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How US restrictions drove Deutsche Telekom and Huawei closer together

Global telecoms giant Deutsche Telekom strengthened its stra..

Global telecoms giant Deutsche Telekom strengthened its strategic partnership with Huawei last year despite growing defiance toward the dominant Chinese 5G vendor, documents reviewed by POLITICO show.

The internal company records describe how Deutsche Telekom and Huawei agreed on a deal in mid-2019 that said the Chinese supplier would take measures to avoid supply chain disruption caused by U.S. measures, as well as cover the costs of potential damages and delays.

The deal was struck just weeks before the U.S. administration imposed restrictions on businesses dealing with the Chinese firm in May 2019 — a milestone for Washingtons efforts to push back against Huaweis dominance on 5G equipment.

It laid the groundwork for a partnership between the two companies for the early rollout of 5G networks in Europe, despite national lawmakers efforts in key markets like Germany, the Netherlands and Poland to reduce the use of Chinese equipment.

In the months after the deal, the companies underlined mutual commitments to treat each other in preferential ways. Deutsche Telekom executives described Huawei repeatedly as a “strategic partner” that is “key for our 5G plans,” according to the internal documents. On Huaweis end, Deutsche Telekom was described as a “preferred customer” for its 5G equipment.

“This pledge by Huawei to pay for any disruption adds to that incentive to stick with Huawei” — Thorsten Benner, director of the Global Public Policy Institute

Deutsche Telekom has repeatedly declined in the past to disclose how much of its networks consist of Huawei equipment.

But in its internal communication, it has likened the scenario of not being able to use Huawei in its broader 5G rollout to “armageddon,” a recent report in German paper Handelsblatt showed.

A spokesperson for Deutsche Telekom declined to comment on questions related to the documents but said the company “takes the global discussion about the security of network elements very seriously.”

The spokesperson added: “We are already pursuing a multi-vendor strategy for the network elements used all over our networks. We buy from a variety of vendors like Ericsson, Nokia, Cisco, Huawei and many others.”

Huaweis care-free package

At the core of the mutual agreement is a commitment by Huawei to shoulder the burdens and costs of the U.S. restrictions that have bogged down the Chinese vendor in the past year.

“This pledge by Huawei to pay for any disruption adds to that incentive to stick with Huawei,” said Thorsten Benner, director of the Berlin-based Global Public Policy Institute, calling it a “care-free package” offered to Deutsche Telekom.

The deal includes a clause that annulled provisions if local regulations and trade controls prohibited Deutsche Telekom from acquiring and using the products.

A spokesperson for Huawei said the company “never comments on any specifics of deals or contracts with our customers worldwide.” The spokesperson added: “We have worked successfully with Deutsche Telekom in many areas over many years and look forward to continuing this cooperation.”

The agreement laid out in internal documents instructs the Chinese equipment-maker to set up emergency stocks of spare parts in countries where Deutsche Telekom has local operations. That includes Germany, Poland, the Czech Republic, the Netherlands and Austria.

It spans a list of components that would allow Deutsche Telekom to continue running its networks for at least two years, until April 2021. It allows for Deutsche Telekom to call on Huawei to transfer spare parts from the vendors stocks to those of the operator, and for Deutsche Telekom to unload unused spare parts with Huawei when the contract ends — effectively giving the German operator group preferential access to Huaweis stocks.

It also softened the blow as Huawei started grappling with delivering “small cells” used to increase local network capacity for mobile internet users. These components suffered a big hit due to the U.S. restrictions last year.

Swedens Ericsson is one of Huaweis major European competitors | Jonathan Nackstrand/AFP via Getty Images

At the end of 2019, the two companies held advanced discussions on a major 5G deal that would have cemented their partnership, Reuters reported in December, citing three sources familiar with the matter. The operator however put that deal on hold due to political concerns, the news service wrote.

The companies dealings largely defied efforts by security officials to reduce Europes reliance on Chinese equipment in 5G networks during 2019.

The U.S. administration started warning European counterparts in 2018 about the risks it associates with Huawei, arguing it is under direct influence by the Chinese state. In May 2019, Washington imposed export controls that hampered Huaweis suppliers of chips, software and other components from selling to the Chinese company.

In Europe, security officials started looking into the security risks in early 2019. From as early as March 2019, the European Union worked on common measures that aimed to decrease Europes reliance on equipment from Huawei and its smaller Chinese competitor ZTE.

The security concerns have prompted a number of countries to ban Chinese suppliers in “core” parts of 5G networks.

It has also prompted some operators to “swap” Huawei equipment for kit from its European competitors, Swedens Ericsson and Finlands Nokia, in new 5G rollout plans, including in Denmark, Ireland and Norway. It has also prompted promises from large operator groups, including Deutsche Telekom, to phase out Chinese suppliers from “core” networks to alleviate security concerns.

German exception

Allegations that Huawei poses a security risk largely fell on deaf ears at the German chancellery in Berlin.

Chancellor Angela Merkel “threw all her political weight behind keeping Huawei, at least for some part, in Germany,” said Benner.

In the past year she dismissed growing pressure from her junior coalition partner SPD in parliament, part of her own conservative faction and even government ministers like Foreign Minister Heiko Maas to impose much tougher restrictions on Chinese vendors to participate in Germanys 5G rollout.

German Chancellor Angela Merkel has dismissed pressure to impose tougher restrictions on Huawei | Pool photo by Clemens Bilan/Getty Images

Merkels stance reflected warnings by Deutsche Telekom — of which the German state holds a 14.5-percent stake — that a ban on Huawei gear would put 5G rollout at risk of delays and huge extra costs. Other German businesses, including the powerful automotive sector, also fear banning Huawei could lead to retaliatory measures in China that hurt their profits.

“Merkels chief concern is about retaliation on German companies in China,” said Benner. “Its not Deutsche Telekoms pressure thats driving this … but rather the concerns about German businesses and large German companies that depend on the Chinese market.”

T-Mobile deal in US unaffected

Deutsche Telekom also resisted the U.S. governments pressure to drop Huawei — at a time when it was seeking approval from U.S. regulators for a major telecoms merger with local operator Sprint.

The German group merged its T-Mobile U.S. affiliate with Sprint in April, forming a third telecom operator aimed at challenging industry giants AT&T and Verizon.

As it sought government approval for the deal, T-Mobile U.S. executives took a radically different approach to the use of Chinese vendors than the groups leadership in Bonn.

John Legere, then-chief executive for T-Mobile U.S., last year testified to the U.S. House of Representatives in a hearing on the Sprint merger that “we do not use Huawei or ZTE network equipment in anRead More – Source

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