Huawei, ZTE Customers in the U.S. Contemplate Life Without Them

(Bloomberg) -- As the U.S. government mulls further restrictions on the activities of Chinese telecom-equipment makers Huawei Technologies Co. Ltd. and ZTE Corp., many small carriers dependent on these vendors for low-cost gear have found themselves in limbo.

Companies that bought network equipment as well as handsets from the Chinese firms may experience disruptions -- some may have to rip out existing network gear, while others could confront shortages of cheap phones they sell in their stores, potentially turning away some price-sensitive customers.

The carriers are bracing themselves as more bad news for the Chinese suppliers trickles in: The White House is mulling restricting their ability to sell telecom equipment in the U.S. based on national-security concerns, the Wall Street Journal reported. The Pentagon is also restricting sales of the companies’ phones and modems on military bases, and may consider a department-wide advisory regarding purchases of their devices. The Federal Communications Commission is considering sanctions. In April, the Department of Commerce prohibited ZTE from exporting anything out of the U.S. -- which means that the company can’t access chips to make its phones for sale in the U.S. market, said John Marick, chief executive officer of Consumer Cellular.

"Literally every company in the U.S. that sells ZTE devices, they are all scrambling to fill this void," Marick said.

In the fourth quarter, ZTE accounted for 10 percent of North American smartphone shipments, according to researcher Counterpoint. Huawei is a smaller U.S. supplier of phones, but was the third-largest seller worldwide in the fourth quarter, according to Gartner.

Representatives for Verizon Communications Inc. and Sprint Corp. declined to comment. AT&T Inc. and T-Mobile US Inc. didn’t immediately respond. Verizon and AT&T both dropped plans in January to carry Huawei’s flagship phone amid renewed concerns by lawmakers that China-made gear could present security issues.

Marick said he’s talking with other vendors, such as Nokia Oyj’s Alcatel and Lenovo Group Ltd.’s Motorola, but may have a gap of several months when he doesn’t have the low-cost device options his customers are used to. Consumer Cellular now sells a $60 ZTE phone; once the supply runs out, its lowest-priced phone will cost $100, he said.

"A lot of our customers choose us for affordability, and that’s what ZTE was filling out in our lineup," Marick said.

Another carrier, LHTC Broadband, is also in a bind because it’s about 75 percent finished installing Huawei’s gear to provide video and high-speed internet on its network.

"Obviously we are concerned," said CEO Jim Kail. "It creates uncertainty, to say the least. Now we are 75 percent done with this particular project, it’s very difficult to just stop and change direction. We are hoping we don’t have to start ripping things out."

Huawei and ZTE’s products make up less than 1 percent each of the U.S. mobile and fixed telecommunications-equipment markets, according to Dell’Oro Group.

If unable to continue working with Huawei, Kail said he may work instead with its existing vendors, Calix Inc. and Adtran Inc.

Eastern Oregon Telecom, meanwhile, is unsure which vendors it would be allowed to deal with, CEO Joe Franell said.

If all work with Huawei is prohibited, "we’d have to rework some portions of the network and that would be costly, so I wouldn’t have as much money to expand into rural markets," Franell said. "That would be a lose for rural America."

"The Ciscos and the Junipers of the world, they are more expensive," he said.

--With assistance from Scott Moritz and Bill Faries

To contact the reporter on this story: Olga Kharif in Portland at okharif@bloomberg.net.

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Jillian Ward, Andrew Pollack

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