Protectionism or a national security concern?
In an era of de-globalization, political demarcation and limitation, it's easy to get overwhelmed by the nightly news and anxious about the future.
Dr. Sebastian Heilmann, Professor of Chinese political economy at Germany's University of Trier underscores the importance of finding common ground and closing the gap between continents, countries, cultures and technologies.
In an interview with RFID & Wireless IoT Global, Heilmann provided an overview of the current state of global relations. He also spoke on the RFID & Wireless IoT tomorrow 2019 on Oct 29th & 30th and offered insight on the choices that Europe and the rest of the world face as China exports its digital ecosystem.
Lüneburg near Hamburg, Germany
Current state of global relations
"We are in a situation that draws into doubt the reliability of open markets, of free trade, of the free flow of goods, investment and people as well... so it's really a very turbulent time for globalization as we know it and there's a tendency for, what I would call, de-globalization," said Heilmann. The escalating trade war between the United States and China exacerbates the tension and greatly impacts the world economy.
Heilman explains, "It's about a kind of closure of some parts of the market now. For the Europeans, who have taken open markets for granted to a large extent, this has come as a shock. It's clearly a major challenge to the German approach – that relies on open markets, transnational supply chains, and transnational manufacturing networks."
EU-China: a core axis of the world economy
According to Heilmann, EU-China relations remain strong.
"This is a major pillar of world trade, goods trade especially. There are a lot of industrial enterprises that rely on China as a market and many Chinese companies rely on the EU market – which is the largest statistically (including the UK), so it's really one of the core axes of the world economy. Many German companies: car companies, chemical companies, they rely on the profits that they're making in China. So the China market from a European perspective is clearly indispensable. It has to remain open and we have to intensify the partnership, so things have to go on in spite of all the political frictions."
Heilmann adds, "China needs an open western market, so the European market is indispensable for China too. If things go wrong with the US, then China will certainly court the European side. It's already happening now. I would expect that to be intensified in the next few years."
China's Belt and Road Initiative
Ample opportunities for partnerships exist, the largest of all being China's ambitious Belt and Road Initiative.
Heilmann describes the project, "What the Chinese have in mind is creating a Eurasian economic sphere, and integrating this large geography through new ways of connectivity: not just railroads and energy networks but also satellite and telecom systems. So it's really an integrated way of thinking to mobilize all that geographical space and to bring these huge economies of China, Central Asia, East Asia, and Europe closer. That would certainly unleash some growth and economic potential for all the societies in between Europe and China. That's the positive part of the vision. It's attractive to many Europeans."
He adds a note of caution as well. "It's a geopolitical project also. China wants to gain influence in the countries that are targeted by the Belt and Road project."
Deciding how to proceed with an appropriate mix of optimism and caution could lead to both increased trade and sound investment.
Huawei's stake in 5G network build-out
One particular Chinese company that has been involved in multiple Belt and Road developments is Huawei.
As the world's biggest technology supplier to communications service providers, Heilmann explains Huawei's significance, "Huawei is important because it's seen as the top-notch Chinese company that is pushing China's technological status. It really is a global company. Huawei already has 30-40 contracts with national governments to build up their 4G networks in emerging and developing countries. They are present in many markets and are collaborating with western companies also, so we must not underestimate them. They have 80,000 development engineers and are really powerfully organized. They are a company that has to be taken very seriously on the grounds of technology and R&D capacity."
Business as usual with Chinese characteristics
Despite the Trump administration's attempt to exclude Huawei from the 5G market, the Chinese juggernaut continues to thrive globally.
"They are really accelerating the development not just of the operating systems for their cell phones, but also AI chips. It's about new telecom equipment that doesn't rely on American or western suppliers anymore. So they are actually trying to build up, with the help of the Chinese government, an ecosystem of their own – including the apps, all the hardware and software, so this is something that might become a much more serious challenge to American predominance in these sectors because Huawei is already very established in many of these markets. They can build a 5G network. They have the components; they have the services; they are really an attractive business partner, " explains Heilmann.
Of course, the risk to reward ratio needs to be taken into consideration.
"The security risk clearly is there. It doesn't matter if there are 'backdoors' or not – we have no hard evidence of that so far – but clearly they have access to the networks. Huawei itself probably wouldn't spy on customers for the government but let's face it: if the state security department in China or the military comes and knocks at the door of Huawei... they will have to open the door. So it's not about their intentions, it's about the context in which they operate and that's bad for them. Distrust is justified because of the political context in which they have to work," cautions Heilmann.
Collaboration among the competition
Should a country opt to select a tech provider other than Huawei, competition surely exists.
"The Europeans are strong now, so Ericsson and Nokia are the telecoms equipment providers that can build 5G networks with the help of American components and components from all over the place. It's possible to do that," says Heilmann. He continues, "The problem is that Huawei is involved in the 3G and 4G networks everywhere, so the Huawei components are built into those established networks, and 5G will be built on top of those networks."
Shutting Huawei completely out is likely impossible now that networks are so far along.
Heilmann explains, "Practically, it's not doable if you want to build 5G networks in a decent time – within the next few years. That's what Ericsson executives warn against: if we exclude Huawei, 5G buildup will take much longer because we have to find replacements for all the components. People talk about keeping Huawei out of the core 5G network and letting them build the peripheral network components. That's probably the way the Europeans will pursue, as far as I see the policy-making, and the Americans won't be satisfied with that. Collaboration between Huawei, Ericsson, and Nokia will probably – for the Europeans – be the way to go, with Huawei kept out of the core net while many other countries will welcome Huawei. The worldwide networks that are being built up presently and in the recent past have been seriously penetrated by Huawei. They are already everywhere."
Protectionism or a national security concern?
Given Huawei's ubiquitous nature, the question of security must be addressed.
Heilmann has given it considerable thought, "Telecoms is a critical infrastructure, and those who can make trouble within the systems can be a security risk. So it's clear to me that where these critical infrastructures are concerned, we can't rely on companies from countries that might turn this into a strategic or policy advantage in the future. I don't see this as protectionism. I see it as justified national security goals that have to be defended. So that's something where the scrutiny of Huawei is certainly necessary and keeping them out of the core network is sensible."
A shift in the setting of standards
China has focused its attention on one additional area that has traditionally been a western-led activity: the setting of standards.
"Westerners dominated the tech market, the IT market, the standards setting... but what we are facing now is that China is becoming very active in all those standards-setting bodies in the international realm of technology: that applies to 5G, quantum computing, ultra-high voltage long distance power grids, etc," explains Heilmann.
"Traditional western technology leaders have to come to grips with the situation where a new, very large and dynamic competitor is pulling some strings and claiming some major stakes in these new digital economies. China will try to set standards, for example e-commerce standards in markets where they are predominant. They will bring their standards of payment systems: entire business models with an ecosystem and platform enterprise. I would certainly expect, for example Amazon to be at loggerheads with Alibaba in several markets in the near future. Technological standard-setting as a policy priority tends to be underrated by many western policy makers even though this new digital economy needs new, shared standards... and the Chinese understand that. They are sending delegations with 24 people to 5G deliberations in the respective standards-setting body and western governments send one or two experts. Sometimes in the Chinese delegation, the Vice Premier is even taking part! It's really their top priority. It's not technical stuff to them. The setting of tech standards is creating markets for companies in the future, so if you take an active part... that is concrete, economic potential for your companies and business models."
United? Policy towards China puts pressure on Europe
In an effort to ensure that everyone benefits simultaneously, collaboration really is key.
"I believe the Europeans will try to come up with a new strategic perspective on how to interact with China. This will probably be driven forward by the pressures from the US and China. In a way, the EU is in the crossfire of those large rivaling states and economies now and the EU will have to find a new, more robust footing in all these dealings. I'd expect that to take shape in the next few years. There are many other wild cards in the EU (domestic polarization and other upheavals), but the pressure is there that might be conducive to forming a more united European position in the near future," concludes Heilmann.
Dr. Sebastian Heilmann
Dr. Heilmann is Professor for Government and the Political Economy of China at the University of Trier near Luxembourg, and one of the most internationally renowned European experts on contemporary China. From 2013 to 2018, he served as the Founding President and CEO of the Mercator Institute for China Studies (MERICS) in Berlin. At the same time, he was one of 15 German representatives to the semiofficial German-Chinese Dialogue Forum.
Dr. Heilmann serves as the Chairman of the Sinolytics Advisory Board. Sinolytics is a specialized European consultancy entirely focused on China. He advises Sinolytics on business strategy and the development of Chinese industrial technologies and financial markets. Heilmann has many years’ experience providing advice to German and European policy-makers and corporate leaders.