Canada's arrest of Meng Wenzhou, a senior leader of China's Huawei Telecoms Group, is yet another episode in the US-China battle for the establishment of 5G, the new generation of mobile communications. It is a highly political arrest that risks having diplomatic as well as economic consequences.
On Wednesday, December 5th, Canada announced that it had arrested, at the request of the United States, Meng Wenzhou, the financial director of China's telecom equipment group Huawei. Ms Meng is being charged with trying to circumvent the US embargo against Iran. Washington has filed an official extradition request.
This arrest was commented upon by Huawei with some caution and with significant tension by the Chinese Embassy in Canada, who called for the release as well as the blocking of the extradition of Meng, the daughter of Huawei’s founder: "China strongly opposes and vigorously protests against such actions that seriously undermine the victim’s human rights."
Meng Wenzhou’s arrest is one of many twists in the fight between Washington and Beijing, against the backdrop of the arrival of 5G – the new generation of wireless network – whose economic stakes are of such magnitude that they are overflowing into diplomatic and geopolitical fields.
The 5G network, which should begin to rollout in 2019 in some countries, promises not only to improve the speed and quality of wireless connections, but also permit new uses, such as connected objects, autonomous cars and even applications based on artificial intelligence or virtual and augmented reality in our mobile devices, tablets and smartphones. 5G should also provide improved global coverage of internet connections. The stakes are commensurate with the investments needed to set up this new network, estimated at nearly $34 billion by 2026. Spending on 5G infrastructure is increasing business appetites and international tensions.
China leads the way in 5G
The battle for 5G is underway. If telecom operators sharpen their weapons to be the first to offer their customers this new network, a more discreet but perhaps even bloodier battle is raging between 5G-compatible chip makers and routers. And in this competition, the Chinese manufacturers have taken a step ahead of their Japanese, Korean and American competitors – the Europeans are, for the moment at least, on the outside looking in.
At the Mobile World Congress, held in Barcelona in March 2018, the Chinese manufacturer Huawei, catching its main competitors - Qualcomm and Nokia - off-guard, unveiled its Balong 5G01, the first commercial 5G chip, as well as a modem-router compatible with the next generation wireless network.
This technological advance has naturally attracted the attention of all manufacturers of smartphones as well as telecom operators worldwide. In France, Bouygues Telecom and SFR have been supplied by the Chinese company for some fifteen years, even if it’s tech has been excluded from the "core network," namely the country’s most sensitive infrastructure. If France could offer 5G from 2020, the appetite for Huawei devices seems obvious for the telecom operators.
The ambitions of the Chinese telecom giant have not been confined to France; throughout Europe, German, British and Spanish operators have also used its products. Regarding the transition to 5G, the Chinese had, until recently, held all the cards and was poised to become the preferred partner of many operators around the planet.
But this momentum towards the 5G dominance was slowed by a response organized by the United States. Last February, the directors of the NSA, FBI and CIA, questioned by the Senate Intelligence Committee, warned against the possibility of espionage via Huawei smartphones.
They also stressed the risk of allowing Huawei access to telecom networks. "We are very concerned about the risks of allowing a company or entity close to foreign governments that do not share our values to have so much influence in our telecommunications networks," said Chris Wray, boss of the FBI.
Shadow of a doubt
It is true that Huawei's founder, Ren Zhengfei, is a former engineer in the Chinese army. It is also true that Beijing has a very peculiar conception of personal data protection and that, since 2017, Chinese companies have been obliged to participate in the national "intelligence" effort. China has been regularly accused of using its computer equipment – which has conquered the world – to spy on foreign powers and companies. The strategic benefits of Huawei's explosive growth could hardly be explained away.
5G is a particularly sensitive network, economically as we have seen, but also technologically. First of all, it would connect many more devices, which multiplies de facto cyber-risks. Then, there is the architecture of this next generation compared to the previous ones. In 4G infrastructure, cellular relay antennas, which relay signals, are relatively isolated from the heart of the mobile network, which collect users’ most sensitive data. On the other hand, in 5G infrastructure, network security is more fragile as sensitive data and communications that are easier to intercept. In a report published in March 2018, the European Agency for Cybersecurity (ENISA) warned operators against the proliferation of risks of intrusion, espionage and cyber-attacks made possible by 5G.
Strategic and economic issues
The nature of the American response therefore certainly has strategic roots, but it owes a lot to economic stakes. In just over three years, Huawei, which was until recently confined to telecoms equipment, has succeeded in winning a sizeable share of the global smartphone market. The Chinese manufacturer recently supplanted American manufacturer, Apple, as the world’s second biggest smartphone producer, behind Samsung.
The goes for the microprocessor market. Huawei is overshadowing US companies, like the giant Qualcomm, but also European companies like Nokia and Ericsson, with which US operators have established historical ties.
The repeated attacks by the US authorities against Huawei's products – chips as well as terminals – ended up discouraging the Chinese. After several unsuccessful attempts to gain a foothold in the United States, especially through a partnership with AT&T, Huawei’s management announced, in January 2018, it had throw in the white towel and give up its US expansion plans.
The United States on the front line
The United States has used all its influence to remove Huawei products not only from US territory but also from that of their major diplomatic allies. Last August, Australia announced it was excluding Chinese equipment from its 5G infrastructure. New Zealand made a similar decision in late November, officially for technological reasons.
In recent months, Washington has ratcheted up pressure on its two other traditional intelligence partners: Canada and the United Kingdom. In July, a British report pointed out that the Chinese company gave only limited guarantees on the security of its facilities. And at the end of November, the BT announced that it would exclude the Shenzhen group from its 5G equipment.
In Italy, France and Germany, the authorities have also, more or less openly, confessed to thinking about taking action against Huawei and other Chinese equipment manufacturers. And Japan, another ally of the United States, will think of doing the same.
Cascade of consequences
Meng Wenzhou's arrest resulted in an immediate increase in tensions between China and the United States, stuck in an endless trade war. Beijing continues to accuse Washington of falling back on security arguments as a pretext to favor American or Western companies. The outcome of Meng’s extradition hearing, set for May 8th, also risks weakening the commitments made by the two countries at the end of November to normalize their commercial relations.
From an economic point of view, the US campaign against Huawei is likely to favor its Western competitors, from Ericsson and Nokia to Qualcomm. However, this roadblock put up against the Huawei juggernaut is also likely to slow down the transition to 5G in Europe and the United States, eagerly-awaited by telecoms operators as well as governments who hope to revive growth and job creation through it. As Marcelo Claure, the CEO of the US operator Sprint recalled at the Mobile World Congress in Barcelona, 5G is expected to create 3 million jobs in the United States and generate $500 billion in GDP.
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