Much has been written about the impact that the US Commerce Department sanctions announced on May 15, 2020 will have on Huawei. In the short term, they will blunt Huawei’s growth for sure. But the prevailing view among media and analysts is that the sanctions will not ultimately take the company out of business.
But this is not what I want to talk about here. Much less attention has been drawn to the impact of the policy on the United States. My reflections below are about the long-term implications for the US market and technology, not the political underpinnings of the new policies.
Huawei will not simply disappear if it cannot use US components and IP. It will fight tooth and nail with the support of the Chinese government and a huge home market – it is a matter of survival and of national pride. It may take time, but Huawei will find a way to replace US vendors and to further increase R&D investment to secure a broader IP footprint. Huawei already spends $8.38 billion (about 15% of revenues) on R&D, nearly twice as much as Ericsson and Nokia combined ($4.46 billion).
The most immediate effect will be that US device and infrastructure suppliers will see a decrease in sales because of being unable to sell to Huawei or its partners – notably, but not exclusively, TSMC. This is going to especially hurt chipset and components companies such as Qualcomm, Intel and Broadcom, but also smaller companies such as Finisar or Oclaro. In the long term, the emergence of technologically strong non-US suppliers may erode the US leading role in the semiconductor market.
But the disruption will go beyond the semiconductor sector, especially if China decides to retaliate. It may affect companies like Apple, with 14.8% revenues from China. The Chinese may decide to buy Chinese and ditch their beloved iPhones, even if there is no outright ban on their sales.
To remove or minimize dependency on the United States, Chinese vendors (and, preemptively, others too, perhaps) will step up their R&D investment to develop technologies based on domestic IP. China and other emerging countries such as India have a huge pool of well-educated engineers, software developers and other technologists who might find coming to the US less attractive. Many of them may choose to remain in their countries and build a wireless industry less dependent and subservient with the support of local operators and governments. The center of gravity for technological innovation in the long term may shift away from the US, and protectionism will hasten the pace of this change.
In addition, the US’s moves against Huawei could cause fragmentation of global standards and technology development. Inclusivity and convergence to global standards has been essential to the growth of wireless technologies, even though it invariably requires hard compromises from everybody. Could Wi-Fi have become the most widely used wireless technology without a global standard and spectrum harmonization? Creating a polarized technology environment, where vendors and operators have to carefully guard who they can and cannot work with, will make it harder for them to collaborate and agree to compromise. Marginalizing China in standards bodies such as 3GPP would most likely create competing standards. The resulting standard fragmentation will hurt not just China and the US – and not just the wireless industry.
In addition, protracted and escalating economic warfare could spread beyond China and the US because vendors across the globe may want to reduce their dependency on US or Chinese components and will want to preserve access to both the Chinese and US markets. If technological leadership becomes more distributed across countries, regional ecosystems may emerge. More geographic diversity will increase the competition for US companies (and possibly for Chinese ones too).
Openness as an alternative to protectionism
Instead of shutting doors to single out individual players, opening up the wireless ecosystem to a more varied set of vendors is going to be more beneficial to the US market, especially since we do not have a domestic tier-one wireless infrastructure vendor, but a rich milieu of innovative and creative companies that deserve to have their seat at the table and succeed.
As wireless operators build their 5G networks, an open environment encourages a wider selection of vendors to work side by side and promote technological innovation and increases cost efficiency. It will also strengthen the commitment of all players to global standards and to open-source platforms.
This approach also puts pressure on incumbent Tier 1 vendors to open to competition and reduce the dependency of operators on them. Indeed, this is one of the reasons why operators have been pushing to open interfaces and expand the ecosystem. Under pressure from mobile operators, Tier 1 vendors like Nokia and Ericsson have come to accept the challenge and participate in organizations such as the O-RAN Alliance, which is committed to the evolution toward a more open and disintegrated access network.
Notably, Huawei is not a member of the O-RAN Alliance and refrains from participating in some open source and ecosystem-wide initiatives. This may do more harm to the company in the long term: it may lose acceptance as a result of market forces that can be more difficult to bypass than policies.
Transparency and security
With more players and more open interfaces, and transparency built in the networks, it will be not only easier, but necessary, for all to stay vigilant about each other. This will make it possible to expose – and harder to conceal – security, privacy and safety breaches.
Network disaggregation, distributed architectures, virtualization and, more generally, open interfaces are far more effective at ensuring fair competition, security and performance excellence in our networks than bans and trade barriers. A global open ecosystem allows us to retain the technological leadership we have built using talent from all over the world. We should be pushing the technology boundaries forward, not backward.