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The exclusion of Huawei and ZTE in 5G networks will have severe consequences, warn Ericsson and ABI

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The exclusion of Chinese suppliers of 5G network equipment in the telecommunications infrastructure of the West will have severe consequences for the further development of the 5G regulation and the future 6G, due to the fact that they hoard many essential patents, in addition to the increase in the price of the equipment as a result of the lower supply and the high costs that operators will have to incur to replace existing Chinese networks, as recently alerted by Börje Ekholm, president and CEO of Ericsson, and the American consultancy ABI Research.

In Ericsson’s fourth-quarter results presentation in late January, Ekholm again criticized the Swedish telecoms regulator’s decision to exclude Chinese manufacturers of 5G network equipment from supplying products to Sweden’s telecom infrastructure. The head of the Swedish company Ericsson was very concerned because “it may be detrimental to our operations in China” but, above all, because it may affect the continued development of a single global standard for mobile communications.

For Ekholm, Ericsson’s current business in 180 countries has been built on free trade and the development of open and competitive markets. “This has also ensured the development of a single global standard for mobile communications” and “it is critical that the response to the geopolitical situation safeguards the extraordinary value associated with the standards that make 5G and beyond networks work.”

Huawei is five times bigger than Ericsson or Nokia: Huawei had a turnover of $ 136.7 billion last year, Ericsson $ 28 billion and Nokia $ 23.3 billion, so vetoing Huawei is risky

In a report published last week, the American consultancy ABI Research argues, in the same vein as the president of Ericsson, that “prohibiting Chinese manufacturers from deploying 5G equipment in Western countries, under alleged security problems, will be in to the detriment of the deployments of 5G networks and their technological evolution in the coming years ”.

For the consultancy, excluding Huawei from the installation of its 5G equipment in the West will delay the deployment of this technology for several years and will mean additional costs of several billion dollars for operators to replace their existing infrastructure.

In the opinion of Leo Gergs, analyst at ABI Research and author of the study, “the ban on Huawei and ZTE from deploying their 5G network equipment and restricting their access to semiconductor supply chains will have severe implications for the economic returns” of the new mobile technology. Furthermore, he adds, banning these Chinese network equipment manufacturers “will undermine the research and development of 5G and the future 6G.”

First, the supply restriction has economic consequences for telecommunications network operators. Discarding the offer from Huawei and ZTE not only imposes additional costs for the replacement of the equipment that have already been installed in the West, but by reducing the number of equipment manufacturers, competition in the market is reduced, a competition, in addition, that the Most analysts and even operators recognize that it has high quality and low price. The disappearance of these Chinese companies from Western telecommunications networks would inevitably cause prices to rise, because it would force operators to pay a higher price than there would be under perfect conditions of competition, Gergs says.

For the analyst, restricting Huawei access to 5G chipsets from US companies can also be very detrimental to the US economy because Huawei is already building a chip factory in Shanghai to circumvent US restrictions. And while Huawei could only make chips for its own consumption, it could supply equipment to all of China and Southeast Asia, its natural market, with the result that the US semiconductor industry would sell fewer chips, Gergs argues.

Implications for future releases

The other aspect highlighted by the analyst, which also coincides with the alert issued by Börje Ekholm, is that, apart from the economic consequences, a ban on Huawei will also have severe implications in the future process of standardization of 5G networks, the current Release 17 still to be completed and the next Release 18 to be discussed at the end of the year. Huawei and ZTE are among the main holders of essential patents for 4G and 5G mobile phone networks, approved and included in the 5G standard by the international standardization body 3GPP, dependent on the International Telecommunications Union (ITU), and which will be the cornerstone of the future 6G.

These essential patents for 5G networks are held by a very small number of companies. Apart from the Chinese Huawei and ZTE, the main ones are the Swedish Ericsson, the Finnish Nokia, the Japanese NTT DoCoMo and Fujitsu and the Korean Samsung (Qualcomm essentially has patents for 5G terminals).

The licenses to use these essential patents are available to other equipment manufacturers under FRAND (fair, reasonable and non-discriminatory) standards. But this does not mean that, when a new generation of mobile phone standards, such as 6G, is to be discussed, companies that have patents, essential or not, must necessarily give up their use. In fact, the discussion about the fair remuneration of patents is the order of the day. Ericsson, for example, filed a lawsuit against Samsung a few months ago because it considers that it does not comply with the agreement made at the time and the compensation should be reviewed.

China wants to dominate the international patent and standards market for the most technologically advanced products to collect royalties in the coming decades and influence its future development.

The US Administration has realized relatively recently that the bulk of regulatory development in telecommunications is in the hands of a very small number of companies, who appoint and fund large numbers of highly trained technicians to serve on various international committees . Many of these international standardization committees, both in 3GPP and ITU, are chaired at the primary and secondary levels by representatives from Huawei and ZTE.

The task and dedication of the representatives of these standardization committees is enormous and they work to achieve a consensus that benefits the majority. But, inevitably, they are clear about who pays them, either in the form of advance information of what will be the technological criteria that will prevail in the adoption of a regulation or of trying to choose a part of the regulation so that it better favors certain interests.

The decisions made in these organizations are always very complex and they all have trade-offs, so having an ally is important. Being present on these committees is important, but it means dedicating a lot of time, effort and knowledge, which is only available to large companies and who look at long-term profitability. By their nature, large Asian groups best fit this profile and it is no wonder that they dominate many committees.

Members of the ITU Board of Directors. In the center, Houlin Zhao.

The Secretary-General of the Geneva-based ITU is Houlin Zhao from China, who on January 1, 2019 began his second and final four-year term at the helm of the ITU. Zhao had already been Deputy Secretary General for the past eight years; since 1998 he was director of the ITU Standardization Office and twelve years before, since 1986, a senior advisor of the same organization. Thus, he has been occupying very important positions at ITU for 35 years without interruption, which shows his high professionalism. The other four top executives of the ITU are a British (Malcolm Johnson), a Uruguayan (Mario Maniewicz), a Korean (Chaesub Lee) and, since 2019, an American (Doreen Bogdan Martin), the first time the organization has chosen a woman at the highest management level in its 153-year history. They are easily identifiable in the photo above.

Huawei five times Ericsson and Nokia

For many, Huawei is considered to be of a similar size to Ericsson or Nokia. It is true that the beginnings of Ericsson go back to 1876 and those of Nokia, as an amalgam of the centennial ITT-CIT Alcatel (Standard Eléctrica as a subsidiary in Spain) and later of Lucent-AT & T and part of the Bell laboratories, also go back to many decades ago, although Nokia was created in 1864 as a paper company in Finland. Next to Ericsson, Huawei is a relatively young company, having been founded in 1987 by Ren Zhengfei and still running it de facto. Huawei has a very unique shareholding structure, because a large part of the shares are in the hands of its employees.

In 35 years, however, Huawei has grown to be five times the size of Ericsson or Nokia. Huawei had a turnover of $ 136.7 billion last year, a growth of 11.2% compared to 2019, according to preliminary results published by China Business Network. Ericsson’s revenue in 2020 was $ 28 billion, 5% more, and Nokia’s was $ 23.3 billion, 6% less.

Huawei’s net profit increased 10.4%, despite the US veto, to $ 9.9 billion, while Ericsson’s remained at $ 2.13 billion, after overcoming the drastic readjustment in 2019 that led to a net profit of 220 million for the elimination of 25,000 jobs, a fifth of the workforce at that time, to guarantee their survival. Nokia’s operating profit in 2020 was $ 1.11 billion, slightly more than double that of last year, and it is in the process of complete restructuring to ensure its viability.

The situation of the world market for telecommunications equipment for this year is not at all buoyant. According to Ericsson’s expectations based on the Dell’Oro consultancy report and set out in its 2020 results presentation, the global market for link network equipment (RAN) is estimated to grow 3% in 2021. China will increase 4%, North America 2% and Europe 3%.

In terms of turnover, the Asian market for 5G network equipment will be much more important than the European and North American combined, at least in 2021. It is not surprising, therefore, that the president of Ericsson is alarmed by the veto that the Swedish regulator wants to impose. Huawei and, perhaps, all of Europe if it succumbs to pressure from the US government, which with Biden seems to be softer in ways than Trump but not necessarily in substance.

Ericsson could sell more equipment in Sweden and in Europe and the United States if Huawei is banned, but Börje Ekholm’s well-founded fear is that the immense Chinese market would be banned in the short term, just now that it has just achieved a significant contract and that its sales in China were 2,200 million dollars last year, 17% more than the previous year. Nokia was left out of the Chinese market last year because the cost of the key component of its network equipment is too high, as a result of a bad technology decision made four years ago, and the Chinese market is tremendously price competitive. The consequences in the telecommunications equipment market are not seen from one day to the next.

Europe could strengthen the position of Nokia and Ericsson, favoring the purchase of more equipment from these companies. But this would hurt European operators, who would have access to a smaller and probably more expensive offer or perhaps indirectly subsidized with European research funds. European manufacturers, in the short or long term, would see their potential market reduced, as the Ericsson chairman fears if Chinese manufacturers are banned.

Huawei, meanwhile, seems immune to pressure from the United States. Last week, in a rare public appearance on the occasion of the opening ceremony of a laboratory in Shanxi, Ren Zhengei regretted that Joe Biden had not called him yet, although a conversation “would be welcome” and he has long awaited it, although not in a hurry. He made it clear that he does not intend to part with Huawei’s smartphone division, although he has recently sold the Honor brand to a Chinese consortium, because he thinks that the future of terminals, especially in the industrial and mining fields, is still in its infancy and thinks to exploit it thoroughly.

Regarding the technology transfer of telecommunications equipment that he offered a few months ago, he assures he has not received any response. And he has no doubt about the quality of his equipment, as he believes that anyone can see when operating an iPhone 12 in a European 5G network and in which the most demanding international performance tests are passed.

Control of international technical standards

Last week, The Wall Street Journal published an extensive article in which it warned that China already controls the manufacture of multiple products designed based on international technical standards and patents created in recent decades by Europe and the United States in organizations such as ISO, since from the humble USB connector to the large container used by ships, freight trains and trailer trucks.

The novelty is that China wants to lead the technical standards of the equipment of the future, from telecommunications or electrical transmission to artificial intelligence, and receive the patents and royalties generated with them in the coming decades, as has already happened in many aspects of 5G.

Last June, the European Internal Market Commissioner, Thierry Breton, already warned that Europe’s rivals are being very active in the development of international standards in key markets to protect and increase their competitive advantage. Left unchecked, European technology leadership and competitiveness in many products will be seriously compromised, Breton said.

According to the American financial newspaper, Chinese executives and politicians have a saying: One third of companies make products, the second third make technology, and the top third set standards. And according to the German data analysis firm IPlytics, Huawei is the company that owns the most patents in 5G and also leads the 5G product standardization proposals that it submits to the 3GPP, more than 35,000.

The effective control or approval procedure of an international standard or a broad set of regulations by a country, such as 5G mobile communications, can lead to the company behind it being highly competitive in that market. Or, worse still, to give an example, that the development of a single future international mobile telecommunications standard that allows networks to understand each other, as in the last century and a half, is impossible if the veto is promoted. to certain Chinese companies, as the president of Ericsson fears.