TOKYO -- Japan's three main mobile phone carriers SoftBank Group, NTT Docomo and KDDI have decided not to use Chinese equipment in their 5G networks due to rising security concerns that spurred the Japanese government to block Huawei Technologies and other Chinese companies from public procurement.
E-commerce company Rakuten, which will become Japan's fourth wireless carrier next year, is also shunning China, stating that "there are no plans to use Chinese telecommunication equipment." The company will use Nokia products for its 4G network.
These moves will be a major blow to Huawei, which has been moving aggressively into Japan's telecom and smartphone markets.
Tokyo on Monday essentially banned Chinese telecom purchases by central government ministries and its Self-Defense Forces starting in April. "It's extremely important to avoid buying equipment that includes malicious functions like stealing or destroying information or halting information systems," Prime Minister Shinzo Abe told reporters.
Washington has already banned Huawei and ZTE from the US 5G market, and has imposed sanctions on Chinese companies for their dealings with Iran. It will also bar companies that use products from certain Chinese companies from doing business with government agencies starting in 2020 -- a concern for SoftBank and the NTT group as they look to expand abroad.
The Japanese government currently does not restrict such purchases by private-sector companies. But with pressure from the U.S. mounting, carriers face the possibility that this could change.
Japanese telecoms plan to start testing 5G next year with the goal of a full-scale rollout of commercial service in 2020. Carriers, needing to choose suppliers for orders to be placed next spring, decided against taking the risk of buying from companies that could ultimately be barred from the market.
Technology conglomerate SoftBank, the only major telecom in the country that uses Huawei and ZTE equipment in its 4G systems, will determine whether it has to find other makers. SoftBank had been partnering with Huawei in 5G trials, and it has worked mainly with the Chinese company's base stations when honing its 5G know-how. Choosing a different supplier could delay its plans.
Meanwhile, Docomo and KDDI do not use Chinese equipment for 4G. While Docomo has been running 5G trials with Huawei, the company has decided not to use Chinese-made equipment in its 5G network, due partly to technical hurdles. KDDI also plans to continue avoiding Chinese equipment.
Huawei's market share for the country's base station sales jumped to 13 percent in fiscal 2017 from 4 percent in 2016, according to Tokyo-based research company MCA -- an increase mainly fueled by SoftBank, according to Taro Daimon, an analyst at MCA. Huawei accounted for about 60 percent of the carrier's base station installations by value in fiscal 2017.
Takuya Kamei, senior researcher at Nomura Research Institute, said Japanese telecoms will be able to meet their 5G rollout goals by procuring equipment from other vendors. All three majors are expected to commercialize 5G services before the 2020 Olympics in Tokyo.
"Companies will be able to obtain the necessary equipment," because none of them are solely reliant on Huawei, he said.
But given that the transition to 5G typically involves upgrading some existing 4G infrastructure, the decision to steer clear of Chinese suppliers "will be a major blow to SoftBank, which has Chinese 4G equipment," MCA's Hironori Amano said.
While no companies have indicated plans to halt sales of Huawei handsets, the Chinese maker's reputation has been tarnished. Huawei surpassed Apple this year to become the second-largest smartphone maker in the world, and has been making a big push in Japan, launching flagship models such as the P20 Pro.
Jim Xu, Vice President of Huawei's consumer unit, told the Nikkei Asian Review in late November that the company plans to cultivate the Japanese market by opening dedicated Huawei booths in retail shops.
Washington informed Tokyo and other allies of the risks posed by Chinese information technology equipment and urged them to block Huawei and ZTE from their markets, a Japanese government source said. Australia and New Zealand have already banned Chinese makers from building their 5G networks, and Britain's BT Group has said it will not use Huawei equipment in the core of its 5G infrastructure.
Unlike the U.S. ban, Japan's new procurement guidelines do not single out any specific country or company by name. The World Trade Organization bars such discrimination in public procurement, and while exceptions can be made when security concerns exist, whether Huawei meets that threshold remains unclear.
Japan may also be leery of damaging its relationship with China. "It is very important for our two countries to develop a relationship of friendship and cooperation," said Chief Cabinet Secretary Yoshihide Suga.
Government agencies will need to survey their IT equipment to ensure it complies with the new guidelines, expected to take effect in about three months. Any equipment that poses a security risk must be removed or replaced.
IT and telecom companies are starting to conduct their own reviews to see if any Chinese parts or products were included in equipment sold to the central government.
"It's technologically possible to intercept [information] through telecom equipment," said Goh Tokida, a security consultant at NRI SecureTechnologies. By inserting chips or modifying software, bad actors can collect information traveling through certain communication channels, he said.
NTT Data, which develops systems related to the new "My Number" national identification program, is among those looking to get a head start on the process. The company says it "cannot completely rule out the possibility" that it used products from China.
NEC, which builds its own telecom equipment in-house, says it basically does not use equipment from China. But other Japanese companies within its supply chain may have outsourced production to Chinese manufacturers, and NEC is considering how to check for such cases.