By Bart H. Meijer and Toby Sterling
AMSTERDAM (Reuters) - Dutch telecom firm Royal KPN NV (OTC:KKPNY) said on Friday it would select a Western supplier to build its core 5G mobile network, making it one of the first European operators to make clear it would not pick China's Huawei for such work.
The United States has been seeking to discourage its allies from using equipment made by Huawei because of concerns that it could be used for spying by the Chinese government. Huawei says such worries are baseless and U.S. policy is driven by economic interests.
KPN, based in The Hague and the Netherlands' largest telecom firm, said Huawei would supply 5G radio equipment, which it considers less sensitive.
Chief Financial Officer Jan Kees de Jager said the decision took into account concerns heard in the Dutch political debate and was in line with the stance to be taken by the United Kingdom, according to leaked government plans.
"They see the core networks as somewhat more critical than the radio access networks," said De Jager, who served as the Netherlands' Finance Minister from 2010-2012.
Sources told Reuters on Wednesday that Britain's National Security Council (NSC) had decided to bar Huawei from core parts of the country's 5G network and restrict its access to non-core areas, although it is not yet official British policy.
The Dutch government has yet to take a stance on the issue, although the head of the country's intelligence agency this month warned against buying technology from Russia or China, countries whose spying activities he said threatened national security.
Although Huawei has been a key supplier to KPN over the past decade, De Jager argued the company's purchasing costs would not rise by excluding Huawei in favor of companies such as Nokia (HE:NOKIA) and Ericsson (BS:ERICAs) for its core equipment.
KPN also reported on Friday slightly worse than expected first quarter core earnings of 563 million euros ($627 million).. Shares were 0.4 percent higher at 2.70 euros by 0926 GMT.
The core of a 5G network is where the most critical controls are located and the most sensitive information is stored, while the periphery includes masts, antennas and other passive equipment.
KPN said it would use equipment made by Huawei, which it described as a world leader in radio and antenna technology, to improve security on its existing network.
"This preliminary agreement can be adjusted or reversed to align it with future Dutch government policy," it added.
The Dutch government set up a task force with KPN and other major operators in the Netherlands this month to analyze the "vulnerability of 5G telecommunications networks to misuse by technology vendors ... and measures needed to manage risks".
The government is expected to make a statement on its position on the use of Chinese technology by the end of June.