The absence of a major U.S. alternative to foreign suppliers of 5G networking equipment underscores the growing dominance of Huawei, which has evolved into the world’s biggest supplier of telecom equipment, sparking fears within the Trump administration that a 5G network powered by Huawei’s wireless parts could endanger national security. And it throws into sharp relief the years-long retreat by U.S. firms from that market.
Carriers such as Sprint and Verizon have moved swiftly to launch 5G services for consumers. But the wireless networking gear the industry relies on still comes from foreign suppliers: four companies, Sweden’s Ericsson, Finland’s Nokia and China’s Huawei and ZTE, account for two-thirds of the global market for telecom equipment, according to analyst estimates.
Some U.S. technology giants such as Cisco sell switches and routers that reside in the innermost parts of a carrier’s network. But despite its size, Cisco doesn’t compete in the market for “radio access,” or the wireless infrastructure that allows cell sites to connect with smartphones and other mobile devices.
“There is no U.S.-based wireless access equipment provider today that builds those solutions,” said Sandra Rivera, a senior vice president at Intel who helps guide the chipmaker’s 5G strategy.
It’s this part of the Internet ecosystem that is increasingly important as more devices and appliances gain wireless connectivity and smart capabilities. 5G is expected to shape technological innovation for years to come, providing mobile data connections for virtual-reality headsets, driverless cars and more. Proponents say 5G eventually will support download speeds of 1,000 megabits per second, roughly 100 times faster than today’s 4G standard.
The rising global demand for 5G equipment highlights how the United States, a technology leader in other respects, is largely absent from the wireless networking industry. It reflects the decline of a once vibrant ecosystem of American companies that formerly went toe-to-toe with the likes of Nokia and Ericsson. And it puts a focus on Chinese firms such as Huawei, whose rise to prominence has come at the expense of Western networking titans and sparked a global campaign by U.S. officials eager to persuade allies not to allow Chinese equipment into their networks.
At the dawn of the wireless age 30 years ago, U.S. companies jostled for primacy in wireless networking. Companies such as Motorola and Lucent — an offshoot of the old AT&T monopoly — were sources of innovation, exploring new ways of delivering voice and data wirelessly. It was Lucent, for example, that helped introduce Code Division Multiple Access, or CDMA, a mobile technology that promised to improve the capacity of wireless carriers.
But their fortunes declined around the turn of the century as they failed to keep pace with a changing market. No U.S. company stepped in to fill the gap as those companies faded — partly because of the growing strength of foreign alternatives and partly because of the immense scale required to survive in that line of business, according to industry experts.
“Lucent basically collapsed because they didn’t have a big enough wireless arm to keep them afloat when the Internet backbone [business] collapsed” in the dot-com bust, said Roger Entner, a telecom analyst at Recon Analytics. “Motorola, over time, simply became less competitive because the other vendors had more economies of scale.”
Motorola and Lucent’s wireless infrastructure businesses were soon gobbled up by Finland’s Nokia and France’s Alcatel, respectively. One reason the European companies proved so successful, Entner said, was because the European industry agreed from the start to develop a common standard for wireless communication, known as GSM, that all European telecoms would share. By contrast, the industry in North America took a looser approach, with some carriers backing network technologies that weren’t mutually compatible.
Take CDMA. First developed for mobile use in the 1990s, the standard was technologically superior, allowing carriers such as Verizon to pump more traffic through their cell sites over the same amount of time compared with alternative standards. But the technology created headaches for consumers who found they couldn’t keep their phones when they switched from Verizon to a network like T-Mobile’s, which ran on GSM.
While the American approach allowed for more technological experimentation and innovation, a fragmented market based on competing standards made it more challenging for U.S. wireless equipment sellers to amass a large customer base.
Today, Nokia and Ericsson are the top providers of telecommunications networking gear in North America and are No. 2 and No. 3, respectively, in the world. The two companies each recorded revenue of about $25 billion last year.
But both have been surpassed by Huawei, which in the span of three decades has become the world’s largest provider of telecom equipment.
“I do think the Western companies did underestimate how credible Huawei was,” said Paul de Sa, a telecom industry analyst and co-founder of the advisory firm Quadra Partners. “There were executives who basically laughed [at the idea] that Huawei or ZTE could compete.”
Founded in the late 1980s by Ren Zhengfei, a former engineer for the Chinese military, Huawei began as a technology supplier for Chinese customers. But by the early 2000s, Huawei had begun selling globally, and now does a robust business not only in network equipment but also in consumer smartphones and enterprise services. Last month, the privately held company reported that it had finished 2018 with revenue of $107 billion, up 20 percent despite the U.S. campaign. Profits rose 25 percent, the company said, to $8.8 billion.
To give another perspective on Huawei’s enormous influence, the company’s chief rivals, Nokia and Ericsson, account for 17 percent and 13 percent of the global market for telecom equipment, respectively, according to figures compiled by the research firm Dell’Oro Group.
Huawei’s market share, at 29 percent, is nearly as large as both of them combined.
Despite an early reputation for cheap knockoff hardware, Huawei today is recognized for low prices, reliable equipment and engaging customer service, analysts say. As Huawei has invested in its own research and development, even Western telecom companies acknowledge that Huawei’s products are as good as — if not better than — competing equipment from Nokia or Ericsson.
“About 25 percent of our members have Huawei or ZTE” in their networks, Carri Bennet, an attorney for the Washington-based Rural Wireless Association, told lawmakers at a recent House Judiciary subcommittee hearing.
Gordon Smith, the chief executive of Sagent, a network intelligence and analytics company formerly known as Clover Telecom, estimated that Huawei gear typically costs “tens of percents” less than the competition’s.
With the support of China’s state-owned development bank, Huawei also has been able to undercut competitors with attractive financing for its products. In February alone, Huawei announced partnerships with wireless carriers in eight countries, including Iceland, Switzerland, Saudi Arabia and Turkey.
It doesn’t hurt that Huawei serves a massive domestic market in China, which grants it tremendous advantages of scale that many tech companies, including American ones, are hungry to access themselves. China is so critical to Apple, for example, that the iPhone maker blamed the country’s economic slowdown for a downward revision in Apple’s recent quarterly sales estimates — the company’s first such warning in 15 years.
Huawei’s success, however, has been clouded by allegations of intellectual property theft.
The U.S. government accused two Huawei units this year of trying to copy a robotic arm used by T-Mobile to test smartphones. (Huawei has pleaded not guilty.) In the past, Huawei has also been accused of stealing technology from Cisco; the two firms became locked in a legal dispute in 2003 and settled months later, after Huawei conceded that Cisco-made code had ended up in a Huawei product. The code was later removed.
Then there is Nortel Networks’ discovery in 2004 that hackers — traced to IP addresses in Shanghai — had stolen nearly 1,500 sensitive files from the Canadian telecom giant’s computer systems. The company’s subsequent investigation failed to prove China’s direct involvement, much less Huawei’s. But after analyzing the stolen files — which bore cryptic names such as “Photonic Crystals and Large Scale Integration,” “Eco_Strategy.ppt” and “HDX R2 Standard Reconfigurations Test Plan - Draft 0.2″ — and a months-long probe, Nortel’s security adviser at the time, Brian Shields, became convinced Huawei benefited indirectly from the breach. The file names, a list of which Shields provided to The Washington Post, have not been previously reported.
“Nobody would be interested in these kinds of documents other than a competitor,” Shields said. “In my opinion, looking at what the hackers went after, it is likely these documents made it to Huawei.”
That seemingly ancient history is newly relevant, as U.S. officials argue that incorporating Huawei gear into U.S. carriers’ 5G networks poses a significant spying risk.
At an industry conference in Barcelona in February, U.S. officials urged allies in bilateral meetings not to use Huawei equipment over concerns that it could enable eavesdropping by authoritarian regimes. U.S. partners largely acknowledge the risk but have asked for more concrete evidence to back up the case.
“The Europeans really keep pushing for this concept of, ‘Where’s the smoking gun?’ ” said a person familiar with the discussions, who spoke on the condition of anonymity to speak more freely about the closed-door meetings. “They say, ‘Hey, we don’t want security threats either ... but you can’t just come in here and tell us that there is a unity of interest between Beijing and Huawei and have that be the end of your presentation.’ ”
Some analysts say that in a previous era, America’s allies might have been more sympathetic to the Trump administration’s message. But Trump’s conduct, they say — berating NATO allies, canceling a visit to a World War I memorial because of rain, calling Europe a “foe” on trade — has not helped.
“In a world where the U.S. had more soft power,” Entner said, “I’m pretty sure the Europeans would be a lot more receptive.”