By Sarah Marsh, Andreas Rinke and Hakan Ersen
BERLIN (Reuters) -Germany's interior ministry has proposed forcing telecoms operators to curb their use of equipment made by China's Huawei and ZTE (HK:0763), a government official said on Wednesday, sparking warnings of likely disruption and possible legal action.
The interior ministry wants to impose the changes to 5G networks after a review highlighted Germany's reliance on the two Chinese suppliers, as Berlin reassesses its relationship with a country it dubs both a partner and a systemic rival.
Telecom operators swiftly criticised the proposals, while Huawei Germany rejected what it called the "politicisation" of cyber security in the country.
"Such an approach will have a negative impact on the digital transformation in Germany, inhibit innovation and significantly increase construction and operating costs for network operators," it said in a statement.
Germany's interior ministry has designed a staggered approach to try to limit disruption as operators remove all critical components from Chinese vendors in their 5G core networks by 2026, the government official said.
They should also reduce the share of Chinese components in their RAN and transport networks by Oct. 1, 2026, to a maximum of 25%, said the official, who declined to be named.
The interior ministry and Chinese embassy did not immediately reply to requests for comment.
Deutsche Telekom (ETR:DTEGn) called the deadline unrealistic, comparing it to Britain's attempts to impose restrictions on Huawei, while Telefonica (BME:TEF) Deutschland said it would consider seeking damages as well as legal action.
"This represents a major u-turn," said Paolo Pescatore, an analyst at PP Foresight. "Germany has been much slower than other countries in removing and replacing Huawei."
Pescatore said the phaseout would take significant investment and be challenging given the ambitious timeframe.
"This will be a major headache for telcos. It could hold back 5G rollout and potentially lead to higher prices for users as well as dealing with disruption in any service issues."
The interior ministry wants to present its approach to cabinet from next week, but could face resistance. A digital ministry spokesperson said no decision had been made yet.
The Huawei issue reflects a realisation in Berlin that it may need tough political measures to force German companies to reduce their strategic dependencies on Asia's rising superpower.
An analysis by the IW Institute showed German direct investment in China in the first half of this year remained close to its 2022 record high.
'ARBITRARY'
Germany is considered a laggard in implementing the European Union's toolbox of security measures for 5G networks and Huawei accounts for 59% of Germany's 5G RAN networks, according to a survey by telecoms consultancy Strand Consult.
Last week, the government said in response to a parliamentary inquiry that it had so far not forbidden the use of any new Chinese critical components in 5G networks.
While some countries like the United States have agreed to compensate telecoms operators billions of dollars for phasing out Chinese gear in 5G, Berlin has underscored that current legislation does not require it to provide compensation.
Juergen Gruetzner, managing director of the VATM industry association, told Reuters a transition period of 6-8 years would be needed to avoid extra costs and achieve the phaseout.
"Simply upgrading and retrofitting tens of thousands of mobile phone masts is not technically possible. We are already working at full capacity," he said. "All the capacity we have at the moment is needed to build 5G and fibre networks."
The interior ministry plan foresees Chinese tech not being used at all in especially sensitive regions like the capital Berlin, home of the federal government, the official said - a distinction that Strand Consult called "arbitrary".