Caixin
Jan 02, 2019 08:32 AM
TECH TALK

After Getting Spurned in 5G, Could China Go It Alone in 6G?

As we head into the brave new world of 2019, last year’s top story from China’s high-tech realm promises to be equally loud in the year ahead. That story comes from the telecom realm, and saw local heavyweights Huawei and ZTE make nearly nonstop global headlines for much of last year for all the wrong reasons.

The bottom line was that in the space of just a year, this pair of global networking giants saw much of their hard work of the last decade rapidly undone by a U.S.-led campaign that transformed them from champs to chumps in the space of just a few months. That story looks set to continue in the year ahead, which could sow the seeds for a potential future where China may decide to walk away from the table of global standard-setting that it worked so hard to join.

I’ll explain what I mean in more detail shortly. But suffice to say that if China believes its smartphones and networking equipment will be spurned by the West for decades to come, it may decide there’s no longer reason to follow the current system that creates global standards for communications like 5G.

We’ll begin with a recap of big developments in 2018 that got us here, before exploring what may lie ahead. Caixin Global’s top two corporate stories of last year nicely summarize the picture, though in the name of full disclosure I’ll confess I had a hand in picking that pair of items.

The top story saw Huawei’s CFO detained in Canada for possible extradition to the U.S. on fraud charges for allegedly helping to facilitate sales of American products to Iran in violation of U.S. sanctions. That development, which infuriated Beijing, came against a broader backdrop that has seen many of the world’s largest and most advanced markets say they will no longer use Huawei or ZTE equipment due to national security concerns.

The year’s No. 2 story was quite similar, only focused on ZTE, which is quite a bit smaller than Huawei but still significant globally. That story saw ZTE nearly put out of business last year by the U.S., after Washington determined the company had violated an earlier settlement also centered on similar violations of U.S. sanctions against Iran.

The ZTE story was mostly focused on a specific transgression, but also came against the backdrop of the broader campaign by Western countries to shun Chinese-made equipment. That bigger campaign, which has seen the U.S., Australia and New Zealand ban Chinese equipment outright in their new 5G networks, gained even more steam last week when Britain’s defense secretary voiced “grave concerns” on the issue.

The Western countries are worried less about the lack of security of Huawei and ZTE equipment, and more that such equipment could contain backdoors and other mechanisms for spying in the future. The basis for their concerns lies in China’s unusual relationship between government and the corporate sector, with Beijing basically giving itself huge leeway to intervene whenever it sees fit in the affairs of companies from both the state-run and private sectors.

Whose standards?

With all that recent history and background in mind, we’ll spend the remainder of this column looking to what may lie ahead for Huawei, ZTE and ultimately China’s place at the table for global communications standard-setting. In my view the outlook is cloudy at best, since China will have less and less reason to adhere to such global standards if it knows the communications products it makes based on those standards will be shunned by major foreign economies.

Here it’s helpful to quickly recap China’s history in this regard. I can remember back in my early days of covering China more than a decade ago when Beijing was quite bent on creating its new alternative standards to global rivals. China had little or no say in development of those earlier standards, and as a result had little or no role in the development of intellectual property behind those standards. That’s important because ownership of such intellectual property is hugely lucrative for the companies that developed the technology.

Instead of playing the global game, which largely benefited big global names like Intel and Ericsson, China decided to try to leverage its own huge market to develop homegrown alternatives. Such alternatives may have been technically inferior, but would be more affordable and thus might be able to compete in more price-sensitive developing markets.

Telecom historians will remember the two big cases in this regard, one involving Wi-Fi and the other 3G telecoms. The Wi-Fi case came in the early 2000s, and saw China try to develop its own standard for the technology before ultimately abandoning the effort. The 3G case came a few years later, and saw China roll out its own homegrown standard known as TD-SCDMA, which was used at home by dominant local carrier China Mobile but ignored in most of the rest of the world.

The failure of those two cases, both accompanied by loud complaints from local companies that were forced to use the homegrown standards, led China to join the global table for standard-setting for 4G and upcoming 5G wireless communications. A report out last month from patent tracker IPlytics shows that Huawei and ZTE are now the world’s second and third biggest owners of 5G-related patents, behind only Samsung and ahead of global giants Ericsson and Qualcomm.

But with a growing list of countries now saying they won’t buy Chinese networking equipment, Huawei and ZTE, as well as Beijing, may soon start asking: What’s the point? Sure, adhering to a single worldwide standard makes global communications more practical for everyone. But if profits for creating products and services for that standard all go to Western companies, why should China continue to play by those rules?

Of course all of this is just speculative on my part. What’s more, the list of countries banning Huawei and ZTE products is still relatively small, and the vast majority of governments still see no problem in using such equipment. But if current trends continue, I could certainly see Huawei, ZTE and Beijing deciding at some point that maybe it’s better to start a new club to develop their own made-in-China standards for telecoms. That could provide some cheaper alternatives both at home and in more price-sensitive developing markets, even at the risk of fracturing the global telecom market.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com

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