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Beijing's global 5G ambitions threaten to disrupt telecoms

Risk of industry split between China-led and Western camps in standards battle

| China

Beijing's central planners are aiming to use China's Belt and Road Initiative to dominate the next wave of wireless technology by becoming the global leader in the development of 5G networks.

The 5G standard represents a quantum leap over today's wireless technology by providing lightning-fast connectivity and better bandwidth. It is the essential infrastructure for the internet of things, which will drive the next phase of the digital economy.

Beijing is pouring billions of dollars into 5G, which is also part of the "Made in China 2025" technology master plan that has raised concerns about China's ambitions in U.S. President Donald Trump's administration.

As well as rolling out 5G in a huge home market -- which already has more than 600 million mobile internet users -- the Communist Party hopes to expand the customer base beyond China's borders, as Chinese companies push out in countries involved in the BRI.

The result: China's version of 5G technology -- almost certainly less expensive than that of Western rivals -- could quietly become the de facto global standard. Preparing the way, Beijing is spending lavishly to influence global standards-setting organizations, such as the Institute of Electrical and Electronics Engineers (IEEE).

But these well-laid plans are encountering growing resistance.

Foreign companies, including Qualcomm, Ericsson, NTT Docomo and Samsung are looking to crowd out Chinese 5G with their own proprietary technology, and are also lobbying the IEEE and other standard-setting bodies, in an attempt to reinforce their position as the world's leading 5G contenders.

Two possible scenarios are emerging.

The first -- an optimistic view -- would involve collaborative ventures between foreign and Chinese companies, where harmonized 5G standards and protocols would eventually materialize. Here, Beijing would have to convince foreign companies that the Communist Party would serve as an enabler and facilitator and agree to a framework of multilateral rules.

A second, more likely scenario, would involve the fragmentation of 5G global value chains into distinct regions. Different 5G standards would compete for market share and influence. The Chinese-led group might be dominant in many BRI countries in Asia, while Western companies would try to defend their positions in the Americas and Europe.

The growing tech rivalry between Beijing and Washington would put international groups at risk for exposure to sanctions, export controls and blocked deals -- which would hamper Beijing's plans, at least in the short term.

Chinese telecoms companies like Huawei and ZTE have benefited spectacularly from open-sourced research and development with foreign companies.

However, the recent ZTE case involving the alleged violation of U.S. sanctions laws revealed how dependent China's premier companies remain on foreign technology. The Chinese group's very existence was under threat when the U.S. initially announced plans for a ban on ZTE's access to American-made components.

While the threatened penalty was later withdrawn, the shock is still reverberating around the industry. Regarding 5G, according to LexInnova, a research firm, Chinese companies control only about 10% of all global patents. Today, Qualcomm and Nokia, alone, account for more than 25% of 5G patents.

Thus, Beijing must continue to aggressively pursue technology transfer and IP acquisition strategies -- a gambit that will meet fierce opposition in Washington.

American technology groups would seem unlikely collaborators in the digital Belt and Road, given that U.S. laws are increasingly hostile to technology partnerships between Chinese and American companies. Yet there are plenty of voices in the American private and public sector calling for improved Sino-U.S. cooperation on trade and investment. Consider, for example, Google's latest overtures to re-enter China.

With or without the participation of U.S. groups, the lure of a digital Belt and Road might be enough to move the needle for the rest of the world. If Beijing could give assurances of market access to European and Asian companies, it might find suitable substitutes for American technology. Thus, not only would Beijing gain access to critical resources, it could split Washington from key European and Asian partners.

It's more likely, however, that a Sino-U.S. technology race will derail the prospects for international 5G collaboration with Beijing. Under this scenario, geopolitical competition would lead to a fragmented 5G landscape, with different blocs coalescing around different interests.

Recently the Australian government banned Huawei, the Chinese telecoms manufacturer, from participating in Australia's 5G network development. This follows a similar course of action in the U.S., where the list of blocked business deals with Chinese groups continues to grow.

A consensus has emerged in the West that any dependence on Chinese digital infrastructure will open the door to cyberattack and espionage. The British security services, for example, recently stated that they could provide "only limited assurances" that telecoms equipment provided by Huawei does not compromise national security.

On the grounds of national security, the U.S. government appears poised to double down on export controls and export licensing to prevent U.S. strategic technology from passing to adversaries. The result: fragmentation and ring-fencing of key technology value chains as companies cut off association with potentially blacklisted entities.

This could make it difficult for Beijing to entice leading foreign groups to migrate into innovation hubs in China, as the fear of U.S. sanctions imposed for sharing tech with Chinese companies could be a showstopper.

Even for a large group like South Korea's Samsung or Sweden-based Ericsson, a U.S. sanctions violation would impact operations all over the world, given the extensive interaction with American multinationals in global value chains.

Parag Khanna, Managing Partner, FutureMap, and author of the forthcoming book The Future is Asian, argues that the Belt and Road Initiative will ultimately position China as the global 5G leader. U.S. sanctions will have a temporary disruptive effect, says Khanna, but eventually Beijing will acquire both the talent and the resources to develop any technology it wants.

For now, the fragmented 5G landscape scenario has become reality. This puts multinational companies in the position of having to craft business strategies to manage different standards, different threats and different regulations from one region to the next.

This adds complexity and costs to global operations, and, by having to ring-fence off China-focused businesses, multinationals will have to grapple with disrupted value chains -- in addition to the threat of being whipsawed by new U.S. sanctions.

A fragmented 5G landscape could have repercussions beyond telecoms, forcing similar divisions in the artificial intelligence, robotics, and integrated circuits sectors, among others.

Companies, therefore, must learn to live in a more fragmented world, as Beijing's 5G ambitions have set in motion forces that will persist for years.

Alex Capri is a senior fellow in the Business School at the National University of Singapore.

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