This report is divided into three sections, which are published separately. The first, presented here, looks at the environment for competition by exploring how 5G creates wealth, the standards contest, and the effect of technological change in telecommunications as we move to an “open” environment. The second will discuss the strengths and weaknesses of two key national competitors in Europe and China. A final section to be published later concludes by assessing U.S. strength and recommending elements of a comprehensive national approach to 5G strategy.
The growing recognition that technology builds national power has led to a narrative of a “race” between the United States and China. China is now what the European Union calls a “systemic rival” and technology is a central part of this rivalry. China has recognized the advantages of being a leader in technology and uses statist economic policies and espionage to obtain an advantage. Fifth-generation mobile technologies (5G) have become one of the most high-profile domains where this competition is playing out.
Key Points
The United States is not losing the 5G “race.” S. (and Japanese) technologies are essential for 5G infrastructure.
The United States is holding its own in the standards bodies and is well placed to repeat the commercial success it had with 4G.
5G technologies meet the growing demand to create and move new knowledge faster and more efficiently than competitors.
5G creates wealth by enabling new enterprise services for industry and by building the network that will support the internet of things.
The “killer app” for 5G has not been created, but this will change as entrepreneurs explore newly available 5G capabilities and develop services and products to use it.
Telecom is changing in ways that make Huawei hardware less important. The telecom supply chain depends on semiconductors and software—all areas where the United States has a substantial lead over China. In some cases, there are no Chinese competitors.
The problems attributed to a 5G “race” are overstated. The United States needs policies to speed deployment and reduce risk, but the larger issue is how to deal with an increasingly hostile China in a new kind of nonmilitary competition.
Is It a Race?
The “race” metaphor has a long history—the race to the moon or the arms race. It is appealing because it lends a sense of drama and highlights competition. Its shortcoming is that it obscures that we are talking about business competition where the primary actors are companies, not governments. If there is a race in 5G, the United States is not losing. In fact, it is well-positioned to take advantage of 5G technology, just as it did with 4G. U.S. companies are strong performers in 5G, but one might not always gather this from the stream of stories where the United States is “falling behind.” Lurking behind alarmist announcements of a 5G race between the United States and China is a not unreasonable concern that China will do whatever it takes to win while the United States is distracted by internal problems.
The 5G issue has become politicized, and this shapes perception. First, contrary to some reporting, the United States has not been rebuffed in Europe. Interviews with colleagues in the United Kingdom and Europe show there is broad agreement with the United States on the risks of using Huawei. Where there is disagreement is over how to manage risk. The UK decision, not being reconsidered, is best seen as a partial ban on Huawei because it blocked Huawei from two-thirds of its network and from being used in sensitive areas around government and military installations. More restrictions are likely. Other European countries are committed to maintaining supplier diversity and avoiding Huawei market dominance (if they can find a way to do this without putting the China market at risk). Recent decisions by key European countries have led to the selection of European 5G suppliers, both on grounds of security and quality of equipment.
Security cooperation coexists with economic competition. Economic competitors in Europe and Asia see 5G as a chance to gain market and technological leadership. Countries have different models for how to succeed: China with heavy, state-centric investment, espionage, and predatory trade practices; the European Union with intra-European coordination; and Japan and Korea with accelerated national strategies for investment and research. The United States, with its strong semiconductor and software sectors, relatively flexible spectrum management process, and its “app” economy, has an advantage and its companies and entrepreneurs gained valuable lessons from the 4G experience.
The United States is not losing the 5G “race.” U.S. (and Japanese) technologies are essential for 5G infrastructure. The United States is holding its own in the standards bodies and is well placed to repeat the commercial success it had with 4G.
Each competitor has different plans for 5G. 5G will play a central role in the development of smart and self-driving cars, and all countries with an automotive industry will compete in this. Germany intends to use 5G for industrial applications as part of its Industry 4.0, and its strong manufacturing sector may give it an advantage. South Korea also benefits from having a strong app economy, but its main advantage in 5G comes from Samsung, the telecommunications equipment and semiconductor giant. Chinese companies have already created valuable consumer apps, like WeChat, and a strong developer base, and they will also pursue industrial and enterprise applications. China had an advantage in developing apps for the internet of things since its companies are the source of many of these products. But Chinese companies also face trust issues, since any Chinese-made device that connects to the internet could be exploited by Chinese intelligence agencies.
How 5G Creates Wealth
Markets follow their own logic, and national strategies, unless carefully designed, can be redundant or even an obstacle. National strategies that allow companies to compete with each other tend to produce better outcomes. The metrics for success are revenue, return on investment, future expected returns, and market share. The ultimate metric is growth in national income produced by 5G.
Two centuries ago, farming produced wealth. A century ago, wealth came from heavy industry. Today, knowledge creation is the source of wealth. Knowledge creation drives economies more than the production of physical goods. Some call this the “conceptualization” of production.1 The creation of ideas, knowledge services, and other intangible products is the best way to create wealth. The result of knowledge creation is data, and the ability to move vast amounts of data rapidly around the world to meet business and consumer needs creates demand for telecommunications services. National competitiveness in this environment depends on the ability to create and move new knowledge faster and more efficiently than competitors, and then to use that knowledge to produce new goods and services. 5G technologies meet this growing demand.
Knowledge creation is the source of wealth. . . . Some call this the “conceptualization” of production.
5G could be the start of another round of innovation and growth similar to what we saw with the arrival of the internet, but for this to happen, 5G must be accompanied by “complementary investments.” These include the invention of new products and services that make use of 5G networks and the development of new business models and processes.2 The United States is strong here, but so is China. The need for complementary investments and business innovations put the race metaphor in context because what companies and countries do with 5G is more important than how quickly or how “much” 5G they have. So far, the “killer app” for 5G has not been created, but this will change as entrepreneurs explore newly available 5G capabilities and develop services and products to use it.
Understanding the economic benefits of 5G requires understanding where it fits in the tech ecosystem. It is important to divide the 5G market into segments and look at each segment both in terms of profit and security. There are the producers of 5G technologies, including telecom hardware—the leaders here are Ericsson, Huawei, Nokia, and Samsung. There are the companies that make the chips and software that are the essential components for telecom hardware. These are mainly American and Japanese. There are the consumer-facing networks and apps we know from our smartphones and there will be an increasing number of enterprise applications such as smart seaports and factories.
Who makes the technology is important for national security, and how the technology is used is more important for economies.3
National competitiveness in this environment depends on the ability to create and move new knowledge faster and more efficiently than competitors, and then to use that knowledge to produce new goods and services. 5G technologies meet this growing demand.
4G, 5G and the App Economy
Discussions of a 5G “race” can focus on the wrong metrics. The race metaphor often relies on 5G deployments. A better metric is the development of software and applications that will ride on the new 5G networks. It is not the number of 5G cell towers or the number of consumers carrying 5G phones that will drive economic growth. Many industries can use 5G services to be more efficient and innovative, and innovators can create the new services and products that 5G can enable. What counts is how people use 5G to make money.
The fourth generation of telecommunications equipment (4G) let smartphones (essentially small mobile computers married to a radio) connect to the internet. 4G technology paid dividends throughout the U.S. economy. Smartphones created the “app economy,” offering new services to consumers and generating rapidly growing revenue. 5G will expand the potential market for the app economy. U.S. entrepreneurs initially captured 91 percent of the world’s mobile app downloads and U.S. companies created the operating systems on 9 out of 10 smartphones worldwide. While both Europe and China are gaining market share in the app space, U.S. companies still lead in revenue.4
Other countries saw the United States’ 4G successes and want to duplicate it in 5G, but this requires more than being fast at installing cell towers. It requires an ability to innovate in software applications, something U.S. entrepreneurs are good at doing, but companies in other countries—WeChat (China) and, at a smaller scale, Spotify (Sweden) and Shopify (Canada)—are strong competitors. Germany is also strong in developing industrial apps. China’s app developers are particularly good (if the Chinese government does not get in the way), and the real race is in the nascent competition over who will write the 5G industrial and service apps for the global economy.
Another way to make money from 5G is to sell the technologies that enable it. This is where much of the public attention has focused because of the security risks. There are five companies that sell telecom network technologies—Ericsson, Huawei, Nokia, ZTE, and Samsung—but they sit atop multinational supply chains for critical components that are largely American and Japanese. Without U.S. technology, Huawei will be hard-pressed to make 5G infrastructure products, and this was likely the intent of the recent Commerce Department rule changes.
Another way to make money is to sell 5G services—this is what telecom companies will do. The most “disruptive” way to make money, and the way that probably offers the best outcomes for economic growth, is to create applications (apps) that take advantage of 5G services. When we say application, people may think of Angry Birds or some other consumer product. 5G will “industrialize” the app economy and expand it beyond games and other consumer programs, and this is where the opportunities for economic growth will appear. Initially, the most important market segment for 5G will be enterprise applications that allow companies to operate more efficiently and productively. Examples of these enterprise apps would include supply chain management systems, customer relationship management systems, and knowledge management systems.
The real competition will be in writing the software applications that take advantage of 5G so that companies with access to 5G services more are profitable. Consumer applications are less important in this space—people can already watch videos on their phones and are unlikely to pay more for a slightly faster speed. In contrast, the enterprise and industrial applications that 5G can support will be the space for growth. The German firm Trumpf is developing Axoom, an industrial app designed to let companies manage smart factory solutions.
5G (and Wi-Fi) will enable connections between sensors, data, and powerful internet computing resources. Innovators can take advantage of these connections to create new services and applications. These will include new enterprise and industrial applications such as smart hospitals or factories. Self-driving cars are part of this and 5G will speed up their use. U.S. companies are strong here, but so are European and Chinese companies.
Europe and China have announced they intend to dominate 5G the way the United States dominates 4G, and U.S. companies face new competition, but success depends on making products and offering 5G products and services that appeal to the market. It is not credible to expect the nimble, well-resourced, and entrepreneurial U.S. tech sector to be squeezed out of profitable markets where they currently lead.
The policies that promote success in each of these markets are different. For 5G infrastructure and technology producers, the focus of competition is over intellectual property, standards, and patents. Policy should encourage and support R&D, protect intellectual property, and ensure a level playing field in international standards and trade. The best metric is how well a country gains the full advantage in the growth and income that 5G can provide.
The Standards Contest
Standards are a battleground, but in 5G it is a battle where the United States is holding its own and retains the lead. Standards are the guidelines that companies use to build their products. They can create a stream of revenue for the holder, funding research, and jobs. The core of the contest remains research, patents, and standards.
The definition and development of 5G standards is an international activity intended to identify the best technologies for wireless communication standards. 3G and 4G standards were developed by a partnership of global standards organizations, with dozens of companies from around the world attending meetings in standards bodies to agree on new technical solutions. Similarly, the private 3rd Generation Partnership Project (3GPP) develops standards for 5G.
China has politicized the international standards process. This reflects a long-term strategy by the Chinese government. Interviews with executives from numerous U.S. companies identify this as a plan to dominate standards processes to give Chinese companies an advantage. Technology built to Chinese standards can also create cybersecurity risks. The standards-setting process is complicated, which makes it easy to exaggerate China’s success, but there should be no doubt about China’s intent. Anecdotal reports from attendees at international standards meetings tell of greatly expanded Chinese participation.
Standards bodies use voting to make decisions. Chinese companies face intense pressure to vote the party line to support Chinese proposals even if they are technologically inferior. In the summer of 2018, for example, the chairman of Lenovo was forced to apologize publicly and promise never again to vote for a non-Chinese standard after Lenovo representatives voted in favor of a technologically superior U.S. proposal instead of a Chinese proposal. This is not how the standards process is supposed to work, but China will flout norms to gain dominance.
China was unable to dominate the first round of 5G standards discussions, but it will be back in force in upcoming rounds. We should not be surprised that China’s telecoms and high-tech industries play a more significant global role than in the past.5 China has displaced Europe as a center of economic power, invests heavily in R&D, and the Chinese government is desperate to increase the national ability to innovate. It is, after all, the second-largest economy in the world and will necessarily play a larger role. The issue is not a greater role for China but China’s efforts to manipulate the standards process. The United States will need to work closely with Western partners to ensure the standard process remains politically neutral.
Interviews with private sector representatives find that opinions about the 5G standards process differ on the prospects for success of this Chinese effort. The majority say that Western companies are holding their own against a Chinese onslaught, but a sizable minority point to the risk of China’s efforts to politicize and overwhelm standards setting to gain the advantage. At this time, while there is increasing pressure from China, U.S. firms, along with their European, Korean, and Japanese counterparts, continue to lead. The majority of interviewed experts believe that the United States is holding its own in the standards process.
A crucial element for maintaining the U.S. presence in standard bodies is to make clear that export control regulations do not prevent U.S. companies from participating in international standards discussions. The Commerce Department needs to immediately clarify that standards participation remains exempt from export regulations. This is a self-inflicted wound that the United States must avoid if it is not to be displaced in standards setting.
Open 5G Architecture and Future Telecom
We can better assess the risk to national security and the future of economic competition if we take technological change into account. Telecom is changing in ways that will make Huawei hardware less important. The most visible aspect of this change is the Open Radio Access Network Alliance (O-RAN), an industry group developing architectures and software that will enable virtualized networks (e.g., those using software to provide services rather than proprietary hardware, the way that music-playing software replaced CD players)), relying on commodity computers, specialize software, and standardized interface.
Telecommunications technology is now going through a transition similar to the transition in computing that began 30 years ago with the introduction of the internet.
Telecom technology used to be static, changing slowly. It relied on specialized hardware. New technologies like cloud computing6 were layered on top of existing equipment and protocols. This is now changing as software-based, “open” network technologies begin to offer the same functions as conventional telecom technology. The shift has major implications for security and business as this disruptive technology can provide cheaper and more agile services using a supply chain open to any supplier.7
One way to think about this is to compare it with computer networks. At their cores, these are essentially a combination of semiconductors and software. In very simple terms, your computer connects to servers and routers that then connect to the internet. These connections work irrespective of the manufacturer, so one company can make the computer, another can make the server, a third the connecting software, et cetera.
A simplified (and arbitrary) portrayal would divide 5G networks into four parts: device, RAN, core, and cloud. An “end device” such as a mobile phone or a car, connects to a “Radio Access Network” (RAN) cell towers RAN connects devices to the telecom networks. The core of these networks use specialized routers, switches, and other packet handling technologies to aggregate and manage billions of calls. Some core processing (along with billing and other functions). Most of this is now done in the cloud (the cloud refers to managed computing resources that can be accessed over the internet). In 5G, some processing will move to the RAN, creating both opportunities and risks for security by providing hostile actors better access to data unless the 5G network is carefully designed to manage this—something that some say is impossible.
Put simply, your phone connects to a cell tower that connects to a network that uses specialized computers and cloud services to route calls and manage your account.
Telecommunications technology is now going through a transition similar to the transition in computing that began 30 years ago with the introduction of the internet.
The telecom supply chain relies on areas where the U.S. has a substantial lead over China. In some cases, there are no Chinese competitors. The lower prices of this approach mean that service providers are already moving towards software-defined networks, where software replaces specialized hardware, and the lower capital expenditure requirements of an open architecture make it attractive.
In contrast, current telecom technology relies on proprietary systems that are vertically integrated. Vertical integration is an arrangement where major components and software are provided by a single company as opposed to different companies providing different parts that are horizontally integrated. The existing market for vertically integrated systems of the kind made by Huawei is being eroded by the development of new, modular products (a more sophisticated version of the “plug and play” that consumers are familiar with).
The companies that make the modular components for an open architecture telecom network involve both familiar names and new startups. Qualcomm, Intel, and Samsung make chips. Microsoft (which has built a huge 5G lab in Redmond) writes operating system software. Cisco, Sienna, Xilinx, Nokia, Fujitsu, and NEC make other essential components, as do a number of new companies, such as Altiostar, or InnoEye, and firms that are well-established in the telecom space, such as Airspan. Many of these companies along with telecom service providers have banded together in the O-RAN Policy Coalition (or other groups) to develop common approaches to the new technologies.
The shift to open and multi-vendor modular systems puts Huawei at a disadvantage. Chinese companies have done a good job persuading many governments and telecom companies that only they can supply an integrated 5G solution, from handset to core. This is not true, but many believe it. What Chinese suppliers do offer are government-subsidized prices, meaning substantially lower prices that are attractive in the developing world and even Europe, despite the recognized risks.
For example, a northern European country decided to use Huawei in its national carrier instead of its previous Nordic supplier. According to European telecom sources, Huawei came in with a bid that was perhaps 30 percent lower than its competitor (and it is possible that Chinese intelligence agencies helped Huawei discover the price of its competitor’s bid—this is a standard Chinese practice8). A 30 percent savings gave economics priority over security in government decision-making. The dilemma for this European country will be to avoid being locked into older telecom technology. The open approach is more scalable, has lower capital costs, and makes it easier to shift network resources to meet demand. While an “open” architecture to provide advanced 5G telecom services can be cheaper and easier to modernize in the future, open architectures require an ability to integrate technologies from different suppliers into a working telecommunications network. This will slow adoption in some countries until the technology is more mature.
It is important that we do not underestimate the difficulties posed by integrating new technologies into telecom networks so as to be able to serve tens of millions of customers with the same level service they get now. One advantage of existing technologies is that they are proven to deliver this level of service.
Another is that they pose little challenge for integration, as opposed to multiple technologies developed by multiple vendors. Integration and scalability are major issues and suggest that the next generation of telecom technology is still some ways off. However, the supply chain for telecom will depend on semiconductors and specialized software, all areas where the United States has a substantial lead. In some cases, there are no Chinese competitors. Estimates of how long this telecom transformation will take can range from three years to a decade. The shift puts Huawei at a disadvantage. China will of course invest to catch up (accompanied by increased espionage), but money alone won’t remedy China’s lag in software and semiconductors.
5G as a Mirror for Our Fears
Huawei is a symptom of a larger problem, and 5G is a symptom of larger fears. We face, for the first time in decades, a powerful, unscrupulous, well-resourced opponent who has publicly declared their intent to displace us. We are not ready for this fight and do not have a strategy to respond to this challenge. Increasing the defense budget will not help the United States win. This is a competition over markets and technology, and strategies that cross the intersection of economics and security will not at first be easy for the United States to construct.
Huawei is a symptom of a larger problem, and 5G is a symptom of larger fears. We face, for the first time in decades, a powerful, unscrupulous, well-resourced opponent who has publicly declared their intent to displace us.
China is not our technological peer, but it is making immense efforts to change this. The United States needs to act in response. We have seen some efforts in the last few years, but more needs to be done, including a revitalized science and technology base and a coordinated approach with our allies on how to respond to China’s espionage, unfair trade practices, and efforts to reshape global rules to better accommodate authoritarianism. China has realized, as previous generations of American leaders had realized, that strength in creating new technologies confers both power and influence. Ceding technological supremacy to China through inattention or mistaken beliefs would not be in the interest of any democracy. 5G telecommunications is not a race, but it is a core element of a larger contest over whether the future of technology will be shaped by protection of fundamental rights and by democracies, or by its opponents.
James Andrew Lewis is a senior vice president and director of the Technology Policy Program at the Center for Strategic and International Studies in Washington, D.C.
This report is made possible by general support to CSIS. No direct sponsorship contributed to this report.
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