Unmade: The UK’s 5G reversal splits the global telecom supply chain
The alliance in global engineering is suspended, probably permanently. What countries and telcos call “5G” will be whatever comes to fruition now. Depending on whom you ask, this is either catastrophic or just fine.
"The government agrees with the National Cyber Security Centre's advice," stated the Department's secretary, Oliver Dowden, in a speech delivered on the floor of the House of Commons. "The best way to secure our networks is for operators to stop using new affected Huawei equipment to build the UK's future 5G networks. So to be clear, from the end of this year, telecoms operators must not buy any 5G equipment from Huawei. And once the Telecoms Security Bill is passed, it will be illegal for them to do so."
Last February's initial decision by the same regulatory body, merely to limit Huawei's participation in UK 5G but not permit it into the core of the network, was described by me in these pages as "a pinnacle event with potentially world-changing repercussions." The next move, I argued, lay with the United States. Britain's mid-July reversal suggests the US' move was decisive.
China's response, as signaled by an article in Wednesday's China Daily, is to assert that Huawei owns most of the intellectual property, in the form of patents, related to 5G — an assertion that is widely disputed outside China. Nevertheless, whether it's as big as China thinks it is, it's the next weapon in this new cold war:
Currently, despite being the owner of the intellectual property, Huawei does not receive financial benefit from it, preferring a cross licensing system, exchanging access to its systems with rival companies.
But it is within the company's rights to end that approach in markets from which it has been excluded, meaning systems wanting to benefit from Huawei-owned designs and plans could have to pay for them. As other tech companies have already found out, this can be a lucrative and powerful position.
In March 2019 — back before mask wearing became the polarized political issue of our times — a report from UK-based Enders Analysis projected the possibility, if not the likelihood, of a permanently crippled telecom supply chain. That report cited the considerable consolidation in the global telecom market since 2004, during which time the world's eight leading suppliers besides Huawei were condensed to just two — Nokia and Ericsson.
As with most any other industry, telecommunications providers ("telcos" in the States, "telecoms" in Europe and the UK) don't like to be locked down to any single supplier for a market. They would prefer, at the very least, to dual-source their suppliers instead. Eliminating Huawei from the market effectively makes their dual-source choice for them, potentially eliminating any price advantages that could be gained through negotiation. "This would be a massive backwards step in supply chain terms," the Enders team wrote, "with UK operators having to take whatever products have been developed for other markets, as opposed to being able to take a development lead."
Then last July, while ministers were pondering the repercussions of reversing their earlier decision, Enders projected the cost to the British economy of ripping and replacing Huawei equipment from its wireless networks. With Huawei equipment playing some role in the delivery of as much as 40 percent of Britain's broadband connections, and with BT's fiber infrastructure provider Openreach delivering connections to some 2.6 million premises nationwide, the cumulative cost for the nation, the Enders team estimated, would be between £1.5 billion and £2.0 billion over a period of as long as seven years.
Those reports' principal author is Enders Analysis head of technology, James Barford.
"I think ideally, you would want three global suppliers," Barford told ZDNet. "It would be good if there was a way we could work globally to aid their survival. But it is a global question; it's very hard for an individual country to solve that problem, because you need global scale."
The UK would prefer to be in a position where it could take what steps are necessary to rectify a supply or innovation problem, in an industry upon which so much of its national interests, and even its self-image, depends. Today, Nokia finds itself underwater on account of costly design mistakes (since last year) and shareholder abandonment. As Barford asserted, in a market where the number of available suppliers is artificially pinched to one or two, and one of those suppliers is being widely talked about as a rescue-mission takeover target by the other, it's unlikely, if not impossible, for any single country — not the UK, and not the US (despite the wishes of Attorney-General Barr) — to step in and play rescuer. Sidestepping protocols to grant Nokia special contracts would be illegal or, in the absence of regulatory enforcement, at least unethical.
Meanwhile, insofar as the China market is concerned, stated Barford, "the volume in China is such that, if you're not doing well in China, it's very difficult to be doing well globally. The problem is, the more Huawei gets attacked in the US and Europe, the better it seems to do in China. Huawei grew its revenue in the first half of the year!"
As US and UK policy now both perceive it, Huawei is China. China's hands, at least in the metaphorical sense, are being portrayed as dirty from human rights abuses, dirty from reneging on trade deals, and dirty from its initial international, denial-laden response to the novel coronavirus.
Washing one's hands has become both popular and necessary these days. In May, the US State Dept. cleverly leveraged the mental image of hand washing to its advantage, releasing a recommendations list it calls Criteria for Security and Trust in Telecommunications Networks and Services. Produced by the Washington, DC-based Center for Strategic and International Studies, the document steps away from the argument that China could force Huawei to use 5G systems for its own espionage. In its place are 31 recommendations, none of which mention any country in particular, but which directly bind the intent of any 5G equipment supplier to the policies of the country in which it's headquartered. Preferably there should be an independent judiciary, the document suggests, under a legal system that respects "the presumption of innocence and the right to a public hearing."
There's also this:
Suppliers are less trustworthy if they exhibit a pattern of behavior and practices outside widely accepted international commercial norms that indicate interdependence between a company and a host government. The criteria for assessing this include, for example, legal or formal requirements that government or political party representatives be part of a supplier's administration or management, have arbitrary access to company data and operations or can compel cooperation or impose obligations for intelligence purposes on the company without it having the right to appeal to an independent judiciary.
In its adoption of the CSIS document as the official policy of the US Government, the State Dept. launched its international campaign to promote a kind of post-Huawei, post-COVID technological hygiene. It dubbed this campaign "Clean Networks."
"The tide is turning against Huawei as citizens around the world are waking up to the danger of the Chinese Communist Party's surveillance state," read a statement issued in late June by Secretary of State Mike Pompeo. In that statement, Pompeo cites and effectively certifies France's Orange, India's Jio, Australia's Telstra, South Korea's SK Telecom, Japan's NTT, and the UK's O2 as having made commitments to become "Clean Telcos." And he quotes Telefónica CEO José María Álvarez-Pallete López as having already achieved this goal, declaring Telefónica a "5G Clean Path company," and his company's network for Spain as a "fully clean network."
The principal author of the Criteria for Security and Trust document is CSIS Senior Vice President for Tech Policy, Dr. James A. Lewis.
"If Huawei went away tomorrow — if there was a loud popping noise, and there was only a big grease stain [left] — it wouldn't slow down 5G at all," Dr. Lewis told ZDNet.
"It would be a godsend to Nokia and Ericsson, but it's not going to happen," he continued. "Yes, they're an important company. Yes, they play a big role. But the idea that they dominate or lead is just complete fiction. . . Huawei has a tremendous public relations firm — they pump out all this nonsense, 'Huawei is the only company that can make 5G.' Oh, horses**t. Horse manure, if you prefer. It's like the rest of the Chinese state. They have a Leninist propaganda machine, and they crank out this stuff. 'China did not do a bad job in handling COVID.' Oh, right! You get this overwhelming flow, and Huawei is part of the Chinese propaganda machine."
Should the equipment providers for "clean networks" simply resume their march towards a sustainable business model, undaunted by Huawei's absence — or the billions that countries may absorb in erasing any trace of its presence?
"Huawei's finally caught by its own track record," responded Lewis, "which is, it's probably one of the least trustworthy companies in the world." He cited a Canadian government official who recently told him that no one, from his perspective, trusts Huawei in Canada. "Some countries don't care," he added, "so Huawei's going to be dominant in Africa. It'll do well in Southeast Asia [and] the Middle East. But Huawei needs to do more on P.R., and the P.R. problem isn't that Huawei is the only place that makes 5G. The P.R. problem is, Huawei is a tool of the Chinese government, and if you buy from them, you're giving up your privacy."
"I don't think Huawei is run by the Chinese state," remarked Enders' James Barford.
"I think China is a lot more complicated," he continued. "It's not like North Korea or Venezuela in terms of the power of the state. It's very authoritarian in some ways, but you also get really quite entrepreneurial companies popping up within it. It's kind of more complicated than to say, here's this authoritarian state, and that means every company within that country is suspect, and is somehow controlled by that state. I don't think it quite works that way."
With respect to technological security, Barford pointed out that a more effective method for disrupting a 5G network may involve, rather than a cryptographic back door that leads to a "kill switch," a baseball bat. Any actual or would-be authoritarian state with interest in disrupting a system upon which another state's citizens are dependent, could easily float some tinfoil-hat conspiracy theory on Twitter or Facebook. Probable case in point: the notion that 5G generates coronavirus, which not only led to acts of vandalism against cellular towers throughout the UK, but the publication (and subsequent withdrawal) of at least one purportedly serious medical study.
"There's a reasonably big base station near where I live," noted Barford, "and the power supply is at the ground level. You just have to rip out the cords; it's not that hard. There's a fence, yeah, but it's not a high fence. You need a latter and a pair of very insulated wire cutters, and you can stop it working."
Barford suggested that the type of conspiracy theory which would lead one to suspect Huawei is a propaganda tool of the Chinese state, isn't really clever enough for a 21st century scenario, where the more clever approach is typically lower-tech — apart from a few behavior-tracking algorithms.
"I think you should be looking for a kill switch in everybody's equipment," he told ZDNet. "Because you don't know which factory it's been through. You don't know who's been bribed by whom. Is it only Chinese nationals who can do things on behalf of the Chinese state? I don't think so; they've got money."
Three ways to doomsday
Back in July 2019, ZDNet cited former FCC CTO Dr. Henning Schulzrinne as having asserted that the prevailing anti-China theory at the time — that Huawei could leave open a technological back door for its master country — would be both technologically impossible for 5G, as well as unacceptable in a market-driven economy. Since that time, this theory has been abandoned.
"Huawei doesn't need a back door. They have a front door," remarked CSIS' Dr. Lewis. "They own the updater, they get status reports from the equipment sent back to Shenzhen, they do in some cases operate the networks."
In his testimony before the Senate Commerce Committee last March 4, Lewis explicitly asserted that Nokia and Ericsson would both produce better 5G technology than Huawei, which a European Union-commissioned study found to be producing equipment that was vulnerable to exploitation. As he told Congress:
US companies are strong in the markets that 5G will enable. We face tough competitors, but chief risk to US strength in 5G innovation is badly designed privacy rules. The doomsday argument is that, because of slowness in 5G deployment and the allocation of the wrong spectrum frequencies, American entrepreneurs will not be able to take advantage of 5G. But the US is not slow in 5G deployment, and spectrum allocation is not an obstacle.
There are two other doomsday arguments, the first of which will be familiar to ZDNet readers. It's that a disconnected global supply chain will lead regional markets to spin out unto themselves. In the absence of a clear American leader, and because the reach of those markets would all be limited and competition reduced, the cost of equipment would be higher, the speed of innovation would be slower, and the likelihood of global investment activity would be much lower, if not in certain cases, zero.
It would be the quintessential catalyst for market fragmentation. This was the argument being made by every telco, every equipment producer, and every telecom analyst with whom we spoke two years ago, without exception, back when the world seemed more cooperative, and globalization was a good thing.
"What we don't want," explained Enders' James Barford, "is a situation where Huawei and ZTE work in China, Ericsson and Nokia work in the rest of the world, Samsung does a bit here and there. Ultimately, telecoms companies everywhere have reduced choice, and at the basic standards level, suppliers aren't working together. The best ideas aren't winning through. At the moment, if one of Ericsson, Huawei, and Nokia have a good idea, the others have to follow. . . to keep up. But we don't want to be in a situation where one of them has an innovation, and the rest of the world just kind of carries on. If Huawei has an innovation that makes China better, the rest of the world just misses out."
Dr. Lewis chuckled a bit at this scenario. His assertion is that technology standards at all levels, but especially technology, become global by nature. Yes, countries may seek to assert some type of sovereign control over Internet traffic — besides China, Germany and Russia have also staked claims to digital sovereignty, and observers do perceive this as a global trend. But the technology that enables this sovereignty can, and probably will, depend on globally interdependent standards that are being designed and decided upon at a different level of the conversation, believes Lewis. "We've only started thinking through these technologies that will allow governments to exert greater control," he told us. "I think that's inevitable."
Just as a plethora of digital communications protocols eventually gave way to TCP/IP, argued Lewis, wireless telecommunications is following the same trend. The drive toward interoperability will force the technologies at the core of the network to become lower-margin, less consequential businesses — less so than the applications built atop the single stack. This trend, he believes, is orthogonal to the evolution of the telecom supply chain. "When you move to this IP-based, white-box telecom world, some of these issues are just going to go away."
But what if these applications from which 5G would bear fruit, don't take root on a broad enough geographical scale to be profitable investments? That's the other doomsday argument, as articulated by Barford: Telecommunications and information technologies have essentially merged into one industry, he stated, essentially agreeing with one of Lewis' premises. But if the supply chains for both technologies not only separate from one another again, but subdivide amongst themselves on sovereignty lines, then investment in the businesses that constitute these chains — especially the startups seeking to produce new applications — will become withdrawn. Funding for new ventures will dry up, and so much for autonomous vehicles.
"You don't want to reverse it, so that telecoms equipment once more is the slightly doddering uncle of the rest of the IT industry," Barford said.
"Some politicians like the idea of their national champions," he continued, citing some MPs' continued despair about ARM Holdings, the former jewel in the British crown, selling itself to Japan's SoftBank in 2016. "This is madness. The American tech sector isn't strong because it's got Cisco, Facebook, or Google. It's strong because it's got a thousand small startups developing the next thing, and Cisco's hoovering up a lot of them. A lot of the technology is developed by startups — small, specialized companies that do one thing, and do it very, very well. . . Most of the employment will always be in companies that will be eventually acquired. And you're shooting yourself in the foot by saying you can't be acquired. Who's going to invest in that? Who's going to want to be a founder of that, if you don't have your upside? You'll stick with working for the American giants; you won't form your own startup."
"There's a lot of maybe's in that argument," responded CSIS' Lewis. "There's a series of conditions."
Venture capitalists, he argued, think in simpler terms. "They want to make 10x," he said, "but they'll settle for 3x. I think we're seeing a world that has more money than ideas. That would be a good thing to change."
Besides, added Lewis, it may be foolish to assume that the money put to use in chasing good ideas, is entirely global in nature. He cited the Chinese government's interest in slashing foreign investments. There are plenty of good ideas emerging from unusual product segments — one example Lewis cited was "food tech." If a food tech idea looks good enough to a VC, simply put, it will invest. But if it looks good enough to China, he said, its response would be different.
"Are the Chinese going to say, 'No, we're always going to buy Chinese food tech?' The first thing they do is try and copy it. But if that doesn't work, then they're going to buy it. I think that's one of the problems: There's not going to be a bifurcation in the global market. Americans will still sell some stuff to the Chinese; the Chinese will still sell some stuff to the Americans. Europeans will sell to both. It could happen, but right now the problem is, more money than ideas."
In Lewis' analysis, there are three principal trends underlying the costs of 5G technology:
The short-term costs of purging Chinese technology, which would cause an uptick;
Countries protecting their own industries by not buying China-subsidized technology, which would level off that uptick;
The long-term, inexorable move to white-box telecom equipment at the core, which will restore the downward price trend to the level it was, making this near-term event a blip on the radar.
"People need to stop pretending that we're not in a dispute between two very different kinds of systems," asserted Lewis. "For the Europeans, I get that they want technological sovereignty. We have to accept that. We have to support it. But they're much more likely to get a deal that's consistent with their values, and with the rule of law, working with the US than with China."