Huawei's reported interest in Nokia could give it control over NSN

A top Huawei executive's comments opened the door to the possibility of the Chinese firm gaining a strong foothold in the U.S. network gear market via a takeover of Nokia (NYSE:NOK), which could give Huawei control of Nokia Siemens Networks.

Huawei is "open-minded" to the prospect of buying struggling Nokia in an effort to become the world's leading smartphone maker, said Richard Yu, chairman of Huawei's consumer business group. "We are considering these sorts of acquisitions; maybe the combination has some synergies but depends on the willingness of Nokia," added Yu, who made his comments to the Financial Times ahead of the launch of Huawei's Ascend P6 premium smartphone in London.

Though the Register reported that Huawei later said it currently has "no plans" to buy Nokia, that did not stop observers from debating what a Nokia takeover by Huawei would mean to Microsoft (NASDAQ:MSFT). Nokia is Microsoft's top ally in developing handsets based on the Windows Phone OS. However, Yu told the Financial Times that Windows Phone is "weak," and indicated the OS is especially unattractive because it requires a license fee, unlike Google's Android OS, which powers most of Huawei's smartphones.

Lost in the discussion, however, has been the possible impact on the telecom network infrastructure market should Huawei make a bid for Nokia. The fact that Yu would even mention the possibility sets up what could become an intriguing scenario, because if Huawei were to buy Nokia, it might also end up with infrastructure vendor NSN. Nokia currently owns half of NSN but is in the process of buying out partner Siemens' 50 percent stake for $2.21 billion.

Nokia has repeatedly stated its desire to make NSN an "independent entity," and Nokia could eventually spin NSN off as a public company but the timing for such a possibility is far from clear.

Taking over NSN via Nokia could give Huawei a backdoor entry into the U.S. mobile network market, where its infrastructure gear has been effectively banned by persistent concerns that the Chinese company poses a national security threat. A report from the House Permanent Select Committee on Intelligence recommended in October 2012 that the U.S. government and U.S. companies avoid using equipment from Huawei and ZTE.

However, it is unclear what actions the U.S. government could or would take if Huawei (or ZTE, for that matter) gained a significant foothold in existing U.S. telecom networks by taking over an infrastructure vendor that already has a strong presence in the market.

NSN and Ericsson (NASDAQ:ERIC) are primary vendors for T-Mobile US' (NYSE:TMUS) $4 billion network modernization project. NSN has also won LTE radio access network (RAN) and mobile management entity (MME) contracts from U.S. Cellular (NYSE:USM). Further, NSN supplies Verizon Wireless' (NYSE:VZ) IMS core as well as the IMS core for smaller operators. Rick Corker, head of NSN North America told FierceBroadbandWireless early this year that NSN believes it has some 40 percent market share in IMS core in the United States.

Although Huawei has repeatedly argued that it does not pose a security threat and has no ties to the Chinese military or government, the allegations refuse to die down. Former CIA and NSA head Michael Hayden told the Australian Financial Review last week that he believes Huawei has shared with China's government "intimate and extensive knowledge" of foreign telecom systems in which the company is involved.  

Huawei, China's largest maker of telecommunications equipment, was quick to defend itself once again. Huawei's vice president of external affairs William Plummer demanded critics produce concrete evidence of espionage or "shut up," said ZDNet, citing a report in Sina News.

Even without new U.S. wireless network contracts, Huawei's wins around the globe put it in strong position. Ovum has estimated that Ericsson held a market-leading 34.7 percent share in the global RAN market at the end of 2012, followed by Huawei with a 20.5 percent share and NSN with 18.7 percent.

For more:
- see this Financial Times article (sub. req.)
- see this Register article
- see the Australian Financial Review article and transcript
- see this Bloomberg article
- see this ZDNET article

Related articles:
Huawei fends off more spying claims and faces UK security review
NSN records operating profit, but Q2 sales fall 17%
Huawei's R&D spending tops $4 billion
Nokia 'buys a future' with NSN, but does that future include devices?
Nokia paying $2.21B for Siemens' stake in NSN
Huawei puts its hopes in Europe, the UK
China hits back over EU threat to Huawei, ZTE
Report: Microsoft plan to buy Nokia's phone biz fell apart

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