One by one, America’s allies are endorsing Donald Trump’s war against Huawei. Britain this week was the latest to capitulate, vowing to ban the use of the Chinese tech giant’s 5G equipment in its telecom networks. Among the big Western countries, Canada and Germany stand out as holdouts and will surely surrender soon.
The United States fears that Huawei is a spy for the Chinese government – and it may be right, even if it has offered no evidence. But that’s not the only reason Western countries should avoid installing gear made by Huawei or its smaller Chinese rival ZTE, both of them backed by the Chinese state.
If they are sidelined, the Western world will have a fighting chance to develop its own national and global 5G (and eventually 6G) tech champions. As it stands today, Huawei and ZTE are virtually unassailable. The Dell’Oro Group, a U.S. market research firm, recently estimated that the two Chinese companies control 38 per cent of the global market for telecom equipment.
Their success has a lot to do with the Chinese government’s lavish support for strategic industries. Their Western competitors, among them Nokia and Ericsson, spend more, relatively speaking, on research and development than they do. In effect, the market share of Nokia, Ericsson and others was “artificially” constrained by China’s unfair trading practices, says Robert Atkinson, the Canadian-American economist who is president of the Information Technology and Innovation Foundation (ITIF) in Washington.
The Chinese government would have you think otherwise. The week before Britain pulled the plug on Huawei, China’s famously outspoken ambassador in London, Liu Xiaoming, said, without a hint of irony, that a Huawei ban would damage Britain’s reputation as a “business-friendly, open, transparent environment.”
The implication was that Britain’s economy was becoming less open than China’s – when it was precisely China’s closed economy that helped propel Huawei into 170 countries. It already has a strong foothold in Europe. Its breakthrough European contract came in 2009, when it built a 4G network in Norway. Huawei has built other 4G networks on the continent and was in the pole position to win the 5G rollout – at least until Mr. Trump made Sinophobia the signature policy of his presidency.
Mr. Atkinson, who has studied Huawei’s rise and its effect on Western rivals extensively, says China’s efforts to largely exclude foreign telecom competitors allowed Huawei and ZTE to dominate domestic sales. The ample cash flow and profits extracted from what would become the world’s biggest telecom market gave the companies the financial might to attack the world.
But shielding them from competition wasn’t the only route to their runaway success, especially in the developing world, where dozens of countries are members of China’s Belt and Road Initiative, an infrastructure development strategy.
Huawei also received generous tax incentives and incredibly indulgent export financing from Chinese export-import and development banks, which reportedly included loan periods of as long as 30 years, payment holidays of two to four years and total financing as high as 130 per cent of the equipment purchase price. The Washington Post last year reported that “state-owned Chinese banks made a $100-billion line of credit available to Huawei customers” (not all of it was used).
There’s more. Allegations of intellectual property theft have been levelled against Chinese tech companies for years. In 2012, The Globe and Mail reported that Nortel Networks, Canada’s fallen tech champion, went to the RCMP with evidence of Chinese industrial espionage in 2004 but received no help. In the article, Brian Shields, who was Nortel’s senior systems security adviser, said an internal investigation showed that for almost a decade, hackers from China downloaded “volumes” of internal Nortel documents, from top-secret R&D to business plans. After the company went bankrupt in 2009, the Canadian Department of National Defence discovered listening devices in the Nortel building.
Huawei’s endless advantages probably accelerated the downfall of Nortel and Lucent (the latter was absorbed into Alcatel and, later, Nokia) and put pressure on the survivors.
Mr. Atkinson concluded that Nokia, Ericsson and others were the victims of unfair competition from Huawei and ZTE. In an extensive report published last month, he said “Chinese market-share gains have come at the expense of innovative telecom equipment providers in other countries. By artificially taking market share from more innovative companies, the latter have less revenue to invest in cutting edge R&D.”
Pushing Huawei out of European and North American 5G networks – Australia has also shut it out – would of course be a gift to Nokia, Ericsson and their smaller rivals, including Samsung. Would they become complacent if their main competitor were hobbled? Unlikely. With Huawei unable to compete for 5G contracts in some big Western countries, their revenues and profits would rise, allowing them to spend more on innovation.
The 5G market is immense, and dazzling new products would allow them to compete better in Latin America, Africa and Asia. Still, Huawei would be a formidable competitor. To give the Western tech companies a boost, governments would have to help by, say, topping up export financing support.
Huawei and ZTE had it too good for too long, for many of the wrong reasons. Mr. Trump’s Sinophobia could backfire in ways that we can’t predict today. But sending the message to China that its efforts to manipulate the crucial telecom market will no longer be tolerated in the West has promising prospects.
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