The 5G Factor:A Primer

Introduction

The reason the future of the 5G Industry merits discussion here is the unique leverage (in addition to its control of supply chains) it would provide to China if it emerges as the ultimate victor of the projected $2 trillion pie (by 2030). Amidst the pandemic, China has utilised its monopoly position in manufacture of medical equipment by undertaking what has been termed as “mask diplomacy” in the context of the vulnerable economic and public health situations. When states are struggling to restrict deaths and prevent hospitals from being overwhelmed, Xi Jinping  strategically weaponised China’s monopolised supply chain of integral medical equipment including half the N95 masks in the world  to further Huawei’s 5G gains. 

The integral question that must be answered is why 5G infrastructure is so crucial from a geo-economic as well as political standpoint. 5G goes beyond just the generational jump and promises to be the harbinger of the future – with the Internet of Things, M2M communication, self-driving cars etc. The rollout of 5G is thus, not only an important economic interest for China and its telecom companies, but is also considered a national strategic priority in its competition with the United States for control of global telecom and IT infrastructure. This present push for 5G dominance goes beyond mere economic interests – one of the only areas where production and projected numbers conspicuously did not fall. China has kept on pushing for expansion through its BRI and Digital Silk Road initiatives. It represents a larger geopolitical battle for control of technological control and global governance in the future. This explains why the US has been making all attempts possible to prevent China from dominating 5G. 

The telecommunication standard-setting bodies, most importantly the 3GPP represent a crucial aspect of the US-China 5G battle. The process of standard setting represents an important element of the geopolitical battle where other allies have not followed suit in isolating China. Domination in the standard setting process has further allowed Huawei to possess several patents and dominate global supply chains in 5G technology - providing the full stack of equipment required for 5G functionality. 

After last year's sanctions on Huawei, the 3GPP had warned the US of possible breakdown of and divergence in standard setting mechanisms, given the dominant role Huawei and China have played in standard setting for 5G. The role of the US has been restricted in the standard setting process because US tech companies including Intel, Qualcomm, Amazon etc. refrained from active participation in the standard setting bodies where Huawei is a member. This was due to the uncertainty around the information or technology they could legally share because of the restrictions on working with Huawei. 

Other than delays in release of the latest standards, the pandemic has impacted US-China relations significantly which in turn is likely to affect the standard setting process. The COVID-19 outbreak caused a worsening of relations and brought hostility from the United States which could have further harmed their own prospects in the 5G battle. The fresh set of sanctions on Huawei certainly indicated that the hostility might cause further disengagement from the standard setting process, as seen over the past year. However, the US Department of Commerce has created an exception on its Huawei ban to permit US companies to work with them in the standard setting process. This could enable balanced engagement through US private presence in standard-setting along with Huawei. The amended rule seeks to ensure full participation of US companies in voluntary standard setting bodies to curb Huawei’s position of strength. 

The US has also released a “national strategy to secure 5G” to encourage further government involvement in the standard setting process. These measures indicate US recognition of the importance of international standard setting and its resolve to not permit Huawei to dictate the 5G standards. While these actions are ostensibly aimed at diluting Huawei’s influence in the standard-setting bodies - one of the most important spheres in the 5G battle - the actual tangible impact in affecting the dynamics at these bodies remains to be seen. In an international body where Huawei has consistently been the largest contributor towards 5G standards, it poses an uphill battle for US companies to immediately cover the lost ground and gain sufficient influence. 

Apart from the above brief issues, the factors working in favour of strengthening China’s dominance in the 5G industry, potential threats, and the resultant geo-economic/political impacts will be analysed in detail. 

Factors in favour of China’s 5G dominance

As the coronavirus outbreak had worsened in China, it seemed that the position as a leader in 5G technology was threatened by the virus. The initial reports in February pointed towards a slowdown in the rollout of 5G in China owing to the quarantine measures and complete lockdown in important regions such as Hubei. However, the SOEs (state-owned enterprises), i.e., China Mobile, China Unicom and China Telecom have continued to push for an increased pace of 5G rollout in China and towards laying the 5G infrastructural foundations abroad. Notably, as per a GSMA report in March, China has remained on track with setting up 5G base stations even at the peak of the outbreak. 

The crisis has made it a lot more complicated for the US to lobby against Chinese 5G infrastructure being used in Europe and other developing economies. There are three important reasons for this: a) the massive financial burden of recovering from the pandemic b) the increased need for digital connectivity in the post-COVID world and c) China’s strategic leveraging of its monopoly on medical equipment to obtain acceptance of Huawei 5G. 

On the international front, despite the United States best attempts to persuade its European allies to not adopt Huawei 5G infrastructure they have constantly been thwarted. Their objections have been based on alleged security concerns caused by “backdoors” present in the network.  The US has warned the world that Huawei effectively functions as a wing of the Chinese government and conflicting state interests might threaten the stability of core communication systems and critical infrastructure including power grids and water supply. 

However, Europe had taken a balanced approach by including risk mitigation plans which would limit access of ‘high-risk’ vendors (where Huawei has been included) particularly from “critical or sensitive infrastructure networks.” Further, they already have Huawei infrastructure integrated in their 4G networks and a ban would be financially imprudent given the costs of replacing existing networks and expanding 5G infrastructure from alternative sources. This is even more pronounced given Europe's current recessionary outlook and massive expenditure undertaken to support public healthcare and boost the economy. The likelihood of adopting China’s 5G infrastructure to cut costs has never been greater. 

In developing economies, there is an enhanced need for digital connectivity to brave through current pandemic and prevent future crises. Beyond the conventional innovations associated with 5G networks, it was implemented in facilitating online schooling, public healthcare. Digital health technologies saw several innovations including use of Artificial Intelligence, big data, and cloud computing to improve case tracking, improved efficiency of diagnosis and treatment (telemedicine) as well as thermal imaging systems and health apps utilised during China’s months-long lockdown. The fallout of the pandemic and China’s seemingly effective response to it, have furthered the narrative that 5G-enabled digital connectivity and the associated technologies it functionalizes - cloud computing, AI etc, are a certain benefit for any country’s public healthcare and response mechanisms to future crises. This may further bolster China’s establishment of its 5G infrastructure in several developing economies in furtherance of its Digital Silk Road. In fact, Huawei has recently undertaken strategic events with India’s telecom association to boost its position in India including its 5G enabled health technologies used to tackle the virus, despite the strong anti-China sentiment. 

On mask diplomacy, there had been reports that Jinping had made supply of masks and other integral medical equipment contingent on acceptance of Huawei 5G infrastructure. Using economic coercion to broaden Chinese influence and global power is a commonly occurring phenomenon with its patented ‘debt trap’ implemented successfully in the BRI. The response from countries accepting Chinese has been either gracious and grateful (as in the case of Italy, Eastern Europe, Spain, The Netherlands) or one of grudging acceptance with no choice at hand as seen with most major Western powers. Even Huawei, ZTE, Alibaba and other Chinese Big Tech companies stepped up to provide medical aid to improve their image after recent security-related controversies. (for a more detailed look into Europe-China relations during COVID-19 see here)

The claims of China hiding information about the coronavirus outbreak from the rest of the world and the WHO had contributed strongly to its negative image. As a crucial aspect of rehabilitating this negative perception, China adopted a massive propaganda campaign in Western media. China’s ‘information warfare’ aimed to further its narrative of acting decisively in managing the outbreak locally and as a leader in the global fight against coronavirus with its medical and humanitarian aid. These have also been viewed as China’s attempts to upend global governance norms and replace the US when it has not been able to respond adequately during the crisis.

However, the confused and sometimes aggressive messaging from the Chinese has backfired with some countries and the soft power gains are likely to be limited. China’s medical aid and propaganda push, which aimed to prevent an increase in its worsening image have witnessed limited success in specific geographic areas, but it has achieved the crucial task of securing loyalty from most of China’s allies including the South-East Asian Nations, Italy, Eastern Europe, and several others. 

The crucial gain for China remains in states’ recognition of the possible repercussions of acting against Chinese interests, i.e., Huawei’s interests - the overt threat of retaliation in economic, political and diplomatic consequences. This highlights the point that China’s soft power gains, though limited, are underscored by China’s use of economic coercion to achieve its ends.  

Threats to Huawei and Chinese Dominance

Beyond the beneficial contributors to Huawei’s dominance, recent developments have created factors that can threaten Huawei’s growing clout in the 5G industry. These include: a) the fresh set of sanctions targeting Huawei by the US and b) the UK’s reactionary security review of Huawei, the subsequent ban and its proposed 5G alliance. c) India's recent ban on Chinese apps amid border tensions with China and Reliance Jio, a major Indian telecom operator, announcing independent home-grown 5G network solutions. The likely impacts and effectiveness of these threats will be evaluated here. 

The US, nearly a year after its first ineffective sanctions against Huawei has imposed fresh sanctions on them. Despite the sanctions on Huawei last year, which barred export of some American technology including access to Google on its mobile devices, the Chinese tech giant had a remarkably successful 2019 with a 19% rise in revenue. This prompted Washington to adopt a more direct approach by banning the use of any American tools for making crucial semiconductor chips for Huawei’s products. The official sanctions by the US Department of Commerce termed the Export Administration Regulations (EAR) place a bar on chips designed or customised to Huawei’s specifications being manufactured even by foreign companies using American equipment except with a license. 

Superficially this appears to be a master-stroke since all major companies including Taiwan Semiconductor Manufacturing Corporation (TSMC) - Huawei’s main supplier - and China’s Semiconductor Manufacturing International Corporation (SMIC) use some American tools in their chip manufacturing process. However, the increasingly globalised nature of the chip-making industry with only 27% of American manufacturers’ plants based in the US, had curbed the effectiveness of the earlier sanctions - exposing the limitations of what US domestic law could achieve globally. It may appear that the target on chip-making tools where a majority of the assets of the larger companies are held in the US, allows more effective control. 

Initial responses have focused on the possible impact of these sanctions threatening Huawei’s survival, which is however, not the first time Huawei has spoken in terms of ‘survival’ being threatened by US sanctions. Going with the trend of the US efforts to sanction Huawei, this move may backfire as well and there are a number of reasons for this. Legal experts have identified a few loopholes which would permit companies such as TSMC and others to continue supplying chips to Huawei. The scope of the words ‘designed by Huawei’ in the EAR remains vague, which may permit Huawei to purchase uncustomized chips. Further, Huawei’s system includes paying contract manufacturers to assemble its 5G base stations and mobile devices, and the chips are sent directly to them. Lawyers analysing the EAR have claimed the chips sent to third parties would be permissible for use, providing Huawei devices access to the chips indirectly. 

The sanctions have also prompted numerous responses including the Chinese Government’s announcement of providing funding of $1.4 trillion by 2025 to develop independent capacity for its 5G technology industry including chip-making. To counter the fallout of an escalating trade-war and protect its core sectors, Huawei has been building a stock-pile of its most important chips since 2018, which ensures it has supply for the next two years. SMIC, China's biggest chip-maker has simultaneously announced that it has received a $2.2 billion investment from Chinese state investors to beef up its production capacity in China by nearly six times. Samsung Electronics also has a chip-making factory in Xian, China and it has intentions of investing nearly 115 billion in the coming decade. All of these measures suggest that Huawei will not be an entity easily taken down by US sanctions, not with the CCP behind it. 

The UK was in favour of permitting Huawei access to 35% of the network in January 2020. However, implications of US sanctions and pressure from a group of MPs in the ruling party prompted a security review of Huawei’s involvement by the National Cyber Security Centre (NCSC). The NCSC security review was conducted in the backdrop of Chinese threats of retaliation, if the UK decides to exclude Huawei. The UK has subsequently banned Huawei, after its security review and hopes to phase out Huawei equipment from its networks by 2027. The alternatives that the UK must explore now include Nokia and Ericsson and their 5G rollout stands to be delayed by 2-3 years and with additional cost of replacement placed at nearly £2.5 billion. Beijing has responded with contempt for the decision, with the Chinese foreign ministry and Ambassador to the UK issuing threats stating that the Huawei ban will cause stiff retaliation from the Chinese administration and businesses. 

On the UK's future 5G plans, as mentioned in Part 1, the UK had proposed a 5G alliance of democratic nations including the G7 nations, South Korea, India and Australia. The main objective of the alliance is to finance existing telecommunication companies to create 5G networks independent of Huawei due to its alleged national security concerns. However, beyond the US and Australia, the rest of the countries remain ambivalent on a 5G alliance. 

Two challenges the 5G alliance would face include garnering support from key members of the alliance including the G-7 nations of Italy, France, and Germany as well as achieving the required technological capacity amidst economic turmoil. Italy continues to hold strong relations with China after it signed on to the BRI in 2019 and received Chinese medical aid when it had been abandoned by its European neighbours during the pandemic. France has stated it has no intention to discriminate against telecom operators including Huawei but will build in safeguards in their networks. Germany though undecided on its policy regarding Huawei has had certain important telecom players express the need for Huawei’s technological expertise which ties into the second challenge. 

The required technological competence towards beating Huawei’s edge even with all the funding their bruised economies can muster presents an additional obstacle. If Huawei, the largest telecom technology provider in Europe is removed, the alternatives are sole reliance on Ericsson and Nokia with  possible dangers of a duopoly over the entire continent emerging. Further Huawei’s presence in the continent is more than substantial, where it has spent more than decades conducting research and fine-tuning networks to industry requirements. (for specific details see here). Europe’s biggest telecom operator Deutsche Telekom has acknowledged recently  that it “needs Huawei involvement” for construction of 5G base stations in Germany and their elimination could delay 5G rollouts in Europe by 2 years. Switching from Huawei presents not only a big economic cost to governments but also industries reliant on Huawei’s efficient network and communication systems. 

The hopes of a democractic 5G alliance, while important given legitimate national security concerns with Huawei, are at a nascent stage and come with a unique set of cooperative challenges given the populist and isolationist policies in  a number of countries as a consequence of the pandemic. Europe has largely been resistant to US warnings on national security threats posed by Huawei, even before the pandemic. Sans the key European nations, the alliance would lack crucial technological expertise and more importantly, funding it would need to beat China which keeps pumping billions into its 5G future.

India's recent ban on Chinese apps also merits some consideration at this juncture. The Indian  government's interim order to ban 59 Chinese apps originated in the backdrop of border clashes  at the Indo-China border. The ostensible reason for this move is the alleged practice of unauthorised sharing of Indian users’ data to servers outside India affecting national security and data privacy and China’s data-sharing laws as well. The ban’s enforceability remains uncertain with the Indian administration asking the banned apps to submit their data-sharing practices for the process of hearings to be conducted where the legality of the ban will be determined. 

The possibility of further escalation from India (i.e. 5G) must be understood in the context of its trade relations with China and its strong reliance in several sectors beyond technology as well. There exists speculation that China’s rise as a global tech power may be threatened by the ban but several reports have contemplated the possibility of the ban inflicting larger harms to India than China. This is because India’s trade deficit towards China stands at nearly $50 billion, despite a fall in Chinese imports over the past two years. Thus, as emphasized in Part 1, decoupling from China particularly at an economically vulnerable stage, will come with harsh economic consequences on its struggling economy and its citizens with prices of non-Chinese goods likely to be higher. 

Despite this reality, there have been reports suggesting that a ban on Huawei and ZTE’s 5G equipment may be under consideration by Indian ministers. The news of a possible ban on Chinese telecom equipment has been met with opposition from the Cellular Operators Association of India (COAI). Their argument relies on separating geopolitical factors from commercial decisions, barring which higher costs (25-30%) would invariably be incurred on network gear equipment and imposed on customers. 

Conversely, India has recently witnessed Jio’s announcement of foraying into the 5G technology space - in line with the ‘Atma-nirbhar’ (self-reliant) narrative in India. The current political climate may suggest India's intention to limit Huawei’s access to the 5G network infrastructure in the country. With its enviable list of strategic investors (Google, Qualcomm, Facebook, Intel) and emerging technological solutions (OpenRAN and Cloud), Jio seemingly possesses the  capability to produce wireless telecom equipment for 5G networks and associated 5G solutions. However, to make its mark, Jio must play catch-up with Huawei’s technological capability. It presents a tall order because of the long timelines - nearly 3 years - and associated challenges with using OpenRAN to develop competent software and hardware solutions which can integrate 4G networks and is also compliant with 3GPP standards. The success or failure of its purported full stack of “home-grown 5G solutions” also remains contingent on government policy and allocation of spectrum, slated a year later. With no real testing and proven use cases of its 5G solutions, the venture still remains a prospective success and does not realistically imply Huawei’s complete exclusion or Jio becoming an immediate competitor in global telecommunications equipment. 

Path ahead for 5G

The developments over the past few months indicate that China faces several challenges to its dominant position in the global 5G race. However, a majority of these factors may not possibly deliver the impact that they promise. 

Despite widespread claims that the US clampdown on supply of semiconductor chips to Huawei may hit them hard, precedent says otherwise. The company has not been one to shy away from drastic measures including 24-hour workdays and other innovations to overcome supply issues. Testament to this was Huawei’s aforementioned 19% growth despite sanctions in 2019, by using loopholes to obtain supply of essential components from American facilities abroad. Huawei enjoys the advantages of state subsidies and the full support of the CCP which allowed its rise as a global telecom leader. China’s unique economic and diplomatic position including control of integral supply chains provides it enough ammunition to counter the growing anti-China sentiment and alliances which largely remain restricted to a few countries of the developed world. Huawei’s conditions certainly remain precarious but as displayed in the past - the company’s resolve to take drastic measures coupled with state support have been able to provide solutions to problems (such as last year’s sanctions) that seemed insurmountable. 

In addition to these factors, Huawei’s capability of providing the full stack of 5G technology from receiver base stations to smartphones. Huawei continues to hold the largest number of commercial 5G contracts - 91 worldwide and more than half (47) in Europe. Further, its dominant position in standard-setting ensured they hold the largest number of patents promising economic benefits despite the US restrictions. The economic benefits of 5G domination include the payouts for setting up base stations and network infrastructure and payments to Huawei for use of its patented technology by other companies.  

Even assuming that the consistently increasing challenges spell the end for Huawei, there remain a few reasons why China’s 5G ambitions can’t be dismissed just yet.  China’s tech surge goes beyond Huawei too and the possible failure of Huawei through bans and restrictions, though unlikely, would not prevent China from emerging as a technology superpower in the coming decades (also see here). With a population of 1.4 billion,  where key US companies like Apple have nearly a fifth of their sales, losing access to their market would be disastrous for the rest of the world as compared to the loss China will face from losing out on the US market. Chinese investments in digital infrastructure clearly outpace its competitors and its recently concluded Two Sessions meeting saw an economic stimulus package of $506 billion with a focus on development of 5G and digital infrastructure (as opposed to massive US stimulus spending not focused on infrastructure).

Beyond the aspect of US sanctions, India represents a major digital market in China's quest for global technological dominance. Being the second most populous nation, and relatively unsaturated a closed Indian market could dampen Chinese ambitions. The Indian ban on Chinese apps has further bolstered the US’s anti-China stance with several statements highlighting their intent to ban TikTok. Combined with UK’s ban on Huawei, it may additionally serve as precedent for other countries to take a stronger stance against Chinese tech companies. The caveat of any measures against China however, is the inevitable pushback. The threat of Chinese retaliation through economic sanctions/ trade retaliations (as threatened against UK by Chinese officials), cyber attacks (as seen against Australia recently) and threats of action at multilateral fora such as the WTO (against India) would remain important concerns for any country before taking such a step amidst the pandemic. 

Additionally, China has become the first major economy to recover and has posted a 3.2% growth in GDP in the second quarter this year, already beating predicted growth statistics after the dramatic fall in the first quarter. Even with growing anti-China rhetoric across countries, certain practical realities regarding China will play a part in policy decisions for most countries. Given the fact that it is the world’s second largest economy, holds crucial links in a majority of global supply chains and is a technological behemoth, it cannot be realistically isolated without plunging the global economy into worse suffering in the short run. 

Thus, most of Europe, recognizing their own interests and unwilling to be pushed around by the US, has not ruled Huawei out. The disengagement with Huawei comes at heavy trade costs which the US and UK may be willing to bear but most countries are likely to consider those economic interests closely before upsetting Beijing. With access to 5G becoming crucial, the developing world will likely rely on Huawei even if a handful of US allies ban the Chinese entity. It might trigger a split in the world’s tech industry spilling over to all trade conducted between the West and China - something neither side would prefer. 

Despite the seemingly unending challenges, the task of acting against Huawei and China presents even more complex problems, and it seems writing off Huawei from the future of 5G, may be a premature call.