Christine Dobby Telecom reporter
Includes correction
Published December 21, 2018 Updated December 21, 2018

BCE Inc. and Telus Corp. are pressing the federal government not to block them from using Huawei equipment, warning that a ban on the Chinese company could lead to higher costs and delay the rollout of 5G wireless technology in Canada.

Executives at Canada’s second- and third-largest cellular carriers say restrictions on Huawei’s equipment would force them to spend more for technology from other vendors, which could lead to higher prices for consumers or job cuts at the companies. The increased costs and potential need to rebuild parts of current networks could also slow deployment of next-generation technology and lead to a loss of innovation in Canada.

5G networks – which will be much faster, more reliable and will reduce lag-time – are expected to support sensitive new applications such as smart-city sensors, factory automation and autonomous-vehicle technology. Concern about Huawei equipment has increased partly because in 5G networks, industry reports say, elements of the core technology will be closer to the radio network.

The executives argue that security concerns related to Huawei can be addressed by testing its equipment and restricting its gear to non-sensitive parts of their networks – and say a U.S. campaign to persuade that country’s allies to block the Chinese company is more about trade ambitions and a race for technological dominance than legitimate security fears.

The Globe and Mail spoke with senior sources at BCE and Telus and granted them anonymity, as they were not permitted to speak publicly about the sensitive issue.

Canada is conducting a cybersecurity review of Huawei and its 5G technology as three of its Five Eyes intelligence allies – the United States, Australia and New Zealand – have barred or limited Huawei equipment. Britain has not done so, but one of its biggest carriers, BT Group, said it is removing Huawei gear from its network core, which will create a situation similar to what is allowed under Canada’s rules. Carriers in Japan, France, South Korea and Taiwan have taken similar steps.

BCE and Telus say they are optimistic Ottawa will not ban the carrier. The companies have been seeking meetings with government officials to press their case. Rogers Communications Inc., the country’s largest carrier, installed some Huawei equipment in Western Canada, but has swapped most of it for Sweden-based Ericsson, the company it says it plans to work with on 5G.

Executives at Telus and BCE say they have played by Ottawa’s rules when it comes to Huawei: They have used the vendor’s equipment in their radio networks – the antennas and radios at the top of cell towers – but not in the network core, which carries the majority of data traffic and contains more sensitive information. Federal authorities also established a third-party testing process in 2013 to monitor equipment security.

BCE and Telus have built a shared 3G and LTE (4G or long-term evolution) network, and most of their radio equipment comes from Huawei, the sources say, with BCE at 60 per cent to 70 per cent and Telus at virtually 100 per cent.

A source at Telus said the company has already invested in 5G technology because more than 80 per cent of its radios run software that can be upgraded from LTE to 5G. A ban on Huawei equipment for 5G would devalue that investment.

Using equipment from Ericsson or Finland’s Nokia, which have higher prices, would also bring additional engineering costs because the 5G gear would not “talk” to the LTE Huawei radios and antennas, some of which would have to be removed. There is also a concern that Huawei would stop supporting its products in Canada if it had no further work here.

Huawei has invested heavily in research and development (R&D) in Canada, and some fear it could export Canadian intellectual property to China. BCE and Telus say their engineers like working with Huawei because this R&D produces technology that is more advanced than that of other vendors.

Huawei has made many of these points in recent days as it shifted its communications strategy from not commenting on security fears to having chairman Ken Hu dismiss them. Chinese law requires companies to conduct espionage if requested by Beijing, but Mr. Hu told reporters in China on Tuesday the government recently clarified that firms are not required to install “back doors” into network equipment. “If you have proof or evidence, it should be made known,” Mr. Hu said.

Heightened public anxiety over Huawei equipment in Canada dates back to at least 2012, when a spokesman for then-Prime minister Stephen Harper implied that it would ban the company from bidding on a government telecom contract for national-security reasons.

A report from a British testing centre in July raised concerns about Huawei’s software code, as well as confidence that what is tested is what is actually loaded into the network. Mr. Hu said this week that Huawei is investing $2-billion in a five-year program to improve its code.

On Wednesday, Huawei Canada president Eric Li sent a letter to the Canadian Centre for Cyber Security outlining commitments he said the company is making to guarantee the security of 5G networks. “We are proud to have been able to work with Canada for a decade, and hope that these additional efforts ensure we are doing whatever is required to meet the standards of the Government of Canada,” Mr. Li said in the letter, a copy of which was obtained by The Globe.

In an interview last month, BCE chief executive George Cope said his company has complied with government requirements and would follow any new rules, but added that Huawei is “an incredible company from a technology perspective … . Do we want to deprive Canadians of some of the best worldwide infrastructure?”

BCE and Telus have been working for months to develop relationships with other equipment vendors in case they cannot work with Huawei on 5G. The two companies began using Huawei gear about a decade ago, and industry sources have said that at the time, it offered prices 30-per-cent to 50-per-cent lower than European vendors, but the gap has narrowed as Nokia and Ericsson reduced their prices and Huawei sought higher profit margins. South Korea’s Samsung also wants to supply radio equipment for 5G networks.

A separate industry source who works closely with the companies said network engineers at BCE and Telus have held urgent meetings over the past week after the arrest in Vancouver of Huawei CFO Meng Wanzhou and the detention of three Canadians in China. The Globe granted the source anonymity owing to concerns about future work opportunities in the industry.

“Telcos ... need to know ASAP whether they can source from Huawei or not,” said Ruediger Schicht, who leads the tech, media and telecom practice for Boston Consulting Group in Zurich, Switzerland. “[Replacing equipment] that was just rolled out will be super expensive and stretch operators’ investment budgets.”

The companies must also soon decide how much to invest in a government auction scheduled to begin in March for low-frequency airwaves that will be used in 5G networks.

In a report last week, Desjardins Securities’ Maher Yaghi cited the possibility of financial compensation in the form of subsidies if the government bans Huawei equipment. “While this situation would not be ideal, we believe it would still be manageable for large Canadian telcos.”

The executives at BCE and Telus would not address specific costs, saying the financial impact of a ban on Huawei would depend on a number of factors including any time limits on use of the equipment. The Globe has reported that other industry sources say the costs could range from hundreds of millions at BCE, to between $500-million and $1-billion at Telus, to more than $1-billion for both companies combined.

Editor’s note: Samsung is a South Korean company. An earlier version of this article incorrectly said it is based in Japan.