China Steps up the Long March to 5G

By John Lee
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Despite much of the country still being under coronavirus restrictions, China has doubled down on its national 5G roll-out, with the central government directing measures to “forcefully advance 5G network construction.” The country’s three state-owned telecoms operators have already awarded nearly $10 billion worth of 5G contracts, and are projected to collectively spend $25.5 billion on 5G equipment throughout 2020, installing half a million base stations that will provide 5G coverage to every city in China. So far nearly 90 percent of contract value has gone to the Chinese firms Huawei and ZTE, with Sweden’s Ericsson receiving around 10 percent and Finland’s Nokia nothing to date.

Given Huawei’s extensive presence in European telecoms networks, this will fuel discontent over China’s reciprocity in affording market access to foreign firms. Coronavirus-induced delays to 5G roll-outs in Europe amplify concerns that China’s state-led drive to 5G connectivity will help its firms capture first-mover advantages that will follow in development of the technology and commercial applications. Anger over China’s propaganda campaign concerning the pandemic has amplified growing wariness about Chinese companies’ presence in European economies. Even in the United Kingdom, which in January green-lighted Huawei’s involvement in its 5G networks, the foreign secretary has warned that “we can’t have business as usual [with China] after this crisis,” while a Parliamentary caucus has been established to “promote fresh thinking” about commercial engagement with Chinese interests.

Likewise, citing China’s alleged cover-up of the pandemic’s origin as justification, the U.S. government is now threatening to revoke operating licenses for Chinese telecoms firms, as it conducts “a top to bottom review of every single company that could be controlled by the communist regime” and whether they should be allowed to connect to U.S. networks. This darkening U..S regulatory environment is now impacting international telecoms infrastructure projects that connect to China, reinforcing the prospect of worldwide digital technology fragmentation along national lines.

In this context, China has redoubled efforts to leapfrog the United States and Europe in the race to 5G. Beijing was already committed to rapidly building out next-generation information infrastructure and constructing an “internationally leading mobile telecommunications network” by 2025. Expanding U.S. export controls on transfers to Chinese firms are driving the latter to accelerate development of alternative suppliers and indigenous capabilities, with Huawei now shipping large numbers of 5G base stations without U.S.-origin technology. The combined effect of U.S. government-imposed restrictions and Chinese telecoms operators’ vast demand for first phase 5G deployment is reshaping the supply chain for supporting technologies such as optical transmission components, where Huawei is starting to supplement U.S. suppliers with in-house capabilities.

These imperatives have been amplified by the global pandemic. Rapid expansion of 5G services is aimed at enabling industrial automation to help Chinese enterprises cope with coronavirus restrictions, and at “unleashing new consumption potential to offset the epidemic’s [economic] impacts.” Meanwhile, with export markets depressed and China’s domestic demand unable to fuel private sector expansion, state-led investment in new infrastructure will be needed to achieve even trimmed GDP growth targets likely to be announced at the national “two sessions” later this month.

Achieving nationwide first-phase 5G deployment and commencement of the second-phase build-out of full stand-alone services by winter 2020 would showcase the dirigiste aspect of China’s economy, with state-owned firms driving procurement for base stations and construction of the infrastructure back-end, facilitated by cooperative provincial governments across the country. Exploiting this infrastructure’s potential falls to Chinese private firms and their proven ability to quickly develop and scale out commercial use cases.

Such aggressive scaling underpinned the varying success of national economies in capturing value from 4G mobile networks, at the expense of foreign competition. This will likely be even more true for 5G, as it enables the transition to a world in which the internet facilitates not just communication, but the thorough integration of digital technology with the physical world. Chinese firms leading this transition could expand into foreign markets and lock foreign economies into technological ecosystems that amplify the already massive gravitational pull of China’s economy.

This process might itself be leapfrogged by the rise of nonproprietary and software-oriented network solutions that open the supplier field to a wider range of firms, with the recent launch of a virtualized 5G network by Japan’s Rakuten exemplifying multivendor alternatives to end-to-end solutions provided by Huawei. The globe-spanning O-RAN industry alliance, which includes China’s three state-owned telecoms operators, is attracting digital sector heavyweights to support development of such open network architectures. A bill currently before the U.S. Senate seeks to promote O-RAN and thereby “Western-based alternatives to… Huawei and ZTE.” For the moment however, China appears to be leading the race to 5G in the face of pandemic-depressed economies.