London (CNN Business)Huawei has been granted a limited role in building Britain's 5G network, allowing the company to maintain its presence in a crucial market despite US efforts to rein in its growth.
The decision announced Tuesday by the UK government is likely to have implications far beyond the country's borders, setting a precedent that could bereplicated in markets across Europe, affecting hundreds of millions of people.
The Chinese company will be excluded from "security critical" areas of Britain's networks those that identify customers or make decisions about routing traffic. But it will be able to supply British mobile operators, including Vodafone(VOD), BT(BTGOF) and Three, with less sensitive products such as radio technology and base stations, so long as its market share is limited to 35%.
Those restrictions will make Huawei's life harder in the United Kingdom, and other Europeancountries may soon announce plans to take a similar route. But the rules fall short of the outright ban on Huawei sought by the Trump administration, a positive step for a company that's faced major threats to its growth on national security grounds.
"It certainly avoids the worst case where they're told to get out," Berenberg analyst Usman Ghazi said.
Ghazi said that Huawei's growth may be limited by the kind of restrictions announced by the UK government. But the big money, he said, is in the extensive 5G equipment that needs to be installed on thousands of rooftops and towers. And Huawei can still tap into that.
A complicated environment
Huawei, which has operated in the United Kingdom since 2001, has made clear that the decision is significant to its business. Victor Zhang, a vice president at Huawei, told reporters Tuesday that it was "definitely reassuring" that the company would be able to continue working with its customers there.
That doesn't mean the path forward will be easy. The 35% market cap has Huawei's UK customers scrambling to assess their supply chains, and some may needto change their plans.
"While Vodafone UK does not use Huawei in its core the intelligent part of the network it will now analyze the potential impact of today's decision on the non-core elements of its network," the company said in a statement. Vodafone said it uses a mix of equipment from Huawei and competitors Ericsson(ERIC) and Nokia(NOK) for 4G and 5G masts.
And some European mobile operators have been pushing for complete freedom to choose their supplier.
"We have talked recently with a number of European service providers who are now selecting their vendors for 5G and the message is very clear: They would like to be able to select any vendor that is currently in the market," said Dario Talmesio, an analyst at Ovum, a market research group.
But that runs counter to the goals of the Trump administration, which has been pressing for a total ban on Huawei products, alleging that Beijing could use the equipment for spying. Huawei has denied that its products pose a security risk.
Given the restrictions,some operators may "decide the writing's on the wall" and begin phasing out Huawei equipment in favor of Nokia and Ericsson, according to Berenberg's Ghazi. But in general, the UK decision isn't expected to shift the balance in favor of the European suppliers.
Huawei, which is also a major smartphone producer, has used the United Kingdom as a springboard to Europe, which has grown into the company's most lucrative market outside China.
That means the decision will reverberate far beyond Britain's borders.
"[The UK announcement] is quite a significant achievement on the part of Huawei, which they will then use to show other potential parties that if the UK is comfortable enough, then they should feel comfortable as well," said Steve Tsang, director of the SOAS China Institute in London.
Tsang noted that the United Kingdom is a member of the Five Eyes intelligence sharing community, which also includes the United States, Australia, New Zealand and Canada. The United States and Australia have effectively barred Huawei from participating in 5G.
Decisions from US allies such as Canada and Germany are still forthcoming. The European Commission is expected to weigh in, too, and could make an announcement as early as Wednesday.
German Chancellor Angela Merkel has been reluctant to exclude specific providers from the country's 5G networks, and may now fall in line with the United Kingdom.
"The UK is hugely influential," Talmesio said.