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5G Explained

Part Two: The Competitive Landscape

PUBLISHED: Feb. 24, 2020
UPDATED: JULY 20, 2020

Part I of FP’s 5G series Technology and Infrastructure outlined how the extensive infrastructure needed for 5G RANs has led to intense competition among telecom equipment providers and the entrenchment of Huawei in the global 5G infrastructure space. In Part II of this series, we dig deeper into the 5G supply chain, outline how the development of global 5G standards will shift the power dynamics in 5G rollouts worldwide, and break down the global competitive landscape outlining how countries besides the U.S. and China are set to play major roles in 5G development.

Executive Summary

5G technology is set to revolutionize the internet as we know it. It will increase network speeds, enable the Internet of Things (IoT) by bringing billions of more devices online, and advance new technologies such as artificial intelligence (AI) and machine learning. Despite this transformative impact, the majority of businesses still do not know what 5G is and what it could do.

The “race to 5G” has been widely publicized (and state of development wildly embellished), but the fundamental issues and realities underpinning the transition to 5G technology are still widely misunderstood. Building 5G networks requires extensive global coordination among governments, private companies, and regulatory bodies. It is an ongoing process that will unfold over the next decade at different paces in different countries. As this process occurs, understanding the stages of 5G development in different markets and accurately timing investments will be crucial for businesses. 5G technology will bring broad benefits and widespread risks globally, but there will likely not be one clear-cut winner. Despite this, intense geopolitical competition surrounding 5G is developing, and the results of this competition will have long-lasting and far-reaching effects.

While innovation on 4G networks was largely dominated by the United States and other Western countries, since 2012, China has made a coordinated effort to dominate the build-out of 5G networks and determine operating standards around the world. Chinese omnipresence in 5G infrastructure rollout, embodied in its national telecommunications leader, Huawei, has raised security concerns for Western and other countries and has moved the 5G debate from the technical realm into geopolitics.

China’s push to lead in 5G infrastructure development, combined with long-running U.S. concerns over Huawei’s alleged intellectual property theft, prompted President Donald Trump’s signing an executive order banning Huawei from accessing U.S. supply chains in May 2019. The move sparked a direct confrontation between the U.S. and China over 5G, putting the two countries directly at odds over 5G technology platforms and forcing other countries to take sides. Without a direct competitor to Huawei, the U.S. has moved toward European and South Korean competitors Nokia, Ericsson, and Samsung, and it is strongly urging allies to do the same.

However, Huawei’s competitive position cannot easily be diminished. Huawei’s 2019 revenue was four times greater than Nokia’s or Ericsson’s, and it owns more patents on essential telecom technology than any of its competitors. Further, Huawei played an essential role in the development of 4G networks globally and has its equipment and services already deployed in 170 countries. Already, the majority of countries in Europe, Asia, Africa, and Latin America have begun working with Huawei to develop their 5G networks. For the U.S., unseating Huawei will be an uphill, if not insurmountable, battle.

In FP Analytics’ three-part Power Map Series, 5G Explained, we break down the key issues surrounding the development of 5G networks and the confrontation between the U.S. and China over 5G by:

  • Identifying the key players in 5G technology and infrastructure development;
  • Detailing the global competitive landscape, including issues along supply chains, influence on standards, and forces driving investment decisions in markets around the world;
  • Pinpointing key national security concerns, many of which are currently going unaddressed;
  • Breaking down the emerging geopolitical competition over 5G; and
  • Cataloguing a range of risks and opportunities for businesses.

This FP Analytics Power Map provides the most comprehensive assessment of the issues surrounding 5G to date and provides critical 5G analysis across the technical, economic, geopolitical, and security realms. Beyond the hype and hyperbole, this comprehensive overview provides businesses with an indispensable tool to help better understand the risks and opportunities with 5G.

Subscribe to FP Insider below or contact us at insider@foreignpolicy.com for full access to 5G Explained.

Introduction

Despite being deeply interdependent and commercially and economically intertwined, the U.S. and China’s divergence on 5G carries considerable implications for competition in the 5G space and could contribute to digital decoupling of the economies. Ongoing geopolitical tensions with China, as well the U.S.’s traditional allies, contribute to this divergence. While the U.S. maintains a more favorable regulatory environment for businesses to develop on 5G networks—allowing new market entrants to effectively compete and attract capital—and a deep talent pool, it does not have a coherent overall strategy for rolling out 5G infrastructure or enabling the development of an integrated 5G ecosystem. That makes it difficult to compete against a Chinese model that effectively coordinates government, corporate, academic, and research associations along unified national goals, with limited risk of bureaucratic delays or industrial policy derailment due to regime (or administration) change.

Further, as the U.S. seeks to minimize China’s 5G influence through bans, political pressure, and other measures, recent actions on the part of the Trump administration have actually diminished its leverage and ability to do so. The Trump administration’s expressed rejection of globalism (multilateralism) and pursuit of an “America First” agenda have isolated it from many NATO allies, while policies of disengagement have arguably diminished U.S. influence from Latin America to Asia. As the U.S. pushes back against Huawei’s entrenched position in 5G, South Korea, Japan, the EU, and the UK are all pushing to establish their own positions as global leaders in 5G technology. While the development of 5G has unleashed intense competition already, we are still only beginning to realize the full effects that 5G technology will have on shifting the global competitive landscape and shaping the digitalization of our economies.

Fault Lines in the Global 5G Supply Chain

The full telecom supply chain involves hundreds of companies located in nearly every country in the world, and it reached a market value of $2.4 trillion in 2019. The stability and connectivity of this supply chain are essential to building out 5G networks, as most companies competing in the telecom space rely on suppliers located in different countries. Chinese and American companies represent two critical links in the supply chain; in 2018, U.S. companies exported $146.6 billion of telecom equipment supplies, and China exported $219.7 billion. Critically, China relies heavily on the U.S. to supply semiconductors for its technology, but conflict over 5G, the ongoing U.S.–China trade war, and tensions over the spread of COVID-19 have reinforced the Trump administration’s desire to choke off this essential part of the 5G supply chain. However, Huawei has been able to obtain semiconductors with U.S. parts from other overseas suppliers. In an effort to combat this, in May of 2020, the U.S. Department of Commerce imposed rules requiring overseas semiconductor manufacturers who conduct business with Huawei to obtain licenses from U.S. authorities in order to continue doing business with U.S. suppliers, disrupting both U.S. suppliers’ and overseas purchasers’ operations, and prompting China to double-down on its efforts to develop its own domestic semiconductor industry.

Key Takeaways

  • Despite rancor, China and the U.S. are dependent on each other for key inputs

    Chinese telecom companies are nearly completely reliant on the U.S. semiconductor industry for inputs that constitute the heart of 5G and other advanced technologies, but the U.S. is also heavily reliant on China both for supplies of raw materials and to drive international demand for semiconductors. While recent actions from the Trump administration have further fractured this relationship, continued decoupling of U.S. and Chinese companies in the global 5G supply chain will result in significant economic losses for both sides.

  • China is seeking tech “independence” by 2025

    The U.S.–China trade tensions, combined with the U.S. ban on Huawei, are accelerating China’s efforts to develop its own semiconductor industry and drastically reduce its reliance on the U.S. technology. Should it succeed, it could weaken U.S. leverage over China significantly in the long run. However, given the deeply interconnected nature of the American and Chinese economies, a continuation of the current decoupling is likely to create ripple effects across other global companies that rely on American and Chinese companies to drive demand or provide equipment for the 5G supply chain. It also has the potential to delay 5G rollouts and significantly weaken Huawei’s competitive position against rivals Nokia and Ericsson.

  • What’s at Stake

    Bilateral tensions between the U.S. and China over 5G and trade, which have led to tariffs and security restrictions, are already beginning to distort supply chains, raise costs, and limit access for suppliers and manufacturers around the world. The spillover effects from escalating retaliations between the U.S. and China could force companies caught in the middle to find new suppliers and reorient production chains and may ultimately prolong 5G rollouts globally.

The Breakdown
Will the U.S. Upend 5G Global Supply Chains in Its Fight Against Huawei?
Will the U.S. Upend 5G Global Supply Chains in Its Fight Against Huawei?
The U.S. semiconductor industry is pivotal to global 5G development
Click to see the full 5G supply chain

So far, this series has predominantly focused on the companies involved in building out 5G infrastructure (Huawei, ZTE, Nokia, Ericsson, and Samsung). However, the full 5G supply chain is incredibly complex, involving hundreds of companies operating globally, from telecom providers and telecom equipment providers to chip manufacturers, software developers, raw materials providers, and manufacturing companies. In addition to the 5G network itself, the platform will unleash the development and marketing of myriad Internet-connected devices ranging from smartphones to smart refrigerators to transportation and urban infrastructure. A disruption to this supply chain would cause massive economic losses in the short term.

5G Ecosystem

The full 5G ecosystem encompasses hundreds of firms responsible for building RAN and core networks and developing the software and applications that will drive the 5G digital economy.

5G ecosystem 5G ecosystem
SOURCE: YOLE DEVELOPMENT
Semiconductors: The Beating Heart of the Telecom Industry

While a range of inputs are required for 5G, semiconductors represent a lynchpin for development and are central to U.S.–China competition in advanced technology. Semiconductors are used in nearly all electronic products, executing essential functions such the amplification of signals, switching, and energy conversion. China has long been reliant on the U.S. semiconductor industry, as its domestic semiconductor industry is not sufficient to supply the demand of its technology companies. China is the world’s largest importer and consumer of semiconductors, importing over $300 billion worth of semiconductors in 2018. However, only 16 percent of the semiconductors used in China are produced in-country, and only half of those are made by Chinese firms. For the development of 5G, one key link in the global supply chain is between manufacturers of telecom semiconductors (also known as “chips” or “semis”) in the U.S. (such as Qualcomm and Xilinx) and Chinese telecom equipment companies (Huawei and ZTE). China is still completely dependent on foreign suppliers for advanced chips. Its reliance on U.S. semi-conductors is a crucial point of leverage for the U.S., both in its attempt to limit Chinese influence from 5G and in the broader U.S.–China trade dispute. Recent restrictions on U.S. exports and on U.S. sales to China’s foreign semiconductor suppliers such as Taiwan Semiconductor Manufacturing Co. risk undermining U.S. manufacturers’ sales and competitiveness in China’s burgeoning market.

China’s Industrial Strategy Is Focused on Moving It Away from U.S. Tech Dependence

In 2015, the Chinese government released its latest ten-year plan, Made in China 2025, a state-led industrial policy that seeks to make China dominant in global high-tech manufacturing. Heightened U.S.–China tensions and the U.S. restrictions on U.S. suppliers’ sales to Huawei, have intensified China’s efforts to expand its domestic semiconductor industry. China aims to produce 70 percent of the semiconductors it uses by 2025. Over the next five years, its total planned investment in semiconductors is $118 billion. For comparison, the global leader in semiconductor manufacturing, Intel, invests over $13 billion per year, while Samsung and Qualcomm invest over $3 billion each. Huawei invests roughly $15 billion, and ZTE $1.9 billion. In 2019, U.S. companies sold an estimated $80 billion worth of semiconductors used in China.

Average Annual Semiconductor Investment Over The Next Five Years

China

$23.6 billion

Intel

$13 billion

Samsung

$3 billion

Qualcomm

$3 billion

China’s ability to establish a competitive domestic semiconductor industry would carry considerable commercial implications for U.S. technology companies, which have long dominated the sector. Global semiconductor revenue in 2018 was valued at $481 billion, of which U.S. firms were responsible for roughly half. If China were to substantially reduce or end reliance on U.S. semiconductors, U.S. companies would absorb these losses.

While China has made no secret of its ambitions be a global leader in advanced technology, analysts estimate that it will still be up to ten years before Chinese manufacturers are able to produce semiconductors that can compete internationally with those of leading U.S. semiconductor companies like Qualcomm and Intel. This reality means that, in the short term, the U.S. will still have a significant source of leverage over China in negotiations over Huawei and trade. As the Trump administration continues to crack down on U.S. semiconductor sales to China, the extent to which the U.S. will benefit from recent measures is still playing out and China still may have the upper hand. The raw materials required to build semiconductors include critical minerals and metals that are highly geographically concentrated and China has strategically cornered the markets for these essential inputs, enabling it to exert influence over semiconductor supply chains in the future. See FP Analytics Special Report Mining the Future for further detail. Unless production and value chains are diversified, and alternative materials developed, China could have a stranglehold on the raw materials that are critical to manufacturing semiconductors as well as electronic devices and a range of other advanced technologies.

Key Vendors in the 5G Technology Supply Chain

In addition to the major telecom equipment providers (Huawei, Nokia, Ericsson, Samsung, and ZTE), a number of key U.S. and Japanese vendors provide technology that is critical for the development of 5G networks.

Vendor Country 5G Technology
Intel U.S. Semiconductors, Modems
Qualcomm U.S. Semiconductors, Modems
Broadcom U.S. Semiconductors, Modems
Cisco U.S. Data Center Equipment, Routers
InterDigital U.S. IoT Devices
LG South Korea Edge Devices
Fujitsu Japan Edge Devices, Systems Integration
NEC Japan Network Equipment
NTT Japan Edge Devices
Panasonic Japan Edge Devices
Alcatel Lucent France Fiber Connectivity
NXP Netherlands IoT Devices
SOURCE: EURASIA GROUP

China’s Push to Set Technical 5G Standards Globally

The technology and equipment used to build telecom networks need to be globally standardized in order to be internationally interoperable. Setting these global standards is a collaborative effort by seven standards-setting organizations from Japan, the U.S., Canada, Europe, India, and Korea, and overseen by the 3rd Generation Partnership Project (3GPP). Together, these organizations set standards for mobile networks based on performance and interoperability criteria established by the United Nations International Telecommunications Union (ITU)—and China is seeking to drive that dialogue.

Key Takeaways

  • Companies setting the 5G standards are positioned to win big

    Companies whose technology becomes the industry standard for 5G infrastructure and equipment will be the default, and those companies will receive royalty payments from other ecosystem participants; such payments can be further channeled into future innovation, further strengthening those companies’ competitive position within the 5G ecosystem. These standards are critically important, because they ultimately determine both the equipment and software that will be used for building 5G networks globally.

  • China is heavily influencing 5G standards-setting

    Unlike in 3G and 4G, China has been heavily involved in the standards process for 5G. Since 2013, China has claimed more than thirty key positions in the 3GPP, including one of three chairmanships and two of the nine vice chairmanships within the technical specification groups that compose the 3GPP.

  • What’s at Stake

    China’s influence over 5G standards will guarantee revenue streams for its companies and give Chinese companies a competitive advantage in building applications on top of 5G networks using its equipment. China’s strong position increases the risk that the U.S. will try to enforce separate standards for the U.S. market, leading to market bifurcation and inefficiencies and limiting scale and interoperability across networks.

The Breakdown
Who Sets the Standards, and Why Does It Matter Which Standard Is Adopted?
Who Sets the Standards, and Why Does It Matter Which Standard Is Adopted?
China, Europe and the U.S. are locked in fierce competition over 5G standards
Click to see where each competitor stands today

Broadly speaking, two main issues need to be regulated for telecommunications networks: which spectrum frequencies to use, and which patented technology to adopt. Two main regulatory bodies—the ITU and the 3GPP—have jurisdiction to allocate radio spectrum and set standards for telecom technology; both of which will determine the global standards for 5G. These long-standing regulatory bodies function as international umbrella organizations that bring together telecom standards organizations, private companies, universities, and regional telecom groups from around the world. These organizations work to standardize spectrum allocations and technology usage and facilitate the global transfer of data over telecom networks.

  • International Telecommunications Union (ITU): The ITU is the United Nations’ specialized agency for information and communications technologies. It allocates radio spectrum and satellite orbits to ensure seamless connection between global telecom networks. ITU’s membership includes 193 member states as well as some 900 companies, universities, and international and regional organizations.
  • The 3rd Generation Partnership Project (3GPP): 3GPP is a partnership among seven telecommunications standards development organizations (ARIB, ATIS, CCSA, ETSI, TSDSI, TTA, and TTC). The project covers telecommunications technology, including the essential technologies for 5G: radio access and core network and service capabilities.

The 3GPP determines which companies’ 5G infrastructure technology becomes the standard. In this process, each major telecom equipment provider presents its patented technology, and the three technical specifications groups decide which equipment to adopt as the industry standard. After the equipment is adopted as the industry standard, other companies must then pay royalty payments to that company in order to produce their patented equipment. These companies receive royalty payments from others working to build out 5G infrastructure, which creates significant financial advantages for those whose technology is adopted as the industry standard. Therefore, leadership of the standards committees matters.

The First to Scale, China Secured a Major Standard-Setting Role

Beijing has made the development and deployment of 5G networks a national priority since the failure of Chinese standards-setting efforts around 3G and 4G. In 2013, the Ministry of Industry and Information Technology (MIIT), the National Development and Reform Commission (NDRC), and the Ministry of Science and Technology (MOST) established the IMT-2020 5G Promotion Group to push an all-government, all-industry alliance on 5G. All of the top players in the Chinese telecom ecosystem participate in the work of the Promotion Group: major research institutes, Chinese telecom operators, infrastructure equipment makers, and mobile device makers. The Promotion Group is a venue for planning China’s strategy and enabled China to launch its first standalone 5G networks in November 2019.

Beijing’s coordinated 5G strategy has paid dividends in the standards-adoptions process. Chinese companies own 36 percent of all 5G standard-essential patents (SEPs), more than double their share of comparable 4G patents. In contrast, U.S. firms hold just 14 percent of all SEPs for 5G.

5G standard-essential patents (SEPs)

Chinese companies

36 percent

U.S. companies

14 percent

Of the companies submitting technical contributions to 5G standards, Chinese companies accounted for 35 percent of the overall contributions, with Huawei alone contributing 21 percent. U.S. companies contributed just 16 percent of the total technical contributions toward 5G standards, and European companies accounted for 34 percent.

Technical contributions to 5G standards

Chinese companies

35 percent

European companies

34 percent

U.S. companies

16 percent

In standards meetings, China used its increased presence in the 5G standards-setting process—claiming more than thirty key positions, including one of three chairmanships and two of the nine vice chairmanships in the 3GPP governing body—to push Chinese technology forward. Huawei submitted the most technical contributions of any company (21 percent of the total contributions, and more than three times as many as the closest U.S. company, Qualcomm), while European companies had the most contributions adopted overall by a slight margin. (Europe accounted for 37 percent of adopted standards, and China 33 percent.) While the quality of the submission matters, and not all submissions are adopted, China’s adoption rate of 28 percent was just slightly below the global average of 30 percent, indicating that China’s technology has been catching up in quality. Chinese companies have also been the most active at 3GPP meetings, with Huawei sending by far the most engineers at 3,098, accounting for 14 percent of the total attendance. The next closest company was Ericsson, with 2,193 engineers in attendance.

Even if Chinese telecom equipment is banned, countries will still have to pay to license this patented equipment.

China’s push in the patent race lends another layer of defense against countries attempting to ban Huawei. Having patents adopted guarantees patent-holding equipment companies a source of revenue, even if they are not winning 5G contracts. In February 2020, Huawei sued Verizon for allegedly using its patented technology, claiming Verizon used more than 200 patented technologies without paying more than $1 billion in licensing fees. While Huawei and ZTE do not disclose the amount of revenue generated from licensing patents, it is likely to be significant. For comparison, in 2017, Finland’s Nokia generated $1.86 billion from technology licensing, accounting for about 7 percent of revenue. In its most recent fiscal year, Qualcomm generated $5.2 billion from technology licensing, more than one-fifth of its total revenue. China’s presence on standards boards and the sheer amount of 5G patents it owns are critically important, because even if Chinese telecom equipment is banned, countries will still have to pay to license this patented equipment.

3GPP Technical Contributions

Huawei leads all companies in 5G technical contributions, but Nokia and Ericsson both maintain strong positions. Click a circle to see how the companies in that region compare.

U.S.

14,579 approved
contributions
QUALCOMM
  • 5,994

    5G contributions
  • 4,846

    first contributor
  • 1,994

    approved
Intel Corporation
  • 3,656

    5G contributions
  • 2,895

    first contributor
  • 962

    approved
Motorola Mobility
  • 1,247

    5G contributions
  • 856

    first contributor
  • 406

    approved
AT&T Group
  • 1,174

    5G contributions
  • 71

    first contributor
  • 343

    approved
InterDigital Technology
  • 1,155

    5G contributions
  • 601

    first contributor
  • 317

    approved
Verizon
  • 700

    5G contributions
  • 15

    first contributor
  • 196

    approved
Cisco Systems
  • 653

    5G contributions
  • 466

    first contributor
  • 183

    approved

Europe

30,718 approved
contributions
Ericsson
  • 15,072

    5G contributions
  • 13,195

    first contributor
  • 5,114

    approved
Nokia (incl. Alcatel-Lucent)
  • 11,555

    5G contributions
  • 9,633

    first contributor
  • 3,804

    approved
Orange
  • 1,415

    5G contributions
  • 977

    first contributor
  • 462

    approved
Deutsche Telekom
  • 1,263

    5G contributions
  • 501

    first contributor
  • 397

    approved
Telecom Italia
  • 801

    5G contributions
  • 181

    first contributor
  • 225

    approved
Vodafone
  • 612

    5G contributions
  • 288

    first contributor
  • 206

    approved

Asia

13,507 approved
contributions
Samsung Electronics
  • 4,573

    5G contributions
  • 3,541

    first contributor
  • 1,239

    approved
LG Electronics
  • 2,578

    5G contributions
  • 1,966

    first contributor
  • 685

    approved
NTT Docomo
  • 2,042

    5G contributions
  • 1,487

    first contributor
  • 549

    approved
MediaTek
  • 1,653

    5G contributions
  • 1,176

    first contributor
  • 443

    approved
NEC Corporation
  • 1,276

    5G contributions
  • 870

    first contributor
  • 347

    approved
KDDI
  • 760

    5G contributions
  • 312

    first contributor
  • 186

    approved
ETRI
  • 625

    5G contributions
  • 357

    first contributor
  • 165

    approved

China

32,166 approved
contributions
Huawei Technologies
  • 19,473

    5G contributions
  • 17,466

    first contributor
  • 5,855

    approved
ZTE Corporation
  • 4,692

    5G contributions
  • 3,628

    first contributor
  • 1,188

    approved
China Mobile
  • 2,567

    5G contributions
  • 1,748

    first contributor
  • 787

    approved
CATT
  • 2,562

    5G contributions
  • 2,050

    first contributor
  • 554

    approved
Lenovo Group Limited
  • 1,261

    5G contributions
  • 917

    first contributor
  • 413

    approved
Guangdong Oppo
  • 943

    5G contributions
  • 682

    first contributor
  • 190

    approved
Vivo Mobile
  • 668

    5G contributions
  • 534

    first contributor
  • 159

    approved
SOURCE: IPLYTICS

The Fight Over Spectrum Allocations

“Spectrum” refers to invisible radio frequencies that wireless signals travel over and that telecom companies use to transmit data across their networks. It is a key enabler of 5G and the superhighway for digital applications. However, the frequency of radio waves—or “spectrum bands” allocated by governments for 5G—will in part determine which technology is used to build out, and build on top of, the 5G telecom network. While the global standard for 5G equipment and technology is determined through a formal process in the 3GPP, the global spectrum standard is largely determined through first-mover advantage—despite efforts to standardize it in the global standards bodies. In the case of 3G and 4G, the first country – the U.S. - to have fully deployed stand-alone networks on a new generation of cellular technology has had the spectrum band it operates on adopted as the global standard. Such will be the case for 5G as well.

Key Takeaways

  • Vying for first-mover advantage, the U.S. and China are building 5G networks using opposite ends of the spectrum

    China prefers to use the “sub-6” standard, primarily made up of low- and mid-band spectrum, while the U.S. prefers the “mmWave” standard consisting of primarily high-band spectrum. The global community is largely split on which spectrum frequencies to develop its 5G networks on, meaning that the country to first launch stand-alone 5G networks to their preferred standard—and begin development on them—will significantly increase the likelihood that their preferred spectrum allocation will be adopted as the global standard.

  • A Global Divide on Spectrum Frequencies Could Lead to Two Divergent Systems

    As the U.S. and China prefer different spectrum frequencies, countries in Asia and Europe are divided between the two development trajectories. This divide could delay 5G rollouts in some markets, risk companies building to one development trajectory based on spectrum frequency preference and limiting ability to scale, as well as lead to interoperability issues and market fragmentation if two different standards are ultimately used.

  • What’s at Stake

    The availability of one seamlessly integrated global 5G network. If different spectrum standards are adopted, companies risk needing to develop applications that work with two separate standards, or risk losing out on operating in key markets that have adopted the competing standard.

The Breakdown
Understanding the Importance of Spectrum in the Race to 5G
Understanding the Importance of Spectrum in the Race to 5G
Spectrum is the key resource needed to unlock 5G’s full potential
Click to learn why
What Is Spectrum Anyway?

As noted above, spectrum is the medium through which wireless communications transmit data. It comprises the invisible radio frequency waves that carry voice and data signals across distances. Broadly speaking, there are three main categories of broadband spectrum used in telecommunications: low-band (under 3 GHz), mid-band (3-34 GHz), and high-band (above 24 GHz). Low-band spectrum has the lowest capacity for data transport but supports widespread coverage (up to hundreds of kilometers) across urban, suburban, and rural areas with minimal interruption. Low-band is the spectrum frequency used to build 4G networks. Mid-band spectrum offers a mix of capacity and coverage. It includes the most coveted “Goldilocks spectrum” range (3–6 GHz), which offers the ideal balance between coverage (up to several kilometers) and capacity—giving it the ability to cover large areas and penetrate buildings, while still carrying significant amounts of data. High-band spectrum travels much shorter distances (up to roughly half of one kilometer) but offers the fastest speeds and highest capacity.

Clearing spectrum in the U.S. is a complicated process due to the existing spectrum allocations and the conflicts between commercial and government interests.

Low-Band Spectrum (0–3.6 GHz):

Conflict: The U.S. Department of Defense and other government agencies reserve some frequencies within this range for exclusive government use.

C-Band Spectrum (3.7–4.2 GHz):

Conflict: A potentially key spectrum frequency for 5G development is already owned by foreign satellite firms.

5G spectrum

Mid-Band Spectrum (5.9–7.1 GHz):

Conflict: Coveted mid-band spectrum is already used by automakers to send real-time safety data between vehicles and infrastructure.

High-Band Spectrum (24 GHz):

Conflict: The NOAA and NASA fear that allocation of the spectrum needed for the development of small cell 5G towers will interfere with the satellite collection of weather data.

SOURCES: REUTERS, CNET, FEDERAL NEWS NETWORK

The ITU’s World Radiocommunication Conference 2019 (WRC-19) concluded this past November, with additional spectrum bands identified for 5G. However, the international standard for which spectrum bands to use is still being hotly debated, due to differing preferences among countries. Unsurprisingly, the largest divergence is between the U.S. and China. While this process will attempt to standardize spectrum usage, it is not definitive. Both first-mover advantage and domestic preferences play significant roles in determining the spectrum bands on which 5G networks will operate.

Spectrum Divergence Could Fragment Markets

In order to operate 5G networks effectively, telecom carriers need exclusive rights to spectrum frequencies. This has been a cause of contention both domestically in the U.S. and internationally, as different countries prefer to use different spectrum allocations for 5G. A stark divergence has emerged between the U.S. and China on 5G spectrum standards, which carries international implications for the 5G regulatory landscape and could fragment markets. China favors using lower frequencies (the sub-6 GHz standard) as the main frequency for data routing (core communications), and higher frequencies to handle excess data loads (supplemental communications), while the U.S. prefers the opposite approach (the mmWave standard), due to most low-band and mid-band spectrum being reserved for government and military use domestically. Additionally, private companies such as Apple, Microsoft, and Alphabet all want to use mid-band frequencies to drive communication to their own Internet-connected devices and cloud systems, since they require the least infrastructure to transport data on.

The reason for difference in preferred radio spectrum frequencies is both technical and political. Spectrum is a commodity and a finite resource, and there is not enough of it to accommodate all parties interested in its use. Various interests compete for the use of spectrum—governments, military, commercial—and the allocation of spectrum among these actors in most countries is an inherently political process. Regarding 5G, once the exclusive right to operate on a spectrum frequency is secured, building a network that operates using that spectrum frequency becomes a technical process. For 5G, lower-band and mid-band spectrum has the advantage of covering larger geographic areas but is not sufficient to handle the amount of data that 5G networks will transport. For the additional data burden, higher-frequency spectrum—which covers short geographic regions—will need to be freed up. Due to intense competition for use of the low- and mid-band frequency spectrum, the U.S. prefers to use higher-frequency spectrum for core communications. State-run economies, such as China’s, are able to avoid this issue, since the government is not as impacted by outside interests and competitive pressures and can quickly and effectively allocate low-band and mid-band spectrum as it desires.

Countries around the world are aligning in different camps, largely driven by their ability to clear existing spectrum frequencies for exclusive telecom usage. South Korea appears to support the U.S. position, Japan is split, with DoCoMo (Japan’s largest telecom company) favoring high frequencies, and Softbank (its third largest) favoring low frequencies. And, in competitive markets, it is a convoluted, lengthy process. The EU is attempting to allocate spectrum for both frequency ranges but must harmonize differing uses of frequency across twenty-seven member states and the UK. In the U.S., ongoing debate and intensive lobbying to secure 5G spectrum allocations, as well as back-and-forth between the Federal Communications Commission (FCC) and the Trump administration, are stagnating the spectrum-allocation process. Freeing up spectrum is an absolutely critical step to building 5G networks, and China has already deployed a domestic 5G network using the sub-6 standard, while the U.S. is still stuck fighting internally among different companies and government agencies over which spectrum frequencies to use.

China Is Ready to Capitalize on Its First-Mover Advantage

The internal strife over spectrum in the U.S. and Europe is conferring the first-mover advantage in spectrum allocations to China. Historically, with respect to telecom, the country with the first-mover advantage has been the one to set the global spectrum standard. In the early 2010s, AT&T and Verizon deployed 4G LTE networks across the United States on the 700-Megahertz (MHz) spectrum frequency. That led to the United States becoming the first country (after Finland) with a comprehensive LTE network that delivered approximately ten times the speeds of 3G networks. U.S. companies like Apple, Alphabet, Facebook, Amazon, Netflix, and countless others built new applications and services that took advantage of this bandwidth. As 4G LTE was deployed in other countries, those same applications spread across the world. Additionally, for 5G the general amount of spectrum made available gives countries an advantage in deploying their networks. If China is able to set the spectrum standard for 5G, then it (and other countries using this standard) will have a distinct advantage in building out the next generation of software and applications that will be adopted worldwide. China is on track to repeat in 5G what the United States accomplished with 4G.

China is on track to repeat in 5G what the United States accomplished with 4G.

If China continues to push forward with building 5G networks on low-band frequencies and is able to set the global standard, the impacts for countries using the U.S.’s preferred high-band standards would be twofold. First, the infrastructure demands for building out networks on high-band spectrum are more intense, requiring more small cell towers. Ultimately, a 5G network built on this standard would take longer to build and provide worse coverage, particularly in rural areas. Second, companies building out their networks on the high-band standard, or those looking to build Internet-connected devices on top of these networks, might not be able to compete in international markets operating on the low-band model.

The major risk for companies within the U.S. is that the U.S. pushes forward with its current proposed standard of using primarily high-band spectrum, and that the rest of the world moves forward on the more convenient low-band spectrum standards. For companies outside the U.S., the divide over spectrum standards risks creating two separate 5G operating standards, potentially limiting market access and complicating companies’ abilities to build technology than can seamlessly function across networks globally.

Regional Competitive Dynamics & Geopolitical Implications

As the world’s two largest economies with considerable influence over trade and economic development globally, the U.S.–China competition over 5G will shape the international landscape and could ultimately disrupt different regions’ abilities to take full advantage of 5G technology. However, the full scale of 5G competition is not limited to the U.S. and China, with major competition in 5G equipment development and network deployment emerging in Europe and Asia.

Key Takeaways

  • U.S. retaliation against Huawei would have broad economic impacts

    The U.S. decision to restrict semiconductor sales to Huawei as a measure of retaliation against Huawei’s 5G dominance, will have effects that will be felt throughout the rest of the world. Countries relying on Huawei for 5G will be set back on their deployment timelines, U.S. companies selling to Huawei will incur substantial losses, and companies all along the 5G supply chain will potentially need to locate different suppliers and buyers.

  • Global conflicts over 5G regulation could limit interoperability

    The difference in spectrum preferences between the U.S. and China, and a U.S. refusal to work with Huawei equipment adopted as standard, could potentially divide the Internet into two spheres. Additionally, if another country, such as South Korea, begins deploying stand-alone 5G networks and effectively developing on them first, they would also have a first-mover advantage in setting standards that may be adopted globally. This potential divide could limit interoperability, complicate development for companies on 5G networks, and limit market access based on the adopted standard.

  • What’s at Stake

    A standardized, interoperable 5G network that allows seamless connectivity and data transfer across international borders. Deepening divides between the U.S. and China on 5G could force countries to develop on different standards, while U.S. retaliation against Huawei through export controls could severely delay global 5G rollouts.

The Breakdown
Evolving Regional Dynamics Regarding 5G
Evolving Regional Dynamics Regarding 5G
Global 5G development is playing out differently across markets
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U.S.

While the U.S. has repeatedly stated its desire to lead in 5G, it is increasingly evident that it is falling behind other major economies in 5G development in terms of spectrum allocation, standard setting, and global influence. However, the U.S. still controls a key part of the global supply chain through its semi-conductor industry, and as the world’s largest economy it still holds the most potential to disrupt the competitive landscape through its actions. The U.S. is disrupting the global 5G supply chain by enforcing stricter export controls on semiconductor sales to Huawei, through measures enacted by the U.S. Department of Commerce. However, this measure is likely to result in significant economic losses in the short term domestically. The U.S. has floated plans to become more competitive in 5G by subsidizing a domestic Huawei competitor, switching to a wholesale spectrum model, and, most recently, encouraging open-source software development to push Huawei out of involvement in core network functions for 5G networks. As of now, none of these measures has been adopted.

The U.S. is falling behind on multiple metrics.

The U.S. has continually expressed the desire to “win” the race to 5G, framing the competition as a two-country race between the U.S. and China. This position oversells where the U.S. realistically stands on 5G. As of now, numerous countries are effectively “ahead” of the U.S. in 5G development based on different measures. South Korea leads in the number of 5G subscribers, with nearly 8 percent of its population, or four million people, subscribed, compared to less than 1 percent of the population in the U.S. (17 percent of U.S. subscribers are still on 3G), and it has also achieved the fastest mobile download speeds on its network. (The U.S. ranked thirty-sixth, just below Montenegro.)

Leading in 5G generally refers to an ability to gain a first-mover advantage in deploying 5G networks, and then building applications on top of them. The amount of overall spectrum available on which to build the network creates an advantage in reaching 5G milestones first. On average, countries other than the U.S. are making four times as much mid-band spectrum available for 5G, with China planning to make seven times as much mid-band spectrum available.

The one area the U.S. can still confidently compete in 5G is in building core networks, and in app development on top of 5G networks. However, in both of these areas, they are also constrained by domestic spectrum policy. In order to develop globally leading applications, it is imperative to develop on the global spectrum standard—an area where the U.S. has fallen significantly behind China and other countries focused on developing on mid-band spectrum. Additionally, the U.S.’s push to develop on the mmWave standard requires more small-cell radio towers and thus a more extensive RAN—precisely the area in which the U.S. does not have a domestic company that can compete. While still being the country able to most disrupt the 5G competitive landscape, options for the U.S. actually leading global deployment and development on 5G are severely constrained due to widespread global acceptance of Huawei, diverging spectrum standards, no coherent national 5G strategy, and a lack of a domestic Huawei competitor.

Europe

Europe is caught directly between the U.S. and China, while also trying to position itself as the global leader in 5G. Europe has cautiously embraced Huawei’s presence, while the British government initially granted Huawei access to the UK’s 5G infrastructure network in January of 2020, in May 2020, it added restrictions to Huawei’s 5G participation and moved towards a full ban in July. but adding restrictions to Huawei’s 5G participation later in May; it continues to debate a full Huawei ban. Despite this, 60 percent of EU governments still have either a memorandum of understanding or a commercial contract signed with Huawei. U.S. allies, including the UK, France, and Germany, are now caught between U.S. pressure to ban Huawei and the bloc’s deepening trade and economic relations with China. For Europe, the U.S.–China conflict over 5G means risking the security relationship they share with U.S., or their deepening economic ties to China, including the long-sought EU–China bilateral investment treaty, with the decision on 5G potentially putting European access to the Chinese market at risk. The economic interdependence will hold sway, given that China is the EU’s second-largest trade partner (after the U.S.), and the EU is China’s largest trading partner.

As home to the two largest Huawei competitors, and many of the world’s largest economies, Europe will play a decisive role in determining which spectrum and technical standards are adopted. For U.S. companies, the major risk is that Europe fully embraces Chinese technical and spectrum standards, or comes out ahead and sets its own standards, which would leave the U.S. building out a 5G network that is not interoperable with the rest of the world. From the European perspective, Europe led in innovation on 2G networks and, despite acceptance of Huawei, still sees potential to be a global leader in 5G development and deployment. In this regard, it is better positioned than the U.S. to be able to build networks due to the presence of Nokia and Ericsson. However, Europe also suffers from a competitive disadvantage, similar to that of the U.S., in that coordinating spectrum policy, 5G infrastructure development, and 5G application development is difficult at a regional level due to the competing interests of different European countries.

Update (July 2020): The outbreak of COVID-19 has put significant stress on the relationship between the EU and China, as well as between the EU and the U.S. While Huawei still maintains a solid foothold in the EU, a number of countries, such as the UK, Belgium, and Denmark, are now limiting its 5G participation, opting for alternative carriers, or implementing a ban (the UK announced the ban July). Thus far, the big winners from this tension have been the European 5G equipment providers, Nokia and Ericsson, who have been able to boost their competitive position within Europe amid the crisis.

Huawei's Penetration in Europe
Huawei's penetration in Europe
Considering Huawei ban or restrictions Considering Huawei ban or restrictions
Huawei contract or memorandum of understanding — Restrictions in place or under consideration Huawei contract or memorandum of understanding — Restrictions in place or under consideration
Huawei contract or memorandum of understanding — No restrictions Huawei contract or memorandum of understanding — No restrictions
Opted for alternative carrier(s) Opted for alternative carrier(s)
China

China’s widespread global infrastructure presence and role in standard-setting confers considerable influence over the software and apps that are able to run over its networks. The state-funded global success of Huawei, and China’s aggressive push to expand its technology across the world and gain clout in standards-setting organizations, position it as the clear-cut leader in 5G development. The Chinese Communist Party (CCP) has been forthcoming in its goals to re-shape the global economy around China, publicly releasing its Belt and Road Initiative vision, which includes a plan to lead in cyberspace as well as physically reshape global commerce routes, including the Digital Silk Road. Controlling 5G infrastructure is key to China achieving its global industrial ambitions, and as such, a major focus of state-sponsored infrastructure investment. By funding Huawei’s expansion in the 5G infrastructure space, the CCP can ensure that Chinese national interests and Chinese companies are best positioned to benefit from the rise of 5G networks. China has used 5G strategically as a means of reinforcing existing economic ties and deepening economic and political engagement in regions such as Latin America and Africa. Unlike the U.S., China has been able to lay out a coherent vision for its 5G ambitions and execute due to its state-centric economic model.

Despite a strong lead in the development of 5G infrastructure technology, freeing up significant amounts of mid-band spectrum, and launching 5G networks, China still faces some competitive weaknesses that could lead to setbacks. China’s major weak point is its reliance on the U.S. semiconductor industry for the technology to operate its telecom networks. As the U.S. attempts to exploit this, Chinese plans for 5G dominance could be delayed long enough for a competitor such as the U.S., South Korea, or Europe to seize a competitive advantage in developing on 5G networks. However, with China buying $120.3 billion worth of exports from the U.S., it is unlikely that the U.S. can continue to attempt to cripple China’s 5G development without incurring significant economic losses itself. It remains to be seen how long the Trump administration is willing to maintain its current hard stance against Huawei technology, and how economically viable these measures will prove to be in the long run.

The second area in which China is at a competitive disadvantage is in its regulatory and entrepreneurial environment for developing applications on top of 5G technology. China’s entrepreneurial environment has improved significantly over the last decade, but its state-centric model still puts severe constraints on companies’ ability to flourish in China. For companies looking to develop on 5G, China ranks thirty-first in ease of doing business (Korea ranks fifth, and the U.S. sixth), and China’s restrictions on foreign firms entering its markets could make it difficult for multinationals to develop on its 5G networks. Despite these issues, China is still undisputedly positioned to benefit from the development of 5G significantly more than from previous generations of cellular networks.

Update (July 2020) – The U.S. has doubled down on restricting sales of semiconductors to China, causing a potentially major setback in China’s 5G development globally. However, Huawei has not yet taken a significant hit to its market share, maintaining 28 percent of the overall telecom equipment market through Q1 2020. Additionally, the outbreak of COVID-19 has had mixed impacts on China’s 5G development. While the pandemic has weakened China’s relationship with Europe, it has also catalyzed the rapid deployment of 5G technology domestically, as China has used 5G technology in its efforts to track and contain the virus as well as to improve medical care and service delivery.

Asia

While the Chinese push to lead globally in 5G development has taken up most of the headlines, there are a number of other Asian countries with significant potential to shift the competitive landscape. Japan was the leader in 3G technology, beginning with the development of its i-mode mobile ecosystem in 1999, and it has ambitions to re-create some of this success with 5G. In 2007, Japan had emerged as the global leader in 3G with a 50 percent 3G market penetration. At the same point in time, the U.S. had a 3.5 percent market penetration, Germany had 12 percent, and Italy had 25 percent. That year, developers on Japan’s i-mode ecosystem were earning $9 billion a year. While Japan is currently still in the development stages of its 5G networks, with its 5G spectrum released at the end of 2019, neighboring South Korea was the first country to roll out its 5G services in April of 2019, beating the U.S. and China. South Korea launched its 5G services on a non-standalone 5G network (NSA), which builds on top of existing 4G infrastructure to increase data-transmission speeds. The U.S., China, and Japan have all followed similar strategies, hoping to build non-standalone 5G networks first, in order to develop technology and market leadership, and then move toward stand-alone (SA) 5G networks, which would enable the advantages of ultra-low latency and network-slicing functions, and facilitate a wider range of use cases for new devices.

In addition to being the first to launch commercial 5G services, South Korea is home to Samsung, the only other end-to-end 5G equipment provider, and the largest telecom equipment provider in terms of revenue. South Korea favors using high-band spectrum in its 5G networks, the U.S.’s current preferred standard. While China should still be considered the current leader in 5G, due to Huawei’s massive global footprint, its lead in patented technology, and its presence in standards-setting organizations, South Korea is best positioned to benefit competitively if the U.S. and China’s confrontation continues to complicate their planned 5G rollouts. The rest of Asia also presents a potentially key tipping point in favor of China’s strengthened 5G position. Huawei has had a long presence in Southeast Asia and was a major player in the rollout of 4G networks across the region, leading to Southeast Asia widely ignoring the U.S. ban on Huawei equipment. Additionally, on December 30th, 2019, India announced that it would allow Huawei to participate in its 5G trials after it had previously considered excluding Huawei. Initially, access to the Indian market, the second-largest telecom market in Asia after China, was a major win for Huawei. However, recent border tensions between China and India have renewed questions about Huawei’s presence in India. If the situation between the countries continues to escalate, India could move further to limit Huawei from accessing the coveted Indian market.

Update (July 2020) – Since the start of 2020, South Korea’s Samsung has struggled to gain market share in the 5G telecom equipment space. In June of 2020, Japan announced plans to fund its own national champion to compete directly against Huawei in the global 5G market. China’s relationship with India has worsened considerably, diminishing prospects for Huawei to play a major role in India’s 5G development.

Latin America

Chile, Argentina, Brazil, Peru, and Colombia have signed memoranda of understanding with Huawei, and Mexico has signed a commercial contract with Huawei, agreeing to allow Huawei to build out the core infrastructure for its 5G networks. The Chinese government has been investing aggressively in Latin America, with $110 billion in total FDI spent in the region between 2005 and 2018. Huawei has been part of this trend, investing $800 million to build a plant in São Paulo, Brazil—where Huawei has maintained a domestic presence for twenty-one years. In November of 2019, Huawei announced a $50 million investment in Latin America to help local developers build apps on its networks. Huawei has leveraged these longstanding relationships, along with prices 20 to 30 percent lower than those of competitors, into contracts with Latin America’s state-owned telecom companies. Given the current offering of Huawei equipment, and the stagnating economic conditions across Latin America, many state-owned telecom providers are faced with the option of using Huawei for their 5G infrastructure or waiting another two to three years to deploy 5G. One notable exception to this trend is in Uruguay, where the state-owned telecom provider, ANTEL, has signed a contract with Nokia to build out its 5G infrastructure. Overall, Huawei’s acceptance in Latin America is part of general shift toward greater economic integration with China. A lack of domestic 5G industry competitors ties Latin America’s 5G future strictly to China. While Latin American economies are unable to impact development of 5G significantly, their 5G rollouts could be hurt if the U.S. bans export of semi-conductors to Huawei.

Huawei's Penetration in Latin America
Huawei's penetration in Latin America
Huawei contract or memorandum of understanding — Restrictions in place or under consideration Huawei contract or memorandum of understanding — Restrictions in place or under consideration
Huawei contract or memorandum of understanding — No restrictions Huawei contract or memorandum of understanding — No restrictions
Africa

Huawei has a long-standing presence in African markets due to its cost advantages and financing options. Huawei recently signed a MoU with the African Union to boost its 5G presence in Africa, and signed a commercial contract with South Africa, the first commercial 5G contract signed on the African continent. Huawei and ZTE built 50 3G telecom networks across more than thirty-six African countries. This trend continued during the rollout of 4G, with reports estimating that Huawei alone built 70 percent of Africa's 4G networks. Kenya signed a $172 million deal with Huawei in April of 2019 to build a data center. Huawei’s longstanding presence in Africa will likely continue through the rollout of 5G infrastructure, with no major competitors positioned to step in and take its place. Much like Latin America, African countries’ 5G development is tied to China, and they do not have a significant ability to impact the development of 5G. However, 5G rollouts in Africa could still be impacted by a U.S. ban on exports of semi-conductors to Huawei.

Huawei's Penetration in Africa
Huawei's penetration in Africa
Huawei contract or memorandum of understanding — Restrictions in place or under consideration Huawei contract or memorandum of understanding — Restrictions in place or under consideration
Huawei contract or memorandum of understanding — No restrictions Huawei contract or memorandum of understanding — No restrictions

Next in Our 5G Power Map Series: 5G and National Security

The development of 5G networks will span the globe and potentially create billions of dollars in economic gains for countries that are able to leverage development on their 5G networks. However, underlying the opportunity promised by the development of 5G are grave concerns about 5G networks’ general vulnerabilities, the trustworthiness of Huawei and China as global actors, and the potential ramifications for national security. With 5G enabling the broad digitalization of the global economy, the potential opportunities for cyber-attacks from bad actors will be more abundant, and their impacts amplified. In the final installment of FP’s 5G Power Map series, we will outline the potential national security threats for governments around the globe, explain key potential vulnerabilities in 5G networks, and explore the implications of China and the U.S.’s confrontation over Huawei on global security – including breaking down the ramifications of the recent U.S. racketeering charges against Huawei. Crucially, we will explain why 5G networks pose a national security risk for all countries and will outline how country-specific risks can be assessed and prepared for.

Written by Christian Perez. Edited by Allison Carlson. Copyedited by David Johnstone. Design and development by Andrew Baughman. Art direction by Adam Griffiths.

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