Strategic Assessment

The strategic competition between China and the United States that developed toward the end of the second decade of the 21^st century includes a struggle for control over the global technology market as a whole, and in particular, over the fifth generation (5G) communications infrastructures. These networks allow the transfer of data at a speed of 1 GB per second, ten times faster than the fourth generation (4G) networks, and their importance lies in the fact that they enable advanced technologies that service fields such as artificial intelligence (AI) and big data to operate at high speeds. Control of communications infrastructures is a strategic asset with an impact on governments, technology companies, industries, and people, since it gives control over the flow and storage of information and its use in commercial, security, and strategic activity. Both the United States and China strive to be the power that defines the international standards and controls future access to communications networks.

The strategic competition between China and the United States that developed toward the end of the second decade of the 21^st century includes a struggle for control over the global technology market as a whole, and in particular, over the fifth generation (5G) communications infrastructures.

In 2021 there were four principal companies engaged in building 5G infrastructures: two Chinese—Huawei and ZTE, and two European—Ericsson and Nokia. Thus far the United States has not developed a local manufacturer of 5G infrastructures, rather, support companies such as Intel and Qualcomm, which are engaged, inter alia, in the production of the chips that are essential for 5G infrastructure. It therefore relies on the European companies to build its 5G networks. The surprising absence of the United States from this field is attributed to its perception that the monopoly on chip production held by Qualcomm and Intel (both American companies) is sufficient to ensure control of the whole system. Or perhaps, it simply “fell asleep at the wheel,” unlike China, which several times has declared its ambition to be the world leader in the new infrastructures. Ultimately Beijing aims to realize its national vision, Made in China 2025, which is designed to advance its economy and industry so that China can become independent of other countries in all aspects of developing and manufacturing advanced technologies. In November 2019, China launched its 5G networks, the second country in the world to do so, after South Korea. In August 2020 the city of Shenzhen in southern China announced 5G full coverage, and in September 2020 it was followed by the capital, Beijing.

The Rise of Chinese Communications Companies

With the implementation of the economic reforms initiated at the end of the 1970s by then-Chinese leader Deng Xiaoping, the Chinese government began trying to upgrade, and in many cases, rebuild its aging communications infrastructures. In the mid-1980s two telecom companies were set up in the new city of Shenzhen, ZTE and Huawei, and they eventually became technological powerhouses in China and beyond.

ZTE

In February 1985, a small company called Zhongxing Semiconductor Co. Ltd. was established in Shenzhen as a joint venture of a number of companies under the Ministry of Aerospace Industry. The name Zhongxing is a compound word meaning “China will prosper.” Among the constituents of the new company was Factory No. 691 of the Ministry of Aerospace Industry, whose technology faculty was headed by engineer Hou Weigui, who also founded the company. In its early years, it served as a front company that was intended in part to send disguised representatives abroad with the aim of gathering technological information on matters of aviation and space, until the Ministry was closed in 1988. In March 1993 the company changed its business model to combined government-private ownership, and also changed its name to Zhongxing New Telecommunications Equipment Co., Ltd or ZTE, and began to engage in the development and manufacture of telecom equipment.

In 1997 the company was issued on the Shenzhen Stock Exchange and in 2004 it was also issued on the Hong Kong Stock Exchange, with two of the main controlling owners two state-owned defense corporations, CASC and CASIC. Today ZTE is engaged in the fields of networks, terminals, and telecommunications, and in recent years it has also entered the fields of artificial intelligence, data security, smart cities, and big data, and yielded impressive revenues (Figure 1). ZTE has many subsidiaries, including some that operate in the United States, Indonesia, Malaysia, Pakistan, Thailand, Mexico, Brazil, India, and Romania.

Figure 1. ZTE Corporate Revenues, 2010-2020, in billions of yuan

Huawei

In 1983 Ren Zhengfei retired from the Chinese military after 11 years of service as an engineer, when it was decided to close his unit. Four years later he founded a small startup in the field of electronics and switches. Ren chose the name Huawei for the small company, which was taken from a slogan he saw written on a wall: Zhōnghuá yǒuwéi (“China has promise”). At first, the young company focused on local research and development of switches and telephone switchboard technologies by means of reverse engineering of foreign technologies. At the time, China’s communications technologies were based on foreign imports, and Ren hoped to set up a local company to compete with the foreign technologies by developing local alternatives.

By the early 1990s Huawei had already come to the notice of the government leaders in Beijing with its development of a locally produced digital telephone, and in 1994 Ren met with then-Chinese President Jiang Zemin. After establishing itself at the local level, in 1996 the company signed its first contract with the Hutchison-Whampoa corporation from Hong Kong, and for the first time entered the African and Southeast Asian markets. In 2000, Huawei passed an important milestone when its overseas profits crossed the $100 million threshold. In 2004, Huawei entered the European market with a contract to supply 3G infrastructures for the Dutch provider Telfort. In 2012 Huawei recorded a further achievement when it overtook Ericsson and became the world’s largest manufacturer of communications equipment.

By 2021, Huawei had become a huge corporation with some 197,000 employees in over a hundred subsidiaries and support units, operating in 170 countries. Its subsidiaries are engaged in a wide variety of areas, ranging from mobile phones (Huawei Device Co.), chips (HiSilicon), and even a hotels management company agency (Shenzhen Smartcom Business Co., Ltd.), to import and export of food products (Shanghai Mossel Trade Co.). In recent years the corporation has been a source of local pride and a symbol of technological advance and innovation in China, and graduates from China’s top universities flock to work in its services. By 2018, the corporation had registered 87,805 patents worldwide, and 2020 closed with sales revenues of some 891.4 billion yuan (Figure 2). Moreover, Huawei’s investment in R&D in 2020 totaled about 141.9 billion yuan.

Figure 2. Huawei Revenues, 2010-2020, in billions of yuan

Huawei’s influence is evident throughout the world. For example, as part of its efforts to enter the British market, in December 2019 it launched an innovation center in London to promote 5G technological cooperation with British companies, along with a financial plan of about 20 million GBP to support programmers in Britain and Ireland to develop applications for it, and in September 2020 it opened an innovation center in Belgrade for 5G applications. A study from May 2021 found that Huawei had concluded at least 70 deals with 41 countries for its cloud services, including the establishment of cloud development centers in Chile and Brazil. In addition, Huawei has set up technology academies in a number of developing countries. For example, in 2017 it launched a student training program in an Angolan university, and in 2020 it signed a memorandum of understandings with the Angolan government to build a technology park in the capital for about $60 million, including training centers for technological professions. In October 2019, a Huawei technological academy for student training was launched in Jordan, in partnership with the Jordanian BAU University, and a similar academy is expected to be set up in Egypt. Since 2015, Huawei has also sponsored a number of sports teams, such as Panama’s national football team.

The American Struggle against Chinese Communications Companies

Huawei and ZTE came to the notice of the United States administration when they began to compete with American companies for the supply of routers. In January 2003, the US company Cisco accused Huawei of stealing the intellectual property of its switch and router technologies. In 2005 RAND, in collaboration with the US Air Force, published a study that examined possible threats from Chinese security companies, including Chinese communications companies. In 2007, according to an article in the New York Times, based on documents leaked by Edward Snowden, the US National Security Agency embarked on a cyber campaign dubbed “Shotgiant,” with the aim, inter alia, of examining the links between Huawei and the Chinese security establishment. In this framework, the NSA hacked into servers at the corporation headquarters. In 2008, after pressure from American lawmakers, the US administration blocked Huawei from acquiring 3Com for reasons of national security. In October 2012, the US Senate Intelligence Committee called on American companies not to do business with ZTE and Huawei out of fears that their equipment could be used to gather information.

The United States, which has not developed its own 5G infrastructure, understood that China, as a rising superpower, was poised to take control of this future technology, and perhaps thereby damage US global influence. In January 2017, when Donald Trump entered the White House, the administration began to take stronger measures against the Chinese communications companies. In March 2017, the administration accused ZTE of trading with North Korea and Iran by means of illegal shipments of products and technology, thereby breaching the American sanctions. In April 2018, at the end of lengthy negotiations, ZTE suffered a severe economic blow when the US Commerce Department banned American companies from selling it components for the next seven years, and also forced it to pay monetary penalties, dismiss a number of senior employees, and agree to a mechanism for supervision of its activity within the United States. The sanctions were a heavy burden for ZTE, which relied on essential components made in the US, and since then it has lowered its media profile to focus on economic and image rehabilitation. In August 2018, the Trump administration increased the restrictions on the Chinese communications companies when it banned Federal employees from using Chinese made mobile devices.

Another significant incident in the US struggle against China occurred in December 2018 with the arrest in Canada of Meng Wanzhou, the eldest daughter of Huawei’s founder, and the corporation’s Chief Financial Officer. Her arrest, which arose from an American request for her extradition on a charge of breaching the sanctions on Iran, was a personal insult to the leaders in Beijing, partly because of the importance of the Huawei Corporation and the family’s status among the economic and party elite. After a few days during which the Chinese tried, without success, to work on a diplomatic level for her release, two Canadian citizens were detained in China and later charged with espionage. Despite formal denials, the timing of the arrests of the Canadians indicates that they were intended to serve as a bargaining chip to secure Meng’s release.

The United States, which has not developed its own 5G infrastructure, understood that China, as a rising superpower, was poised to take control of this future technology, and perhaps thereby damage US global influence.

In May 2019 the US Commerce Department blacklisted Huawei, whereby American companies are forbidden to supply goods and services without a special government permit. Subsequently, dozens of American and other companies, such as Google, Vodafone, and Panasonic, announced that they had frozen or limited their cooperation with Huawei, and would stop supplying them with hardware and software components. In May 2020, the United States announced further export restrictions intended to prevent American chip manufacturers from supplying Huawei. These restrictions led Huawei to look for alternatives and to increase its investments in European Union countries and Russia. In September 2020, Huawei stopped production of the Kirin chips that drive most of its devices, because the process required American technology. At the same time, it was announced that the chip manufacturer Qualcomm asked the administration to ease some of the restrictions imposed on Huawei, so that it could sell its Snapdragon chips for use in Huawei devices. 

In August 2020 the US State Department announced the launch of the Clean Network program, which was a broader reincarnation of the Clean Path initiative launched four months earlier. This was part of the attempt to form a technological coalition of countries that agreed on the need to secure their communications infrastructures, including future technologies, “by relying on only trusted vendors who are not subject to unjust or extra-judicial control by authoritarian governments, such as the Chinese Communist Party.” The program was intended to prevent China from gaining control of future communications networks and to protect the individual and business data of US citizens from serving the interests of the CCP. The broader initiative included six areas that banned the participation of Chinese companies: communication networks, communications providers, app stores, apps, cloud storage, and underwater cables. The announcement ends with a call to allies of the United States to join the initiative, which by the end of 2020 included over 50 countries with “clean” communication networks, among them Britain, Vietnam, Taiwan, Japan, the Czech Republic, France, Canada, Switzerland, and Israel. All are defined as Western states, or alternatively, as states with tensions with China. Later that month, the US Commerce Department added 38 Huawei affiliates from 21 countries engaged in cloud computing activity to the black list, including the Israeli company Toga Networks.

 Figure 3: Main events in the US struggle against Chinese Communications Companies

Allegations against the Chinese Communications Companies

One of the allegations against Huawei is that it is a government entity. At a press conference in April 2019 to answer this charge, Jiang Xisheng, a senior Huawei official, claimed that the corporation was owned by its employees’ union, with no government involvement. According to official documents, Huawei Corporation is subordinate to Huawei Investment & Holding Ltd., which is controlled by two shareholders: company founder Ren Zhengfei and another entity called the Employees’ Union of Huawei Investment & Holding. This union is registered under Shenzhen Municipal Union, the city where the corporate HQ is located. The Shenzhen Municipal Union is apparently subordinate, in one way or another, to municipal and national establishment entities. According to Jiang, the Municipal Union does not influence the Employees’ Union except in connection with employees’ social and cultural activities, but his contrived arguments have so far failed to convince Western experts. 

The most common argument heard among Western elements is that the Chinese companies —both government and private—are required to help the Communist Party and the various government ministries by virtue of Chinese laws. For example, Section 7 of the National Intelligence Law (2017) stipulates that “every organization or citizen shall support, assist, and cooperate with state intelligence work in accordance with the law”; and Section 28 of the National Cyber Law (2017) requires network operators “to provide technical support and assistance to public security organs and national security organs that are safeguarding national security and investigating criminal activities in accordance with the law.”

To date, the West has not issued cast-iron proof of the allegations regarding back doors into Huawei and ZTE equipment through which the Chinese government can collect information. Periodic reports from the Huawei Cyber Security Evaluation Centre, which was set up under the British Government Communications Headquarters (GCHQ) and assesses the standard of data security of Huawei’s telecoms infrastructures and broadband, have not provided unequivocal public evidence of attempts by the Chinese regime to conduct espionage through Huawei equipment. However, they have raised a number of problems with the engineering processes of the Chinese corporation, over which they claim there is a lack of “satisfactory control of the security of third party components.”

Conclusion

The American struggle against China and the Chinese communications companies showed China the extent to which local companies were dependent on foreign technology. The Chinese companies were hurt and forced to deal with American restrictions, and China had no choice but to try to promote its own alternatives to the foreign technologies. Thus just as China, until the 1980s, relied on aging communications technologies and with a slow, methodical process managed to leverage itself to become a global power in the field of communications, presumably it will also be able to develop suitable alternatives that can stand up to their competitors in the West. In October 2020, during the fifth plenary session of the Chinese Communist Party’s Central Committee, China declared that it would have to rely on itself with regard to technologies. And indeed, in November 2020 it was reported that Huawei had begun work on setting up a factory to manufacture chips for telecoms infrastructures, which would not be based on American technology. In May 2021 there were reports that in an internal memo to his employees, Ren Zhengfei entreated them to focus on software products and adopt an “open code” approach. 

So far President Biden has not referred to the Clean Network program, which was a significant element in the American struggle against China in the Trump era. Perhaps this program in its original format will be archived, and replaced with a new and less forceful outline vis-à-vis Beijing. However, the technological rivalry between the United States and China is not expected to disappear from the global agenda, and will likely continue for as long as China grows stronger, with technological achievements that America claims are damaging to its hegemony and intellectual property. Therefore, Israel is advised to identify the next areas of technological friction between the two powers in order to manage the risks that elements in Washington might delineate, bringing with them future demands from its allies for restrictions. 

Indeed, there are several areas of telecommunications that Israel must address. For example, Huawei is active in the field of providing construction and maintenance services for the undersea cables it manufactures through its subsidiary Huawei Marine Networks (which in 2019-2020 as a result of American sanctions was rebranded as HTM Tech, with most of its control transferred to the Chinese telecoms corporation Hengtong). So for example it laid an undersea cable from Brazil to Cameroon, but Western intelligence sources warned that China could lay back door cables and even monitor their activity with submarines. Four times between March 2008 and August 2012, the subsidiary also upgraded the MedNautilus undersea cables of the Italian company Med One, which connect Israel’s coast to Europe. 

Israel is advised to identify the next areas of technological friction between the two powers in order to manage the risks that elements in Washington might delineate, bringing with them future demands from its allies for restrictions.

Another issue concerns satellite communications. A report from US National Intelligence in April 2021 states that “Beijing is working to match or exceed US capabilities in space to gain the military, economic, and prestige benefits that Washington has accrued from space leadership.” The report mentions satellite communications as one area that could be used against the US army. In October 2019, it was announced that Gilat Networks had supplied advanced satellite communications services for mobile and static air, land, and sea applications to China Satcom, a Chinese public corporation largely controlled by the defense corporation CASC.

In addition, and like the United States, China is already hard at work on developing sixth generation (6G) communications networks, advanced infrastructures that will be able to transfer data at speeds of 1 terabyte per second and are expected to reach maturity toward 2030. They are expected to be the next focus of friction between the two powers. In October 2020, Next G Alliance, a private initiative of leading Western technology companies and work groups in that framework had already begun to prepare for promoting the standardization of the new generation. Israel must prepare a national policy on this subject and examine how to incentivize Israel companies to join the race. The Chief Scientist in the Ministry of Science and Technology, and Research and Development of Weapons and Technological Infrastructure in the Ministry of Defense must promote a mechanism for advancing local R&D on 6G applications, as well as other technologies based on communication and information, by integrating the efforts of the government, academic, and private sectors. The goal is to encourage blue and white technologies, position Israel’s relative advantage, and strengthen its political, security, technological, and economic connections all over the world.