US fears that it will lose ‘commanding heights’ of new technology

Nic Fildes in London and Louise Lucas in Hong Kong
December 12, 2018

A leaked memo, apparently written by a senior National Security Council official, revealed as far back as the start of this year exactly how worried the US is about Huawei.

The rise of the Chinese company to become the world’s biggest supplier of telecoms equipment has given China a huge boost over the US in the race to introduce and develop 5G, the next generation of mobile communications, the memo complained.

“We are losing,” it said. “Whoever leads in technology and market share for 5G deployment will have a tremendous advantage towards [ . . .] commanding the heights of the information domain.”

Eleven months on, those fears have mushroomed into open conflict between Washington and Beijing, with American officials pushing allied countries to ban Huawei from building their 5G networks.

The arrest and planned extradition to the US of Meng Wanzhou, Huawei’s chief financial officer and daughter to the company’s founder, has further exacerbated the spat.

Several countries have begun to trial 5G networks, though the full international standards have not yet been agreed. The shift to the new technology carries profound implications, and countries are wary of being left behind.

5G is “by no means simply a ‘faster 4G’”, the US memo said, describing it instead as “a change more like the invention of the Gutenberg Press”. It will bring higher speeds, lower lag times between network and device, and a much larger capacity to transfer data.

Together, these features are expected to underpin self-driving cars, AI and machine-to-machine communications that will transform the way everything from homes to hospitals to factories operate.

Ahead of the current crisis, China was well positioned to dominate the field. Having lagged behind on previous generations of mobile communications, Beijing started planning for 5G early, establishing a working group of mobile operators, equipment makers and handset manufacturers as early as 2013.

As it set up its 4G network, it had an eye on expanding it for 5G, which requires many more base stations. China had almost 2m cell sites in early 2018 which is ten times that of the US, according to Deloitte, the consultancy. There are 5.3 sites for every 10 sq miles in China, compared to 0.4 in the US.

“No country has devoted more effort to preparing the ground,” said a report from the Eurasia Group consultancy last month, which suggested that China will have first-mover advantage in 5G.

That advantage may be amplified if US allies decide to ban Huawei from helping to build their 5G networks.

In the UK, telecoms executives complain that their 5G trials all depend on Huawei equipment and that a ban would push back the arrival of 5G by nine months to a year.

Meanwhile, as the debate rages over whether to use Chinese-made equipment, operators in China are racing ahead.

Commercial 5G operations are slated for next year, and Chinese telecoms companies are spending billions on infrastructure to be able to be the first to have pure 5G “standalone” networks, rather than those layered over 4G, when standards are agreed.

“5G is just a foundation, one of the key technologies. Europe needs to catch up,” said Vincent Peng, head of western Europe for Huawei, adding that there was an investment gap in Europe and a potential shortfall of tech workers.

If China does achieve standalone 5G networks well ahead of the US and elsewhere, Chinese tech firms would have an advantage in developing applications, though the country’s heavy regulation could slow down their lead.

Chinese smartphone makers would also gain an even greater advantage in their home market if China “races ahead”, says Carolina Milanesi, a mobile analyst at Creative Strategies, a Silicon Valley researcher.

“Apple and Samsung, in particular, have a lot at risk in sitting this out and [letting] Huawei, Oppo, Vivo and so on control the very valuable Chinese market,” she said.

Developing 5G business models “may be works in progress for years” said Paul Lee, head of telecoms research at Deloitte.

But he added that China would be ahead in refining applications, especially because of its enormous pool of data. “China has several of the largest bases of digital consumers anywhere in the world,” he said, describing these as “Petri dishes” for 5G development.

Meanwhile, as the woes of Huawei and fellow Chinese equipment company ZTE signal a possible opening in the market, other 5G suppliers have begun co-operating with each other.

In October, Samsung and NEC announced that they would jointly develop 5G base stations. Ericsson announced a tie-up with Fujitsu.

If the US is committed to challenging China’s 5G efforts, it could now go on to ban US suppliers from working with Huawei.

That option would be “nuclear” according to a senior figure within the telecoms sector and could stop development in its tracks.

Mr Lee said: “If Huawei cannot license Android from Google, or Qualcomm’s patents in 4G and 5G radio access technology, it will not be able to build smartphones or 4G/5G stations.”

Mr Peng added that 33 of Huawei’s 92 core suppliers were US companies, showing its vulnerability to any ban.

Taking such action, however, would carry the risk that China would decide to split from international standards and possibly create two separate “and potentially non-interoperable” systems, added the Eurasia Group.

That could leave companies, and countries, having to choose which system to adopt. “There is certainly a risk that we will see a fragmented 5G market,” said Ms Milanesi.

Meanwhile, other countries are hoping that any delay in their 5G rollout will not cost them too heavily.

William Webb, the former head of research at Ofcom and president of the Institution of Engineering & Technology, noted that the UK was slow to launch 4G but caught up quickly.

He also argued that innovation in 5G networks may come from outside the telecoms sector as factories and industries develop their own network technologies.

“China might be building the equivalent of a Concorde. It’s faster but there’s not much point to it,” he said.