War on 5G Network between China and US - An analysis - Seeker's Thoughts

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War on 5G Network between China and US - An analysis

The British government has approached the U.S to form a club of 10 nations that could develop its own 5 technology and reduce dependence on China’s controversial technology giant Huawei. 

What is D10 Club?

The D10 club would see G7 nations – Canada, France, Germany, Italy, Japan, the UK, and the US – join forces with Australia, South Korea, and India to find another company to build the 5G network.

The issue is expected to feature at a G7 summit that US President Donald Trump will host next month against the backdrop of a fierce confrontation with China that has been exacerbated by a global blame game over the spread of the novel coronavirus.

It comes amid rising tensions between the UK and China, with the Government accusing the Communist state of covering up coronavirus.
According to Cabinet Secretary Michael Gove in March that China "was not clear about the scale, nature, the infectiousness of this disease."
Nokia and Ericsson are the only two companies in Europe that are currently supplying 5G infrastructure, but it is believed they could not build the network as quickly as Huawei.

A review into Huawei’s role in the UK's 5G plans was launched by spy chiefs last week after the US announced sanctions against the Chinese telecoms giant.

U.S sanctions

The Trump administration recently announced that it was banning the sale of American chips to the Huawei, claiming the company could be exploited by china to conduct surveillance against western nations.

GCHQ’s National Cyber Security Centre said it was looking again at the possible security risks.

“The security and resilience of our networks are of paramount importance.
“Following the US announcement of additional sanctions against Huawei, the NCSC is looking carefully at any impact they could have on the UK’s networks.”

 The PM ordered aides to draw up plans to ax China’s involvement in UK internet infrastructure.

Mr. Johnson wanted China to have no involvement in the British network by 2023. He has previously called for the UK to become more self-sufficient and less reliant on China for goods.

The Government has come under increasing pressure from the US to ditch the Huawei deal, with the Trump administration threatening to drop Britain's access to intelligence usually shared between the US, UK, Australia, New Zealand, and Canada.
The PM has also faced a backlash from within his own party, having faced his first Commons rebellion in March over Huawei’s role in the UK’s 5G network.
A powerful group of senior Conservative backbenchers demanded the PM set a time limit to remove its equipment from the network.
Mr. Johnson then resisted the calls, instead of saying that the telecoms company would only be allowed to supply 35 percent of the UK’s infrastructure and that it would be banned from “sensitive locations” such as military or nuclear sites.

Would this aggressive move stop the rise of China?
"As things stand, Huawei has 12 months left to live," According to the analysts for the company in a report. The dilemma is the lack of alternatives to US manufacturing tools used by foundries including TSMC (Taiwan Semiconductor Manufacturing Company) and even SMIC, a Chinese company that has been viewed as a potential fullback if the Taiwanese manufacturer is blocked.

Huawei's dependence on TSMC is hard to overstate. According to estimates prepared by The Information Network, and first published on Seeking Alpha, the Chinese firm is currently TSMC's second-biggest customer, after Apple, accounting for about 15% of its revenues.

 In 2019, that would have been roughly $5.2 billion, about half of what Huawei spent annually on US components before emergency stockpiling last year. Among other things, Huawei relies on TSMC for certain 5G chips as well as microprocessors used in network servers.

SMIC has never seemed an ideal substitute, purely because it is thought to lag TSMC in chip-building technology. One of the goals in this game is to shrink the size of transistors, measured in nanometres (nm), so that more can be crammed into a chip, boosting performance and efficiency. Huawei's new TIANGANG chip (a type of application-specific integrated circuit, or ASIC) for base stations uses 7nm manufacturing technology deployed by TSMC.

According to Stefan Pongratz of market-research firm Dell'Oro. SMIC has been investing in 14nm technology. "The transition would likely impact the power efficiency and/or computing performance of the ASICs and the overall RAN [radio access network] performance,"

Chinese funding should eventually produce a more competitive SMIC. the Shanghai-based company was reported to have planned a sale of shares that could raise about $3 billion. 

This move, according to New Street Research, should help to "scale out production" and give China a stronger asset. But a shift from TSMC to a more capable SMIC could take too long for Huawei. "To port over any designs to a Chinese foundry would take time and bring them up to TSMC levels would take years,". China is probably about three to five years behind TSMC.

The other problem is SMIC's apparent use of manufacturing tools made by US companies such as Applied Materials,. This would make the Chinese foundry subject to the same restrictions that now threaten TSMC's relationship with Huawei. What remains unclear at this early stage is if these new rules are much harder to bypass than the initial blockade on US components, which Huawei's suppliers dodged by relying on their non-US facilities. "One of the key unknowns surrounding this latest change is whether or not there will be any loopholes that can be exploited if, for example, TSMC sends the chips directly to non-Chinese contract manufacturers for integration.

For China, the only safeguard with an absolute guarantee is to invest in its own manufacturing tools. "The tool development can happen but will, again, take time,"  The speediest path to manufacturing independence could be to reverse-engineer equipment currently provided by a range of European, Japanese and US firms, a tactic Huawei previously used to enter the network equipment market, according to its critics. "At first sight, this will take five to ten years for most tools,"

While the new US rules will not take effect for 120 days, no company has the inventory needed to survive over such a long period. In the meantime, many Huawei-reliant countries and service providers – already shaken by the US campaign – will be carrying out an urgent risk assessment. "Regardless of the overall outcome, some of the damage will likely be irreversible.

How dangerous it can be for the U.S?

Last year's upheavals confirmed the Chinese firm is a master of adaptation, exploiting loopholes, and stockpiling inventory while simultaneously preparing for a future without US suppliers.

 Spending on research and development, which already dwarfed that of its European and US rivals, soared from $14.3 billion in 2018 to $18.6 billion last year. This year it plans to invest $20 billion. And notwithstanding its claim to have full independence from the Chinese state, it clearly expects China's government to intervene if the US keeps punching.

This obviously threatens a retaliation that could extend to other economic sectors and spheres of geopolitical influence. "The worst-case Chinese response is to take over Taiwan and shut down the majority of US semiconductor companies, which would be an even larger issue leading to armed conflict,".

Unlikely as that may be, tensions have already mounted during the coronavirus pandemic. To New Street Research, the recent crackdown in Hong Kong is a demonstration of Chinese muscle linked to the "new cold war" between China and the US in which Huawei is embroiled.

Another danger for the US is that its efforts to block Chinese firms have unintended and negative consequences for the US industry. Besides attacking Huawei, the US government has also recently added Fiberhome, a smaller Chinese vendor, to its trade blacklist. this move increases the likelihood it will re-include ZTE, a Chinese rival to Huawei than previously came off the list after its payment of hefty fines. "The US strategy is to clearly shut down all Chinese telecom companies to US technology,". "All this is doing is to hurt US companies and move the business to Europe, Japan, and elsewhere."

Just as NeoPhotonics, Lumentum, and other component suppliers to Huawei sought loopholes in the initial rules, companies may simply try to evade the latest US regulations. Nelson Dong, a senior partner at US law firm Dorsey & Whitney, previously spelled out the risks. "

This move may well force the global semiconductor industry to look away from US suppliers of semiconductor design tools and semiconductor production equipment and even to create new rival companies in other countries, including China itself,"

There is precedent for this, too. Once dominant in the satellite technology sector, the US suffered a decline after imposing stricter export controls on technology,. 

Those controls prompted many customers to avoid US suppliers, which ultimately lost billions of dollars in sales to their international rivals. More stringent controls in the semiconductor market could trigger "tectonic shifts within the microelectronics industry for decades to come.

China is already doubling down on technology investments. In October 2019, long before coronavirus and the recent escalations, it was reported to have set up a $29 billion state-backed semiconductor fund that will help it assert technology independence from the US. There can be little doubt that discussions about semiconductor manufacturing tools have now taken place in Chinese government circles.

 Will China lose a technology battle to the US fought over the next five to ten years. "?

 According to New Street Research, These Chinese moves will not produce results quickly enough to save Huawei,. Moreover, its prediction is that China will lose a technology battle to the US fought over the next five to ten years. "China won't be able to have competitive chips on that kind of timeframe, and will have nascent ecosystems, totally subscale to those in place in the US,"

But in the longer term, it probably will. "There isn't true wealth but in people," said Jean Bodin, a sixteenth-century French philosopher quoted by New Street Research, which points out that China's vast resources of human capital will ultimately be the only thing that matters. "The next fight will be on education and economic growth. Can the US win that one?"

This population imbalance is already a critical factor in today's telecom and technology markets. With its 1.4 billion people, China last year accounted for about 17% of total sales at Apple, the largest US gadget maker. It is responsible for as much as 60% of the 4G infrastructure market.

According to Börje Ekholm, the CEO of Sweden's Ericsson, who thinks it will similarly dominate tomorrow's 5G sector. If this estimate is accurate, then limited access to China denies Ericsson and Finland's Nokia a bigger share of mobile industry revenues than Huawei misses due to restrictions in the US, Europe, and parts of the Asia-Pacific.

In the future, its human capital combined with its investments in digital technology will make China the dominant global force in artificial intelligence, explaining US efforts to upset Huawei.

 According to Kaan Terzioglu, a senior industry executive who previously led Turkish mobile operator Turkcell but is today a co-CEO at Veon. "Who do you think will have more success in training tech intelligence?" Terzioglu rhetorically asked Light Reading at last year's Mobile World Congress, before he had switched jobs. "Whoever has more data? Whoever is more digitalized today and has a bigger population. China is much more digitalized than the US."

In the research and development battle, in particular, the human capital imbalance will be hard for the US to counter. Last year, Huawei and ZTE together employed more than 124,000 people in R&D, a figure that equals about 63% of the entire combined workforce at Ericsson and Nokia. "There are so many people in China to hire,". "It doesn't matter that everyone you are hiring isn't an Einstein. One of them will be."

Disentangling US technology from Chinese products will reduce security risks and stop China from ripping off US innovation, say defenders of US policy moves. Amid a virus-triggered backlash against China, critics of this isolationism are becoming harder to find. But the successor to the current system of global supply chains, partnerships, and trade is a balkanized world of incompatible standards, concentrated risk, and potential resource constraints. It is one in which a rapprochement between China and the US is even harder to envisage. In that environment, a technology arms race fought over decades is unlikely to produce a US victor.

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