EU-China investments: the 5G political power game
Serie Duurzaamheid & Economie

EU-China investments: the 5G political power game

25 Feb 2019 - 11:00
Photo: ©Tom Blackwell/Flickr
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Late 2018, China detained two Canadians, thereby pressing Canada to free Meng Wanzhou: a Chinese senior executive of Huawei arrested in Vancouver. Early 2019, more than 27 diplomats from seven countries and 116 scholars and academics from 19 countries signed an open letter urging China to release the Canadians and warning China that the detentions will result in “greater distrust.” In part IV of the Clingendael Spectator series on EU-China investments, China expert Sanne van der Lugt argues that the Canadians are indeed victims of a political power game. But so is Ms. Meng. ”The bottom line is that the U.S. will try everything in order to avoid that a Chinese firm will be the first with widespread 5G coverage.”

Let me start by emphasising that I fully support the request for the immediate release of Mr. Kovrig and Mr. Spavor, who are victims of a political power game. What I am missing, however, is a second letter sent to the Canadian and U.S. governments with a similar request for the immediate release of Ms. Meng, since she too is a victim of this political power game. When I raise this among European policy makers, I usually get the reply that these are two very different cases. They argue that Ms. Meng’s arrest follows normal judicial procedure, while the arrest of the two Canadians is purely political. Let us explore this statement.

At the bail hearing in Vancouver in December 2018, it appeared that the United States had asked the Canadian authorities to arrest the CFO of Huawei on the basis of the allegation that Ms. Meng had participated in a scheme to trick financial institutions into making transactions that violated United States’ sanctions against Iran. In order to understand to what extent this allegation is truly a judicial matter, I will look into the current developments in the telecom industry and their geostrategic consequences. Please bear with me, because this part is going to be rather technical. However, I believe that this background information is necessary to be able to judge the current situation.

Developments in the mobile telecom market
The mobile telecom market exists of infrastructure and platform vendors (building the networks), mobile device vendors (phone brands), mobile network operators (your contract), over the top (OTT) communication providers + content service providers (the apps), and retailers (the shops). Data shows that, by far, most revenue is made by the operators and that telecom infrastructure vendors –like Huawei – only earn a small share of the total revenue. This has not always been the case.

Huawei was the only equipment vendor to gain share in the mobile infrastructure market in 2017, increasing from 25% to 28%

In the early days of the creation of the first mobile networks, telecom vendors made a fortune selling expensive infrastructure equipment to operators.The profit margin for telecom infrastructure vendors has strongly decreased because of two main reasons. Firstly, the mobile telecom market has matured, leading to low returns. Secondly, price pressure from increasing competition with the Chinese telecom equipment vendors led to the decrease of profit margin. The very low profit margin means that currently, starting a new telecom infrastructure firm does not pay off, which in turn has led to a consolidation in the telecom industry.

Around the year 2000, there were about twenty large telecom companies worldwide that were active in the telecom equipment sector. This was the year that Huawei entered the European market, after it had hired leading consultancies such as IBM, the Hay Group, PricewaterhouseCoopers (PwC) and the German Fraunhofer-Gesellschaft (FhG) to help improve its management systems in order to comply with international standards.1 Due to the aforementioned changes in the market, many telecom equipment vendors were outcompeted, cornered by more successful firms, or moved to a niche sector. This led to there being only four remaining telecom infrastructure companies worldwide, namely: Huawei, Ericsson, Nokia Networks, and ZTE. In other words, the U.S. – just like any other country in the world – is dependent on these two European and two Chinese firms for the building of its mobile telephone infrastructure.

inside Huawei's headquarters
Inside Huawei's headquarters, Shanghai. ©Karlis Dambrans/Flickr

At the same time, these four telecom vendors all depend on U.S. companies for crucial chips for their telecom infrastructure equipment. For example, ZTE depends on Qualcomm for about 65 per cent of their chips.2  This global interdependence between Chinese, European and U.S. firms for telecom infrastructure has assured a natural equilibrium between the three large economic blocs. However, Chinese vendors were getting stronger. Huawei was the only equipment vendor to gain share in the mobile infrastructure market in 2017, increasing from 25% to 28%.3  The future looked bright for Huawei, that took over Ericsson’s position as the world’s largest telecommunications equipment vendor in 2012.4  

A leaked (older version of) a National Security Council document suggested that if China will get widespread 5G coverage before the U.S. does "China will win politically, economically, and militarily"

The competitive struggle for 5G
In order to not fall behind any further, it was necessary for the European vendors to attract as many contracts for the new 5G networks as possible. The emergence of 5G offered new chances for Ericsson and Nokia Networks, since the mature markets in North America and Europe also needed a completely new telecom infrastructure to support this fifth generation of telecom networks. At the same time, it caused a new struggle for control over the telecom infrastructure market. Because of the strategic importance of 5G networks, there is quite a lot at stake. It is expected that whoever will get widespread 5G coverage first, will be able to accelerate the development of specific 5G-reliant technologies and, hence, will set the standards. A leaked (older version of) a National Security Council document suggested that if China will get widespread 5G coverage before the U.S. does "China will win politically, economically, and militarily".5  The rising role of Huawei and ZTE in telecom infrastructure within the U.S. already raised concerns about the chances for espionage. However, it suddenly became clear that the threat was bigger: Chinese telecom infrastructure vendors needed to be stopped in their efforts to be the first in getting widespread 5G coverage, or else…

The U.S. government argued that because of the high level of intelligence sharing between Five Eyes countries (U.S., U.K., Australia, New Zealand and Canada) the presence of Huawei or ZTE in any of these countries could pose a significant threat to U.S. national security

Subsequently, the following events took place: beginning January 2018, AT&T backed out of a deal to sell Huawei smartphones, reportedly because of pressure from Congress.6  Lawmakers even pressured AT&T to cut Huawei out of group efforts to establish the 5G standard.7  At the same time, Republican lawmakers proposed a bill that would ban federal agencies from doing business with companies or organisations that use Chinese-made networking equipment.8  In February 2018, six intelligence community chiefs advised American customers not to buy products from Huawei and ZTE for security reasons. However, an article in Bloomberg called the evidence against Huawei and ZTE ‘flimsy’ and argued that it is more about protectionism than about security.9

Huawei's President of process, quality and quality talks about 5g
Kevin Tao, Huawei's president of process, IT and quality, talks about 5G ©Vodafone Institute/Flickr

Despite its large disappointment, Huawei decided to focus on the 25 memoranda of understandings (MoUs) it had signed with European and other global telecom operators to trial 5G equipment. These included agreements with Britain’s BT, Bell Canada (BCE), France’s Orange, Germany’s Deutsche Telekom and global player Vodafone.10  In fact, Huawei launched its first global end-to-end user trial of 5G in Vancouver; together with TELUS.11  ZTE had also signed many MoUs with European and other global telecom operators to trial 5G equipment.

The U.S. government, on the other hand, was not yet done with these two companies. They went to their allies to convince them, one by one, to ban the use of 5G equipment from Huawei and ZTE. In March 2018, a U.S. congressman who serves on the influential House Intelligence Committee warned that if the Australian government allowed Huawei to build 5G wireless networks in Australia, the Canberra-Washington security partnership could be damaged. 12  

The U.S. government argued that because of the high level of intelligence sharing between Five Eyes countries (U.S., U.K., Australia, New Zealand and Canada) the presence of Huawei or ZTE in any of these countries could pose a significant threat to U.S. national security. Australia decided to ban Huawei and ZTE in August 2018.13  Soon after, Huawei stepped out of a tender for 5G in New Zealand realizing that it had no chance of securing the tender after the ban in Australia. In November 2018, New Zealand joined the U.S. and Australia in banning Huawei in supplying 5G technology.14  In the same month, a U.S. delegation visited multiple European countries to urge its allies to safeguard the security of their telecoms networks and supply chains.15

Even more accusations
On top of these efforts, the U.S. demanded from the Canadian authorities to arrest Ms. Meng, the CFO of Huawei, on the allegation of violating U.S. sanctions against Iran when she changed flights in Vancouver on December 1, 2018. According to a Reuters report, U.S. authorities have been probing Huawei’s alleged shipping of U.S.-origin products to Iran and other countries in violation of U.S. export and sanctions laws since at least 2016.16  The probe of Huawei is similar to another one that almost led to the bankruptcy of ZTE. In April 2018, the U.S. government imposed a seven year ban on ZTE, which stopped them from buying crucial U.S. technology. When it looked like ZTE was going to shut down in May 2018 – as it was unable to continue business without the crucial chips from Qualcomm – Trump decided to step in and lift the ban.17  The U.S. seemed to hope that the Chinese government would, in exchange, approve the deal between Qualcomm and the Dutch chipmaker NXP that was already put on hold for two years as the Chinese government was the only player that did not approve of the deal.18  In the end, the Chinese government did not change their mind on this deal and, hence, the deal has been cancelled.19

To summarise: both Huawei and ZTE have been probed for and accused of violating the U.S. sanctions against Iran by exporting U.S. technology to Iran. However, when taking into account that there are only four telecom infrastructure companies worldwide that all rely on U.S. chips: how would Iran be able to build a telecom infrastructure without any company violating these sanctions? Can the U.S. determine whether a country is allowed to build a telecom network? Would that be in line with the U.S.’ global support for democracy? The response of Chinese Foreign ministry spokeswoman Hua Chunying’s is telling. Ms. Hua said that “China’s position opposing nations using their own domestic laws to impose unilateral sanctions is consistent and clear,” when asked whether Huawei violated U.S. sanctions related to Iran.20

Ms. Hua Chunying in Brussels, 2011. ©David Plas/Flickr
Ms. Hua Chunying in Brussels, 2011. ©David Plas/Flickr

What will the future of 5G hold?
The case of Ms. Meng is very complicated and highly geopolitical on many fronts. To me, it is not a question of whether Ms. Meng’s arrest is political or not.The bottom line is that the U.S. will try and do anything in order to avoid that a Chinese firm will be the first with widespread 5G coverage.The question is: do European policy makers and China experts accept to be balls in this political power game and silently swallow the legal language that is supposed to convince us of the U.S.’s rights to arrest Ms. Meng while making the Chinese government look like the bad guys by signing only one letter? Or do they have the balls to really stand up for our European norms and values by supporting all victims of this political game? My guess is that the latter option shows leadership and offers a higher chance for a constructive and inclusive solution for the complex challenges in developing the standards for 5G networks.

The U.S. is steering towards a world in which we have two separate, incompatible telecom infrastructure networks divided over political lines: infrastructure built by Ericsson and Nokia Systems with chips from Qualcomm for allies of the U.S., while China’s allies will have infrastructure built by Huawei and ZTE. That future scenario is far from ideal; it resembles a Cold War situation with a great chance of miscommunication, that can have many possible consequences. Let us step away from this strategy while we still have a choice, and stop this unfair U.S. intervention that leads to unfair responses from the Chinese government: let’s stand up for our European norms and values. In that way, we will create a level playing field in which we can try to find a way in which we all benefit from the technological advantages of 5G. Excluding a powerful economic and military nation is not a clever choice. Instead, we will need to find ways to cooperate. The chances of espionage remain (there has been no evidence for espionage over the telecom networks of Huawei or ZTE thus far), however, they offer a smaller risk and the consequences are easier to deal with than a new Cold War situation.


Sanne van der Lugt
Onderzoeker en beleidsadviseur