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The Sino-American War for 5G Dominance
Technology Briefing |
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TranscriptIn a 2013 speech, Xi Jinping made the case for the life and death struggle between Chinese Communism and the West saying, we “should be staunch believers and faithful practitioners of the lofty ideals of communism and the common ideals of socialism with Chinese characteristics. Facts have repeatedly told us that Marx and Engels' analysis of the basic contradictions in capitalist society is not out of date, nor is their view that capitalism must die out and socialism must win. This remains an irreversible general trend in social and historical development.” “The final demise of capitalism and the final victory of socialism will be a long historical process. We should have a deep understanding of capitalist society, fully estimate the objective reality of the long-term dominance of Western developed countries in economic, scientific, technological and military aspects, and earnestly prepare for the long-term struggle between the two social systems.” Xi concluded that the Chinese people and the Chinese Communist Party must “continuously build socialism with superiority over capitalism, and continuously lay a more solid foundation for it to win the future.” This extends to diplomacy, military confrontation, and economic competition. What does this have to do with 5G technology? Everything. As the world transitions to 5G, Chinese telecom giants Huawei and ZTE have pulled out all the stops to dominate this next generation of wireless technology. Primacy in wireless is a key goal of Beijing’s “Made in China 2025” program and for good reason: The modern world runs on wireless, and 5G networks will make connectivity even more central as the “Internet of Things” connects up all manner of devices and appliances that today are off the grid. Therefore, in the very near future, dominating the wireless world will be tantamount to dominating the world! Beijing believes this, and an increasing proportion of decision-makers in the U. S. government have begun to agree. But many of our allies and others around the world seem content to stand by and let Beijing’s march to 5G domination continue unhindered. Unlike earlier generations of wireless networks, 5G will rely more on software and less on hardware, allowing the possibility that companies could control the networks to divert information without being detected. This capability grows as Washington and its allies have become more suspicious of Beijing, recognizing that a series of new laws gives it unfettered access to data that crosses networks built and maintained by companies based in China. Much of the attention has been on Huawei because it is closely linked to the People’s Liberation Army and it has already been the subject of Department of Justice indictments accusing it of stealing competitors’ trade secrets and is at the center of a spy scandal in Poland. At Trends it’s our belief that we cannot allow a nation that has shown no respect for political freedom, freedom of speech, or freedom of conscience to dominate this crucial technology. As of this writing, American officials confirm that the Trump administration is moving closer to completing an executive order that would ban the use of equipment from “adversarial powers,” in U.S. networks. The executive order, which has been under discussion for months, is aimed largely at preventing Chinese telecom firms like Huawei from gaining control of 5G wireless networks that companies are beginning to build in the United States and around the world. American intelligence officials have grown increasingly concerned about Huawei and other Chinese telecom companies, saying their inclusion in American networks poses security risks that could jeopardize national security. Meanwhile, American officials are increasingly ratcheting up other kinds of pressure on Huawei. For instance, the United States recently brought criminal charges against Huawei’s chief financial officer, Meng Wanzhou, and is seeking her extradition from Canada, where she was arrested at Washington’s behest. Even more importantly, top American officials, including Secretary of State Mike Pompeo, have spent time in Europe pressing allies to take their own steps to ban Chinese companies, including Huawei, from their next-generation networks. Unlike the U.S., where Huawei equipment has long been banned, Huawei is strongly entrenched in the EU, where it boasts about a third of the European telecoms equipment market, with chief rivals Ericsson and Nokia each holding one-fifth or slightly more of that market. There is as yet no European-wide policy for 5G telecom equipment, so each nation (and each company) has gone its own way. For instance, larger operators such as BT, Vodafone, Orange, and Telefónica have announced either the stripping of Huawei equipment from existing networks or decisions to exclude it in future 5G rollouts. But they have also cautioned against a total ban. Similarly, governments have been divided, often with security agencies pitted against other departments and some private mobile operators; for instance, in the Czech Republic, its security agency proposed banning Huawei equipment, infuriating the Czech president, who has developed close ties with the company. Mr. Pompeo has been making the case to allies that they should avoid using Chinese telecom companies in their 5G networks, saying it is a security risk. And American officials have been privately telling European allies that decisions about troop presence and bases could be predicated on which countries have 5G networks free of Chinese equipment. Recently, the Secretary of State issued a public version of that warning, telling allies to steer clear of Chinese-built 5G networks. He conceded that in the end, the decisions regarding Huawei were up to individual nations and the EU as a whole. But he also played the security card, repeatedly warning that if a country decided to retain Huawei backbone equipment, such a move would have potentially grave consequences for their alliance with the U.S. (and by inference, with the NATO alliance). He stated: “[Huawei equipment] makes it more difficult for America to be present. That is, if that equipment is co-located where we have important American systems, it makes it more difficult for us to partner alongside them.” Pompeo warned other nations about “risks that Huawei’s presence in their networks present including actual risks to their people and to the loss of privacy protections.” Until Britain’s recent equivocation, it looked as if the main English-speaking countries including the United States, Australia, New Zealand, Britain, and Canada would unite behind the US strategy. Australia and New Zealand have banned Huawei from 5G backbone sales and Canada is moving to put similar rules in place. However, Canada has already been warned of “repercussions” by China’s ambassador to the country. Moving beyond the security dilemmas, urgent factors relating to competitive market structure and the state of 5G technology are also weighing heavily on both European governments and telecoms operators. The proposed executive order would not simply clarify America’s domestic policy, it would help reinforce America’s demands to these other nations. Those in the know say that the administration wants to complete its trade negotiations with China before introducing the order. As of late April, American trade negotiators are still working with Beijing trying to hammer out a trade deal between China and the United States. American officials have repeatedly emphasized that the executive order — and its concerns about Huawei — is separate from the trade talks. But during an Oval Office meeting in February, Mr. Trump said he expected Huawei to come up during those talks. In the same vein, Acting Secretary of Defense, Patrick M. Shanahan, is raising the dangers of using Huawei and other Chinese telecom firms in foreign networks. While some European countries, like Poland, have embraced the U.S. point of view, Huawei is intertwined in European networks and many countries have made heavy use of its equipment. Britain, for instance, has allowed Huawei to build equipment outside its core networks, but has an oversight board that closely examines Huawei’s equipment and software. Already, the big U.S. carriers like Verizon and AT&T have all said they will not use Huawei equipment anywhere, in anyway. However, administration officials insist that without an executive order, some smaller companies that serve large parts of the rural United States might use Chinese equipment, making the network vulnerable. What’s the bottom line? 5G telecom will rapidly supplant existing networks, enabling the other technologies of the Fifth Techno-Economic Revolution, including the Internet of Things, Service Robotics, Artificial Intelligence, and Quantum Computing, to realize their full potential. As such, no nation or industry can choose to opt-out. China’s mercantilist economic strategy and its national security policy depend on controlling as much of the world’s 5G infrastructure as possible. For that reason, the Communist Party of China, the Chinese Government and the People’s Liberation Army have invested heavily in the success of Huawei. From the theft of intellectual property to ignoring commercial bans on trade with Iran, Huawei has already shown that it’s eager to undermine U. S. national interests. As the confrontation escalates, we’ll see just how much diplomatic and economic capital the United States is willing to invest now, to eliminate a potential military and economic threat, down the road? Given this trend, we offer the following forecasts for your consideration. First, the Sino-American struggle for 5G dominance will be highly asymmetric, with a structure favoring the United States. Through Huawei and ZTE, China controled about one-third of the global 5G infrastructure market as of 2017. Nokia and Ericson each controled about 20%. U.S. networking companies like Cisco are minor players, while Qualcomm creates chip designs and software that go into other people’s products. On the demand side, the United States has by far the world’s largest share of Internet traffic and major telecom companies. As the United States focuses it’s geopolitical resources on putting more of the world’s market out of reach of Huawei, the company will lose the early “scale advantage” it has had in building out Chinses networks. This is a game China can’t win, if the United States holds firm. Second, when all is said and done, regulatory bodies in the EU and most other parts of the world will concede to U.S. demands to shun Huawei based on national security concerns. The greatest advantage the United States possesses in this struggle is its role as the de facto “security guarantor” for the EU, as well as Japan, South Korea, the UK, Canada, Australia, and New Zealand. For these countries, as well as India, a defensive alliance with China is implausible. This gives the United States the ultimate leverage. And, Third, the forthcoming executive order will ban a broad array of foreign equipment, not just Huawei. It will also prevent any Russian software from running on telecommunications networks. But it will not ban European equipment makers like Ericsson or Nokia. The question is whether the White House adds an extraterritorial element to the US ban, similar to the sanctions used against terrorist nations. Such provisions might bar telecom companies doing business with the United States from using specified foreign equipment or software. The rationale would almost certainly focus on national security concerns. |
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