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China bans exporting its technology and the US continues to push with 5G

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China approved a law last Friday that prohibits the sale of any type of technology that is considered strategic if it does not receive the mandatory express approval of the Government. It is sufficiently generic so that it adapts to the interests of each moment and, in reality, it is modeled on that of the United States, with very similar objectives. Meanwhile, the Trump Administration continues to press for more countries to veto Huawei, with good results. But, in recent days, Japan and South Korea have set limits, fearing that their private companies will be too harmed. Even European alternative operators have given a wake-up call by considering the concept of “clean networks” arbitrary and lacking in rigor.

In recent months, 5G technology has become the spearhead of a trade conflict between the United States and China, which worsens week by week. The consequences are quite unpredictable, because it affects more and more countries and markets. Its de-escalation is very complicated, because on the issue of maintaining the technological sovereignty of the United States, both Republicans and Democrats agree. And China is unwilling to compromise on what it sees as its legitimate aspiration to be technologically independent.

One of the central problems of the technological conflict between the two powers, at least as regards the deployment of 5G technology, is that everyone is involved to a greater or lesser extent and collateral problems multiply. Especially the countries that make up the European Union, Japan and South Korea, with their respective manufacturers of equipment, components and telecommunications operators, who see how the United States pressures them to stop buying Chinese products, mostly from Huawei. China, in turn, threatens to cut exports of its most lucrative products.

Japan and South Korea are very reluctant to bow to the dictates of the United States and veto Huawei, for fear of losing many business opportunities and irritating the Asian giant

Three days ago, the Swedish government, through its telecommunications regulatory body, announced the veto of Huawei and ZTE equipment in its national network. The Swedish telecommunications market is very small compared to the rest and Ericsson is also Swedish, so it should not be surprising a certain favoritism with who is the second world supplier of telecommunications equipment, but the explicit pronouncement can cause problems. At Ericsson’s presentation of results, just one day after the Swedish veto of Huawei and ZTE was made public, Borje Ekholm, Ericsson’s CEO, declined to comment on whether there could be retaliation against his company by China.

China, a very important market for Ericsson

Ekholm reported good quarterly results, precisely thanks to the contracts it had won a few months ago to supply 5G equipment to China. The market share achieved by Ericsson in the Chinese 5G market is still very small compared to that of Huawei or ZTE, but its amount is important because the Chinese 5G market is more than half that of the world.

Ericsson plans to sell half a million 5G base stations in China by the end of the year, so it is not surprising that Fredrik Jejdling, head of Ericsson’s network business, said that it was “very difficult” to comment on the situation of his company in China, although he recognized how important the Chinese market was to Ericsson. Ericsson has won a $ 593 million contract to supply 5G equipment to China Mobile and has well advanced agreements to also supply the other two national operators, China Telecom and China Unicom.

Ericsson, together with Nokia, are considered the two main beneficiaries of the problematic situation that Huawei is having to supply its equipment to European operators. But Ekholm, in a display of diplomacy, assured analysts that its recent sales growth in Europe “has been at the expense of competitors other than Huawei and ZTE,” read Nokia. “Our investment in leading technology has allowed us to continue to gain market share and it is worth mentioning that most of these achievements come from non-Chinese competitors,” he stressed during the presentation of the quarterly results. “We did not win because of the geopolitical situation” but based on offering customers the best product catalog and at the most competitive price to choose from, he added.

China may stop supplying “rare earths”, which it controls globally, to its commercial enemies, while supplying vaccines against Covid-19 to those who declare themselves allies

One after another, most European countries are bowing to the US dictate to veto Huawei, although without the forcefulness initially shown by Great Britain and lately by the Netherlands, Belgium and Sweden. France has juggled the awarding of 5G licenses and Germany has not quite decided to adopt a very tough position with Huawei, nor does it appear that Spain, the other major European telecommunications market, will. The main problem is that the telecommunications business does not give large margins to the operators, subject to a tremendous price war in Europe, especially in Spain, and the construction of the new 5G infrastructure is very expensive and hardly profitable before the middle of this decade.

Large national operators in Europe could weather the situation if they are forced to do without Huawei equipment in the very short term, but alternative operators have it more difficult in the current tariff situation. The vast majority of experts recognize that the quality, variety and price of Huawei’s equipment and service are unbeatable, although Ericsson and Nokia are striving to be equally competitive and it is more than prudent to have two or three main suppliers. Not to mention that the migration from 4G to 5G is much easier and cheaper with the same supplier. If supply is reduced, demand prices inevitably tend to rise and lead times for the remaining suppliers to lengthen.

Within this context of the telecommunications business in Europe, it is probably necessary to frame the ECTA (European Competitive Telecommunications Association) statement dated October 16 , where it “warns of the adverse consequences of a veto of Chinese suppliers for the EU welfare and the roll-out of 5G ”, as summarized in the title of the press release. Among the full members of ECTA are the MasMovil group, the German 1 & 1 or the French Bouygues Telecom, as well as Huawei.

More pressure on Japan and South Korea

The United States has not been satisfied with forbidding its operators to deploy Chinese telecommunications equipment in its territory, but has insistently pressured all European countries, and also Japan and South Korea, to have their networks “clean”, according to the Clean Network initiative described by Michael Pompeo on August 5 , after proclaiming in the weeks previous reports that Huawei is not reliable, “because it spies on the orders of its Government.”  Finally, the United States approved a law that prohibits the sale of chips to Huawei to all companies that use American technology in their design or manufacture, which came into force on August 15, with thirty more days to allow time to supply orders ongoing until then.

China’s response has not been long in coming and, as announced, the Last Friday, China’s supreme legislative body approved a law similar to the US Entity List, which expands the list of sensitive technologies and materials and totally prohibits their export without a special and favorable license from the Government. The law, which will take effect from December 1, includes all “interests” that affect Chinese national security.

It is interpreted that the Government will have carte blanche to include what it deems appropriate, apart from the fact that it will be considered a criminal act, with very severe prison sentences. The ban will not only affect end users; also domestic or foreign companies trading in Chinese products can potentially be affected. It is expected to include the so-called “rare earths”, the common name of 17 chemical elements located in the confines of the periodic table, with names as exotic as scandium, yttrium and fifteen of the group of the so-called lanthanides, among them cerium, neodymium , samarium, terbium, dysprosium or thulium, in addition to the lanthanum that gives the group its name.

China controls more than 60% of the world supply of these products, with the majority of mines owned by the Government, and which are essential to manufacture semiconductors. The Japanese company Shin-Etsu Chemical, for example, manufactures neodymium magnets, the most powerful permanent magnet, and its main supplier of neodymium and dysprosium, another key and very rare component, is China, with difficulties to find another reliable supplier. Taiwan may also have a lot of trouble with some materials that dope the silicon in its semiconductors if it takes a very tough stance on chip sales to mainland China, under the crossfire of two conflicting laws.

South Korea is reluctant to ban its three telecoms operators from using Huawei equipment, as the United States wants. For the United States Government, mobile operators SK Telecom and KT are “clean”, despite the fact that much of their fixed network belongs to Huawei. Instead, it pressures LG Plus to stop ordering from Huawei. According to the Yonhap news agency, the Korean government made it clear that “if a private telecommunications company uses equipment from a specific company, it is the Korean company that decides,” and cannot intervene, in a teleconference between the Undersecretary of State for the United States. States, Keith Krach, and the Korean Undersecretary of Foreign Affairs, Lee Tae-ho.

More complex is the position of Japan, a firm ally of the United States in defending the South China Sea, which bathes its coasts. On the one hand, the new Prime Minister of Japan, Suga Yoshihide, wants to cut the price of mobile services in his country by half and the most practical way is to introduce new providers of telecommunications equipment, such as the Chinese. On the other hand, the situation favors that Japanese companies can penetrate more decisively in the Chinese market, supplying both material and equipment to manufacture semiconductors as well as the sale of finished chips.

At the moment, Japan does not contemplate excluding Chinese companies from its telecommunications networks, according to Japanese Foreign Minister Toshimitsu Motegi, Michael Pompeo told Michael Pompeo when they met in early October on his visit to Japan. Yomiuri and the Reuters news agency, based on various sources. Japan told the United States that Tokyo cannot join an initiative that excludes a specific nation, but that it would be willing to reconsider if there are changes to the American plan. Japan is willing, however, to strengthen the cybersecurity of its networks.

China to supply Covid-19 vaccines to friendly countries

The United States, however, does not give up its efforts and recently provided a larger budget to an international collaboration agency, USAID, to provide grants to Southeast Asian countries, such as Laos, Cambodia or Thailand, to install telecommunications networks clean. Even the Trump Administration is willing to credit Brazil to do the same. India, known for always taking advantage of its neutral position in the conflict between the two powers, is waiting for events.

In this increasingly rarefied framework due to a relatively marginal issue such as 5G networks compared to the high stakes, Chinese diplomacy has just entered the scene with its vaccine to deal with Covid-19. As the Financial Times assures on its cover today, China has promised to give preferential access to its vaccine to tackle Covid-19 to countries in Asia, Africa and Latin America, in an attempt by Beijing to win more allies to its cause and against the United States. Jain Bolsonaro, president of Brazil, will find herself in dire straits with her pro-US stance if she wants the Chinese vaccine.

Chinese Foreign Minister Wang Yi has assured that Malaysia, Thailand, Cambodia and Laos will be priority recipients of the Chinese vaccine against the pandemic, according to the Financial Times. China now has four types of vaccine in phase three and last August, the Indonesian pharmaceutical company Bio Farma signed an agreement with the Chinese Sinovac to supply at least 40 million doses of its vaccine to Indonesia, starting next month. The United States also has some pharmaceutical companies with vaccines in advanced development, but Donald Trump has always said that the United States will always be the first to benefit.

Meanwhile, some countries, such as Australia, are in a compromised situation for having vetoed Huawei. Australia was heavily dependent on Chinese tourism, before the pandemic, and its significant meat exports to China have plummeted. Furthermore, the trade conflict between the United States and China is seen to be very difficult to settle even if John Biden won the presidency and the Democrats controlled both the United States Congress and Senate. The issue of maintaining the technological supremacy of the United States, which is basically discussed under the 5G umbrella, is one of the very few that both parties agree on.