China & 5G William "Bud" Roth
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China & 5G Tumult in 2018 William “Bud” Roth Non-Resident Fellow for Cybersecurity Sasakawa USA China and U.S. Tensions Over Huawei The arrest of Huawei CFO, Sabrina Wanzhou Meng, capped off a year of escalating tension between the United States and China centered around China’s high-tech companies and 5G. Her detention in Canada sparked outrage from the Chinese government and state-controlled media. This highlighted, in a way, the degree to which Chinese high-tech giants are the darlings of Beijing and the Communist Party. More urgently, her detention at the request of the United States brought the United States and China into direct conflict, a conflict that, before her release on parole, seemed poised to spiral out of control. 1 Even now, United States and Canada are protesting arbitrary detentions of Canadian citizens in what appears to be a Chinese response of “hostage taking.” 2 This escalation in tensions resulted primarily from the Trump administration’s new, hardnosed tactics for dealing with China, a move which seems to have caught the Chinese by surprise. 1Mark Gurman, Natalie Obiko Pearson, and Josh Wingrove. “Huawei’s CFO arrested at U.S. Request; Sparking outrage in China,” Bloomberg, December 5, 2018. https://www.bloomberg.com/news/articles/2018-12-05/huawei-cfo-arrested-in-canada-as-u-s- seeks-her-extradition. 2Chris Buckley and Catherine Porter. “Canada Presses China on ‘Arbitrary’ Detention of Citizens,” New York Times, December 22, 2018. https://www.nytimes.com/2018/12/22/world/canada/canada- china-detention.html.
2 WILLIAM “BUD” ROTH
To be sure, the Obama Administration voiced concern over the cozy
relationship between Huawei, ZTE and the Chinese government from both an
economic and national security standpoint, but the previous administration’s
name-and-shame focus on hackers left China’s telecom giants mostly alone. In
fact, Chinese experts on U.S. diplomatic policy may have concluded that the United
States would continue to lecture China on trade issues involving its high-tech
giants but take no concrete action to harm Chinese interests. This changed with
the Trump administration, which first caught the world’s attention by sanctioning
ZTE for violating U.S. sanctions against Iran. ZTE put some effort into hiding its
transfers of U.S. technology to sanctioned Iranian entities, suggesting it knew the
United States would object, but it is likely that Beijing’s telecom giant felt that its
activities were outside the reach of the United States. This changed in April 2018
when the Trump administration proposed a complete ban on trade with ZTE. This
ban threatened to bankrupt the company, which was dependent on U.S.
manufactured components. 3 President Trump intervened to avoid ZTE’s
bankruptcy and the Commerce Department agreed to a $1.4 billion fine instead in
June.4
China probably expected similar charges of sanctions evasion would be
levied by the United States against Huawei, but nobody imagined that the United
States would dare to seek the detention of CFO Meng, also the daughter of
Huawei’s founder. A look at the historical predicates to this move reveals, however,
that all of the U.S.’ frustrations with China’s unfair trade practices come into play
when looking at Huawei:
• Huawei and ZTE allegedly receive illegal subsidies and domestic
procurement preferences from the People’s Republic of China (PRC),
helping them keep product prices low;
• Huawei and ZTE’s unique access to the Chinese market position them to
gain economies of scale in 5G that give them an unfair economic edge;
• Huawei has been caught several times stealing technology from overseas
competitors;
• Huawei and ZTE’s strong allegiance to Beijing makes them a possible
conduit for state intelligence and cyber operations against China’s
adversaries;
3 Su, Jean Baptiste. “How the U.S. Export Ban Effectively Bankrupts China’s Telecom Giant ZTE:
Analysis,” Forbes. April 17, 2018, https://www.forbes.com/sites/jeanbaptiste/2018/04/17/how-the-
u-s-export-ban-effectively-bankrupts-chinas-telecom-giant-zte/#7f18a7e8720c.
4 Bloomberg staff. “China’s ZTE to pay $1.4 Billion U.S. Fine to Get Back in Business,” Fortune.com.
June 7, 2018, http://fortune.com/2018/06/07/china-zte-fine-billion/.CHINA & 5G: TUMULT IN 2018 3
• China’s central government announced plans to dominate the global 5G
market as part of its five-year economic plan, suggesting that the
government will do everything it can to favor its domestic 5G players.
When seen in this context, the investigations over Iranian sanction violations
are more than a diplomatic move to isolate Iran—which they are in part—but an
opportunity to disrupt efforts by Huawei and ZTE to dominate world 5G markets.
That goal is and will remain a major national security and economic objective of
the Trump administration in 2019. This is an area of shared concern with Japan
and we can expect significant diplomatic interaction between our two countries on
this topic.
The 5G Opportunity in the World and in China
5G—Tomorrow’s Big Market Opportunity
Estimates vary, but 5G is without doubt the next big event in the growth of digital
networking. 5G networks can transmit data at up to 10 times the speed of 4G.
Ericsson predicts that by 2023, we will see over a billion 5G users with 20% of
cellular traffic carried on 5G networks.5 This new cellular technology will not only
replace existing cellular networks, but eat into WIFI, WIMAX, and even wired
network segments as well. Research and Markets estimates 5G’s compounded
annual growth rate at 97% by 2025, bringing this currently non-existent market to
$251 billion in value.6 MarketWatch estimates the 5G chip market alone will grow
at an annual rate of 49% or more, reaching $14.5 billion by 2025.7
Telecom carriers are rushing to be first to market for this revolutionary
technology, testing 5G networks across the world. Behind this, several component
and equipment makers are poised to earn huge revenues from carriers building 5G
networks and smart device and 5G Internet of Things (IoT) device manufacturers
seeking to connect to them. A laundry list of telecom manufacturers and
researchers, including AT&T, Samsung, Ericsson, Deutsche Telekom, NTT
5 Ericsson. “Mobility Report”, June 2018.
https://www.ericsson.com/assets/local/mobility-report/documents/2018/ericsson-
mobility-report-june-2018.pdf.
6 Research and Markets, Homepage (as of December 20, 2018).
https://www.researchandmarkets.com/research/k87c8n/global_data_sheet?w=4.
7 MarketWatch. “Press Release – Global 5G chipset Market to reach USD 14.5 billion by
2025,” June 14, 2018. https://www.marketwatch.com/press-release/global-5g-chipset-
market-to-reach-usd-145-billion-by-2025-2018-06-14.4 WILLIAM “BUD” ROTH
DoCoMo, Alcatel-Lucent, Huawei, and ZTE, are developing 5G chips and
components to meet the expected demand for 5G.
Indeed, the potential for 5G has attracted the attention of government
policymakers eager to see that their domestic players are positioned to win market
share. That desire, in turn, has led to fears that Chinese manufacturers are poised
to dominate the 5G market at the expense of rivals. The fears center around three
areas that are discussed below, but it is important to recognize that 5G-related
friction is part and parcel of the larger trade dispute between the United States, its
trade partners, and China.
Domestic Chinese Market
Over 1 billion Chinese citizens use cellular devices, more than the number of users
in the United States, Japan, Indonesia, Russia, and Germany combined.8 China’s
government, seeing its population skip a large part of the digital evolution (PC-
based modem connectivity, DSL, etc.) and skip straight to cellular technology-
based Internet connectivity, prioritized development of a domestic 5G industry in
its most recent 5-year economic plan. U.S. leaders resisted this move and decried
the adverse impact of China’s state-owned industries on their U.S. counterparts.
The domestic Chinese 5G market (estimated by Chinese experts at 428 million
users by 2025)9 is potentially huge and, western experts unanimously agree, not
going to be genuinely open to foreign rivals of Chinese telecom manufacturers.
This lack of access to the potentially huge Chinese market for non-Chinese telecom
makers may have consequences at home because it means that Chinese firms like
Huawei and ZTE can build and sell equipment at home relatively confident of
sizeable market share while targeting export markets in Asia, Europe, and North
America. This combination of domestic and export markets gives these Chinese
makers a much larger customer base and the potential for economies of scale that
could lead to price cutting that none of their competitors can match. So, lopsided
and unfair market access is one issue clouding the horizon for 5G manufacturers
in Japan, the United States, and Europe.
8 Staff. “Made in China 2025: How 5G could put China in charge of the wireless backbone and ahead
of the pack,” South China Morning Post, October 16, 2018.
https://www.scmp.com/tech/enterprises/article/2168665/made-china-2025-5g-offers-worlds-
biggest-mobile-market-chance-seize.
9 GSMA Intelligence. “5G in China: Outlook and Regional Comparisons,” p.4 (2017).
https://www.gsmaintelligence.com/research/?file=67a750f6114580b86045a6a0f9587ea0&download
.CHINA & 5G: TUMULT IN 2018 5
Unfair Competition
A second area of concern with respect to China’s telecom equipment makers,
including Huawei, is that they unfairly benefit from both state-sponsored subsidies
in possible violation of the World Trade Organization rules10 as well as a concerted
effort by state intelligence services to steal the technological secrets of western
companies and share them with Chinese firms seeking to develop competing
products. China’s economic “self-help” has been the source of trade friction with
the United States and allies, leading to promises by President Xi to President
Obama in 2015 to not engage in espionage to acquire U.S. intellectual property.11
It appears that China has resumed targeting U.S. companies’ IP, but the fact of the
matter is that in the case of Huawei and ZTE the damage may be already done.
Huawei has been accused of stealing U.S. cellular technology in several
cases that date back to 2003:
2003 - Huawei admitted in U.S. court to stealing a router code from Cisco
and using it in its competing VRP (virtual resource partitioning) router software.
At trial, Cisco produced evidence of large-scale theft of code, including comments
and help screens in which Huawei’s text contained identical typos to Cisco code.12
2007 - Motorola engineer Hanjuan Jin was stopped at O’Hare Airport
with a bag filled with sensitive Motorola documents, $30,000 in cash, and a one-
way ticket to Beijing. She intended to take a job with a Chinese telecom company,
Sun Kaisens.13
2014 - Huawei engineers visiting a secure T-Mobile facility stole
information and a “finger” off a T-Mobile robot. In 2017, a jury awarded T-Mobile
$4.8 million for trade secret misappropriation.14
Despite its past practices of stealing technology, Huawei is not dependent
on stealing technology to build cutting-edge technologies. It has the talent base,
research funds, global academic partners, and acquisition savvy to develop or buy
what it needs to stay ahead of the competition. Many western telecom
10 Simon Johnson and Lee Chyen Yee. “China’s Huawei and ZTE deny getting illegal subsidy,”
Reuters, May 29, 2012. https://www.reuters.com/article/us-huawei/chinas-huawei-and-zte-deny-
getting-illegal-subsidy-idUSBRE84S0OH20120529.
11 Editorial Board. “China’s Hacking State,” Wall Street Journal, December 20, 2018.
https://www.wsj.com/articles/chinas-hacking-state-11545353192.
12 Thurm, Scott. “Huawei Admits Copying Code from Cisco in Router Software,” Wall Street Journal,
March 24, 2003. https://www.wsj.com/articles/SB10485560675556000.
Chandler, Mark. “Huawei and Cisco’s Source Code: Correcting the Record,” Cisco Blogs, October 11,
2012. https://blogs.cisco.com/news/huawei-and-ciscos-source-code-correcting-the-record.
13 Ferry, Jeff. “Top Ten Cases of Chinese IP Theft,” Coalition for a Prosperous America, May 1, 2018.
https://www.prosperousamerica.org/top_ten_cases_of_chinese_ip_theft.
14 Ibid.6 WILLIAM “BUD” ROTH
manufacturers procure Huawei gear and are very upbeat about its combination of
low pricing and high quality. For government authorities looking to position
domestic industry to succeed in 5G, Huawei’s competitive edge appears not only
daunting but unfair.
National Security Risk
Finally, Huawei’s close relationship with the Chinese leadership in Beijing may
also represent a national security threat. The intel leaders of Five Eyes (United
States, Canada, United Kingdom, New Zealand, and Australia) agreed in July 2018
that Huawei represented an espionage threat. Realizing that some countries, the
UK in particular, already had a sizeable Huawei presence, the group agreed that an
outright ban was not feasible. 15 Since that meeting, however, there have been a
number of public government statements on the risk of Huawei products within
national 5G networks:
August 2018
• Australia banned Huawei and ZTE from future 5G networks while Signals
Directorate Director-General Mike Burgess publicly stated that the
presence of Chinese telecom equipment within Australia’s telecom
networks constitutes a national security threat in October.16 17
• President Trump signed into law a ban on Huawei and ZTE equipment
within federal and federal contractor networks and in December, the
Trump administration reportedly lobbied Japan, Germany, and Italy to
ban Huawei.1819
November 2018
15 McKay, Tom. “’Five Eyes’ Spy Chiefs Agreed to Contain Huawei’s Global Reach at Meeting in July:
Report,” Gizmodo, December 16, 2018. https://gizmodo.com/five-eyes-spy-chiefs-agreed-to-contain-
huaweis-global-r-1831131906.
16 Hutchens, Gareth. “Huawei poses security threat to Australia’s infrastructure,” The Guardian,
October 29, 2018. https://www.theguardian.com/australia-news/2018/oct/30/huawei-poses-
security-threat-to-australias-infrastructure-spy-chief-says.
17 Knaus, Christopher. “Marise Payne defends 5G ban on Chinese telcos Huawei and ZTE,” The
Guardian, August 27, 2018. https://www.theguardian.com/australia-news/2018/aug/27/marise-
payne-defends-5g-ban-on-chinese-telcos-huawei-and-zte.
18 Kastrenakes, Jacob. “Trump signs bill banning government use of Huawei and ZTE tech,” The
Verge, August 13, 2018. https://www.theverge.com/2018/8/13/17686310/huawei-zte-us-
government-contractor-ban-trump.
19 Porter, Jon. “The US Government is reportedly trying to persuade allies to stop using Huawei
equipment,” The Verge, November 23, 2018. https://www.theverge.com/2018/11/23/18108649/us-
government-huawei-ban-allies-use-subsidies.CHINA & 5G: TUMULT IN 2018 7
• New Zealand banned its largest mobile carrier, Spark, from procuring
Huawei 5G equipment.20
December 2018
• British Telecom omitted Huawei from its list of equipment suppliers for
5G and announced plans to phase Huawei equipment out of its 3 and 4G
networks, prompting Huawei to meet with the UK’s National Cyber
Security Centre to work out measures to allow Huawei to compete in the
UK.21 22
• Canada, which has not publicly announced plans to ban Huawei from 5G
networks, angered China by arresting Huawei CFO Sabrina Meng
Wanzhou for extradition to the United States on charges of circumventing
U.S. sanctions on Iran.23
This concerted effort by Five Eyes countries to ban Huawei from 5G has had
an impact around the world. Indeed, the Trump administration’s lobbying efforts
appear to be paying off quickly:
December 2018
• Japanese government revised procurement rules to make it impossible to
purchase Huawei and ZTE equipment, while Softbank, NTT DoCoMo, and
KDDI as well as future cellular carrier, Rakuten, announced plans to not
use Huawei equipment in their future 5G networks.24 25
• The largest cellular carrier in France, Orange, announced plans to drop
Huawei from its 5G network procurement as France’s telecom regulator
put Huawei on its “high alert” list.26 27
20 Jolly, Jasper. “New Zealand blocks Huawei imports over ‘significant security risk,’” The Guardian,
November 28, 2018. https://www.theguardian.com/business/2018/nov/28/new-zealand-blocks-
huawei-5g-equipment-on-security-concerns.
21 Staff. “British telecoms giant BT Group to strip Huawei from core networks, limit 5G access,” South
China Morning Post, December 6, 2018. https://www.scmp.com/tech/gear/article/2176573/british-
telecoms-giant-bt-group-strip-huawei-core-networks-limit-5g-access.
22 Staff. “Huawei agrees to UK security steps to avoid 5G ban: report,” South China Morning Post,
December 7, 2018. https://www.scmp.com/tech/gear/article/2176968/huawei-agrees-uk-security-
steps-avoid-5g-ban-report.
23 Rebecca Joseph and Andrew Russell. “Who has taken action against telecom giant Huawei and why
Canada hasn’t,” Global News, December 6, 2018. https://globalnews.ca/news/4736209/whos-taken-
action-against-huawei-and-why-hasnt-canada/.
24 Staff. “Japan to ban Huawei, ZTE from govt contracts-Yomiuri,” Reuters, December 6, 2018.
https://www.reuters.com/article/japan-china-huawei/japan-to-ban-huawei-zte-from-govt-contracts-
yomiuri-idUSL4N1YB6JJ.
25 Satake, Minoru. “Japan’s 4 carriers to shun Chinese 5G tech,” Nikkei Asian Review, December 11,
2018. https://asia.nikkei.com/Business/Companies/Japan-s-4-carriers-to-shun-Chinese-5G-tech
26 Staff. “Huawei facing fresh set of problems in France and Germany,” Reuters, December 14, 2018.
https://telecom.economictimes.indiatimes.com/news/huawei-facing-fresh-set-of-problems-in-
france-and-germany/67094312.
27Bloomberg staff. “Huawei faces further woes – in France,” Straits Times, December 15, 2018.
https://www.straitstimes.com/world/europe/huawei-faces-further-woes-in-france.8 WILLIAM “BUD” ROTH
• Germany’s Deutsche Telekom announced its decision to review its use of
Huawei 5G equipment in light of security concerns.28
As demonstrated above, in concert with traditional U.S. allies, one of the
Trump administration’s most visible diplomatic efforts has been to curtail
Huawei’s plans to become a major player in 5G roll outs within western markets.
This fear of the Chinese government using Chinese-made equipment as a gateway
to the United States and allied networks for nefarious purposes is not universally
held, but the momentum right now is clearly towards a ban of Huawei and Chinese
equipment in 5G markets.
Conclusion
Recent moves by Five Eyes countries to ban Huawei equipment from future 5G
networks has become a major point of contention in the growing trade war between
China and the United States. Banning one company’s equipment from 5G
networks, however, is not a panacea for the cyber risk that comes with societies’
increased dependence on wireless communications. Furthermore, it only partially
addresses the economy of scale advantages that challenges China telecom
companies’ competitors in Europe, the United States, and Japan. It is worth noting
that a national security-based balkanization of 5G markets could exacerbate this
problem.
China’s 5G plans seem frustrated for now, but the Trump administration’s
aggressive moves against China’s telecom players will undoubtedly lead China to
respond with antagonistic plays of its own. Although it is impossible to predict the
outcome, there is little doubt that China’s ties with the United States and its allies
will deteriorate further in the coming months.
William “Bud” Roth has served as the Non-Resident Fellow for Cybersecurity at
Sasakawa USA since January 2016, bringing with him a combination of
investigative, legal, and cybersecurity expertise. Roth researches topics relevant
to the U.S.-Japan relationship within the cyber domain.
28 Staff. “Huawei facing fresh set of problems in France and Germany,” Reuters, December 14, 2018.
https://telecom.economictimes.indiatimes.com/news/huawei-facing-fresh-set-of-problems-in-
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