HONG KONG, LONDON - Huawei is in crisis. The Chinese telecoms-equipment giant has been besieged by legal woes and a mounting security backlash worldwide. As the race to dominate next-generation wireless technology speeds up, Huawei’s containment will have costly ramifications.

WHY ARE FOREIGN GOVERNMENTS SO WORRIED ABOUT HUAWEI?

Privately held Huawei is China’s homegrown technology champion, but its global clout and reach is hard to understate. The company, founded by former People's Liberation Army officer Ren Zhengfei, is the world’s largest telecoms-equipment maker and says it topped $109 billion in revenue in 2018; it is also the second-largest smartphone seller, after South Korea's Samsung Electronics. Most importantly, the company is at the forefront of next-generation mobile technology known as 5G, which promises to connect billions of devices and machines at ultra-fast speeds. Its ascent has attracted scrutiny. Ren's alleged ties with the Chinese Communist Party and the military have dogged its overseas expansion, as foreign officials voiced concerns the company could install "backdoors" into mobile networks, making them accessible to Beijing. Huawei says the government has no influence over its work. This week, the 74-year-old founder made a rare media appearance to reject those claims himself. Now, just as countries prepare to upgrade their mobile infrastructure, the United States is ratcheting up pressure. Huawei says it has signed over 30 5G contracts, but according to a November report in the Wall Street Journal, Washington is pressing allies to stop using Chinese equipment, citing cybersecurity risks. Matters escalated in December last year, as trade tensions between Washington and Beijing ran high: Huawei’s chief financial officer, Meng Wanzhou, who is also Ren's daughter, was arrested in Canada over alleged U.S. sanction violations. She faces extradition to the United States.

ARE THEY RIGHT TO WORRY?

It’s unclear. In 2012, a U.S. House of Representatives investigation concluded that Huawei and smaller compatriot ZTE should be barred because they posed a national security threat. The unclassified report did not, however, offer any detailed evidence. This week, the Wall Street Journal said U.S. prosecutors are also investigating allegations that Huawei stole trade secrets from T-Mobile and others - but the technology in question there was for testing smartphones.

Certainly, China's national security law feeds suspicion. It states local companies and citizens must collaborate in "national intelligence work". This raises the possibility that Huawei and ZTE could be required to hand over data to Beijing if asked, whatever their public statements.

For now, Australia and New Zealand have followed the United States and banned Chinese kit from their 5G networks. Key markets like Japan, the United Kingdom and Germany are considering restrictions too. Trouble may also be brewing in Eastern and Central Europe, with Poland considering curbing Huawei products after authorities this month arrested a Chinese employee of the company and a former Polish security official on spying allegations.

SURELY MOBILE CARRIERS CAN JUST USE OTHER SUPPLIERS TO BUILD THEIR 5G NETWORKS?

They can. The problem is that just four companies - Huawei, ZTE, Sweden's Ericsson and Nokia in Finland - dominate the market for mobile infrastructure. The quartet accounted for over 90 percent of the roughly $37 billion in global sales in 2017, according to research firm IHS Markit.

This creates huge headaches for mobile operators, especially since Huawei has gained market share by offering lower prices. Critics of Australia's decision to ban Huawei, for example, claim that switching to Nokia and Ericsson would cost up to 30 percent more. Another issue is compatibility: analysts at Jefferies estimate Huawei has a 40 percent market share in European existing 4G equipment. Linking old networks to new ones with different kit would be risky and expensive.

With less competition, Nokia, Ericsson and aspiring challenger Samsung Electronics would have greater pricing power over the world’s telecommunications firms – assuming they can make up the supply shortfall. The Nordic duo, whose margins have been squeezed by Huawei and ZTE in recent years, could benefit in the long term. Users, though, will probably end up paying more for 5G.

COULD HUAWEI AND RIVAL ZTE REALLY END UP COMPLETELY SHUT OUT FROM EUROPE?

It’s hard to find issues on which all European Union states agree, and excluding the Chinese duo is no different. Andrus Ansip, European commissioner for the digital single market, said the bloc should be “worried”. Yet French Finance Minister Bruno Le Maire said Huawei’s investments were welcome; that’s despite state-backed Orange refusing to hire the Chinese group for 5G.

A country-by-country approach seems likely. Britain’s BT , for example, is shutting the Chinese group out of the most sensitive parts of its new network. Still, European telecom operators have more to lose from a Huawei ban than American counterparts. The continent’s telecoms market is more fragmented: that means low prices and makes it harder to make a decent return from investing in new networks. Bernstein analysts pencil in a measly 8 percent return on investment for the sector in 2021, which is barely above its cost of capital. Huawei’s exit could make next-generation 5G networks even less affordable.

SO, WHAT HAPPENS NEXT?

Ultimately, the fate of Huawei will be determined by the United States. Restricting U.S. technology companies from selling to Huawei, as proposed by lawmakers this week, would cripple its operations; as would pressuring other countries into banning Chinese telecoms equipment. An extradition of Meng, Huawei’s CFO, to the United States, may also deal a critical blow. And how Beijing responds will be a wildcard that could reshape U.S.-China relations, for better or worse.

Governments, companies and consumers should brace for 5G fallout.

CONTEXT NEWS

- Huawei founder Ren Zhengfei on Jan. 15 rejected claims that his company, the world's top telecoms-equipment maker, is used by the Chinese government to spy on its clients. He said Huawei had "never received any request from any government to provide improper information", according to an interview transcript provided to Reuters. - The company said on Jan. 12 that it had fired an employee arrested in Poland on spying charges. Poland's internal affairs minister, Joachim Brudzinski, has called for the European Union and NATO to work on a joint position over whether to exclude Huawei from their markets after the arrest. - Canadian authorities arrested Meng Wanzhou, Ren’s daughter and Huawei’s chief financial officer, at the behest of U.S. officials on Dec. 1. Meng is alleged to have misled banks about the company’s control of a firm operating in Iran, a country subject to U.S. sanctions.

(Editing by Clara Ferreira Marques and Katrina Hamlin)

© Reuters News 2019