US government officials, including presidential economic advisor Larry Kudlow and Attorney General William Barr, expressed alarm recently over Huawei’s dominance of 5G technology, which promises to give its customers – in China and globally – a decisive edge in a wide range of new technologies.
In order to compete, new technologies are being proposed by companies such as Microsoft, Dell others based on new software and cloud-computing services. The idea is that these “virtual” networks will free carriers from using proprietary hardware from equipment vendors, making the new software the key enabler of 5G services.
The current predicament, in which the US lacks leading telecoms equipment providers, arose from decisions made in the 1980s. And even if implemented, the proposed virtual network solution will not be enough to eliminate the current telecom shortfall. Given the complexity and reach of communications technologies, it takes a large, dedicated and well-funded organization to deliver competitive products.
The success of Huawei as a national champion has been remarkable, but its success should not come as a surprise. Outstanding management and a national playbook previously followed by other economies guided the company’s development.
Founded in China in 1987, Huawei became not only the world’s largest telecoms equipment supplier but also a technology leader. The private company dominates the industry with annual revenues of $112 billion – several times those of its nearest competitors, Ericsson and Nokia, the last large non-Chinese equipment suppliers left after absorbing others that could not survive.
With the advent of modern electronic communications, governments of highly industrialized countries recognized that building and sustaining a growing and complex communications infrastructure was costly and required national standards. Hence, state support (open or indirect) was needed in addition to private capital.
As a result, national champions emerged including Nortel in Canada, NTT in Japan, Siemens in Germany, Alcatel in France, and Ericsson in Norway. In the US, the government allowed AT&T, a private but regulated monopoly, to control the domestic industry – from research and development through equipment production and service delivery. AT&T had the resources to both pioneer new technologies through Bell Labs and implement them all within one giant organization thanks to stable revenues and profits.
After World War II, with the world’s largest customer base, the US was the dominant communications technology center in the world and a leader in setting standards. Bell Labs pioneered many of the modern communications technologies including satellite and cellular services. Controlled customer service pricing provided the profits for investment in infrastructure and pure R&D.
Fast forward to the 1980s.
The Chinese government prioritized a new strategy of rapid industrialization and targeted communications. Initially, all equipment was imported. But state planners were committed to building a domestic telecoms product industry.
When Huawei was launched in 1987, it started by replicating foreign equipment but also invested billions of dollars in an ambitious product development program. The objective was to build a technology leader and global supplier. Huawei’s key strategy was to access the world’s best technology through hiring expertise overseas and developing relationships with technology leaders in chips and other components. (I had some personal experience on this matter: one of my portfolio companies became an early supplier of advanced networking chips to the company at a time when other equipment suppliers in the world thought the chips were too revolutionary.)
For the local equipment market in China, Huawei was given a preferred (but not unique) supplier position. China now has the most telecoms customers in the world and the company has grown quickly thanks to a booming domestic market. In addition to domestic dominance, it has established itself as the top global vendor of leading-edge products sold at relatively low prices. This was achieved by a policy of big investments in R&D in China and globally. Huawei recruited the most talented people and built a global innovation network with thousands of trained engineers. Huawei expanded overseas competing on product quality and price.
So what happened in the US during this period?
Bowing to pressure from increased domestic competition, the US government broke up the AT&T monopoly into independent companies in 1984. The newly independent equipment company (formerly Western Electric) was renamed Lucent but could not compete as an independent company and merged with Alcatel, which eventually merged with Nokia. Without the assured profits of the monopoly years, Bell Labs, which formerly employed thousands of talented technologists and scientists, stagnated, shrank and was eventually broken up.
In effect, the US lost most of its telecoms equipment industry. With the disappearance of a US domestic industry, new standards were not established by US companies and with the fading of Bell Labs, seminal research was no longer conducted in the US.
Going forward, the proposed virtual networks will require large investments in software development. It is safe to say there won’t be enough private capital available to build a credible technology. Government-sponsored programs will be needed on a massive scale.
Without an organization like Bell Labs, just assembling the required talent will be a big task. In the best-case scenario, such a program can be successful but it will take years of development and huge investments.
Meanwhile, Huawei’s 5G technology will continue to improve, surging ahead of competing products. China will complete its full 5G buildout in two or three years, long before an alternative comes online. With Chinese help, Europe’s network will also be in place at roughly the same time. Huawei will set global standards while the United States is still tinkering with a new system. Chinese and European companies will have the first-mover advantage in spinoff technologies. Even if funding is provided, the US will be playing catch-up.
The breakup of AT&T at the time was presented as a great idea to foster competition and promote innovations supposedly impeded by the AT&T monopoly. Such actions had unforeseen consequences that we are experiencing now.
If there is a serious interest, the best the US government can do to build new leading-edge capabilities is to focus its investment in research and development in partnership with companies such as Ericsson, Nokia and software leaders such as Microsoft that have excellent high-quality technology and marketing resources.
Dr. Henry Kressel is a technologist, inventor and long term Warburg Pincus private equity investor. Among his technological achievements is the pioneering of the modern semiconductor laser device that enables modern communications systems. He is co-author with Norman Winarsky of If you want to change the world: A guide to creating, building and sustaining breakthrough ventures (Harvard Business Review Press, 2015).