Industry Voices—Madden: The ‘Cold Trade War’ is starting

Sunac and Nova will use the $3.2-billion fund to acquire and redevelop hotels, office buildings and shopping centers in China.
Beijing remains the center of China's government. (anthonychong/Pixabay)

While many world markets are moving slowly into IoT and 5G networks, the Chinese government started last year on some aggressive plans to leap ahead of everyone else. About 500,000 NB-IoT base stations have been deployed so far, and a HUGE investment in 5G is coming next year. There are multiple facets to this sweeping Chinese government plan:

  • The Chinese central government, through the Ministry of Information and Information Technology (MIIT), gives spectrum to the mobile operators for free.
  • MIIT dictates what technology will be used, how many base stations should be deployed, and even the consumer pricing of all three state-owned operators. They’ve chosen to concentrate everyone on NB-IoT and 5G NR.
  • All three Chinese telcos are expected to award more than 80% of 5G orders to Chinese companies.
  • MIIT has also created an IC development fund worth somewhere between US$80 billion and US$150 billion, designated to subsidize R&D activity at HiSilicon, Spreadtrum, RDA, and other Chinese IC suppliers.
  • The Chinese government funds the “Thousand Talents Program” and the “Spring Light” program, which pay Chinese nationals to travel to the U.S., learn key areas of technology and return to China to establish the technology base in multiple ways. Modem and RF technologies are among the primary targets now.
  • China Mobile has committed to investing the equivalent of $300 million in NB-IoT device projects, subsidizing small companies that develop modules, devices, or software.
  • China Telecom has announced an investment of roughly $45 million for NB-IoT modules.
  • China Unicom will also be investing about $150 million in subsidies for NB-IoT modules and devices.

Make no mistake, all of the eight bullet points shown above are driven by the central government. They are not really legal, as they violate rules that China agreed to as a WTO member, and in some cases they encourage illegal behavior. There are also illegal activities involving cyber intelligence, but that’s not my focus here.

This has been happening for 20 years, so what’s different this time around? The central government is now paying more attention to the semiconductor industry. The subsidies targeted at chipsets are twofold, coming from MIIT directly and from the operators. The total scale of NB-IoT related subsidies comes to $500-600 million, or about $2-3 per NB-IoT device, over the next few years. That’s significant when these modules sell for only $5.

The pattern of government policy intervention has played out before with TD-SCDMA and LTE. Massive investments by MIIT in the LTE cycle vaulted Huawei and ZTE to the #1 and #2 positions in the market, measured by the numbers of radios they ship.

Now, China has scored 4G as a success, and they plan to double down. The Chinese investment in 5G infrastructure is likely to be four times bigger than the rest of the world put together in 2020-2021.

Why will China make such a strong investment in 5G and IoT when they’ve already achieved dominance in the telecom equipment market? Because they feel like they’re too dependent on American suppliers. Premier Xi recognizes that Huawei/ZTE dominance at the system level is hollow, when 56% of semiconductors in Chinese products are bought from American companies. China has a massive trade deficit in semiconductors despite their trade surplus in almost everything else.

At a government level, the conflict between the U.S. and China has become a “Cold Trade War.” Last week, President Trump decided to take action with very blunt weapons. The West can win this one, just like the last Cold War … but we need to be smarter about how we do it:

  1. Forget about tariffs. The U.S. government could help by handing out free spectrum for 5G, getting out of the way of mobile mergers, and by cracking down on technology theft.
  2. European governments should stop looking for new ways to add special taxes to U.S. tech companies. A new 3% tax on Google or Facebook does nothing to help the competitiveness of Western tech ecosystems. Instead, it simply reduces the pool of capital available for investment in Nokia/Ericsson 5G equipment.
  3. State and local governments can stop blocking investment in 4G and 5G networks. Let the superhighway connect your town and create jobs.
  4. The U.S. Department of Commerce has existing Export Controls on key semiconductor devices where the U.S. remains years ahead of the Chinese competition—including mixed-signal devices, amplifiers and beamformers. We should use these existing restrictions like a chess grandmaster, selectively offering waivers in exchange for concessions and somehow avoiding harm to the American companies that currently export these devices.
  5. Western semiconductor companies need to stop fighting for control of each other and invest in a new killer edge in technology. Selective government tax credits for R&D in 5G modems and RF devices would be a good start.

Normally, I don’t use my monthly blog as a political soapbox. But my job is to notify mobile telecom suppliers when danger appears on the radar screen. A Cold Trade War is starting, and this war is going to be painful for European and American tech companies. Let’s first recognize that Western governments are 20 years late in starting to respond. Then, instead of using tariffs, let’s consider a more surgical strategy.

Joe Madden is Principal Analyst at Mobile Experts LLC, a network of market and technology experts that analyze wireless markets. The team provides detailed research on Small Cell, Base Station, Carrier Wi-Fi, and IoT markets. Mr. Madden currently focuses on trends in 5G, IoT, and Enterprise markets for wireless infrastructure. Over 26 years in mobile communications, he accurately predicted the rise of Digital Predistortion, Remote Radio Heads, Small Cells, and the rise of a Mobile IT market. He validates his ideas with mobile and cable operators, as well as semiconductor suppliers, to find the match between business models and technology. Mr. Madden holds a physics degree from UCLA. Despite learning about economics at Stanford, he still obeys the laws of physics.

"Industry Voices" are opinion columns written by outside contributors—often industry experts or analysts —who are invited to the conversation by Fierce staff. They do not represent the opinions of Fierce.