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Trade war

US ponders requiring 5G equipment to be made outside China

European players like Nokia face pressure to revamp supply chains

The U.S. has already essentially banned 5G technology from Chinese companies like Huawei, but may go a step further.   © Reuters

BEIJING/WASHINGTON (Dow Jones) -- The Trump administration is considering requiring that next-generation 5G cellular equipment used in the U.S. be designed and manufactured outside China, according to people familiar with the matter, a move that could reshape global manufacturing and further fan tensions between the countries.

A White House executive order last month to ban some foreign-made networking gear and services due to cybersecurity concerns started a 150-day review of the U.S. telecommunications supply chain. As part of that review, American officials are asking telecom-equipment manufacturers whether they can make and develop U.S.-bound hardware, which includes cellular-tower electronics as well as routers and switches, and software outside of China, said people familiar with the discussions. the people said.

The conversations are in early and informal stages, the people said. The executive order calls for only a list of proposed rules and regulations by the 150-day deadline, in October, so any proposals may take months or years to adopt.

The proposals could force the biggest companies that sell equipment to U.S. wireless carriers, Finland's Nokia Corp. and Sweden's Ericsson AB, to move major operations out of China to service the U.S., which is the biggest market in the $250 billion-a-year global industry for telecom equipment and related services and infrastructure. There is no major American manufacturer of cellular equipment.

U.S. officials have long worried that Beijing could order Chinese engineers to insert security holes into technology made in China. They worry those security holes could be exploited for spying, or to remotely control or disable devices.

Washington has already essentially banned telecom equipment from Chinese companies, especially industry leader Huawei Technologies Co., from the U.S. over these cybersecurity worries, which Huawei says are baseless. Now the White House is taking those concerns to the next step by asking Western telecom-equipment makers whether they can rejigger their China-dependent supply chains.

"While the primary national-security concerns center on Chinese-owned firms, the equipment produced by any firm operating in China is at greater risk for vulnerabilities because of access to personnel and facilities," said Michael Wessel, a member of the U.S.-China Economic and Security Review Commission, which reports to Congress on security issues.

Pressure to disentangle global manufacturing and supply chains is part of a larger rivalry between the U.S. and China that is encompassing technology, trade and influence to shape the global economic and political order. President Trump and China's leader, Xi Jinping, are expected to meet this week at a summit of Group of 20 major economies to discuss the trade conflict that has seen each side levy punitive tariffs on hundreds of billions of dollars in goods.

Unlike a trade dispute that could be resolved soon, the national-security concerns could permanently alter where technology meant to be used in the U.S. is manufactured and designed.

The U.K. and Japan also are each conducting separate telecom supply-chain reviews. While the U.S. has lobbied both countries on blacklisting Huawei, it is unclear how much these governments are coordinating on securing their 5G network supply chains. British and Japanese officials say they are respectively conducting independent reviews.

U.S. officials say they are acting urgently because wireless carriers are starting to upgrade to 5G, a superfast cellular technology that could fuse the mobile internet with manufacturing and other endeavors, creating a world of robot-run factories, remote surgery and driverless vehicles to power a "fourth industrial revolution."

These 5G networks also promise to connect things such as pacemakers to the internet, leaving many more devices vulnerable to cyberattacks.

The White House declined to confirm or comment on specific discussions. "The fourth industrial revolution will be built on the telecommunications networks being constructed today," a Trump administration official said. "It is critical that those networks be trusted."

After Huawei, Nokia and Ericsson are the world's biggest cellular-equipment makers. Based on the companies' annual reports, Citi analysts Amit Harchandani and Robert Lamb estimate China represented 45% of Ericsson's manufacturing-facility area and 10% of Nokia's in 2018. Ericsson operated at roughly 75% capacity world-wide in 2018, they said, suggesting the Swedish company has flexibility to shift production to other countries. The analysts' estimates don't include the possibility that the two companies use Chinese subcontractors.

Spokesmen for Ericsson and Nokia declined to comment on any discussions with the U.S. government. The Ericsson spokesman said the company's strategy is to manufacture products close to its customers and that it has flexibility to move manufacturing to sites in the U.S., China, Brazil, Estonia and India. The Nokia spokesman said its manufacturing strategy can "mitigate against risks such as local disruptive events, transportation capacity and political risks."

Both Nokia and Ericsson have already shifted, or made preparations to move, production out of China because President Trump's recent 25% tariff hike on Chinese goods affects telecom equipment manufactured in China and sent to the U.S.

Last month's White House order for the telecom supply-chain review says the U.S. may create a list of countries considered "foreign adversaries." China is expected to be listed as one, the people said.

Informal discussions between U.S. officials and technology companies to move manufacturing out of China started well before last month's executive order, in 2018 or earlier, the people said. Washington has discussed with other Asian countries the idea of directing investments to them to manufacture products that are currently made in China, one of the people said.

One hiccup, however, is that some countries don't have enough skilled workers or suitable land to mirror China's well-established setup, the person said.

Current discussions center on which U.S.-bound products should be made outside China, the people said. U.S. officials don't want "intelligent" equipment that zip around data, such as cellular-tower hardware, routers and switches, made in China, the people said. They added that the U.S. may allow benign parts, such as power converters and protective cases, to be made in China.

"Those analog, nonintelligent components, from a cybersecurity point of view, would not pose a threat to the supply chain," one of the people said.

Software is trickier to regulate. For example, researchers working in China for the foreign companies might contribute a small piece of code to a collaborative effort. The U.S. may ban essential telecom software developed in China, but could allow generic "open-source" software, which is available to the public, that is developed in China, the person said.

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