Huawei and ZTE are showing a certain resilience in the face of rising uncertainty about their ability to compete globally in the 5G market. They have various cards to play, including their famous price competitiveness, backed by access to significant Chinese government financing, and their advanced developments in some core 5G technologies, such as Massive MIMO and cloud core.
This is highlighted in their very strong patent position in 5G, compared to their status in 3G or 4G, when they were best known for keen pricing rather than cutting edge innovation. While operators fret about being denied access to advanced technologies at affordable prices, the wider industry is concerned about the risk that, if US and other western nations persist with sanctions, the Chinese will retreat to a 5G fortress, creating two distinct technology regions with diverging, and legally antagonistic, patent bases.
This could affect the core radio standards themselves, especially those which are still in the works, and where patent rights have not yet been established.
While ZTE might be a relatively minor player in mobile networks compared to the big three – and its US challenges have been overshadowed by the battles with Huawei – it is still the world’s fourth largest supplier in this market, and it punches even above that weight in terms of 3GPP influence and its patent holdings.
ZTE was recently named as the third biggest filer of 5G patents in the world, registering 1,424 5G standard-essential patents and applications with ETSI – the keeper of the 3GPP standards – over the past year. The company has also registered over 200 patents pertaining to its 5G chipsets during that time.
In addition, it now holds the vice-chairmanship of both the RAN2 and RAN3 groups within the 3GPP, which gives it a huge influence over the next round of 5G standards-setting. This month, ZTE’s Sergio Parolari was elected as vice-chair of RAN2, a committee in which he has been involved sine 2010, working on developments including carrier aggregation, dual connectivity, NB-IoT and 5G New Radio.
Another ZTE engineer, Gao Yin, is vice-chair of the RAN3 committee, and ZTE employees are prominent in work on many technical standards across multiple 3GPP groups, including, according to the company, NOMA (non-orthogonal multiple access), 2-Step RACH (random access channel), CoMP (coordinated multipoint), ATSSS (access traffic steering switching and splitting) and 5G network slicing.
There are many risks to western vendors if current tensions continue. As well as reduced access to innovation for operators and partners, Chinese vendors may chase payments for IPR, including standards-essential patents (SEP), more aggressively. China is determined to reduce its dependence on western IPR, and if the industry thought it was hard to define and impose Frand (fair reasonable and non-discriminatory) pricing practices on Qualcomm or Samsung SEP, try doing the same for angry and defensive Chinese firms.
Chinese firms, especially ZTE and Huawei, are estimated to have doubled their share of SEP in 5G compared to 4G, and to have applied for about a third of major 5G patents so far. According to IPlytics, which analyzed applications (not awarded patents, so the exact percentages may change), Chinese firms have applied for 34% of major 5G patents, compared to 25% for South Korea, and 14% each for the USA and Finland. Nokia and its ecosystem seem to be outgunning Ericsson, since Sweden came in at 8% and Japan at 5%, with Taiwan, Canada, the UK and Italy completing the top 10, but with less than 1% each.
The analysis related to 74,500 patents (so many will not be SEP of course), and it found that China’s share of 5G patents so far is about 50% higher than its 4G share, where it matched South Korea, with about 22% each. The USA has a lower share than in 4G, which highlights one reason both for its defensiveness towards China over 5G trade and technology, and the fact that it is in a relatively weak position once patents get dragged into trade wars, especially as Huawei also has IPR in existing 3G and 4G systems – which it may choose to monetize aggressively as a tactic in its battle against the US ban.
Indeed, Huawei signalled how that could pan out for western operators and vendors when it told Verizon that the telco owes Huawei “more than $1bn in patent licensing fees”. According to reports, the claim relates to equipment made by other vendors, but incorporating Huawei IPR. Reports by the Wall Street Journal and Reuters said “the patents cover network equipment for more than 20 of the company’s vendors including major US tech firms” and involve about 230 patents in all.
According to another patent analytics provider, Relecura, “Huawei has been granted more than 69,000 patents globally related to everything from data transmission to network traffic management”, and another 49,379 patent applications are pending. Of those granted, over 57% are in China, and nearly 18% in the USA.
The divisions over patents could also spread to the wider mobile platform, risking an end to the dream of a fully global platform for cloud-based 5G, and resulting impact on economies of scale and competitive, open ecosystems.
Chinese firms are showing particularly high interest in the open source RISC-V processor architecture, which must be in part a reaction to possible restrictions on their ability to use the dominant ARM designs for devices or future infrastructure (though the status of the Chinese unit into which ARM offloaded much of its local IPR after the Softbank acquisition remains unclear). Just last week, Chinese memory chip maker GigaDevice launched the “first general purpose microcontroller based on RISC-V”, designed to be a drop-in replacement for ARM-based MCUs (see separate item).
Of course, there is huge risk for the Chinese vendors and operators too. They risk losing access to the advances and IPR which have been developed outside their zones of influence in Greater China, and selected markets in Asia, Africa, Middle East and Latin America. Continued sanctions, especially if these are imposed by additional large markets like India, will hit their sales and they could be forced to reverse key technology decisions – Huawei’s Google-free mobile operating system, HarmonyOS, is a prominent example, but what of its potentially market-changing ARM-based cloud server processors, unveiled earlier this year, if its access to that IP is limited?
So far, the impact on actual financial results has been smaller than expected, though executives of Huawei and ZTE are urging caution and the former company has acknowledged it is “fighting for its life”. ZTE – whose finances took a deep dive last year in the aftermath of the US ban on its procurement of US components last May – reported a 13% year-on-year rise in revenues, to CNY44.6bn ($6.23bn), for the first half of its fiscal year last week. It also reversed the huge year-ago loss which resulted from the temporary suspension of most of its operations in response to the US action (as it turned out, short-lived). Net profit for the first six months was CNY1.47bn ($205m), compared to last year’s interim loss of CNY7.82bn ($1.09bn).
However, there are reasons for caution, and for concern that ZTE is not translating its huge IPR and standards body position into sustainable improvement in revenues, despite a cost-cutting program which has boosted margins. Operating profit for the first half of 2019 was CNY2.34bn ($327m), compared to an operating loss of CNY1.75bn ($244m) a year ago. But although revenues were up healthily, that was compared to a dire first half in 2018, and last year, the vendor’s quarterly sales declined year-on-year for four consecutive quarters from Q2 2018 to Q1 2019.
For the second quarter of 2019, revenues were almost double those of the year-ago quarter, at CNY22.4bn ($3.13bn), but not much improved on Q1 2019’s CNY22.2bn ($3.1bn).
It has three business units. By far the largest is Carrier Networks, which accounts for 73% of the total and turned in first half revenues of CNY32.5bn. Consumer Business (mainly handsets) and Government and Corporate Business contributed CNY7.4bn and CNY4.7bn respectively.
Unlike Huawei, ZTE does not have a significant buffer in its handset business, which accounts for only 17% of its total sales – though that also makes it less exposed to potential restrictions on using Android. But disruption in its supply chain, and operating uncertainty, will have been factors in the decline of its handset business, which was once China’s biggest – in the first half of 2017, it shipped CNY17.9bn ($2.5bn) worth of cellphones, about a third of its total revenue, but this year’s figures are down 60% on that level, and 36% down on 2018.
It has been less successful than its larger compatriot in becoming truly global, with 60% of its sales still coming from China, at least that makes it less vulnerable to any future international sanctions. Regionally, it made 61.5% of its first half revenues in China, 17.5% in the rest of Asia, 15% in ‘Europe, Americas and Oceania’, and 6% in Africa.
So ZTE will be looking to drive new sales in ‘friendly’, large markets like Indonesia, and leveraging its considerable R&D investments. It is far more reliant than Huawei on external suppliers, including US ones, for components and software, but is building its own arsenal of fundamental technology enablers aggressively, especially in the areas of databases, chipset and operating systems. It has entered production of 7-nanometer chipsets for various purposes including handsets, and is beginning R&D for 5nm chips and advanced process and packaging technologies.
It is also developing an operating system which, it says, “has been applied in various key industries, including telecommunications, high speed rail, electricity, industry and automotive”.
“The company will adhere to innovation in core technologies and focus on 5G end-to-end deployments, so as to maintain the sustainable development of innovative strength and achieve quality growth at the peak of 5G investment and construction,” a ZTE spokesman told members of the press.