China’s 5G edge more complicated than it appears

4 min read
‘5G is ON’ at Huawei’s massive booth at MWC Shanghai on June 26, 2019. (Image credit: TechNode/Jiayi Shi)

5G was the focus of the Mobile World Congress Shanghai this year, and I was amazed by how many 5G equipment companies I saw showing off networking equipment. The usual suspects, Huawei and ZTE were there, but they were joined by lesser known tier two and tier three companies—Baicells, Comba, Certusnet, Innogence, Skynetworks, H3C, Ruijie Networks, Raisecom, among others—who brought prototype 5G small cell and open radio access network (O-RAN) products, core cellular network components that will be sold in vast quantities over the next few years as 5G networks are deployed.

It’s easy to get the idea that China is racing ahead in 5G. Headlines in mainstream media often tout the country’s 5G prowess, saying that the US and the west are falling behind. But of course, the reality is much more nuanced: the first 5G base stations on the market may have Chinese brand names, but they’re multinational products that rely heavily on US components. This means Washington has leverage over China’s base station manufacturing—but also that US companies are earning a lot of the profit in the base station market even if Chinese companies get the glory.

We all know Huawei and ZTE, and perhaps to a lesser extent Datang. While Huawei designs its own chips for its various wireless product lines, it is by no means completely independent, as the recent US ban has shown. It is, however, more independent and capable than other Chinese companies, the majority of which would likely completely cease production of 5G equipment, at least in the short-to-medium term if they were to suddenly face similar bans. While Huawei and ZTE’s reliance on foreign EDA tools, semiconductor IP and software have been well documented less has been said for this whole other area within the 5G ecosystem.

At least 15 companies, by my count, displayed small cells. Small cells are a key component in any cellular wireless network. They help fill coverage gaps, especially indoors where macro cells are not suitable.

But what was obvious at the show is that the companies making these small cells have limited internal R&D capabilities. In general, at least for the time being, they do not have chip design capabilities. Their initial 5G products will all be based on FPGAs (field programmable gate arrays) from either Intel or Xilinx—in fact, not a single company was using anything but Intel or Xilinx. FPGAs are programmable chips, often used over hardwired application-specific circuits in base stations because they can be upgraded in the field with better algorithms, have lower entry costs, and enable companies to get to market faster. Companies may move to ASICs later once the volumes make sense, but in the beginning FPGA is usually the only choice.

There are domestic companies designing FPGA chips: Tsinghua Unigroup has two subsidiaries doing this, and there are others such as GoWin Semi, but they are still far away from providing a product which is viable for 5G applications.

The CEO of a small cell maker told me they were too reliant on US suppliers and was actively looking for Chinese alternatives. Their customer, perhaps the government, was demanding a fully domestic solution. He/she was optimistic, but other small cell providers laughed off the idea, saying they thought it would be at least five years before any domestic FPGA company could possibly have a competing product and that they were happy with using Intel or Xilinx.

This is great news for Intel and Xilinx. As we know, 5G frequencies are much higher than 4G so base station density will be much higher. More base stations means small cell revenues will be even larger for 5G than they were for 4G. Since the companies making them rely on US technology, the idea that the US is not involved in 5G isn’t exactly true—and US companies are in a great position to profit from the success of Chinese 5G equipment companies as they roll out their equipment in China and around the world.

On the flip side, small cell components are another angle of attack for the current US administration. While the last Huawei ban seems to have been lifted during the G20, if the US wants to slow down or even destroy China’s 5G plans, then export bans on these products to Chinese companies could be a quick way to do it. Most of the small cell  companies I saw at MWC consider themselves too small to be on the US government’s radar, but China and 5G are not, and who knows what the current President may do.

Of course, banning IC exports isn’t simple. I would expect strong push back from US suppliers given the potential revenues involved, and such an action would set back global 5G development significantly. It would also speed up Chinese development in this specific area even further.

Since the ZTE debacle last year, followed by the recent Huawei ban, the race to become semiconductor independent has sped up, and I have recently seen this manifest itself in the FPGA chip sector too. I know of at least a couple of domestic FPGA companies which are now investing further into creating 5G-capable products. This is on top of well-established players like HiSilicon and Unisoc, which already have 5G-capable ASICs in the market for handsets and base stations.

The US may not have a large macro cell brand like Huawei, ZTE, Ericsson, or Nokia but it does have companies integral to the 5G ecosystem and these companies are well placed to make huge profits from global 5G roll outs. China is aware of its reliance on these products though and recent US policy has hastened the development of Chinese equivalents. The likelihood of US FPGA chips being replaced over the next five years with Chinese equivalents is low, and even 5G ASICs from HiSilicon and others rely to some extent on foreign architectures, tools, and IP. But Pandora’s box has been opened, and sooner or later China will catch up in many of these areas, even if the end of the Huawei ban reduces the immediate pressure.