China’s Huawei Battles to Own the Next Generation of Wireless Technology

Wall Street Journal
by: Matthias Verbergt
February 26, 2017

As the global telecommunications industry determines the parameters of its next-generation network of superfast connections, one company is playing an outsize role: China’s Huawei Technologies Co.

The modern concept of a mobile-phone network was fathered by European and U.S. equipment suppliers such as Ericsson AB, Nokia Corp., which now includes the former U.S. giant Lucent, and Qualcomm Inc. They were critical in defining standards and then designing, manufacturing and rolling out the hardware, such as antennas, that underpin today’s globally adopted 3G and 4G high-speed networks.

More recently, Asian rivals, particularly Huawei, have gone on the offense, quietly using an obscure, international process now under way to define the next gold standard, so-called 5G, to challenge the established order. The upshot: A Chinese company all but banned from selling its telecom equipment in the U.S. on national-security grounds is in one of the best positions to help shape the technical standards that will determine how the new network will work.

Late last year, for instance, telecom firms from around the world dispatched their top engineers to Vienna for a discreet, but strategic round of meetings aimed at defining capabilities and specifications of 5G.

As delegates huddled in the gilded conference room of Vienna’s InterContinental Hotel, Huawei’s red flower logo dotted several rows of tables.

“They’re twice as many as anyone else,” said the senior representative of a Western rival as he entered the room, “They’re everywhere.

Huawei already has overtaken Sweden’s Ericsson as the world’s largest supplier of wireless equipment by revenue, according to some estimates. The global market for wireless equipment was $48 billion in 2015, data from IHS Markit show, of which Huawei, Ericsson and Nokia control about 80%.

Huawei executives say the Chinese company initially gained traction by replicating Western technology, and offering quality products at lower costs. With 80,000 staffers working on research and development, however, Huawei has now become a formidable lab force.

That could give Huawei a sizable edge at a time that all suppliers have set their sights on 5G—the technology promises to be a wellspring of revenue by allowing for faster speed and smoother interaction between connected objects—but don’t all have deep pockets.

Ericsson and Nokia are cutting costs and jobs. The two Nordic companies sent smaller delegations to the four-day meeting in Vienna, where telecom companies fought to influence the design of 5G, expected to be rolled out commercially early in the next decade.

“We in Europe took our success early on in the cellphone [business] for granted,” Ericsson Chief Executive Börje Ekholm said during a recent interview in Stockholm.

Huawei has expanded rapidly in recent years in much of the world even as its mainstay telecom-gear business has been effectively shut out of the U.S. market, where a 2012 congressional report concluded that its equipment could be used by Beijing to spy on Americans. Huawei has denied such accusations, saying it operates independently of Beijing.

After meetings such as the ones in Vienna, the International Telecommunication Union, a Geneva-based United Nations agency, will specify final 5G standards, listing which patents are essential to the technology starting in 2019, said Dimitris Mavrakis, an analyst at technology consultancy ABI Research.

“You won’t be able to deploy or create a 5G network without these essential patents,” he said.

The first large cellular networks, often referred to as first generation or 1G, were deployed in the 1980s, and relied on national technologies that were rarely compatible.

In 1982, a European group of national post and telecom agencies set up an association called Groupe Special Mobile, or GSM, with the aim of designing a pan-European mobile standard. The initiative was quickly endorsed by national governments and European authorities, forcing European equipment suppliers to fight for slices of GSM technology. GSM was adopted by carriers in Russia, China and even the U.S. The standard became a byword for 2G networks as it eclipsed rival U.S. technologies such as CDMA.

GSM made the fortune of companies such as Ericsson and Nokia, which supplied large parts of the necessary equipment or owned patents that generated a windfall in licensing revenue.

“The path was shaped up by Europeans,” said Jorma Ollila, who was chief executive of Finland’s Nokia from 1992 to 2006. “Europe was the winner of that geopolitical game.”

The standard-setting process became more international in the 1990s, when ITU, the U.N. agency, oversaw the development of 3G. At the time, Huawei was manufacturing GSM equipment under license, mainly for operators in rural China. Europeans succeeded in retaining crucial positions within industry working groups, maintaining extended sway over patent-picking decisions.

The battleground became more disputed in the next decade as Huawei, founded in 1987, expanded in-house research capacities and became involved with 4G design.

Huawei “went from zero to being a big contributor to the whole standardization process,” said Michael Thelander, a consultant at Signals Research Group.

Building on its success in securing 4G patents, Huawei became a leading supplier of wireless equipment, even winning over clients on Ericsson’s and Nokia’s turf in the Nordics. Huawei also diversified in handset making, a business the Nordic companies have abandoned.

In 2016, Huawei said its revenue rose 32% to 520 billion yuan ($75.7 billion). In the same period, revenue fell 10% at both Nokia and Ericsson.

In the race for 5G dominance, executives at European equipment suppliers said Huawei tends to saturate working groups with design proposals that aren’t always relevant, going for quantity rather than quality.

A Huawei spokesman said the company’s research was “professional, collaborative and based on a significant contribution to investing in research and development.”

After hearing some of Huawei’s proposals for 5G design in Vienna, the senior Western company representative said: “If they threw the same resources with the quality of Ericsson or Qualcomm, it would be game over.”