The US-China 5G race: Where America went wrong
Last week the US’s Federal Communications Commission agency (FCC) declared the Chinese telecoms manufacturers Huawei and ZTE as ‘threats to national security’. The decision bans the use of US government’s money on equipment manufactured by those firms, thus effectively cutting them off from billions of dollars in revenues.
The decision continues the Trump administration’s policy of putting pressure on Huawei and ZTE for ‘security’ reasons. This follows the latter’s – especially Huawei – unstoppable match towards domination of the fifth iteration of mobile technology, called 5G.
While many associate 5G with lightning speed downloads, it is much more than that. It is a game changing technology which will revolutionise many industries, from healthcare to transport to entertainment. The ecosystem that will be spurred by 5G will generate trillions of dollars a year, and over 10m jobs in the US and China alone.
This is the reason the US is hellbent on stopping China from dominating this industry. However, while the US has been discouraging other nations to shun Huawei, the firm has been raking in contracts to supply 5G equipment from left and right, with at least 80 operators lined up today. Moreover, apart from New Zealand, Australia and Japan, it appears that even its own allies do not back its aggressive steps against Huawei. For example, Germany’s Angela Markel commented that ‘(Germany doesn’t believe in) excluding a company simply because it’s from a certain country.’
The US appears to be fighting a lost battle. Indeed some may argue that it lost this battle through decisions made decades ago. While China has Huawei and ZTE, the US offers no alternative but to place all its bets on Sweden’s Ericsson, Finland’s Nokia, and South Korea’s Samsung to cover its nakedness. For a nation with as illustrious a telecom history as the US’s to find itself with no champion in such a mission-critical infrastructure arena is strange to say the least. Whatever exposed America to this situation is primarily to be blamed for the outcomes.
Prior to 1990, America’s telecom innovations were championed by Bell Labs, owned by a company founded by the famous telephone inventor, Alexander Graham Bell, AT&T. Bell Labs developed many inventions such as transistors, solar cells, lasers, cellular technologies, and fibre optics. AT&T dominant market position helped strengthening Bell Labs thus making it a de facto telecoms solutions provider for the US.
However, because of an anti-trust suit, the US government decided to break AT&T in 1984. Over the years Bell Labs went through multiple ownerships but ultimately it started to lose its competitive edge. AT&T monopoly sheltered Bell Labs, but post-AT&T the company failed to deliver given the pressures of accelerated innovation under stringent financial and market requirements. So it started to scale down steadily with time.
Compared to the US, China has been astonishingly strategic about its telecoms ambitions. Even before Huawei was founded, Beijing had earmarked telecoms as an industry that China had to be globally competitive. Whereas the Chinese were happy to allow the West to innovate while they imitated, they kept improving with time by investing billions of dollars in R&D. Today, a report by the US’s Defence Innovation Board that boasts members such as Alphabet’s Eric Schmidt observed, ‘Chinese equipment is cheaper and in many cases superior to its western rivals.’ That simply means the Chinese have won.
In 2013, a Chinese joint ministerial committee cofounded a 5G promotion group to push for standardisation and collaboration with EU, US, Japan, and Korea. China had learned from the missed 3G and 4G opportunities and it ‘determined to make 5G a top priority on its national agenda’, a report by Ernst and Young observed. Consequently the Chinese government threw all its weight behind 5G, and it is expected to spend USD 180 billion by 2025.
Moreover, China harmonised 5G spectrum usage between its operators, thus helped to improve their business cases. The outcome is that operators – China Mobile, China Telecom, and China Unicom, all state owned – have a huge incentive to develop 5G infrastructure and related ecosystem, even though their infrastructure is already superior to the US’s. For example, China’s base stations outnumber the US’s by 10 to 1.
The US, unfortunately, demonstrated no strategic determination before the government hit the panic button and went into its disconcerting aggressive actions. That’s why it has no one to champion its course, allies are not backing its actions, its operators lack the necessary incentives to immediately shift to 5G, costs of spectrum auctions are highly inflated, etc. While the US should indeed be concerned by the prospect of China controlling the world’s telecom infrastructure – the Chinese record regarding individual freedoms is patchy at best – but this is no way to fight this war: the US did not lose because of China, it lost because of its strategic failures.
In telecoms the winner usually takes all. At this point, China is beating the US at its own game, and it is not even close. The US should get back to the basics and salvage anything from this embarrassment. And when the US gets its act together, the smart money should always be put behind it, shouldn’t it?
