Huawei Blacklist: What is the impact on Kenya?
What has happened?
The Bureau of Industry and Security, under the U.S. Department of Commerce, has added Huawei Technologies and 68 non-U.S. affiliates in 26 other countries to the Entity List. The Entity List refers to entities reasonably believed to be involved, or pose a significant risk of being or becoming involved in activities contrary to the national security or foreign policy interests of the United States. This includes violating restrictions on exports to Iran without obtaining a license. The addition of Huawei followed President of the United States of America Donald Trump’s signing of an Executive Order relating to foreign adversaries said to be increasingly creating and exploiting vulnerabilities in information and communications technology and services. A 3-month temporary extension has been announced this morning to allow companies to adjust and for the Bureau of Commerce to determine appropriate long term measures.
Meanwhile, the U.S. eased sanctions on some of its allies, Japan & the EU, on metal and vehicle imports and parts for 6 months. We see this as a pointer that the US is prepared to sustain the trade and security issue with China for a considerable period.
Who is Huawei?
This is by far the largest telecommunications equipment vendor in the world. The market has few players concentrated in U.S. (Cisco, Qualcom), Japan (Fujistu, NEC Corporation) and China (ZTE) – with Finland (Nokia) and Sweden (Ericson) also featuring with locally domiciled equipment makers. Huawei is the second largest smartphone maker after Samsung, followed by Apple. It however does not operate in the United States.
In Kenya, Huawei is involved in supply of telecommunication equipment and smartphone devices to Government and the private sector, including the largest listed company, Safaricom. Government uses Huawei security equipment and recently signed a USD 175m loan from China for the Konza Data Centre and Smart Cities Project by Huawei.
How does this affect Safaricom?
While the developments around Huawei are still evolving, Safaricom which is part of the Vodafone Group and majority owned by Vodacom, may be caught up in the crosshairs should the parent (Vodafone) wish to take a similar position as its U.S. counterparts.
Whereas Safaricom maintains it has a dual-vendor network, Huawei is the bigger supplier to Nokia by our estimation, potentially presenting a material risk. The telco has a network expansion and maintenance capital expenditure of KES 35-39bn per annum. Management highlight that they work with multiple technology partners and hence do not anticipate interruptions on network operations.
The restriction does not apply to historical investments but rather future investments which reduces the risk of heavy investment to potentially replace existing networks. We see an impact on future sales of smartphone and network equipment, especially if support for some of the core services used in the Kenyan market such as Google (Android, Google Play Store Services, Security, YouTube, Gmail, Drive, etc.) is applied.
Kenya, as with most African countries, has really never had to deal with the complication of sanctions from the United States in the way this directive on Huawei may impact the country. So far, it seems that the actual impact may be more extended rather than immediate. Networks may, however, be more expensive in the future due to fewer options.