With U.S. Restrictions on Huawei and ZTE, Where Will Rural America Turn?
December 10, 2020By William Yuen Yee
As the U.S. government intensifies its scrutiny of Huawei and ZTE, many challenges now abound for rural Americans and the small wireless carriers that both serve and rely upon equipment from the two Chinese telecom giants. Recent FCC orders, bipartisan congressional legislation, and a slew of Trump administration executive actions require rural American telecom carriers to “rip and replace” existing Huawei equipment. At present, two questions essential to the future of telecommunications access for hundreds of thousands of rural Americans remain unanswered. First, uncertainty lingers over whether Congress will allocate sufficient funds to reimburse rural carriers for the costly process of “ripping out” this extant equipment. Second, an alternative telecom provider has yet to emerge as a clear and viable replacement for both Chinese telecom firms.
On June 30, 2020, the FCC designated Huawei and ZTE as national security threats—“covered” companies—under the Communications Act of 1934, which provides for the “regulation of interstate and foreign communication by wire or radio, and for other purposes.” The move prohibited the agency’s annual $8.3 billion Universal Service Fund (USF) from purchasing equipment made by either company. The June FCC order followed the passage of the Secure and Trusted Communications Networks Act of 2019, which won unanimous support in the Senate and was signed into law by President Trump in March. Not only did the bipartisan legislation prevent the use of federal subsidies to purchase communications equipment from “untrusted suppliers” like Huawei and ZTE, but it also mandated a “rip and replace” program to remove extant equipment from both Chinese firms. The new law additionally required the FCC to establish a $1 billion fund that reimburses small telecommunications companies (defined as those with less than 2 million customers) for this process, which will be expensive, complicated, and disruptive. Both moves come after President Trump signed an Executive Order on Securing the Information and Communications Technology and Services Supply Chain in May 2019 that barred U.S. telecommunications firms from using the equipment of “foreign adversaries.”
The FCC’s USF serves a variety of purposes: It provides money to rural telecom operators and enables them to subsidize telephone services in low-income areas, proffers Internet access to eligible schools and libraries, and reduces telecommunications service rates for rural health care providers. Issued by a unanimous 5-0 vote in November 2019, the declaration to prevent use of the USF to purchase Huawei equipment effectively bars U.S. firms—especially small wireless carriers—from using Chinese telecom equipment. The decision was based on FCC findings that both companies share close ties to and can be required under Chinese law to cooperate with China’s Communist Party, its military, and the nation’s intelligence apparatus.
According to testimony before the FCC from the Competitive Carriers Association (CCA), an organization that represents nearly 100 rural and national wireless carriers, this new rule will “devastate” the ability of many rural providers to continue serving customers. Some carriers will go bankrupt, as they simply “cannot afford the hundreds of millions of dollars necessary to replace and rebuild their networks using only equipment and services from a new list of approved providers.”
A History of Suspicion
U.S. lawmakers have long viewed Huawei with suspicion due to its purported links to the Chinese military. Since the firm opened its first U.S. offices in 2001, it has confronted a litany of legal and public relations challenges. A widely circulated 2005 RAND Corporation report commissioned by the U.S. Air Force first linked Huawei to the Chinese military, arguing that Huawei was one of a number of Chinese Communist Party-backed “national champions” that receive lines of credit from state-owned banks, alongside staff members and funding from the Chinese military. In 2012, the U.S. House Intelligence Committee released a 52-page report that warned against the dangers of Huawei equipment, noting, “Huawei did not fully cooperate with the investigation and was unwilling to explain its relationship with the Chinese government or Chinese Communist Party, while credible evidence exists that it fails to comply with U.S. laws.” A June 2020 Department of Defense list released to Congress of “Communist Chinese military companies” included Huawei.
Impact on Rural American Carriers
The FCC order is particularly significant because of Huawei’s eminence among telecommunications networks in rural America. The $65.08 billion Chinese conglomerate has long sought to work with small-town internet companies in the United States to replace old-fashioned landlines with high-speed internet connections. In 2018, an estimated 25% of Rural Wireless Association (RWA) networks used some equipment from either Huawei or ZTE. The RWA is a trade association that represents 55 different small wireless carriers, each serving fewer than 100,000 subscribers. A fraction of the 100 carriers in the Competitive Carriers Association—which range from small, rural providers with fewer than 5,000 customers to nationwide providers with millions of customers—also depend on Huawei for their commercial viability, as mentioned in the CCA’s manifold advocacy efforts before the FCC.
Both trade associations swiftly criticized the ban on Chinese telecom equipment. In a press release issued shortly, the Rural Wireless Association wrote, "As a result, rural carriers who have deployed Huawei or ZTE equipment or services in their networks will now lack the ability to support their critical networks that are serving hundreds of thousands of rural Americans and those traveling through rural America.” Steven Berry, the head of the CCA, said that rural carriers were “essentially attempting to rebuild the airplane in mid-flight” by removing and replacing network equipment.
While the exact number of rural Americans that still rely on Huawei equipment for telecom service is unclear, it is not an insignificant amount. Moreover, this proportion of the population remains one of the highest at risk of being left behind by the “digital divide”: Statistics show that nearly 40% of the rural American population (23 million people) lack access to “fast” broadband internet service, defined by the FCC as a minimum download speed of 25 megabits per second.
Small wireless networks serving hundreds of thousands of rural Americans have long been drawn to Huawei’s low-cost, reliable products. FCC filings show that Huawei manufactured 80% of the network equipment of Viaero Wireless in eastern Colorado, which currently serves 110,000 mobile customers. Pine Belt Communications in Alabama built its 4G network exclusively with ZTE. United TelCom, SI Wireless, James Valley Telecommunications (JVT), NE Colorado Cellular, United Telephone Association, Nemont Telephone Cooperative, and Union Telephone Company also count themselves among a number of rural wireless network operators that rely on Huawei equipment. Not only has the Chinese firm mitigated the digital exclusion of rural America, its entry into these communities can also revitalize local economic growth. When Pine Telephone Company in Oklahoma spent $32 million to upgrade its network with Huawei, the investment injected life into the economy of Broken Bow and its town of 4,061 residents. Huawei launched businesses, created new jobs, and revived the local tourism industry.
Estimated costs to “rip and replace” Huawei and ZTE vary by network carrier. For example, the CCA said that one mid-sized carrier with 100,000 subscribers has estimated the cost to be approximately $410 million. The RWA noted that Alabama’s Pine Belt Communications could incur between $7 to $13 million in direct rip and replacement costs. Montana-based Sagebrush Cellular projected the cost of replacing its network to be around $57 million. In total, the RWA approximated that it would cost between $800 million and $1 billion for its member carriers to replace their equipment. A September FCC report pegged the cost at nearly double that price: $1.837 billion.
Insufficient Federal Funds to “Rip and Replace”
While the Secure and Trusted Communications Networks Act stipulated a $1 billion reimbursement fund, this amounts to just half of what FCC Chairman Ajit Pai has requested. Per a September RWA filing, Congress has yet to appropriate the requisite funding for these reimbursements. A July proposal from the Republican-led Senate earmarked $1 billion for the “rip and replace” program, although progress stalled amid coronavirus-related relief negotiations. U.S. Senators Ron Johnson and Gary Peters introduced the bipartisan Ensuring Network Security Act in August, which augments access to federal funding for telecommunications providers to remove and replace Huawei and ZTE; however, the bill currently remains pending deliberation in the House Committee on Energy and Commerce. The FCC has also not adopted final rules to assure RWA member carriers that they will receive refunds for the replacement of “unsecure” equipment.
On December 7, the FCC allotted $9.2 billion via competitive auction to 180 internet and cable service providers to finance the construction of rural broadband networks over the next decade, a move that Pai called the “single largest step ever taken to bridge the digital divide.” This recent allocation is independent of the 2019 Secure and Trusted Communications Networks Act’s stipulation that the FCC provide $1 billion to reimburse small telecommunications companies that remove and replace Huawei and ZTE. However, Pine Belt Communications and Union Telephone Company—two aforementioned rural carriers that utilize Chinese telecom equipment—received $11.1 million and $1.3 million, respectively, from the FCC’s recent allotment. While not explicitly intended to “rip and replace,” the money might help alleviate some costs associated with the process. Executives from other rural operators like Windstream Communications expressed concern that firms like Elon Musk’s SpaceX, which was awarded $885 million, will use the FCC funds to install novel, experimental technologies like gigabit fixed wireless and low-earth orbit satellites rather than to definitively ensure rural households in underserved locations obtain sufficient broadband access. As recipient companies have ten years to build the networks, the funds provide a possible—if incomplete—long-term solution to resolve the extant dearth of rural broadband access. But short-term challenges for many rural telecom carriers to feasibly “rip and replace” Huawei persist.
Inadequate funding has already forced two wireless carriers, SI Wireless and Blue Wireless, to shut down. One new source of potential support lies in the congressional appropriations package intended to avert a December 11 government shutdown, although its internal provisions are unclear. Yet, as the 2020 legislative session on Capitol Hill draws to a close, rural carriers remain anxious. The executives of 14 small telecom carriers recently wrote to lawmakers and warned that a failure to act would “devastate many rural areas and exacerbate the digital divide.” As CCA chief Berry described, “It’s been a cliffhanger for these small carriers for more than six [to] eight months. The damnedest thing about it is they’ve sort of been frozen in time since the FCC started implementing restrictions.”
Lack of Cost-Effective Alternatives
The second question that arises—which constitutes perhaps the most pressing challenge for rural American telecom carriers—is who can serve as a cost-effective replacement. For now, Finland's Nokia and Sweden's Ericsson stand to be early frontrunners. The United Kingdom has faced a similar reckoning with Chinese telecom equipment after Prime Minister Boris Johnson ordered Huawei to be entirely removed from Britain’s 5G network by the end of 2027. So far, the Scandinavian firms have emerged as primary beneficiaries of the ban. Nokia recently inked an expansive deal to replace Huawei and become the largest supplier to British telecom firm BT Group, the principal provider of broadband services in the UK with over 30 million customers. Ericsson, too, signed a new software contract for BT’s 5G core network. Telecom firms in Canada and Singapore have also eschewed Huawei and contracted the European firms to build 5G networks in their countries. In a February speech, U.S. Attorney General William Barr similarly offered Nokia and Ericsson as viable alternatives to replace Huawei in the U.S. He said a feasible partnership might arise through an American company or a “consortium of allied companies” adopting a controlling ownership stake to add “financial muscle” to one of the two European firms, although Barr’s proposal lacked specifics.
However, Nokia and Ericsson remain too costly and technologically inferior to Huawei; they have thus far struggled to capitalize on America’s sanctions against the Chinese firm. In 2019, Reuters reported that over a dozen rural American telecom carriers were actively negotiating with the Scandinavian firms, although affordability remained a lingering issue. At present, both Nokia and Ericsson seem unable to match Huawei’s pricing, which charge between 30% to 50% less than its rivals. Not only are both European companies unable to benefit from the economies of scale in the massive Chinese market and its access to cheap financing from state-owned banks, they also remain technologically deficient with subpar 5G offerings. A July article in The Wall Street Journal highlighted Nokia’s dilemma: The Finnish firm initially invested too heavily in the flexible and powerful albeit costlier field-programmable gate array (FGPA) chip, while customers turned out to prefer Huawei’s cheaper, efficient, less energy-intensive “system-on-chip” (SoC). Nevertheless, the race for 5G dominance appears to be tightening: While Huawei commands a significant lead vis-à-vis spending on research and development, Ericsson and Nokia are amassing a greater portion of 5G patents. Yet, the bottom line remains affordability, an area where Chinese firms retain a competitive advantage.
Other potential replacement options include South Korea’s Samsung and COMSovereign Holding Corp, an American telecom equipment company headquartered in Dallas. Samsung signed a $6.6-billion contract with Verizon Communications in October to provide 5G network equipment through 2025, making clear its ambitions to join the competition for global 5G dominance. COMSovereign has explicitly stated its desire to become the “American Huawei.” CEO Dan Hodges has enthusiastically lobbied U.S. lawmakers for government funding to help COMSovereign accomplish this objective, promising the creation of American jobs and the opportunity to surpass China in the race for 5G. In an FCC filing, the Dallas-based firm touted its ability to become a “trusted” vendor and its competitiveness with both Chinese telecom giants, while emphasizing that its partners develop “much of their own hardware and software in proprietary North American facilities.”
However, industry analysts remain skeptical of the capacity of COMSovereign (or any American company, for that matter) to become the next Huawei—at least for the time being. Price considerations notwithstanding, COMSovereign was founded in 2014 and remains in its nascent stages. Compared to its rivals, the Dallas-based firm does not command the same share of the mobile infrastructure equipment space and must spend ample time to develop such relationships. For example, it took Samsung ten years to establish itself in the U.S. equipment market; to this day, the Korean conglomerate has yet to become a competitive network infrastructure vendor in Europe. In addition, COMSovereign’s current financial situation seems precarious: It bears an extensive debt burden, has defaulted on several loans, and reported a negative $4.5 million operating cash flow, according to its latest quarterly financial statement. Daryl Schoolar, a practice manager at the market research firm Omdia, said, “It will take COMSovereign at least a decade to get closer to its stated goal of competing with Ericsson, Huawei or Nokia.”
An Uncertain Future
Now, the future of rural wireless operators and the American customers they serve remains unclear. This state of limbo is rapidly proving untenable. An FCC filing from the Rural Wireless Association revealed that individual member carriers turned off 3G services over insufficient funds, eliminating 911 services in some rural areas. Indeed, many rural carriers have repeatedly iterated their willingness to remove equipment from “unsecure” vendors like Huawei, provided they receive sufficient federal assistance to do so. However, Congress has not earmarked the requisite funds. A viable, cost-effective alternative to Chinese equipment has yet to emerge.
While it is easy to lambast Huawei and reiterate calls for “rip and replace,” an effective solution requires nuance, coordination, and, most importantly, adequate funds. The first step lies in a concerted, bipartisan congressional effort to allocate the $2 billion that FCC Chairman Pai has requested to finance the nationwide removal of such unsecure equipment. To replace this equipment, the U.S. government can, in the short-term, utilize subsidies and issue credit to European firms like Nokia and Ericsson, enabling them to match Huawei’s prices. In the long-term, the federal government should aim to create a startup-friendly environment that spurs competition, stimulates innovation, and invests significantly in 5G research, applications, and infrastructure. Indeed, while the U.S. lags behind Huawei, ZTE, Ericsson, and Nokia, the goal of developing a homegrown, American competitor is not entirely out of reach.
However, this status quo of uncertainty cannot endure, and congressional inaction will prove dire: The lack of adequate financing and an organized plan for “rip and replace” could result in the ultimate elimination of access to basic communications for thousands of rural, underserved American communities.
William Yuen Yee is an intern with the Freeman Chair in China Studies at the Center for Strategic & International Studies (CSIS).