Commentary / Japan

China holds the key to 5G technology's growth

by Waichi Sekiguchi

The most closely watched technology in the information and communications field today is the next-generation superfast mobile network. The communication speed of the fifth-generation (5G) network will be roughly 100 times faster than the current standard and, due to its ultralow risk of delays and the massive capacity for simultaneous connections, the technology will hopefully be used in a wide variety of services ranging from the delivery of high-resolution video to self driving vehicles and remote machine operation.

Service on the 5G network was launched in April in South Korea and the United States. Last month in Japan, the Internal Affairs and Communications Ministry distributed licenses for 5G services. Commercial service is set to begin next spring as the nation prepares to host the 2020 Summer Olympic and Paralympic Games in Tokyo.

The technology has also been the centerpiece of sanctions imposed by the U.S. government on Chinese firms in the intensifying row between the world’s two largest economies. In mid-August, the U.S. introduced a ban on the federal government from procuring products from five Chinese high-tech firms, including Huawei Technologies Co. and ZTE Corp., based on the National Defense Authorization Act that became law a year ago. It is also moving to prohibit U.S. electronics parts makers and software firms from selling their products to Huawei.

The U.S. government charges that Huawei has built “back doors” into its products for stealing user information, and that therefore it cannot adopt its products for the U.S. communications system on national security grounds. It has urged Canada, Japan and European countries to take similar steps. Japan, which is just about to introduce its 5G network, looks set to follow the U.S. in its measures against Huawei.

Views are emerging, however, that to expedite the building of the 5G network, it is not desirable to exclude the Chinese firms. During a conference organized by the U.S. government in late July related to the National Defense Authorization Act, an estimate showed that the price of communication devices in the U.S. could rise by more than 10 percent if Chinese suppliers are excluded from the U.S. market because the free market will be hampered.

Signs of the superiority of Chinese companies were also observed in late June at the Mobile World Congress Shanghai 2019, Asia’s largest mobile technology exhibition. The exhibition took place after 5G licenses were distributed by the Chinese government, and the event featured various demonstrations using the technology, such as remote medical services and remote operation of construction machinery.

In a keynote speech, Huawei Deputy Chairman Ken Hu stressed that China is the most advanced in the 5G field. Huawei has already concluded more than 50 5G-related contracts with communications service companies around the world, and has installed more than 150,000 base stations — a number that is expected to reach 500,000 by the year’s end. As sales of 5G telecom equipment increase, prices will decrease, thereby solidifying the Chinese firms’ global lead in the 5G field.

Other communications device manufacturers such as Ericsson of Sweden and Finland’s Nokia offer 5G products, but so far Huawei is the only supplier in the world that develops and delivers a full product lineup from mobile terminals to base stations. Therefore, emerging economies and developing countries that lack their own 5G technology believe that the development of their domestic 5G infrastructure will proceed more rapidly if everything is left in the hands of Huawei.

For that reason, many countries, including Malaysia, Indonesia and Brazil, are moving forward with adopting Huawei products for their 5G networks.

For its part, Huawei is taking steps that appear intended to encourage such decisions, for example by announcing a $800 million investment in Brazil’s state of Sao Paulo to build a new plant to make 5G base station products.

In fact, the U.S. market accounts for a tiny portion of Huawei’s worldwide sales. U.S. sales combined with those in Canada and Latin American countries comprise a mere 6.5 percent of Huawei’s global sales. It makes more than half of its sales in China, and countries in the rest of Asia, the Middle East and Africa are its key overseas customers. It has not made many inroads into the base station market in the U.S. due to U.S. government intentions, and Huawei says it does not expect the latest U.S. sanctions to cause major damage to its business. Rather, the sanctions are prompting Huawei to focus even more on emerging markets.

Of course, it’s not that the U.S. sanctions will have no impact on Huawei. Aside from the base station business, Huawei sells smartphones using Google’s Android mobile operating system in the global market. The U.S. government has urged U.S. companies that make key smartphone components and develop apps to not supply their products to Huawei. Huawei would suffer huge damage if its access to popular U.S.-made apps is blocked. Huawei has disclosed that its global smartphone shipments in the April-June period fell 10 million units short of the initial estimate of 70 million.

Huawei, however, is taking a series of quick steps to secure key smartphone components and software. It has already developed a next-generation flagship processor named Kirin 985 and has built its own Android-compatible software for the smartphone operating system. It has also released a smartphone for the 5G service.

While it plans to keep using the Android OS on its products for overseas markets, it’s preparing to build a system that will shield it from disruptions to product shipments to the domestic market and emerging economies in case its supply of Android operating systems is terminated. It also plans to turn its own smartphone OS into open-source software to foster collaboration with other rising telecom equipment makers.

Currently, the world market for mobile operating systems is dominated by Android and Apple Inc.’s iOS. But if Huawei is to start going its own way, there is no guarantee that the structure of the global smartphone market dominated by the U.S. firms will remain unchanged.

Many apps have been developed for Android and iOS because there are so many mobile terminals using those operating systems. It will only be a matter of time before apps that run on a new operating system will be developed if the mobile devices using the new OS gain a large share of the market. In that case, the sanctions intended to cap Huawei’s rise might end up working to its advantage.

In its trade row with China, the U.S. government said the imposition of its fourth round of punitive tariffs on Chinese imports would be postponed until mid-December — to avert negatively impacting domestic sales in the Christmas shopping season. U.S. consumers depend on Chinese imports for 90 percent of the targeted products — laptop computers, game equipment, toys and so on.

In that sense, Washington may be thinking that the country can do with domestic procurement of telecom equipment. Since the U.S. lacks a major manufacturer of mobile communications equipment, however, it will be difficult to procure the 5G mobile system. The U.S. will be able to buy equipment from European firms like Ericsson and Nokia, but a lack of sufficient competition may inflate their cost. In the end, that cost will be passed on to U.S. consumers.

The U.S. government will likely not budge on what it considers to be national security concerns. But to build the 5G network infrastructure in the U.S. smoothly and at a low cost, the U.S. and China should discuss their high-tech friction and seek out a solution. The same thing can also be said of the Japanese government, which one-sidedly follows the U.S. on this issue.

Waichi Sekiguchi is president of MMRI, a Japanese research and consulting firm on information technology. He was formerly an editorial writer and a Washington correspondent for the Nikkei newspaper.

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