Huawei and the 5G complex

May 22 2019
by Joshua Levine


China's Huawei, the world's largest provider of networking gear and No. 2 smartphone vendor, is the latest entity to be added to the Trump Administration's blacklist. The official reason is for the company's purported role in aiding Beijing in espionage. Huawei and dozens of its affiliates are considered national security risks and will be prohibited from buying hardware and software from American firms without government approval. The US had ramped up diplomatic efforts in recent months to urge allies to sideline Huawei. 5G is a "game-changing technology with implications across all aspects of society from business, government, military and beyond," Gordon Sondland, US Ambassador to the European Union, said in February. "It seems common sense to me to not hand over the keys to your entire society to an actor that has demonstrated malign conduct."

The 451 Take

US actions against Chinese tech giant Huawei are shaking up the global technology industry, and especially top mobile chipmakers like Qualcomm and ARM. The blockade against Huawei is already disrupting strategic plans for upcoming rollouts of 5G in several countries and forcing suppliers and enterprises across several markets to rethink the structure of their supply chains. Because uncertainties abound, organizations involved in the buildout of 5G networks need to manage risks, but also recognize that circumstances can and will likely change rapidly, and may be vastly different a few months down the road.

Securing 5G's future

Fifth generation (5G) mobile networks are expected to deliver a huge leap in the speed and capacity of communications. As the successor to 4G – the current top-of-the-line network technology first introduced commercially in 2009 – 5G could end up being 100 times faster than its predecessor, with data speeds reaching 10Gb per second. That would allow consumers to download a full-length high-definition movie in seconds. But 5G isn't only about faster data. The upgrade to 5G – occurring over the next several years – will facilitate an exponential spike in the Internet of Things, from home security systems to traffic lights to self-driving cars, which are expected to send and receive data on the 5G network. By 2024, the amount of data carried by mobile networks will be five times greater than it is today, and 5G networks will cover more than 40% of the world's population, according to Ericsson. It estimates that more than 22 billion gadgets will be IoT connected by 2024.

This configuration of 5G networks means there are many more points of entry for a hostile power or group to conduct cyberwarfare against the critical infrastructure of a target nation, community or organization. That threat is magnified if an adversary has supplied equipment in the network, according to US officials. So far, though, the US hasn't publicly produced hard evidence that Huawei equipment has been used for spying.

US, global semiconductor firms disrupted by Huawei action

Blocking the sale of critical components to Huawei could also disrupt the businesses of American semiconductor giants like Micron Technology and slow the rollout of critical 5G wireless networks worldwide – including in China. That in turn could hurt US companies that are increasingly reliant on the world's second-largest economy for growth. If fully implemented, the Trump Administration action could have ripple effects across the global semiconductor industry.

Huawei has paid Qualcomm more than $1bn in royalties in recent years, and last year bought $11bn worth of chips from American companies such as Intel and Broadcom. Intel is the main supplier of server chips to the Chinese company; Qualcomm provides it with processors and modems for many of its smartphones; Xilinx sells programmable chips used in networking; and Broadcom is a supplier of switching chips, another key component in some types of networking machinery.

Today, with some 2,300 patents, Huawei is the world leader in the 5G generation of broadband wireless architecture and offers the only turnkey system that can be installed in a working network. Since few competitors are capable of making 5G gear as reliable and inexpensive, any impediment to Huawei's production of this equipment could slow the rollout and adoption of 5G technologies. That, in turn, could dampen demand for smartphones and networking equipment and may also hinder the development of new technology that will depend on 5G, such as driverless cars.

Despite the constant drumbeat against Huawei, Alphabet's Google said on Tuesday that it plans to work with Huawei over the next 90 days – just after the US temporarily eased some trade restrictions on the company. This is a sudden and dramatic turnabout for Google, which on Sunday said it would cut ties with Huawei. According to an announcement on Monday, the latest authorization had been created as a temporary general license. It allows disclosures of security vulnerabilities and for Huawei to engage in the development of standards for future 5G networks – effectively prompting the firm to become more transparent. Huawei was one of a select few global hardware partners to receive early access to the latest Android software and features from Google. Outside of China, those ties are critical for the search giant to spread its consumer apps and bolster its mobile ad business.

The US actions, so far, are focused on limiting Huawei's access to Western markets. But to shape tomorrow's communications networks, it would also have to compete in developing and emerging markets – especially in Asia and Africa, where 90% of global population growth is expected by 2050. Beyond China, Huawei has signed dozens of commercial 5G contracts around the world, including 25 in Europe and 10 in the Middle East. It could be harder to fulfill those contracts if Huawei can't buy parts from US suppliers. A similar export ban by the White House last year briefly crippled another Chinese tech rival, ZTE. That ban, which was tied to ZTE breaking sanctions on Iran, was lifted after the company agreed to pay a $1bn fine, overhaul its senior management and bring an American monitoring team on board.

Importantly, on Wednesday it was reported that the British chip designer ARM has halted relations with Huawei to comply with the US blockade, potentially crippling the Chinese company's ability to make new chips for its future smartphones. Huawei, like Apple and chipmakers such as Qualcomm, uses ARM blueprints to design the processors that power its smartphones. It also licenses graphics technology from ARM, which is owned by Japan's SoftBank. ARM said in an internal company memo that its designs contained technology of US origin, the BBC reported. It told staff they were no longer allowed to "provide support, delivery technology (whether software, code, or other updates), engage in technical discussions, or otherwise discuss technical matters" with Huawei, according to the memo seen by the BBC. Huawei's international partners are moving to distance themselves from the company until there is clarity over its relationship with US technology partners that provide the apps and services that are crucial for consumers. Notably, 451 Research analysts point out that seven of ARM's 23 acquisitions since 2003 have been of US companies, most of them in core intellectual property. ARM has built up a big presence in Austin, Texas and also in Silicon Valley – all their OEM licensing negotiations are done from the US. It appears that while the core instruction set is not from the US, much of the surrounding IP will be.

5G switches on, Huawei cut off

Two of the UK's biggest carriers said they were removing Huawei phones from 5G rollout plans. BT Group and PLC's EE – which had planned to use phones from makers including Huawei and Samsung as they launched the next-generation wireless services later this year – will pause on Huawei handsets. It couldn't assure customers full access to Google services on the Huawei phones. Vodafone also said Wednesday it was halting preorders for the 5G version of the Huawei Mate 20X, which it had intended to offer as part of its 5G rollout. The company said this is a temporary measure while uncertainty exists regarding new Huawei 5G devices.

In Japan, KDDI and SoftBank both said Wednesday they are suspending sales of the Huawei P30 lite, which was scheduled to launch in the country later this month, while they gauge the impact of the US restrictions. NTT DoCoMo, which commands half of the Japanese market, is considering halting preorders for new Huawei phones, including the P30 Pro. With its 5G rollout just around the corner, Japan is preparing for a surge in demand for new phone numbers by expanding the maximum number of digits from 11 to 14, a change that will enable mobile carriers to offer 10 billion new numbers starting with the 020 prefix. So far the Japanese government has not taken action against Huawei, whose products are relatively popular there.

5G is already partly available in South Korean cities, but it is not expected to see widespread adoption until 2020 at the earliest. Still, South Korea – one of the five pioneering 5G countries alongside the US, China, UK and Switzerland – is dominated by Huawei rival Samsung, so it isn't much of a potential market for the Chinese company. Under the current scenario, this may give South Korea an advantage as it promotes major initiatives to transform its economy around 5G networks. In South Korea, the country with the world's fastest internet speeds, the transition to 5G networks is also leading to an era of interactive robots. It switched on 5G networks nationwide in April, with data speeds of about 1.5Gbps. Businesses are counting on 5G to deliver AI-based robots, 3D content and holograms that they say will someday be a part of people's daily lives. The higher speeds will also enable companies including automakers and wireless carriers to connect devices with vehicles, home appliances and buildings. And because the country also boasts the world's highest robot density, some of these same companies, such as Hyundai, LG and Samsung, are trying to develop bots that will provide some fixes for problems like a rapidly aging population and rising labor costs.

What does Huawei management think about all of this? "Restricting Huawei from doing business in the US will not make the US more secure or stronger; instead, this will only serve to limit the US to inferior yet more expensive alternatives, leaving the US lagging behind in 5G deployment," Huawei said in a statement last week. Whether or not these words turn out to be prophetic is impossible to predict today. This is all happening only a month after Verizon launched its 5G network in its first two cities – Chicago and Minneapolis.