China Macro Reporter
1. 5G: 'The U.S. is winning a race that no one else is running'

<table class="nl_card" id="19apr2401"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe class="embed-responsive-item" src=""></iframe></td></tr></tbody></table><p class="caption"><em>[Fareed Zakaria does a great job of illustrating the 5G issues in a <a href="" target="_blank">3m 27s video</a>]</em></p><p class="excerpt">The Trump administration is betting on the wrong technology.</p></td></tr><tr><td class="nl-post"><p><strong>Which new technology wins</strong> in the marketplace - whether mobile phones or video players or 5G - depends on which standard most of the world adopts.</p><p><strong>So, will the U.S. or China</strong> win the 5G race?</p><ul><li><strong>Only one metric</strong> really counts: choice of 'spectrum' - which 5G standard will become the global standard ?</li></ul><p><strong>‘The question of spectrum allocation</strong> is at the heart of the 5G competition, for the spectrum band of choice, whether sub-6 or mmWave, impacts nearly every other aspect of 5G development,’ says a recent <a href="" target="_blank">report</a> from the <a href="" target="_blank">Defense Innovation Board,</a> an advisory committee to the Department of Defense.</p><ul><li><strong>China</strong> and most of the world plan to use 'sub-6.'</li><li><strong>Right now</strong> the U.S. plans to use 'mmWave' (in part because the Department of Defense controls sub-6 and is reluctant to give up any of it).</li></ul><p><strong>'The United States</strong> may choose to continue down the path of mmWave, but the rest of the world is focused on building out sub-6 infrastructure, with China in the lead,' says the report.</p><ul><li><strong>‘U.S. carriers</strong> may continue to pursue mmWave, but it is impossible to lead in the 5G field without followers.’</li></ul><ul><li><strong>‘Leadership</strong> in wireless networks requires the global market to subscribe to and build to the specifications of the leader’s spectrum bands of choice.’</li><li><strong>‘The rest of the world</strong> does not face the same sub-6 spectrum limitations as U.S. carriers [that is, sub-6 dominated by the DoD], and is subsequently pursuing 5G development in that range [sub-6].’</li></ul><p><strong>‘China plans to deploy</strong> the first widespread 5G network, with its first set of sub-6 services becoming available in 2020.’</p><ul><li><strong>‘First-mover advantage</strong> will likely drive significant increases in their handset and telecom equipment vendors market along with their domestic semiconductor and system suppliers.'</li><li><strong>'As a result,</strong> Chinese internet companies will be well-positioned to develop services and applications for their home market that take advantage of 5G speed and low latency.’</li><li><strong>‘As 5G is deployed</strong> across the globe in similar bands of spectrum, China’s handset and internet applications and services are likely to become dominant, even if they are excluded from the US.’</li><li><strong>'China is on a track</strong> to repeat in 5G what happened with the United States in 4G.'</li></ul><p><strong>'The United States</strong> may choose to continue down the path of mmWave, but the rest of the world is focused on building out sub-6 infrastructure, with China in the lead.'</p><p><strong>Also mmWave</strong> isn't as good as sub-6.</p><ul><li><strong>‘When President Trump</strong> unveiled his administration’s plan for “winning the race” to 5G earlier this month [<a href="" target="_blank">watch his comments here</a>], he neglected to mention that the United States is building its network using a technology that’s inferior to what the rest of the planet will likely adopt,' <a href="" target="_blank">says Josh Rogin</a> in the Washington Post.</li><li><strong>For the U.S.,</strong> ‘It’s akin to building a Betamax system in a VHS world.'</li></ul><p><strong>‘Only in passing</strong> was it mentioned that Trump’s plan commits the United States to build out 5G infrastructure on a high-band spectrum swath known as “mmWave” (between 24 and 300 gigahertz), which is inferior in range and penetration capability to the “sub-6” (below 6 gigahertz) spectrum being used for 5G by most other countries, especially China.'</p><ul><li><strong>‘“So we are winning</strong> a race that no one else is running to build a 5G ecosystem that no one else will use” is how one administration official put it to me.’</li></ul><p><strong>‘“As sub-6 becomes the global standard,</strong> it is likely that China, the current leader in that space, will lead the charge,” states a <a href="" target="_blank">report</a> issued this month by the Defense Innovation Board,’ an advisory committee to the Department of Defense.'</p><ul><li><strong>‘That means foreign companies</strong> — especially from China — could dominate 5G business worldwide.’</li><li><strong>'That would allow others</strong> to set international standards and could turn the United States into an island of relatively bad 5G service surrounded by a sea of better technology.’</li></ul></td></tr></tbody></table>

2. Department of Defense: The obstacle to U.S. winning 5G

<table class="nl_card" id="19apr2402"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="pdf-container"><iframe src=";embedded=true" style="width:100%; height:500px;border:none;"></iframe></td></tr></tbody></table><p class="caption"><a href="" target="_blank">open in a new window</a></p></td></tr><tr><td class="nl-post"><p><a href="" target="_blank"><strong>The Defense Innovation Board</strong></a> is an advisory committee to the U.S. Department of Defense (DoD).</p><ul><li><strong>Its 33-page report</strong><a href="" target="_blank"> 'The 5G Ecosystem: Risks & Opportunities for DoD,'</a> analyzes why the U.S.'s adoption of the mmWave 5G standard instead of the sub-6 standard adopted by China and most of the world will doom U.S. chances of dominating the 5G market.</li><li><strong>The main reason</strong> why the U.S. has not adopted sub-6 is that it is controlled primarily by DoD.</li><li><strong>And, DoD</strong> has legitimate reasons and concerns for not opening sub-6 to commercial use.</li><li><strong>Those reasons and concerns</strong> notwithstanding the Board recommends a radical reversal of DoD and White House stances.</li><li><strong>Below are excerpts</strong> from the relevant Board recommendations.</li></ul><p><strong>But, first here</strong> is how the Board lays out the problem.</p><p><strong>‘An additional challenge</strong> in the United States is that the government owns large portions of the sub-6 spectrum and limits commercial access to them.’</p><ul><li><strong>'It is possible</strong> to relocate Federal users or share these bandwidths to allow commercial sector to develop 5G capabilities on them, but both of these processes are time-intensive.’</li><li><strong>‘The average time</strong> it takes to “clear” spectrum (relocate existing users and systems to other parts of the spectrum) and then release it to the civil sector, either through auction, direct assignment, or other methods, is typically upwards of ~10 years.’</li><li><strong>‘Sharing spectrum</strong> is a slightly faster process because it doesn’t require a complete upheaval of existing federal users, but even that has historically taken upwards of five years.’</li></ul><hr><h2>‘Board Recommendations’</h2><p><strong>‘The Defense Innovation Board</strong> bases its recommendations on the assumption that mmWave fundamentally cannot be deployed on a large scale in the United States because of the propagation and cost limitations, and that sub-6 GHz mid-band spectrum (in the 3 and 4 GHz range) will become the global standard for broad area networks in coming years.’</p><p><strong>'Recommendation #1</strong><em>(excerpts)</em><br><em>'DoD needs to make a plan for sharing sub-6 GHz spectrum to shape the future 5G ecosystem, including an assessment of how much and which bandwidths need to be shared, within what timeframe, and how that sharing will impact DoD systems.'</em></p><ul><li><strong>'DoD and the FCC</strong> must flip their prioritization from mmWave to sub-6 GHz spectrum for 5G. DoD and FCC have been prioritizing the 28 and 37 GHz bandwidths as options for 5G development, but this effort is misplaced. This study has covered the broad range of limitations associated with mmWave, and reasons why the rest of the world will adopt a sub-6 GHz 5G ecosystem.'</li><li><strong>'DoD should particularly focus</strong> on the bands of the sub-6 GHz spectrum that are already being used by China. Chinese 5G systems and infrastructure operate in the 3.2-3.6 GHz range, as well as the 4.8-5.0 GHz range. As a result, the commercial world has developed semiconductors and handsets that are configured for that range.'</li><li><strong>'Without aggressive action</strong> as outlined in this report, we believe there is a high likelihood that the United States will be unable to convince the rest of the world to adopt mmWave technologies as the standard 5G pathway. This may bifurcate the global market and result in the majority of the world adopting 5G sub-6 technologies, which will be dominated by the Chinese equipment and handset manufacturers.'</li></ul></td></tr></tbody></table>

3. China in the report

<table class="nl_card" id="19apr2403"><tbody><tr><td class="nl-post"><p><strong>Here is the China section</strong> of '<a href="" target="_blank">The 5G Ecosystem: Risks & Opportunities for DoD'</a> by the <a href="" target="_blank">Defense Innovation Board,</a> an advisory committee to the Department of Defense.</p><p><strong>‘China has taken the lead</strong> in 5G development through a series of aggressive investment and<br>spectrum-allocation initiatives.’</p><ul><li><strong>‘In addition</strong> to investing $180B in capital expenditure for 5G deployment over five years, China assigned 200 MHz of mid-band spectrum to its three state providers and is considering reallocating 500 MHz of C band spectrum as well.’</li></ul><p><strong>‘Domestically, China’s 5G deployment</strong> is being implemented through its major telecommunications companies (China Mobile, China Unicom, and China Telecom).’</p><ul><li><strong>‘All three are primarily focused</strong> on developing a standalone 5G network in China, with plans to deploy pre commercial application in 2019 and formal commercial application in 2020.’ ‘China now has ~350,000 5G-operable base stations deployed, which is nearly 10 times as many as are deployed in the United States.’</li></ul><p><strong>‘Globally, China’s large manufacturers</strong> (Huawei and ZTE) are pushing 5G deployment through commercial sales of 5G-enabling equipment and devices primarily for non-standalone networks, and Huawei has already shipped upwards of 10,000 base stations overseas.’</p><ul><li><strong>‘Overseas,</strong> China has been developing partnerships with countries and foreign companies to expand its 5G influence.’</li><li><strong>‘In Europe</strong>, Huawei and ZTE are offering their services to build individual countries’ 5G networks, and have signed multiple 5G contracts despite pressure from U.S. officials demanding that allies block Chinese companies.’</li></ul><p><strong>‘Additionally,</strong> China has invested significant time and resources into its Belt and Road Initiative, including a push for Chinese-built network infrastructure to provide connectivity across the length of the route.’</p><ul><li><strong>‘This strategy</strong> has already had some success: in Q3 of 2018, Huawei held 28% share of the global telecommunications equipment market, up four percentage points from 2015.’</li><li><strong>‘Huawei</strong> is expected to continue growing that share as more 5G networks are rolled out relying on Chinese telecommunications equipment.’</li><li><strong>‘These efforts</strong> will allow China to promote its preferred standards and specifications for 5G networks and will shape the global 5G product market going forward.’</li></ul><p><strong>‘In aggregate,</strong> these approaches have given competitive advantage to China in 5G technology and capability.’</p><ul><li><strong>‘China’s 5G strategy</strong> should be viewed in the context of the Chinese Communist Party’s (CCP) grand strategy.’</li><li><strong>‘Like artificial intelligence (AI)</strong>, 5G development is a crucial component of Xi Jinping’s “China Dream” vision and “Made in China 2025” roadmap.’</li><li><strong>‘Social stability and economic growth</strong> are the CCP’s top priorities because failures in those two areas are seen as direct existential threats to the regime, and 5G has the potential to transition China from a capital- and labor-intensive manufacturing economy to an innovation-led, consumption-driven economy with reduced dependence on foreign investment.’</li><li><strong>‘In light of China’s slowing growth</strong> and its ongoing trade war with the United States, the CCP likely feels pressured to pursue technological advancement initiatives like 5G more aggressively.’</li></ul></td></tr></tbody></table>