5G, Xi and Huawei: Looking Beyond Trump and the ‘China Price’

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There’s a right way and a wrong way to think about 5G networks in a nation-state. Right now, according to Bloomberg, 40% of the world seems to be thinking the wrong way.

The debate on 5G and Huawei has descended into a simple binary choice: ‘Do you want to “follow the U.S.” and ban Huawei?’ or ‘Do you want cheap 5G from Huawei, while sending comforting messages about trade and investment to Beijing?’

The second of these ideas has been stoked at telco-world events such as Barcelona’s Mobile World Congress, where corporate CEOs like Vodafone’s said banning Huawei will bring higher costs (and disturb commercial relationships).

This sets up an attractive rationale for national leaders who want to show their independence from Donald Trump’s America, and get plaudits from companies that have commercial relationships with Huawei—all while signalling a desire for more Chinese investment. Nationalism and cash: what a delightful result.

If only it were that simple and that attractive. It’s not, as the 30 nations’ representatives at the recent security discussions in Prague are no doubt thinking.

The national security issues involved in 5G are fundamental, and the commercial implications from the combination of national decisions on it will shape global communications technology development and markets.

None of this has anything to do with liking or not liking Trump. And, as is often the case with economics, what looks like a low-cost option on its face may well turn out to be the opposite.

On national security, there’s a larger story around the broad and rapid expansion of Chinese tech companies across the globe, but 5G is central to that effort.

A country’s 5G network will be the nervous system that connects its economy, carries its data and for the first time bridges the gap between internet-connected systems and ‘operational technology’ (in places like factories, power stations, utilities, railways and airports) that right now is mainly air-gapped from the internet. That’s what the long-promised ‘internet of things’ is about. It will also enable telemedicine, driverless cars and drone delivery systems to become realities, with all the economic and security implications this will bring.

So, who can control, distort, disrupt or harvest data from your 5G network becomes more important than for any prior telecom network—4G or fixed line.

As has been said many times, the Chinese state’s security agencies have the inside running to do this when it comes to their national 5G champion, Huawei. These agencies also have form when it comes to large-scale cyber intrusions and data theft.

So, on national security grounds, not having Huawei as a provider of your country’s future critical digital infrastructure makes sense, regardless of who the U.S. president is and what he or she does.

What’s been less talked about, though, is that the commercial arguments are equally compelling.

Normally, purchasing decisions take price and quality into consideration. There’s been a lot of talk about price. But there’s been very little mention of the longstanding design and engineering quality problems that the UK’s Huawei evaluation centre continues to find in Huawei network products and software. A more critical eye is needed on the product itself.

Beyond this, it’s not just the U.S. that understands that the Chinese state laws, policies and practices that protect and enable Chinese companies’ growth and pricing, along with forced technology transfers, are core problems for the global economy. The EU has a long, sorry history of negotiating with China over these issues, and it’s now in the midst of a WTO action as a result.

Huawei has been a beneficiary of market-distorting Chinese state policy and practice. It has grown because it has had the luxury of operating in a protected home market in China.

As Rick Umback noted in a recent ASPI report, the company’s executives have longstanding ties to China’s security apparatuses. And, since its formation in 1987, Huawei has benefited from Chinese government contracts, a protected domestic market, financial support from state-owned banks, and diplomatic support for its overseas expansion. In Huawei founder Ren Zhengfei’s words, ‘If there had been no government policy to protect [Chinese enterprise], Huawei would no longer exist.’

These protections are set to continue under President Xi Jinping’s signature ‘Made in China 2025’ plan, designed around his desire for strategic and economic dominance from future internet and communications technologies including 5G. The one area that’s least likely to be resolved in the U.S.–China trade dispute is real access to China’s high-technology market, along with an end to Chinese global cyber espionage and talent cultivation to get hold of others’ high-tech intellectual property.

It’s laughable in this context to hear telecommunications companies that are Huawei’s commercial partners saying Huawei needs to be included in national systems to enable market competition. It’s an even more Through the Looking-Glass experience to hear Huawei claim that it is ‘encouraged by the emphasis on the importance of research and development, open markets and competition, but would urge policymakers to avoid measures that would increase bureaucracy and costs and limit the benefit that 5G can bring’.

The home-market protection provided by the Chinese state to Huawei is a major explanation for the ‘China price’ offered by Huawei for 5G. On simple competition policy grounds, this must be taken into account when national decision-makers outside China think about competitive bidding involving Huawei—or any other Chinese ‘national champion’ firm.

A further contributor, though, flows from classic economic theory: because Xi and Huawei see 5G as one of the keys to strategic and economic dominance, it’s worth pricing low now to buy global market shares.

Of course, economic theory and history tell us what happens next if companies succeed in cornering markets: they exploit their monopoly position to charge ‘rent’ on top of costs and profits, with supernormal profits a usual by-product. A study by the International Monetary Fund on market power validates this effect in both advanced and developing economies, finding ‘a positive relation between firm markups [over costs] and other indicators of market power’.

Many of Europe’s telcos are probably reluctant to make the big up-front investments 5G requires while they’re wringing profits out of existing fixed-line and low-margin 4G investments. So, there will be bulls and bears when it comes to 5G—slow and fast adopters.

Decision-makers in Europe, the Middle East, Asia and Latin America must think beyond any eagerness to get low ‘entry level’ prices from Huawei. To help here, the EU and NATO can both still do the work to get some important things like harmonised standards on 5G security—and competition policy—right and inform national decisions across Europe and elsewhere.

Rather than rushing into decisions based on Huawei’s cheap and ubiquitously marketed offers, nations need to think a few steps ahead and consider the wisdom of handing global market power to Xi’s national 5G champion, for the health of both their own telcos and their citizens. Getting the framework and decisions right on 5G will also help them deal with the other technology investment decisions they’ll face as China’s tech expansion continues.

On top of this, for those of you who remember the TV detective Columbo, played by Peter Falk, ‘there’s just one other thing that bothers me’. As Xi’s ‘Made in China 2025’ plan makes clear, the Chinese state sees strategic power as coming from dominating 5G and other communications and internet technologies. Having 5G from Huawei in your nation’s network is a key step here, bringing Xi’s ‘Digital Silk Road’ into being.

If a nation wants its future core digital infrastructure to be one of Xi’s tools of strategic power, then by all means let your telcos sign those cheap Huawei deals. But do it knowing that the ‘China price’ won’t last, and that Xi has already given ample demonstration that he’s happy to use all the global, strategic and economic power he can muster for his own ends.



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