The Last Chance to Defeat China and Win Back the Cyber Domain?

Narration: Over 68 countries went with Huawei for 5G deployment, despite U.S. warnings of national security risks. What does that mean?

Declan Ganley: If Beijing succeeds in the strategy that it is implementing now everywhere else, 10 years from now, there won’t be anywhere else to go.

Narration: The U.S. is struggling to go 5G itself. What happened?

Newt Gingrich: They took 85 billion dollars and they bought Time Warner… They can’t afford to go to 5G, and they’re desperate that nobody else go to 5G.

Narration: A wholesale open access model will break the mobile industry’s oligopoly. But is that all it takes to prevent China’s dominance in the cyber domain?

Robert Spalding: It is absolutely a government decision, because it’s talking about our freedoms going forward. What kind of country do you want to live in?

Host: Welcome to Zooming In, I am Simone Gao. Two months ago, when Zooming In did a story on Huawei and global 5G deployment, Huawei was poised to take control of much of the world’s cyber domain. We talked about the national security implications of that prospect. And we observed the U.S. efforts to raise awareness of that risk. Two months later, when we were doing another story on this, we realized the world knows Huawei a lot better through these efforts, but Huawei’s momentum has not stopped. In fact, Huawei and China are playing a grander game. They have a brilliant strategy that is working well with the very nature of crony capitalism. Can this battle still be won by the free world? And what does it take to win? Let’s find out in this edition of Zooming In.

Part 1: A Huawei Victory Party

Narration: For many stakeholders, the Barcelona World Mobile Congress held at the end of February this year was what they feared: a victory party for Huawei, China’s primary telecommunications equipment provider who will be deploying 5G networks worldwide.

Narration: According to Zooming In sources, Huawei has signed official 5G deployment contracts with 68 countries. That number jumps to 80 if Memorandum of understandings, where countries are testing and planning on using Huawei equipment, are included. When Zooming In reported this story in early February, the number of countries who had decided to go with Huawei was 61.

Narration: Interestingly, in public, Huawei has under reported the victory number by asking some of its new clients not to announce the deal. Some of its clients have also asked Huawei to do the same out of fear of political pressure.

Narration: Huawei’s success is significant against the backdrop of a few important events. First, on December 1st, 2018, Huawei’s CFO, Meng Wanzhou, was arrested in Canada at the request of the United States for allegedly breaching U.S.-imposed bans on dealing with Iran. Two months later, Huawei was indicted for theft of trade secrets, wire fraud, and obstruction of justice in the U.S. Following that, America warned allies that whoever uses Huawei equipment for 5G deployment will be cutting themselves from information exchange with the U.S.

Narration: Responding to the U.S. warning, the European Commission decided not to call for a European ban on Huawei, leaving it to EU countries to decide on national security. But it urged EU countries to share more data to tackle cybersecurity risks related to 5G networks.

Narration: On March 19th, Danish telecom provider TDC announced it will go with Sweden-based Ericsson to build the company’s 5G network. But Germany recently refused to ban Huawei from its 5G development. The UK has indicated a similar stance.

David Goldman: The Huawei campaign has been I think one of the most sorriest episodes in U.S. diplomacy in history. As you know, the United States told its allies not to use Huawei technology for the 5G rollout because it would give China an opportunity for espionage. The result of that is even the British, not to mention the west Germans, Malaysians, South Koreans, Indians, and a dozen others, Poles, Czechs, Hungarians have told us: No thank you very much, but we are going to use Huawei equipment. Why is this? We don’t make any of these systems. We used to. Cisco used to dominate the market. Cisco has 72 billion dollars worth of cash in the bank. Huawei spent 72 billion dollars in R&D in the last 6 years. The alternatives, like Ericsson and Nokia, make their chips in China. The Chinese can put back doors into those chips as easily as they can into Huawei chips.

Narration: That was at an April 25th forum by Committee on the Present Danger: China, in New York. Two weeks earlier at an event by the same committee, former House Speaker Newt Gingrich lashed out at another American company over 5G.

Newt Gingrich: Our companies are so out of sync. And take AT&T, which is currently lying about this whole thing, and the reason they’re lying is simple. They took 85 billion dollars and they bought Time Warner. For 85 billion dollars, they could have leapfrogged Huawei and we’d be the dominant internet country in the world. But now that they’re the most indebted American corporation, they can’t afford to go to 5G, and they’re desperate that nobody else go to 5G.

And so what you get is, the domestic companies will tell you, well we’re not doing badly here. Well first of all we’ve blocked Huawei from being here. But they missed the whole point. Huawei’s now in 60 or 70 countries. Now how are you going to operate worldwide if virtually every country in the world has a Chinese internet system?

We haven’t had a wake up call. We don’t understand what the problem is, we don’t understand what the scale of the response is going to have to be, and we are losing.

Host: It actually took a long time for the U.S. politicians to realize there is a problem. When they finally decided to fix it, they immediately know this is not an easy task. It takes more than just security alert about Huawei to turn the tables on China’s 5G ambition. Why is it so? We will have to first examine how Huawei became so invincible in the first place, not just in the developing world, but in the developed world as well.

Narration: In many western industrialized countries, the mobile broadband service industry runs on a retail model. In this model, major commercial carriers pay a large amount of money upfront to purchase spectrum from the government, leaving no one else in the field, because smaller players can’t afford the price. Then they charge consumers as much as they possibly can for data. Meanwhile, they naturally look for the cheapest equipment and rollout costs. This equipment comes from China. And these big commercial carriers end up serving as lobbyists for Chinese companies to gain regulatory favors from their governments. Declan Ganley, Chairman and CEO of Rivada Networks, an Ireland and U.S.-based telecommunications company called these commercial carriers “Trojan horses.”

Declan Ganley: I talked about the fact that Beijing uses these retail mobile carriers as their Trojan horse. I think in Chinese it’s, I’ll mispronouce this now, Shashou Jian is the term that is used for this. “The assassin’s mace” is the rough translation in English. It’s using an asymmetric advantage against your opponent and using your opponent’s own strength really against your opponent. And the carrier lobbies in each of these countries have done all of the lobbying with not an awful lot of need for help from Beijing. And the reason that they’re doing that lobbying is, Beijing has offered them extremely attractive terms, is really offering a massive subsidization of their 5G rollouts, and these carriers who are trying to maintain the market, the margin, between what they retail a gigabyte of information of data for and the cost that it costs to produce it. While they want to maintain this retail business model, they need these Chinese subsidies and so they’re addicted. There is an addiction problem in the retail mobile carrier oligopoly in the West and the addiction problem is to Chinese subsidization so that they can do 5G.

Narration: America runs on the same retail model although it doesn’t allow Huawei equipment currently. However, what will happen if Beijing were to be successful in Europe and everywhere else? According to Ganley, if that’s the case, 10 years from now, there will be no other option other than using Huawei equipment.

Narration: Coming up, can the table be turned? What is the Wholesale open access model?

Part 2: Can the Table Be Turned?

Host: Can the table still be turned? The short answer I got from industry leaders and policy experts is yes. And it so happens that a big portion of the cure for the problem identified in the 4G era is also a prerequisite for the 5G era. That is, a wholesale open access model.

Narration: As we mentioned earlier, in the U.S., under the current retail model, the major mobile carriers spend all their money buying spectrum, building networks, and investing in the entertainment industry for maximum profit. They are left with little money for anything else. When the wave of 5G finally hits the United States, the country is presented with two options. One option is the continuation of the old retail model, in which four major players all have their own networks. They can tweak their networks to go 5G, but they won’t be real 5G. According to Accenture, a global management consulting and professional services firm, it will cost two hundred and seventy five billion dollars just to build one 5G network. If all four U.S. mobile carriers were to build their own networks, it would cost a trillion dollars, an amount of money they do not have.

Host: Another option will be to build one physical network that everyone shares spectrum from according to General Robert Spalding, senior fellow at Hudson Institute. When he served as senior director for strategy to the president, he was the chief architect of the framework for national competition in the Trump administration’s National Security Strategy (NSS). In my recent conversation with him, he said the characteristics of the 5G technology require a different business model.

Robert Spalding: One of the things that 5G can do is called virtual splicing. It allows you to have many private networks on one physical infrastructure. And so right now the 4G networks, each company has built their own 4G networks, but because of the propagation characteristics of the frequency spectrum they’re in, which is primarily the midband, they go much farther. Also the signal itself is a broadcast wide area signal, not a very narrow pencil beam like 5G. And so that allows them to have fewer towers for them to place their equipment. Again, though they’re still paying off that equipment.

In 5G because we have virtual network splicing and because you can use the same frequency that you’re using in 4G, except in a 5G implementation, as you build one 5G network, one physical network, in other words, same set of towers, one set of antennas for one physical network, every operator can use that network and have higher speeds to the customer, have lower latency, and more bandwidth to the customer. If you were to apply that like the current 4G model you would have a slower, less capable 5G network. You’d have actually four. In the current model, you’d have four very slow nationwide 5G networks. In fact you wouldn’t even consider them 5G, because the max speed that you would get out of each of those networks would be probably in the range of 300 megabytes per second.

When you take all of that spectrum and you build it on one physical network, your max throughput on that network is up to five gigabytes maybe even 10 gigabytes per second. Now each network operator, if they are a virtual network operator on that network, can give their customers five or 10 gigabytes per second service. In other words, ATT’s customers are better served, Verizon customers, T-Mobile customers, they’re all better served by using one physical network. Now the wholesale argument came out of the fact that we have a number of retail operators in the United States. Each of these operators in the past have sought to build their own networks, because it made sense because of the technology. The new 5G technology, it does not make sense to build your own network, because it actually means that you’re investing more than you have to. In other words for the United States, I just told you we would have to invest almost a trillion dollars to build these networks. That’s four times what we, in the current system, what we would have to spend if we only built one physical network. So not only is your network cheaper to install, it has actual better speeds, and it’s a better overall service for the American people. Now finally, the big reason why we need one physical network is because it’s much easier to secure that network against infiltration by totalitarian regimes like the Chinese Communist Party.

Host: So, who will build this one physical network and who will own it?

Robert Spalding: So whatever company chooses to build it would be the one that built it. In our current system, what would happen is the FCC would have to sell cell spectrum to a company to do that.

Host: Good. You know some people have been criticizing the wholesale open access model as being a government controlled and nationalized 5G network. What do you say?

Robert Spalding: Well first of all as I said, all spectrum in the United States is already owned by the federal government. They sell licenses to use the spectrum, but the spectrum continues to be owned by the federal government. So nationalization actually occurred several decades ago when the FCC was begun, number one. Number two, I think this has been used as a, essentially a literary device to prop up and promote the continuing oligopoly that the telcos have obtained, and they don’t want to give it up. And so they’re preventing anybody else from coming into the marketplace. If you built a single physical network, it would make it very easy for new entrants to come into the market and get wholesale, buy wholesale service from that network and then sell it to the customers at a reduced rate. The telcos don’t want to do that because it would allow you to take their customers very easily by providing better service. Right now it’s very hard to take their customers, because they own the network and so they want to continue to own the network, and the best way that they can do, the best thing they can do to maintain that ownership is to make sure that a single physical network that’s wholesaled out to other retailers is never allowed to be built.

Narration: The Federal Communications Commission is skeptical about this idea. On March 5th, National Review published an article by Brendan Carr, a member of the FCC that says, “The U.S. has a free-market plan to secure our 5G leadership. It’s built on smart infrastructure policies, putting more spectrum into the commercial marketplace, and allowing our private sector to invest and compete. We’ve been executing this plan for two years. At the FCC, we’ve already cut over $3.6 billion in government red tape. And our plan is working.

“By getting government out of the way, we now have the largest commercial deployment of 5G in the world, the digital divide in the U.S. has been cut by 25 percent, internet speeds are up 40 percent, and a report out last month shows that in 2022 the U.S. will have more than two times the 5G connections as Asia as a percentage of total mobile connections.”

Host: What do you think of the above arguments?

Robert Spalding: It’s not true. It’s been reported that in China, they’ve deployed somewhere like three hundred thousand antennas, 5G antennas, and the U.S. has deployed something like thirty three thousand. I also happen to know from an industry insider in China that they’re working to deploy two point seven million antennas very shortly. There’s no such investment going on here in the United States. Again, look at the debt load that AT&T has. They’re at about one hundred and eighty billion dollars in debt. They don’t have the money to make these investments. They are building some 5G networks in the cities. Again, that’s going to be the extent of it. They’re going to have primarily 4G for the country and 5G for the dense urban market. That’s traditionally the high value markets. That’s what AT&T and Verizon, T-Mobile and Sprint are going after, and they’re not going after the underserved portions of our country. In other words, we created the post office to connect America so that somebody sending a letter to their congressman from California would pay the same for, as somebody in D.C. that was sending a letter. In the 21st century the digital connectivity is the most important. And having that digital connectivity extended in a way that allows for self-driving cars in the cities, and in the country, or all the automation, whether it be self-driving tractors in the country or advanced manufacturing. Some of these towns [were] left behind when China joined the WTO, all the manufacturing left. Manufacturing that’s going to come back has to connect to this 5G network. That’s part of the industry portfolio that 5G is supposed to impact. You’re going to leave all of these rural communities behind, the same people that have lost millions of jobs are going to continue to remain unemployed, they’re going to continue to have poor cell service as they do today, because the current plan is designed to really prop up the current telco oligopoly in the United States.

Host: So what is he essentially saying in this article? What’s going to change and what’s not going to change?

Robert Spalding: If you build a 5G millimeter wave network, it’s a dense infrastructure build out. In other words you have hundreds, maybe thousands of antennas to place within the city. Each, for example, in Seattle, Ericsson was trying to build a network. They had you know something like 40-something municipalities that they had to put drawings to. Each municipality wanted different color ink on the drawings or wanted a different design for the box that you were mounting on a light pole or on a building, and some of them wanted to charge a fee for that. What the FCC has tried to say is, no we really need to build out 5G in America, and each municipality can’t force the telecom operator to to go through all of these hazards or they will never be able to install it. That’s what the FCC is talking about, about streamlining some of that red tape for installing infrastructure of course, and infrastructure they’re installing is millimeter wave which means it’s never gonna get built in a nationwide capacity.

Narration: Coming up, what does the wholesale model have to do with China?

Part 3: What does the wholesale model have to do with China?

Host: Let’s summarize the rationale so far. In China’s journey to dominate the next generation of the cyber domain, major western mobile carriers have provided great assistance by lobbying for Beijing in front of their own governments. They do so because they have benefited tremendously from Huawei’s cheap equipment. The Chinese company is also offering them massive subsidization of their 5G rollout. As long as they want to maintain this retail oligopoly, they need China’s subsidization. On the other hand, the successful 5G rollout in the United States is also impeded by the same mobile carriers in order to maintain their old business model. If the mobile industry’s oligopoly is the reason behind these two bad scenarios, then dismantling that model seems to be the way to go. And a wholesale open access model will be the route. However, changing the business model will not be a complete solution. If China keeps its subsidization, when big Trojan horses disappear, smaller Trojan horses will emerge, because reducing cost and going after maximum profit is the nature of any company.

Host: How do you prevent this from happening in the future? I mean isn’t lowering price and maximizing profit what every company is after?

Robert Spalding: China is subsidizing Huawei. That’s not okay. That’s not free trade. We should not accept that. And if we do accept that, in 10 years there will be no other equipment manufacturers other than Huawei. They do it for a reason. Because if they install Huawei then they can have back doors. If we want to have an equipment manufacturing industry, we actually have to prevent the subsidization of that equipment. Now that was supposed to be what the WTO was going to enforce. The Chinese don’t follow the WTO. So you have to come up with some mechanism to actually create an industry that allows you to have the kind of hardware gear that you want in your in your network. We need free trade. Fair reciprocal trade. We don’t have it right now. So it’s not just a wholesale model that’ll fix it. You actually have to have protections for the industry itself. Right now we we used to have Lucent in the United States, Nortel in Canada. Both gone. Ericsson, Nokia, Samsung for equipment manufacturing. None of them will survive Huawei, if we don’t protect them. So it’s not just about, hey we can’t do Huawei, we actually have to provide another mechanism to protect the industry as well.

Host: And also with the wholesale model these players can do without Huawei. But in the old model it’s almost like they can’t leave Huawei, because they can’t afford it.

Robert Spalding: But even in a wholesale model they could still go to Huawei, they just make more margins. Right? And Huawei supposedly has some of the best technology, at least that’s what some of the telcom operators say. So if if they’re the only ones that are investing in new technology and advances in 5G and none of the other equipment manufacturers have any ability to do that, then how does that put us in a better position 10 years from now when we’re looking at the next iteration of infrastructure? It puts us in a worse position, because then all we have is Huawei. And so it just can’t be we’re going to have a wholesale open access model. You actually have to think about how today you incentivize industry to build the kind of industry architecture that you need going forward for national security.

In the National Security Strategy we said: Data is a strategic resource in the 21st century. Because data can be used along with artificial intelligence, machine learning, big data analytics and social media to do targeted influence to do mass surveillance and also to do other things that are inimical to the liberal order, that you have to actually look at the world in a different way. And it forces you to think about industrial policy again in targeted areas. It forces you to think about how important it is that we have a secure internet for our nation and how we look at things like individual liberty, rule of law, private property, sovereignty in a digital sense. All of these are made worse when we allow consolidation for both the equipment and the infrastructure by a totalitarian regime that believes in none of those.

Host: So eventually it should be the government who makes the decision to keep Huawei out, not the free market.

Robert Spalding: It is absolutely a government decision, because it’s talking about our freedoms going forward. What kind of country do you want to live in? AT&T does not sit up at night and think about how do we make America safe for democracy. They think about how to make money. So does Verizon, so does T-Mobile. So does any network operator. It is not their job to protect the citizens of a country. It is actually the government’s job. And so in this case the government is doing a very poor job of actually looking at how do we protect data. That’s a strategic resource so that your data and my data and industry’s data and government’s data all maintains along with the owner. That’s something that certainly government needs to be involved with.

Host: I have talked about this several times. In the past few decades, the U.S.- China policy had been dominated by a profit-driven business sector and the results have been very bad. How do we prevent that from happening again? Maybe we could use this analogy: The U.S. would never hire a general from the Chinese military no matter how much cheaper he is. With cyber, it is similar. Let me know what you think on Twitter @ZoomingInSimone. You can also join the conversation on our Facebook page and subscribe to our YouTube channel: Zooming In with Simone Gao. Goodbye until next time.