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The Huawei conundrum and global telecoms competition

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Astonishingly, despite all the handwringing over Huawei, in the central competition for backbone 5G telecommunications equipment, no US company is seriously in the running.

A Huawei logo in Madrid, Spain, February 7, 2019 – via REUTERS

Some years ago, I wrote a long paper on the “Huawei conundrum.” Since then, parts of the conundrum have been resolved but much about the company remains shrouded in mystery — and huge controversy. Huawei has emerged as a major symbol of the high tech competition between the United States and China — both economically and, with graver implications, strategically. For some years, the US has banned Huawei equipment from its domestic market and recently it has moved to pressure key allies similarly to eliminate Huawei equipment, most particularly in the development of the basic structure of 5G networks. Further, several months ago the US Justice Department indicted Huawei’s Chief Financial Officer (and daughter of its founder) on charges of bank fraud in relation to hidden connections with Iran. And ten days ago, the Justice Department also charged in a criminal indictment that employees of Huawei in the US had stolen key trade secrets from T-Mobile at the direction of Huawei officials back in China.

In a series of blogs, I will explore some of the technological and policy dilemmas (both economic and security) posed by Huawei’s emergence as a leading — and in some areas, dominant — player in worldwide telecoms and wireless competition. Here, the focus will be on just where Huawei stands in such competition and on its relation to major competitors — facts that will undoubtedly have a strong, if not determinative, role in future policy initiatives.

First, the basics.  Huawei had an operating revenue of $92.5 billion in 2017. It employs about 180,000 workers around the world (mostly in China). A key element in its current position in world competition has been a sustained investment in research and development (R&D). In 2017, the company invested just under $14 billion in R&D.

Huawei operates in a number of manufacturing and service markets but the two most important elements in its portfolio of activities are telecommunications equipment and smartphones (an area that came late but has grown rapidly in recent years). Today Huawei is the largest manufacturer of telecommunications equipment (cellular-tower hardware, routers, switches, and related equipment for 5G networks).  From a low base and late start, the company has just passed Apple as the second largest manufacturer of smartphones (Samsung is the largest).

Global 5G network competition    

While there are important economic and security interconnections in global smartphone competition, the most difficult technical and policy issues are found in the battle to compete successfully and even dominate the 5G mobile network equipment market. In this competition, Huawei competes with the European companies, Ericsson and Nokia, as well as its smaller sister state-owned company, ZTE.  Though they compete worldwide, the two European companies are smaller than Huawei. In 2017, Nokia posted revenue of $27.8 billion and employed just over 100,000 workers. It spent $5.9 billion on R&D. In the same year, Ericsson posted revenues of $24.6 billion, and employed about 100,000. In 2017 it spent $4.7 billion on R&D.

It should also be noted that Samsung, the world’s leading smartphone manufacturer, is pouring large sums of money and research into 5G equipment R&D in a late move to join the competition.

Both Ericsson and Nokia have gone through difficult periods in recent years. And while both now seem to have overcome many of their difficulties, neither company can match the resources of Huawei. Both are somewhat financially limited and neither has been able to match the deals often offered by Huawei, particularly in developing countries — with or without (as claimed by Huawei) unofficial Chinese subsidy.

Thus, as highlighted at the outset, though it is a tech superpower, competing across a wide spectrum of sectors, the US has no company competing directly in the race to produce backbone equipment for 5G networks (a number of US companies fell by the wayside in the run up to 2-3-4G technology, though Cisco still has a small presence).

There are various estimates of global mobile infrastructure shares. A composite rough guide for recent years would place Ericson and Huawei with around 28-30 percent, and Nokia with about 23 percent, ZTE with 10-12 percent and Samsung with 3 percent. Within these global totals, there are substantial regional variations. Huawei has been totally excluded from the huge US market, though it dominates the domestic Chinese market (12 percent of Nokia’s revenue came from China in 2018, and 7 percent of Ericsson’s revenue came from China the same year).

Huawei has achieved strong, sometimes commanding, competitive positions in the developing areas of Africa, Asia, and Latin America. In the immediate future, the key battleground will be Europe, where the US is pressing allies to exclude Huawei from future contracts relating to 5G telecoms equipment. Some European telecom operators have complained that Ericsson and Nokia are lagging Huawei in both in price and timely 5G equipment rollout. (A future blog will analyze this very fluid situation).

The US firm Qualcomm is an important actor in mobile network competition but its central role lies in the technology and intellectual property for the complex chips that underpin the equipment.  Qualcomm does have a leading role in 5G development, largely through its place in the standard-setting process and through the patents essential to parts and components of equipment structure.

So here’s a parting question: Given the facts set out herein and the strategic centrality of 5G development, will the Trump administration — despite endless America First mantras — decide that in the end the US must swallow its pride and mobilize large resources to bolster two European tech companies? It may be the only way to “Keep America Great.”

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