equipment in a managed way to ensure there are no disruptions to network coverage.

Developing countries face challenging times. Telco financial management is difficult at the best of times, but now telcos are facing the additional encumbrance of navigating the geostrategic divide on Huawei/ZTE and their alleged security risks. Similar to Brazil, many operators in these developing markets rely heavily on Chinese network equipment. The U.S.-led boycott of Chinese network equipment would certainly create additional friction and delays in the decision-making and eventual rollout of a country’s 5G network.

With the second largest smartphone market and mobile data consumers in the world, India (ABI Research forecasts India’s mobile data traffic will balloon to 160.4 Exabytes by 2025) is keen to expedite the rollout of 5G. The current geopolitical situation, however, is contributing to the hold up of 5G trials and spectrum auctions in India. Despite allowing Huawei to participate in 5G trials in January 2020, it seems that the Department of Telecommunications (DoT) is still undecided on officially approving the Chinese vendor’s participation in the nation’s 5G buildout due to U.S. pressure and recent border disputes. Given that Huawei has existing 4G network deployments for Bharti Airtel and Vodafone Idea, an exclusion of Huawei equipment could not only delay 5G for the country but also drive up equipment procurement costs by 25%. Reliance Jio has already taken a stance by deciding not to include Chinese equipment vendors and is instead opting to develop its own 5G network by utilizing individual network technologies from a diverse selection of vendors. While Reliance Jio’s enterprising path would definitely help mitigate vendor dependencies and security risks from foreign vendors, fully developing competitive 5G solutions would require a tremendous amount of time and effort, which would further tack on additional waiting time for India’s pending 5G rollout.

Reliance Jio’s solution parallels the in-house strategy of Vietnam carrier Viettel. Viettel is planning to use its own manufactured/designed components in combination with equipment from other infrastructure vendors to integrate a 5G network and bypass the use of non-Vietnamese equipment. As previously discussed in the ABI Insight Is It Possible for Vittel to Deploy a 5G Network with In-House Equipment? (IN-5784), creating a 5G network through internally developed proprietary technology or harmonizing network equipment from different vendors require very substantial financial commitments, addressing issues pertaining to patents, extensive trials, and training, all of which would serve to further delay 5G rollouts.

Regulators play a big role in determining the pace of their countries’ respective 5G rollouts. The current geopolitical climate will force regulators to make big, consequential decisions down the road. For example, Brazil’s crossroads is also influenced by its strong economic ties to China. China has been Brazil’s biggest trade partner since 2009, accounting for almost US$99 billion in two-way trade in 2018.

Excluding a major network infrastructure vendor such as Huawei would bring a host of additional constraints to operators in developing countries, like Brazil, which already need to confront obstacles to 5G such as:

• Declining Average Revenue per User (ARPU): Brazil has one of the lowest global mobile ARPUs, with an average of US$4.14 in 4Q 2019 across its four major operators. Contrast this with AT&T’s 4Q 2019 ARPU, US$55.52. Oi SA has also recently filed for Chapter 15 bankruptcy, with a debt load of US$19 billion.
• High Capital Expenditure (CAPEX) Required for the Network Densification of Macro and Small Cells in Urban and Rural Areas: According to ABI Research’s Network Technology and Market Tracker (MD-NWMT-104), Brazil is expected to invest an average of US$7.8 billion from 2021 through 2025 on mobile network CAPEX. The average Brazilian mobile network CAPEX figure from 2021 to 2025 is larger than developed countries’ like Australia (US$4.3 billion), United Kingdom (US$4.1 billion), Belgium (US$2.2 billion), and Taiwan (US$1.451).
• Overcoming Mobile Network Infrastructure Deficit and Providing Nationwide Coverage to Rural Communities: Around 47 million people, around 35 million of which live in rural areas, still do not have access to the internet in Brazil. In this case, providing network infrastructure to establish any type of mobile connectivity (let alone 5G) is sorely needed.

Geopolitics aside, good policies and initiatives from regulators can go a long way toward improving the commercial viability of expanding 5G networks for operators in developing markets. Regulators can coordinate infrastructure sharing agreements among operators to prevent redundancies of work; Telefonica Brasil SA and TIM Participacoes have recently secured approval from the Administrative Council for Economic Defense (CADE) in their bid for mobile network infrastructure sharing. Regulators can also provide subsidies to incentivize operators to extend their network coverage to rural areas expeditiously through concrete coverage commitments.