US Tech War on China & the 5G Battlefield02/08/2020
THE US tech war on China continues, banning Chinese equipment from its network, and asking its 5-Eyes partners and NATO allies to follow suit. It is a market and a technology denial regime that seeks to win back the market that the US and European countries have lost to China.
International trade assumed that goods and equipment could be sourced from any part of the world. The first breach in this scheme was the earlier round of US sanctions on Huawei last year, that any company that used 25 per cent or more of US content has to obey the US sanctions rules. This meant US software and chips based on US designs, could not be exported to Huawei. The last round of US sanctions in May this year, stretch the reach of US sanctions to cover any goods produced with US equipment, extending its sovereignty well beyond its borders.
In the last decades of trade globalisation, the US has increasingly outsourced manufacturing to other countries, but still retained control over the global economy through its control over global finance – banks, payment systems, insurance, and investment funds. With the new slew of sanctions, another layer of US control over the global economy has been revealed: its control over technology, both in terms of intellectual property and critical manufacturing equipment in chip making.
The new trade sanction that the US has imposed is in violation of WTO’s Rules. Why the US has gutted the WTO refusing to agree to any new nominations to the Dispute Settlement Tribunal becomes clear. China cannot bring the illegal US sanctions to WTO for a dispute settlement as the dispute settlement body has been made virtually defunct by the US.
The battle over 5G and Huawei has become the battle ground for the US-China tech war. The 5G network market itself is expected to reach 50 billion dollars in 10 years, but it will drive many times that – trillions of dollars of economic output – over the 5G networks. Any company or country that controls the 5G technology will have an advantage over others in this economic space.
To understand the tech war over 5G, we need to understand the role of 5G. The internet is the foundation on which almost all future digital technologies will be deployed. 5G networks will boost wireless internet speeds by ten to forty times. For the consumers, slow internet speed is the bottleneck for a number of applications such as video conferencing, online games that allow multiplayer games, where both upload and download speeds have to be high. This is unlike consuming videos over the internet like Netflix, where only download speeds are important. 5G networks would also allow such high speed internet to be deployed over a much larger area, and on our mobile devices.
The two other areas that would benefit from 5G are driverless cars and the Internet of Things (IoT), in which all our gadgets will talk to each other over the wireless internet. While driverless cars are still some distance away, IoT could be much more important in improving efficiency and maintaining the physical infrastructure of electricity, traffic lights, water and sewage systems in future ‘smart cities’.
The G in telecom networks refer to generations, and each generation of technology in wireless communications means increasing the amount of information the radio waves carry. The 5G networks are much faster than equivalent 4G networks, and support a much higher number of devices in a given area. The price is that unlike the current 3G and 4G, 5G cannot travel long distances, and needs a number of repeater hops, or cells and antennas, to travel the same distance. A 5G network can provide the same speeds that a fibre optic cable network provides, without the large cost of physical cabling. It can therefore reach less dense population centres including rural areas with high speed internet at much lower costs.
Who are the other players in the 5G space? The other major players apart from Huawei are Samsung (South Korea), Nokia (Finland), Ericsson (Sweden) and ZTE (China). While the US has no major player at the network equipment level, it has Qualcomm that manufactures wireless components and chipsets, and Apple that today is the market leader in smart phones.
The US sanctions had earlier attacked Huawei using its dominant position on software. Google’s Android powers most of China’s mobile phones as it does most of its non-Apple mobile phones. In semiconductor chips, today ARM processors have a leading position, with most companies that require advanced processors switching over from Intel to ARM. ARM, a UK based company but owned by SoftBank of Japan, does not manufacture chips themselves but provide designs for cores that go into processors. These are then licensed to companies like Huawei, Qualcomm, Samsung and Apple, who then design their processors based on 2,4, or 8 ARM cores and get it manufactured in silicon foundries. These processors power mobile network equipment, the mobile phone or the laptop of different manufacturers.
The silicon foundries that manufacture the actual processor chips from designs of Huawei, Samsung or Apple, are silicon foundries like Taiwan Silicon Manufacturing Company (TSMC), the largest in the world with 48 per cent of the global market. Samsung also has high capacity silicon foundry with 20 per cent of the global market. It uses the captive facility for its needs but also for other manufacturers. China has the fifth largest silicon foundry in the world, Semiconductor Manufacturing International Corporation (SMIC), but it is only one-tenth the size of TSMC. Only TSMC and Samsung have 7 nanometre technology (transistor size in the chips), while SMIC has currently a 14 nanometre technology.
The earlier US attack on Huawei and China banning US software meant that Huawei had to change over from Android and various apps that rode on top of the Android system in Google’s app store. It had anticipated this attack and created its own operating system, HarmonyOS and its own app store. How its users would cope without the Google play store, remains to be seen. It would depend on whether the app developers switch to Huawei in large enough numbers and the quality of Chinese app makers who have already proven themselves in the Chinese market.
It was initially thought that ARM processors would not be available for Huawei in the future. This raised a question mark over Huawei’s equipment, as it depends on the ARM processors for networking equipment, mobile phones to laptops. ARM initially suspended all future sales of its processors to Huawei as the US claimed that it has more than 25 per cent US content and therefore fell within US sanctions regime. Subsequently, ARM has come to the conclusion that its US content is less than 25 per cent and therefore not subject to US sanctions.
This is what precipitated the new sanctions that the US has imposed, that any equipment of US origin, if it is used to produce components or systems for Huawei also comes within its sanctions regime. TSMC uses US origin machines for its manufacture of chips. Samsung has a mix of US, and non US machines for its fabrication lines and could, if it wanted, switch at least some of these lines to use only non-US machines for its fabrication. This leaves a window for Huawei to beat the US sanctions, provided Samsung is willing to partner Huawei.
If Huawei has to depend on only domestic sources, it is going to take a hit on its future production. It has a stockpile of possibly 12-18 months of fabricated chips, so this is the time window it has for a new supplier or use a less dense – 10 or 14 nanometre – technology..
For the 5G market, the 7 nanometre fabrication may not be the decider. Huawei has a significant lead in radios and antennas that are the key components in the 5G network. The 5G networks depend on what are called Massively Multi-input Multi-output (MIMO) antennas, where Huawei is streets ahead of others. This, more than processor size, may decide the technical advantage of Huawei’s offerings. Nokia and Ericsson are using Intel chips which are no match for ARM processors. And with Huawei’s support, China’s SMIC may be able to switch to a 10 nanometre technology quickly, shortening the gap between its processors and that of others.
Huawei has still some cards to play, one of which is ceding the high end mobile phone market to Samsung for access to chip fabrication. And Huawei is virtually the only player in the world who can provide a complete 5G solution and install it much faster than others. Its home market currently is bigger than all other 5G markets in the world combined, with which it can power its growth.
It is certainly not game over for Huawei as many other tech analysts are concluding. They have already pronounced game over twice, once over Google’s Android system denial, later on ARM processor ban. With this ban, while the US has secured some temporary advantage for other western players, but also created an incentive for most manufacturers outside the US to move away from US equipment.
So it is very much game on for Huawei and China in the tech war. It is the larger forces of political economy that will decide this war. Like any other war, it is not one battle in one arena that will decide the war. The 5G is only one battle theatre, there are many other battlefields that will decide the future of this war. And in many of those, China holds the cards.