Amidst a Gold War between the world’s two largest economies, the US and China are quietly squaring off over the key technological platform of the future, 5G cellular wireless communications. 5G will permit the connection and interaction of billions of devices worldwide, will transform the daily lives of millions as well as local and national economies, and will sketch the future of the digital economy. Whichever country wins this race will enjoy lasting advantages in multiple areas. China already enjoys a wide lead in 5G over the United States, on account of its dominant telecom company, Huawei Technologies Co., a symbol both of Chinese advanced accomplishments and its national priorities.
On October 4, 1957, the Soviet Union launched the world’s first artificial satellite into space, which was named Sputnik, confronting the United States with a vision of a technological, scientific, military, and political future that was not American, guided by principles fundamentally at odds with U.S. values. For 5G and the next digital era, Huawei is the new Sputnik. And America is actively fighting that future.
5G is a game-changing technological platform, allowing wireless communication at much faster, less interrupted, and less power-demanding rates. Initial 5G speeds have been predicted to reach 1.4 gigabits per second, roughly 20 times faster than current 4G networks; they are expected to reach 100 times the speed of 4G. 5G will soon become a distinctive and distinguishing feature of technologically advanced, economically competitive countries.
A 5G platform will permit the Internet of Things (IoT) to evolve into the next great technological, industrial, and economic frontier. The value potential for IoT has been estimated at $3.9-$11.1 trillion per year by 2025, or nearly 11 percent of the global economy. 5G will permit IoT to help machines to interact in unprecedented ways, enable the collection and analysis of data at a scale never approached, and promote the creation of the next generations of self-driving cars, ultra high definition video, remote surgery, industrial robots, smart drones and virtual reality, among others. IoT advances will require much higher performance than current wireless networks allow, but 5G can accommodate it; 5G can permit up to one million connections per square kilometer at very low rates of power consumption.
The great challenge in installing a 5G network is that it is exceptionally expensive. Large-scale installation of last-mile fiber-optic cable is required and costly. A high 5G (above 6 gigahertz) spectrum network, where the real advantages lie, demands a completely different infrastructure from 4G networks and a much more dense network of transmitters. According to McKinsey & Company, 15 to 20 5G transmitters would be required per square kilometer in high-density sites, compared to only 2 to 5 for a 4G network. Thus, the total cost of ownership of a high 5G network is estimated at four to six times higher than the current costs of a 4G network. How will telecom companies recoup these huge investments? Will they simply pass the costs on to consumers, who will quickly divide into those that can afford 5G and those that cannot?
A dark side of 5G is that it will hugely increase the existing digital disadvantage many already suffer, with real economic, societal, and political consequences. In stark contrast to 5G’s high wireless speeds for the affluent, approximately four billion people (52 percent of the global population) have no Internet access, 90 percent of which live in developing countries. Over two-thirds of the unconnected people in developing countries do not understand what the Internet is, let alone 5G. Women in developing countries are 25 percent less likely to be online than men. Mobile broadband networks (3G and above) reach only 67 percent of the global rural population. Thus 5G will both accelerate and exacerbate existing digital disadvantage.
Even within developed nations, 5G networks will likely become a differentiator between wealthy urban centers, which will obtain 5G quickly, and other less developed and more rural locales, which will not. 5G will certainly become a key feature for cities to recruit and maintain its tech communities, attract new businesses, and woo new residents. 5G may rapidly create digitally preferred districts, to which those seeking 5G for work or entertainment will gravitate. Urban development will likely be affected by the location and intensity of this technological platform, a platform governmental authorities may not control.
5G is coming soon. In 2019, it is slated for rollout in several countries. In the U.S., Verizon is expected to offer it in small sections of Houston, Indianapolis, Los Angeles and Sacramento. Sprint is targeting 9 U.S. cities in 2019 and T-Mobile may have 5G installations in 30 U.S. cities. 2019 should also see 5G rolled out in other countries, including China, the UK, Germany, Switzerland, South Korea and Australia.
Huawei is China’s most advanced telecom company and is one of China’s most admired domestic firms. It is the world’s largest supplier of telecom equipment and by 2020, it will be the world’s largest seller of smartphones. Its founder, Mr. Ren Zhengfei, is a former engineer in the People’s Liberation Army. Its 2018 revenue was $100 billion, projected to rise to $120 billion in 2019 (by comparison, Google’s 2017 global revenues were $110.8 billion). Its 180,000 worldwide employees include 80,000 engineers. It manages the phone networks of half the world. While half of its business is in China, Huawei enjoys an estimated 40 percent market share in Europe.
The Chinese government intends for Huawei to become the dominant global 5G vendor and to install 5G networks worldwide. In their 5G efforts, Huawei and other Chinese telecom manufacturers have been directly supported by the Chinese government with finance, project support, and research, as achieving 5G preeminence is a stated goal in the Chinese government’s strategic report Made in China 2025. In many ways, Huawei is a successful embodiment of Made in China 2025, a Chinese company with emerging dominance in a critical tech sector, significantly advanced by direct government support.
China’s intervention in the race for 5G dominance has been decisive and effective. Since 2015, China has outspent the U.S. in 5G infrastructure investments by $24 billion and, according to Deloitte, the U.S. may never catch up. China’s 5G investment plan of $400 billion over five years dwarfs any comparable U.S. effort. 5G equipment is estimated to be 35 percent less expensive to install in China than in the U.S. As a result, since 2015, China has built 350,000 new 5G cell sites while the U.S has built fewer than 30,000. These towers and small cells are the beating hearts of 5G.
As a result, Huawei is perceived as the dominant vendor to develop global 5G networks. Buttressed by unflinching government support, Huawei enjoys capital advantages no Western private telecom company can match. Given the enormous expense of building 5G networks, Western companies prepared to partner with Huawei to create these networks in their countries. But then, politics intervened.
Upon taking office, President Trump declared a Gold War on China, reevaluating the PRC as a threat to the United States. This was less motivated by ideological competition with a communist country (as in the Cold War) but rather by a more traditional Great Power orientation, attempting to retard China’s challenge to U.S. economic, scientific, and technological dominance. In 2017, U.S. military spending reaching $597.2, more than doubling the PRC’s $228.2 billion, but the economic contest is much closer. In 2019, the U.S. economy will reach an estimated $21.5 trillion and China’s $14.2 trillion. But both the IMF and the World Bank now judge China as the world’s largest economy (based on Purchasing Power Parities).
President Trump mobilized U.S. power to thwart China’s efforts in multiple areas. He imposed tariffs on billions of dollars of Chinese goods. At his insistence, the U.S.-Mexico- Canada Agreement (the new NAFTA) included a clause requiring Canada or Mexico to inform the U.S. if it launched trade talks with a “non-market” economy (i.e. China) and if a deal was struck, they could be cast out of the North American agreement.
This contest between China’s centrally directed economy and the U.S.’s market economy had become bitter. But over 5G, Huawei’s advantage of government support abruptly became a huge vulnerability. Trump Administration officials organized a campaign against Huawei’s participation in 5G networks in countries including Britain, Poland, and Germany, and drafted an Executive Order (not yet released) that would prevent U.S. companies from using Chinese-made equipment.
However, in a nine-week period, this U.S. policy hostility was supplemented by serious legal charges. On December 1, 2018, Sabrina Meng, Huawei’s CFO and the daughter of Huawei’s founder, was detained in Canada at the behest of the U.S. Justice Department, who charged her with circumventing U.S. sanctions against Iran and stealing trade secrets, and requested her extradition to the U.S. for trial. On January 11, 2019, Mr. Wang Weijing, a Chinese employee of Huawei was arrested in Poland on espionage charges (and was, unsurprisingly, immediately fired). Then, on January 28, 2019, U.S. Attorney General Matthew Whitaker himself unveiled 23 charges against Huawei itself, which included ten charges of corporate espionage, as well as obstruction of justice, and wire fraud charges.
To Ms. Meng’s arrest, China’s government formally responded with rage. Zhang Ming, China’s Ambassador to the EU, insisted that Huawei was being subjected to a campaign of “slander” and “discrimination”. Lin Songtian, China’s ambassador to South Africa, stated that President Trump’s trade policies had made Washington “the enemy of the whole world”. Two senior Canadians were immediately detained in China after Ms. Meng’s arrest and Lu Shaye, China’s Ambassador to Canada, accused anyone who questioned these arrests as being guilty of “western egotism and white supremacy”.
Western governments had long considered Huawei an active participant in Chinese espionage efforts. In 2012, the U.S. House Intelligence Committee concluded that both Huawei and ZTE (another Chinese telecom firm) were functioning as agents of the PRC government and that their technology was being used for espionage. Among the Five Eyes (the intelligence services of the U.S., Britain, New Zealand, Australia, and Canada), each service advocated to their government that Huawei not be permitted to participate in creating domestic 5G networks. As a result, both Australia and New Zealand banned Huawei from participating in building their 5G networks for national security reasons, despite Huawei’s considerable financial and technological advantages. Other governments are considering similar actions. The German government is considering banning Huawei from its 5G networks, as is the Japanese government, which publicly mused about banning Huawei and ZTE from government ministry procurement one day after Sabrina Meng was arrested.
As a Chinese company, Huawei is required by law to assist the Chinese government when requested on national security grounds. Article 7 of China’s 2017 National Intelligence Law states that “Any organization and citizen shall, in accordance with the law, support, provide assistance, and cooperate in national intelligence work, and guard the secrecy of any national intelligence work that they are aware of.” Were Huawei to build and manage 5G networks around the world, would it be required to provide information to the Chinese government upon request? Further, Article 22 of the 2014 Counter-Espionage Law (updated in 2017) states that during a counter-espionage investigation, “relevant organizations and individuals” must “truthfully provide” information and “must not refuse”. The Chinese approach of individual and corporate responsibility for national security is the opposite of the US system’s focus on individual liberties and privacy and is a significant point of distinction in U.S.-Chinese issues of wireless communication management.
Huawei’s ability to participate in 5G efforts around the world has now been seriously damaged. Huawei itself may soon be subject to huge fines from U.S. authorities, similar to ZTE’s March 2017 fine of $1.19 billion for evading U.S. sanctions and selling U.S.-made goods to Iran. Huawei’s prior dominant position has been lost, but several strengths remain; it is the best capitalized, largest telecom company in the world, that can best address the huge capital requirements to construct 5G networks, wherever they are permitted to do so. And, without a doubt, they shall do so in China.
Once implemented, 5G will change the world. Whoever dominates the creation and implementation of that infrastructure will derive huge influence and benefit from it. This has long been the Chinese government’s stated goal. Now the Trump Administration is actively attempting to block it, as a threat to America’s global dominance. 5G networks are expensive and the Chinese government is willing to subsidize it to a level no other government will, because they understand how influential control of tech infrastructure can be. However, China’s champion Huawei has now been excluded from multiple markets, because it is no longer seen as simply a company but as an agent of technological and economic competition between Great Powers.
Prior to Huawei’s legal issues, as a result of the Gold War, both Foxconn Technology Group and Alibaba Group recently backed away from previous commitments of U.S. job creation and investments. 5G raises issues of sectoral dominance, individual privacy, industrial development, first mover advantage, and the future of mobile communication. Huawei is no longer simply recognized as a possible path to 5G implementation but as a serious geoeconomic threat to American hegemony. 5G development will nevertheless continue in China and the benefits of that industrial commitment will bear China fruit for years.
In 1957, Americans feared that they had lost the space race to Sputnik. In 2019, the U.S. is afraid it may have lost the communications race to Huawei. Only time will tell.