The real cost of removing Huawei from the UK 5G roll-out

Huawei: the lads

Last week the government took the decision to ban Huawei from the UK’s 5G network. Whatever the reasons for the decision, no real attempt has been made to count the cost of this move.

We should stress that none of what follows is an argument for the inclusion of Huawei in the 5G network. There are any number of issues around that, from security to ethics. This is just a short attempt to delineate some of the potential economic consequences of the decision to first include, and then exclude, the company from the UK’s mobile infrastructure.

We think there are four principal ways of accounting for the economic impact.

  • The actual cost of removing and replacing Huawei kit from both existing and future networks.
  • The cost to the UK digital economy of an estimated three year delay in roll-out of 5G.
  • The likely cost of an out-and-out retaliatory trade war such as China is now signalling.
  • The costs to the UK’s economy of a weak position in future trade negotiations.

The first of these is not too significant. The government estimates the removal of Huawei will cost £2bn. The Economist, citing Strand Consult, estimates that it would cost about $3.5bn, or around $7 per user of mobile networks: not so bad. This is the only cost the government has so far acknowledged; but there are far greater implications for the economy.

To calculate the cost of the delay to the 5G roll-out, we need to look at what was expected from the government’s timetable. Last year, economists at Barclays predicted 5G would benefit the UK economy by between £8bn and £15.7bn by 2025. This tallies roughly with the World Economic Forum’s prediction of global benefits of $12tr by 2036 (the UK’s share by 2025 would be between $15bn and $20bn in their model). On these bases, pushing back the development by three years would mean the economic benefit to the UK reaching only £4bn-£7bn by 2025: a total loss to the UK economy of between £19bn and £36bn over the next five years. So that’s pretty chunky.

Then there is the cost of the trade war that the decision looks likely to trigger. It is, of course, impossible to calculate at this stage: warnings that many universities could go bust are just the tip of the iceberg. Trade with China accounted  for £30.7bn in exports in 2019 and £48bn in imports last year. This is only 4% of all exports and 6% of imports, but still significant, especially since this is one of the few fast growth areas of the economy: exports to China accounted for only £1.9bn in 1999, and had grown to £23.4bn in 2018. Between 2018 and 2019 alone, exports grew by 31%.

While these numbers are dwarfed by trade with the EU (43% of all exports, 51% of imports) and the US (20%, 13%), they are significant: and the fact that the UK only accounts for 1.2% of all China’s imports, and 2.3% of all exports, means that Britain is a relatively easy fly to swat, especially for an economy which is now back in strong growth while the UK’s enters recession.

However, Chinese direct investment into the UK economy has fallen dramatically over the past few years: from over $30bn in 2017, investment fell below $10bn in 2018, to under $2bn last year. There may be a calculation in government that this decline signals an end to the “golden era” and they are best to side with their US allies. This would be fine, were it not for the fact that a recent study by the Henry Jackson Society shows that the UK is “strategically dependent” on China for 229 categories of critical goods: from some pharmaceuticals and minerals, through to equipment for our hi-tech infrastructure such as Huawei supplies.

This would mean that the UK is in no position to replace these critical supplies in the short term, and is dangerously exposed to a major huff from China. In return, our goods exports to China – cars, luxury goods, jewellery – are hardly critical to the country’s well-being. While the trade deficit is in the UK’s favour, the critical importance of their goods means that the boot is firmly on China’s foot in trade negotiations.

And this brings us to the real cost of the Huawei fiasco.

This is the first substantive trade decision made since Brexit was enacted on January 31st. Initially, whether you agreed with it or not, the decision early this year to confirm the use of Huawei kit at least looked like the UK government had held a firm line against intense US lobbying. But that lobbying has now paid off.

As stressed before, this is not an argument about the suitability of Huawei to contribute to the UK’s mobile networks. There are many questions about dealing with China and a whole range of other states with poor human rights records. But with additional concerns over security in Huawei’s case, it is reasonable to assert that the UK would have been better to back Ericsson or Nokia in the first place, despite their higher price. In which case, China’s offence may not have been so compounded.

The real problem is that it exposes – again – poor decision-making at the heart of the UK government. Under pressure from the Trump administration, they have performed a highly public U-turn. The promise of the Johnson government was that it would take us to the broad, sunlit uplands of independence where the UK could take back control. At the first hurdle, the government has demonstrated that the UK will not be in charge of its own destiny, and will be looking over its shoulder at governments it is desperate to impress. If we pursue a WTO Brexit, this fiasco could become the new normal.

And the cost of that is – genuinely – incalculable.

Martin Tripp

Martin Tripp Associates is a London-based executive search consultancy. While we are best-known for our work across the mediainformationtechnologycommunications and entertainment sectors, we have also worked with some of the world’s biggest brands on challenging senior positions. Feel free to contact us to discuss any of the issues raised in this blog.