Will 5G be the big casualty of China-US trade war?

Will 5G be the big casualty of China-US trade war?

As the war of words hots up between the US and China over some $150 billion in bilateral trade tariffs, evidence that 5G and telecoms programmes will be among the collateral damage is growing.

While China drags its heels over approving a range of deals, such as Qualcomm’s critical $44 billion bid for NXP Semiconductors, and the US seeks to force through changes to existing China-US deals, Chinese companies that are state-owned or which have significant state investments may find themselves sidelined from operations in the US and the UK.

Earlier this week, Britain and the US announced measures against one of China’s largest telecoms equipment makers, ZTE Corp, which bar it from doing business in the UK on national security grounds, and shut the company out of dealing with US suppliers for a period of seven years.

The company has suspended trading in its shares in Hong Kong and Shenzhen while it explores the impact on its business. ZTE has suggested the move is “extremely unfair” and could threaten its survival.

On Monday, the British government warned local telecoms operators not to use ZTE equipment because the company’s state ownership raises security concerns. With billions of pounds in potential revenues up for grabs in 5G and fibre contracts in the UK, the impact on ZTE will certainly be significant.

Robbing Peter to pay Paul

The global trade dispute comes at a difficult time for the UK, which – along with other Western countries – finds itself being drawn deeper into the White House’s dispute with Beijing. Hostilities centre on IP and, in the background, on China’s growing dominance in areas such as AI and robotics.

With Brexit on the horizon, the UK needs to forge closer ties with other large economies. In January, Prime Minister Theresa May visited China with 50 business leaders to revive “the golden era” of Sino-British trade. The aim wasn’t just to promote British interests in China, but also to encourage Chinese companies such as China Mobile and Alibaba to invest in the UK and set up operations in London.

Chinese companies already employ thousands of people in the UK and contribute billions of pounds to the local economy, while professional services providers, such as PwC and Deloitte, run large operations dedicated to helping Chinese companies work in the country. More, China is a major investor in UK property and construction programmes – not to mention in 5G rollouts and telecoms infrastructure upgrades.

Whether the UK might now act against other companies, such as Huawei, on national security grounds remains to be seen. The world’s largest telecoms equipment supplier has a large and ever-expanding presence in the UK and is actively monitored by GCHQ. In the US, however, telecoms companies are barred from dealing with Huawei in moves that may see the US invest in 5G unilaterally.

A 5G elephant in the room

Huawei itself has not been silent on the subject. In an extraordinary move, the long-term 5G proponent and BT partner joined the war of words this week by suggesting that 5G technologies may be a white elephant that most consumers won’t notice and that operators will struggle to make a profit from.

Current chairman Eric Xu – the company rotates its leaders – said that while 5G may be faster and more reliable than 4G and its mobile network predecessors, consumers would find “no material difference between the two technologies”. He added that Huawei would continue to invest in 5G, simply because failure to do so would be bad for business overall.

“If you are not good at 5G, customers won’t buy from you even for 4G,” he said. “If one [network operator] says, ‘I have a 5G-enabled network’, the rest really have to launch 5G even if it’s just for branding or marketing purposes.”

National embarrassment

Huawei’s comments will be acutely embarrassing to BT. Britain’s network giant signed a major deal with Huawei 13 years ago and started joint research and development work on 5G in 2016. In March 2018, the two companies inked a strategic partnership deal to “ensure 5G leadership for the BT Group and its mobile network, EE”, according to a joint statement at the time.

Speaking about that deal, Howard Watson, CTIO of BT Group, said, “Huawei has helped us drive the evolution of the EE 4G network, and they are the ideal partner to help us push the barriers of 5G.”

Now that key partner has effectively poured cold water on the entire project in a move that seems calculated to raise tensions with the West.

Is Huawei right?

5G networks have been lauded as a critical component in the rise of a range of technologies, including autonomous cars, smart city environments, robotics, and the IoT itself. But Xu continued, “Even today we have the technology that can support autonomous driving”.

In China, Alibaba and Baidu are among the local giants testing autonomous vehicles on public roads without the need for 5G connectivity, echoing moves by Waymo, Uber, and others, in the US. They are also huge investors in IoT programmes.

Make no mistake, this is an East-West battle for dominance, with China’s one-billion-plus citizens and very different attitude to concepts such as IP, data protection, and privacy giving it a massive advantage in an automated, big data, AI-enabled world.

However, according to a report in the FT, Huawei’s unexpected 5G broadside echoes “a broader sense of gloom among telecoms operators and kit manufacturers. Pessimism about 5G has been growing behind the scenes in the mobile industry, but Huawei is the first large infrastructure company to state it explicitly”.

Even as nations and cities compete to invest in 5G test programmes, analyst Ben Stanton of Canalys told the FT, “The reality is that 5G will be incredibly expensive for operators to deploy, requiring tens of thousands of new base stations per country. And the industry has yet to uncover a killer-use case for the 5G network.

“Oft-cited use cases, like IoT and self-driving cars, are actually more dependent on computing power built into the device itself, rather than the network”.

Stanton neglected to mention that the distributed core and edge environments are of at least as much importance to IoT projects as onboard intelligence and processing; but his point stands. More, Internet of Business’ own panel of experts recently warned that 5G introduces brand new security challenges that are not faced by 4G networks. These require organisations to adopt a new approach, as our separate report explains.

Despite all this, low-cost Chinese hardware has long made the evolution from 4G economically viable. That’s the big problem as the trade dispute escalates – especially for those countries, such as the UK, that are making a big bet on 5G technology.

Internet of Business says

The trade dispute’s potential impact on 5G programmes in the UK, the US, and elsewhere could be significant, while IoT projects may feel the heat from the conflagration too, given their reliance on low-cost electronics, many of which will be sourced from, or manufactured in, China.

Meanwhile, many of the US’ largest technology companies also rely on low-cost components and manufacturing from China and its allies – including from Republic of China’s (Taiwan’s) Foxconn, which counts Amazon, Apple, Cisco, Dell, Google, Hewlett Packard, Intel, Microsoft, Motorola Mobility, and Vizio among its client base.

But what of the bigger picture?

If Chinese state ownership or investment is what signals a national security threat to Western companies, then that presents a serious challenge to the West, as Beijing has been taking large stakes in a variety of companies, and has unrivalled political power to bend any Chinese operation to its will.

The monolithic offshore outsourcing culture that relies on countries that offer low-cost manufacturing labour – cheaper even than robots – is starting to look shaky, and that spells trouble for the many Western businesses that rely on it to scale production and to keep costs down and profits up. China is at the centre of that universe.

Then there are AI and robotics to consider. Three quarters of China’s one billion citizens are online, and Beijing is investing tens of billions of dollars in AI and machine learning, with an ambition to dominate the market by 2025 – just as it aims to lead the world in robotics on the same timescale.

With little or no restrictions in place on how much data it can gather about its own citizens, China is also is able to build vast databases and research parks, and train its AI systems with supermassive data. Those ambitions and investments will remain unchecked by the war of words with the US – a country that may still have the bigger economy, but has only one quarter of the population.

Chinese companies already dominate the top 10 biggest companies in the world by revenue, with the exception of Walmart (number one) and Apple (number nine), and the Beijing government has the money, the willpower, the stated ambition, and the workforce to do as it pleases in industrial terms, subject to international law.

So it is hard to see who benefits from the war of words in either the short or the long term. Chinese companies may be licking their wounds, but it is not a one-way relationship. China can hold up US business deals, call in debts, withdraw investment from critical infrastructure projects and, above all, withdraw low-cost hardware and labour – or simply put up its prices.

The biggest loser in that scenario would be Brexit UK, whose ongoing attempts to forge closer relationships with Beijing would be caught in the crossfire, while Chinese companies hold huge stakes in local infrastructure projects, both digital and physical.

But perhaps the biggest weapon the West has in offer in response is its very different political culture – ongoing protectionism in the US aside. As companies such as Alibaba and Baidu seek to compete with the likes of Amazon and Google on their home turf in the US and elsewhere, customers face a choice: do they want to buy AI systems that have been trained on Chinese citizens in a compulsory social monitoring scheme, or not?

That may be the critical factor in forcing a change in attitudes within Beijing, as well as in the US.