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Huawei and 5G. The Strategic Goals behind Huawei's 5G Standard Development

Hausarbeit 2020 26 Seiten

Orientalistik / Sinologie - Chinesisch / China

Leseprobe

1. Introduction

2. Becoming a Network Standard Developer
2.1. The Shift of Network Standards into Chinese Hands
2.2. Huawei's Business Scope

3. The Downsides of Being a Standard Developer
3.1. Costs and Short-Lived Impact
3.2. Chinese State Interference and International Security Concerns

4. The Long-Term Benefit of 5G Standard Development
4.1. The Value Propositions of 5G
4.2. Huawei's Competitive Advantages

5. Huawei's Monopolistic Strategy
5.1. The Characteristics of a Monopolist
5.2. The Creation of an Ecosystem

6. Conclusion

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

In the past several years, the Chinese company Huawei has gained attention by becoming a significant player in the global telecommunication market. Huawei started as a network equipment provider in the Chinese market in the late 1980s. Confronted with the technological superiority of foreign network equipment at that time, Huawei had to invest heavily in research and development (R&D) to gain a foothold in network development.1 Apparently, the company subsequently movedtothe building ofconsumer electronics as the company's core business. Today, Huawei is one of the largest consumer electronics producers worldwide. In the third quarter of 2019, Huawei managed to become the second strongest player in the smartphone market, only falling behind Samsung.2 However, Huawei is strongly refocusing on its role as a network equipment provider. The companyhas become one of the most important developers of new network architecture and its corresponding standard, namely the fifth-generation cellular network (5G) standard.3

The development of network standards, or new technological standards in a broader context, has long been dominated by Western companies. Despite considerable efforts, Chinese companies could not make a convincing contribution to network standard development.4 Hence, the sudden technological dominance of Huawei is receiving extensive coverage in the international press. The West wants to defend its technological superiority since technological innovations create significant competitive advantages. This general assumption applies to most industries.

Despite the economic importance of an innovative networkfor the overall economy, the companies directly involved in developing network standards and building up network infrastructure are reported to not making a significant or only short-term profit. For mobile network operators like national telecoms, there seems to be only little financial incentive to spend billions of dollars necessary on equipment to build up thousands of new transmission masts, e.g., in rural European communities.5 For developers and suppliers providing the equipment like Huawei, the development of a new equipment standard comes with tremendous R&D spending.6 The competitive advantage stemming from a standard then lasts only until a new and better standard, e.g., the sixth-generation cellular network (6G), is developed. It is unclear whether or how the tremendous R&D spending in network standard development will pay for itself.

I argue that network infrastructure development resembles the building of highways: innovative infrastructure is an indispensable part of a nation's competitiveness. Private consumers and businesses can exploit the road for their endeavors. However, the ones providing the tar (like Huawei) and the ones maintaining the road (like mobile operators) only receive a one-time payment or at least tolls. In Huawei's case, payments and fees comprise license and patent fees for the 5G standard and equipment. Nevertheless, the companies building up the road are hardly able to create long-term competitive advantages for themselves.

Why does Huawei then engage so vigorously in network development? The overriding opinion on Huawei's intentions is focused on geopolitical considerations. The fear is that the partly state-owned company might intentionally integrate vulnerabilities in its 5G architecture to use it for espionage. Huawei's business plans are in line with Chinese policy aiming at technological superiority. Huawei is reported to be heavily subsidized by the Chinese government.7 However, there is to date no clear evidence of severe technological vulnerabilities in Huawei equipment.8 Still, most papers do not venture into discussions over other potential interests, such as trade or industry.

The following paper does not aim to defend Chinese companies or Chinese policy. Neither does it primarily examine whether fears over espionage are perceived or real. Reasons for concern will be addressed since the ongoing debate around Huawei and 5G is rapidly changing the business environment. However, the paper will mainly try to evaluate how Huawei is fostering its position as an indispensable player in network standard development. What is so special about Huawei's 5G standard that other producers cannot provide? How will Huawei outweigh the risks associated with network development? Moreover, how is Huawei going to add value and monetize the “5G highway”?

2. Becoming a Network Standard Developer

Founded in 1987 by Ren Zhengfei, Huawei has become one of the world's most successful telecommunication companies.9 Its tremendous growth reflects the Chinese state's determination to become a technological leader in telecommunications. In the following part, I will illustrate the economic importance of innovative telecommunication standards and how standard development gradually shifted into Chinese hands. Subsequently, I will shortly outline the structure and evolvement of Huawei's different business groups.

2.1. The Shift of Network Standard Development into Chinese hands

Intellectual property rights (IPR) on the newest technical standards are regarded as a measure of innovativeness and technological might of a company and in a broader sense of entire national economies.10 Roughly speaking, a generation change in telecommunication standards takes place every ten years, and each time enables new functions and business opportunities. Companies and nations that are first to use a new network gain crucial competitive advantages. The introduction of the second-generation cellular network (2G) enabled extended data services for mobile devices and marked the start of SMS text messaging. The third-generation cellular network (3G) found application in wireless voice telephony, mobile Internet access, video calls, and mobile television. The fourth-generation cellular network (4G) enabled digital platforms like Uber, Spotify, and Square.11

For a long time, the development of new telecommunication standards has been concentrated in the hands of European and US-American companies, while Chinese companies struggled to make an innovative contribution. 2G was launched on the Global System for Mobile Communications (GSM) standard by a Finnish operator in 1992.12 China relied on the European standard and continued to do so when the 3G network based on the European standard General Packet Radio Service (GPRS) was introduced in the mid-1990s. While most Chinese telecom operators used GPRS as a standard, China Unicom decided to build its 3G network based on the American Code Division Multiple Access (CDMA) standard, creating a direct competition of international standards in the Chinese market.13 The apparent dominance of foreign technology became even more apparent when China joined the World Trade Organization in 2001, agreeing to the opening up of its telecommunication sector and foreign investment. This lead to the same conflict of objectives that is heavily discussed regarding Huawei's 5G deployment today. On the one hand, China did not want to lose track by using old standards. On the other hand, the growing involvement of foreign companies in the mission- critical telecommunication industry lead to growing concerns around security and dependency.14

Realizing the importance of telecommunication, China has already started to make telecommunication a priority in industrial policy in the 1990s.15 Since then, standard development has gradually shifted into Chinese hands. In the course of the 3G network development, China actively introduced the Time Division Synchronous Code Division Multiple Access (TD-SCDMA) standard.16 However, this standard was not commercially successful abroad and is until today only offered in China.17 The creation of a long-term national innovation strategy in 2006 reinforced China's plans to become leading in standard development. Nonetheless, Chinese companies again lost the race for the introduction of a new standard, namely the 4G standard.18 Despite these setbacks, Chinese players have continued to race towards grabbing a more significant portion. Huawei has started to act as a supplier for some parts of the 4G equipment in Australia.19 Furthermore, the company is, until today, engaging in 4G deployment in developing countries.20 Currently, Huawei has less than a quarter of the market in 4G network equipment worldwide, with the rest being divided among foreign companies. Its aspirations lie in the development of the heavily debated 5G standard.21 Huawei has speeded up its activities and was the fastest player to develop the new standard.22 Hence, for the first time in history, a Chinese company takes the technological lead in telecommunication standard development.

2.2. Huawei's Business Scope

Huawei was founded by Ren Zhengfei, a former officer of the Chinese People's Liberation Army. Thus, the company's activities have arguably always been intertwined with Chinese state interests.23 Its business scope primarily included the manufacturing of phone switches and the building up of telecommunication networks and equipment for the Chinese state. Finding international standards to be technologically superior, the company began to focus on manufacturing a broad range of consumer electronics.24

Today, the business scope of Huawei is tremendously broad. The company is standing on four pillars described in Huawei's Investment & Holding annual Report of 2018: the consumer, cloud, enterprise, and carrier business. The consumer business takes smartphones as its pillar. With a revenue share of approximately 48.4% in 2018, the consumer business is Huawei's most important business field. The cloud business focuses on developing a stronger presence in automotive information and communications technology (ICT) components and safe city domains. The enterprise business aims to provide innovative software and services to enterprise customers. Lastly, the carrier business focuses on the building of telecommunication infrastructure and equipment like the deployment of 5G infrastructure.25 After focusing on its consumer business for a long time, Huawei has massively reinvigorated its carrier business in recent years. In 2012, Huawei overtook Ericsson as the largest telecommunication equipment provider in the world.26 As of 2018, the carrier business is Huawei's second-largest business field, with a revenue share of 40.8%.27

3. The Downsides of Being a Standard Developer

Huawei is likely generating considerable short-term revenues out of supplying and cooperating with international telecommunication providers. However, there are also tremendous costs and risks associated with activities in the carrier business, which will be discussed in the following part.

3.1. Costs and Short-Lived Impact

Former active players in the smartphone market like Nokia are concentrating on the development of network equipment too - as a consolation, one might argue.28 The business of network equipment developers has been compared to a massive ship swing: when a new generation is introduced, order books are full, but sooner or later, the market is saturated, and sales of network technology shrink rapidly.29 In contrast to Nokia, Huawei is still vigorously active in the consumer business. Hence, the question remains why Huawei has suddenly become so eager to develop and deploy new telecommunication standards worldwide.

Developing new standards and equipment is a costly affair. In 2018, Huawei spent 101,509 million CNY on overall R&D (as of January 2020, approximately 14.7 billion US dollars), making up for approximately 14.1% of its revenue.30 According to Huawei, from 2013 onwards, more than 600 million US dollars were invested in 5G technology research specifically. As a next step, in 2017 and 2018, Huawei invested almost 1.4 billion US dollars into 5G product development.31

To define revenue streams directly stemming from Huawei's 5G standard is the most challenging part of this analysis because most reports lack clear financial information about Huawei's 5G activities. TheHuawei Annual Report of 2018 states that the sales revenue of all four business groups in 2018 is rounded off at 721,202million CNY (approximately 104 billion US dollars). With revenues of 348,852 million CNY in 2018 (approximately 50 billion US dollars), the consumer business was the most significantbusiness group, followed by the carrier business with revenues of 294,012 million CNY (approximately 42.5 billion US dollars).32 A substantial part of revenues in the carrier business might be stemming from specialized 5G patent development and licensing, the resulting competitive lead, equipment delivery, and advisory work around new functions for customers and partners. However, Huawei gives little information about the revenues directly derived from sales of 5G network equipment and anticipated future profits.

When talking about cost structures and revenue streams, Huawei is rarely talking about its own finances, but often stressing the costs and revenues, 5G will create for its partners. For instance, Ryan Ding, the executive director of the board, declares that “5G's Average Revenue per User (ARPU) is 75% higher than in 4G, but the per-GB price is 90% less, meaning that both users and operators benefit.”33 Besides, “the cost of main wireless equipment is far less than site rental and accounts for only 20% of the total site construction costs,” and “new antennas have four times the capacity and increase network coverage.”34 Operators like national telecoms can maximize the return on investment of their networks. Huawei seems to stress its willingness to help and its interest in shared value creation by working with its partners.

The international media, though, has come to a different conclusion regarding Huawei's building up of a mission-critical network like 5G: espionage.

3.2. Chinese State Interference and International Security Concerns

Huawei is facing a massive backlash by the international media for its engagement in standard and network development, arguably stronger than expected. The widespread mistrust strains the partner network and business opportunities of Huawei. This downside is specifically relevant for Chinese companies due to China's history of industrial espionage.

The Chinese state and Chinese companies have sustained a remarkable track record of intellectual property theft and cyber espionage, raising concerns about its reliability as a trading partner.35 From 2011 to 2018, over 90% of all economic cases handled by the US Department of Justice involved China.36 To name an example, the 2013 Mandiant Case revealed the systematic theft of confidential data from over 140 organizations by the Advanced Persistent Threat 1 (APT1) hacker group supported by the Chinese People's Liberation Army.37 Huawei, as a company, has been denounced for intellectual property theft from Cisco or stealing information about the T-Mobile robot “Tappy.”38,39 After video surveillance companies like Hytera Communications, Hangzhou Hikvision, and Dahua Technology acted conspicuously as well, Chinese telecommunication companies enjoy a deficient level of popular trust and face sales restrictions in the US.38 39 40

The negative notion of Chinese telecommunication technology has been reinforced by the introduction of laws meddling into business affairs and strengthening China's position in the battle for IPR. The 2014 Counter-Espionage Law requires organizations and individuals to grant access to facilities and information.41 The 2016 National Intelligence Law goes one step further as it requires all Chinese companies to support, provide assistance, and cooperate in national intelligence work.42

The growing superiority of Chinese players in the telecommunication industry is regarded as particularly critical because the 5G standard will be even more user- and data- centric as all previous standards. 5G will connect more industries into coherent systems and lays the base for Internet of Things (IoT) services.43 In a geopolitical context, more varied devices could be interpreted as more potential targets. Huawei, which actual ownership structure remains to be unclear, has been accused of actively helping the Chinese state to acquire a more dominant position in global affairs.44 Huawei holds the most 5G patents worldwide and is the only company able to provide a whole value chain of network equipment and devices.45 Therefore, foreign economies fear to be trapped with only one possible supplier spying on them for the Chinese state. Frequent concerns even go as far as to accuse Huawei of granting the Chinese state control over a 5G “network-off-button” or “kill switch” as a technical weapon for blackmail in the battle for economic supremacy.46 The NATO Cooperative Cyber Defense Centre of Excellence quotes ancient Chinese philosopher Sun Tzu's “The Art of War,” to summarize its opinion on Huawei's and China's real intention: “The supreme art of war is to subdue the enemy without fighting.”47

[...]


1 Ahrens 2013: 2-4.

2 Statista 2019: n.p.

3 Kaska/Beckvard/Minarik 2019: 7.

4 Fischer 2003: 1345.

5 Scheuer et al. 2018: n.p.

6 Sharma 2018: n.p.

7 Coonan 2019: n.p.

8 Westbrook/Kaye 2018: n.p.

9 Ahrens 2013: 2 et seq.

10 Sharma 2018: n.p.

11 Chinavasion 2008: n.p.

12 Vodafone Deutschland 2012: 2.

13 Fischer 2003: 1345.

14 Ibid.: 1347.

15 Ibid., 1347.

16 Ibid., 1345.

17 Electronics Notes n.d.: n.p.

18 Coonan 2019: n.p.

19 Westbrook/Kaye 2018: n.p.

20 Scheuer/Kerkmann 2019: n.p.

21 Sutton 2019: 45.

22 Kremp 2019: n.p.

23 Pearlstine et al. 2019: n.p.

24 Ahrens 2013: 2-6.

25 Huawei Investment & Holding Co., Ltd. 2019: 20 -34.

26 He 2012: n.p.

27 Huawei Investment & Holding Co., Ltd. 2019: 20.

28 Wollaston 2018: n.p.

29 Scheuer/Kerkmann 2019: n.p.

30 Huawei Investment & Holding Co., Ltd. 2019: 65.

31 Huawei.com, "An overview of Huawei 5G: The battle over 5G commercial devices is coming," 2019: n.p.

32 Huawei Investment & Holding Co., Ltd. 2019: 20.

33 Huawei.com, “Ryan Ding from Huawei: Industries + 5G, Enabling New Growth,”2019: n.p.

34 Huawei.com, “Huawei's Yang Chaobin: 5G Is ON, Keep Innovating to Realize Large-Scale 5G Commercialization,” 2019: n.p.

35 Kaska/Beckvard/Minarik 2019: 5.

36 Maza 2018: n.p.

37 Fireeye 2013: n.p.

38 Newsweek 2006: n.p.

39 Tabuchi 2014: n.p.

40 H.R.5515 -John S. McCain National Defense Authorization Act for Fiscal Year 2019: Public Law No: 115­232, 2018: 132 STAT. 1878.

41 Reuters News Agency 2014: n.p.

42 Merics 2017: 5.

43 Wireless X Labs/Huawei 2017: 8.

44 Sutton 2019: 45.

45 Kaska 2019: n.p.

46 Sutton 2019: 45.

47 Kaska/Beckvard/Minarik 2019: 4.

Details

Seiten
26
Jahr
2020
ISBN (eBook)
9783346221506
ISBN (Buch)
9783346221513
Sprache
Deutsch
Katalognummer
v899758
Institution / Hochschule
Bayerische Julius-Maximilians-Universität Würzburg – China Business and Economics
Note
1,0
Schlagworte
Huawei 5G China Netzwerkstandards Technologie
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Titel: Huawei and 5G. The Strategic Goals behind Huawei's 5G Standard Development