FCC officially designates ZTE and Huawei as national security threats

The FCC has officially designated Huawei and ZTE as threats to national security, barring any telecoms operator using federal funds to purchase or maintain equipment from the vendors.

The public notice will come as a hammer blow to some rural connectivity providers who have relied on lower prices from the Chinese vendors. In response to the announcement, the Rural Wireless Association (RWA) has condemned such action, questioning whether the FCC is acting on the interests of the entire industry.

“Given the difficultly in demonstrating where specifically their USF support is being utilized in their networks, this puts rural carriers in a precarious situation while they strive to offer extended payment terms for their customers as requested by FCC Chairman Pai, adjust to the fallout of the T-Mobile/Sprint merger, and continue to keep rural Americans connected to broadband and telephone services during the COVID-19 pandemic,” the RWA said in a statement.

The designation means no funds which have been received from the FCC’s upcoming Universal Service Fund can be used with regard to the Chinese vendors. This means purchasing equipment, maintenance, improvements, modification or any support for Huawei and ZTE products or services.

As the RWA points out, it is difficult to explicitly demonstrate what the USF funds are being used for, or perhaps more important, not being used for, therefore it effectively ends the relationship between the rural telecoms operators and the Chinese vendors. These are companies which operate on slim margins in a perfect world, but when cash flow has been reduced due to COVID-19, this is a complication few would want to stomach.

“With today’s Orders, and based on the overwhelming weight of evidence, the Bureau has designated Huawei and ZTE as national security risks to America’s communications networks – and to our 5G future,” said FCC Chairman Ajit Pai.

“Both companies have close ties to the Chinese Communist Party and China’s military apparatus, and both companies are broadly subject to Chinese law obligating them to cooperate with the country’s intelligence services. The Bureau also took into account the findings and actions of Congress, the Executive Branch, the intelligence community, our allies, and communications service providers in other countries.”

This public notice comes after the revelation of a list of 20 companies the Department of Defense deemed to have material ties to the Chinese Government and operate on US soil. At the time, this looked to be a bureaucratic step to validate further action against Huawei and/or ZTE, and perhaps this should be taken as a confirmation.

Thanks to this move, the rural telecoms operators are being painted into a corner, with purchasing decisions being dictated by Government policy not the company’s own technological or commercial reasons. As these firms have stated before, Huawei and ZTE are favoured due to price and support, though these concerns seem to have been ignored.

Not only is the FCC forcing these companies to prioritise Government-favoured suppliers, but as new funds cannot be used to maintain, improve or modify any equipment from the vendors, they will be forced to ‘rip and replace’ equipment. This is expensive, but also time consuming and distracting. At a time where these firms could be focusing on deploying 5G, attention will have to be turned backwards.

This might be justified by the pursuit of national security, but Law of Unintended Consequences is rearing its head once again. By diverting attention away from 5G, these connectivity providers could become less attractive to the consumer, and in turn, less competitive. The move favour larger telecoms operators and could potentially extinguish local competition in the regions where it exists.

This is the issue when politics has too much influence in a segment. Bureaucrats are not telecoms experts and do not consider all the direct and indirect consequences of their actions. The US is perfectly entitled to fight national security risks, though in this case little concrete evidence has been presented to support claims, but the question is whether the sustainability of competition has been considered?

We suspect competition in the US could take another disastrous turn. Even with federal support to ‘rip and replace’ or purchase equipment from favoured (and more expensive) alternatives, some of these firms will go under or perhaps there will be market consolidation. In either case, competition will be reduced, a headache for US consumers who already have to tolerate some of the highest connectivity tariffs in the developed world.