China 5G Network – Focus shifts to Coverage from Scale

The Chinese Telecom think-tanks have changed their strategy over the last six months, mainly driven by increasing recognition as a result of China Mobile / Telecom / Unicom lobbying that the 5G ecosystem will take time to mature, and an escalating global tech war that has substantially reduced the size of global demand for Chinese telecom equipment.

There were two key objectives in China’s aggressive push of 5G buildout as under

  • Promote a 5G Industrial Revolution by complementing its initiatives of AI, cloud computing, big data and IoTs
  • Nurture a globally competitive domestic supply chain of 5G equipment, led by Huawei and ZTE, to garner even bigger global market shares in telecom, which will also pave the way for China’s rising influence in future wireless standards such as 6G

COVID-19 led Global Geo-Political backlash against China
The second objective would naturally push China to have large-scale 5G buildout at home in order to help scale up the domestic supply chain. However, owing to escalating geopolitical tensions, more and more developed market countries will ban the use of Chinese telecom equipment. That has made the second objective much harder to achieve.

How China’s 5G Ambitions were Halted by US Executive Order ?
US imposed a export ban and Direct Product Rule (DPR) which has effectively cut off the supply of chipsets to Huawei. The March 2020 order requires any semi fabs around the world that use US technology (defined as US equipment, knowhow and/or software) to produce HiSilicon designed chipsets for Huawei to obtain a US export license before being allowed to ship them to Huawei. That has effectively shut down HiSilicon’s chipset design business. Since Huawei’s 5G BTS is based 100% on HiSilicon designed baseband chipsets, the March version of the DPR has already paralyzed Huawei’s 5G base station business

Progression of Chinese indigenous Telcos led R&D
In the Chinese Ministry of Communications, Telcos’ (China Mobile, Telecom & Unicom) arguments have become more credible, since they have a high level of understanding of the 5G tech based on extensive R&D work they have done at 3GPP. In previous generations of cellular technology, the say in roadmap and buildout plans were largely dominated by the equipment vendors. 5G is also the first time that China was to be the first country to build out a brand new cellular technology in large scale. That has never been the case with earlier wireless cores of 4G (2014), 3G (2008 – although CM’s buildout based on TD-SCDMA is the worlds’ first but also the world’s only one) and 2G (GSM and CDMA – late 1990s).

Huawei has enough component inventories to produce another 700K 5G BTSes. We estimate they will deliver roughly 300K 5G BTSes to the Chinese telcos (from May 2020) and 50K overseas. That means it will have another 350K capacity for 2021. Assuming it will not deliver to overseas customers in 2021 any more, all those 350K 5G BTSes would be what the Chinese telcos can buy from Huawei next year.

For ZTE to triple its capacity (if the objective is for China to keep building 1m BTSes a year), it will take time and comes at significant risk. Finally, the ZTE being subject to US sanctions is not low given the rapidly rising geopolitical tension. If ZTE increases its component procurement in the US by 2x to 3x, we are worried it would attract political attention since the US would see ZTE as potentially another Huawei in the making. In such a situation, China has no other way but to keep its fingers crossed, wait & watch.