Why is China's 5G commercialization going astray?

"The 5G race is a race that the United States must win."

On April 12, U.S. President Trump delivered a speech on the U.S. 5G deployment strategy at the White House, which not only added fuel to the fierce competition for 5G around the world, but also set off a wave of public opinion in China's communications industry.

Is China falling behind in the 5G competition? Will China’s 5G, which was originally planned to be commercially available in 2020, fail to catch up with the United States? The anxiety aroused by the Korean and American operators’ early rush to launch the world’s first 5G commercial service in early April has returned.

[[264066]]

China's 5G industry positioning and commercialization process planning

The government has always had a very clear position on the development of China's 5G industry. The 13th Five-Year Plan clearly proposes the strategy of building a strong manufacturing country and a strong network country. From the perspective of promoting the deep integration of information technology, manufacturing technology and economic and social development, it aims to "accelerate the development and application of new information network technologies, actively promote the research of key technologies for the fifth generation of mobile communications (5G) and ultra-wideband, and launch 5G commercial use."

Therefore, the mission of 5G in China is to build a new generation of information infrastructure for the Internet of Everything, empower industrial upgrading and economic transformation, promote the widespread use of information network technology, lay the foundation for communication in vertical industries, promote the upgrading of industries such as the Internet of Vehicles and the Industrial Internet, and promote the development and maturity of related industries in China. In short, as Li Yue, President of China Mobile, said, 4G changed life, and 5G is here to change society.

From the perspective of changing society, among the three major business scenarios of 5G, eMBB (enhanced mobile broadband) is only an upgrade of the existing 4G in terms of speed, and is still aimed at improving the existing user experience. However, mMTC (massive machine type communication) and uRLLC (high reliability and low latency communication) are the focus and foothold of combining 5G technology with vertical industry applications, expanding connections from people to the Internet of Everything, enabling industrial upgrading to create new value for social and economic development.

Therefore, based on the 3GPP technical standard roadmap and 5G industry positioning, my country's three major communication operators have relatively consistently set the 5G commercial timetable for 2020. It should be said that this is a relatively calm, rational and safe timetable. Although the truly complete international 5G standard (R15) was frozen in June 2018, the R16 standard that fully supports mMTC and uRLLC scenarios is scheduled to be completed in March 2020.

Based on the R15 standard, chip manufacturers in the industry chain launched the first 5G chip at the end of 2018, but it can only be used for field testing and verification for "early applications". Therefore, although South Korean and American operators very aggressively announced the commercial use of 5G in April this year, they can only support eMBB applications, and are still in an awkward stage where each terminal has only one model and the performance is still unstable.

For Chinese operators, although my country's 4G commercialization time was more than two years later than that of the United States and South Korea, the three major operators fully utilized the latecomer advantage of the mature industrial chain and soon surpassed the United States and South Korea in network construction scale and commercial results, built a global 4G network and became the global 4G user market. Therefore, in the face of the current 5G global competition, my country's communications industry still needs to have confidence and determination, and based on the established 5G industry positioning, do a good job in the corresponding network testing and application verification and other preparations, and promote the 5G commercialization process according to the established plan, without having to compete with others in the time of commercial launch.

The key to measuring the success or failure of the 5G competition lies in the social and economic value achieved by promoting industry application innovation. The goal of "catching up with 3G, keeping pace with 4G, and leading 5G" mentioned by China's communications industry also refers to achieving breakthroughs in the commercial value and social value created by the industrialization of communications technology. Therefore, the global competition of 5G will be a deep competition with a long time period and a wide range of industries, rather than a game that can be won or lost in one place at one time. All links in China's 5G industry chain should have a clear understanding of this and be mentally prepared for a long-term battle.

In particular, communication operators, which are in a leading position at the front end of the 5G industry chain, shoulder the historical responsibility of driving industrial development with network first. At the beginning of 5G network construction, they should select the technical path according to the principle of starting from the end, firmly determine the direction of 5G empowering vertical industry applications, and steadily advance my country's 5G commercialization process to avoid the mistake of greed for quick success.

Operators' network construction strategy swings affect my country's 5G commercialization process

To promote the commercialization of 5G, we must first solve the technical path problem of whether to choose NSA (non-standalone networking) or SA (standalone networking) for 5G network deployment. For the construction and deployment architecture of 5G networks, 3GPP defines two standard options: non-standalone networking (NSA) and standalone networking (SA). The communications industry has had sufficient discussions and clear conclusions on the comparison of the advantages and disadvantages of these two 5G standards, which can be summarized as follows:

Professor Li Jinliang, a senior expert in the communications industry, summarized his view that NSA is not the real 5G, and SA is the "real 5G". The advantage of NSA lies in the slightly faster industrial progress, while the disadvantage is that it does not support uRLLC and mMTC scenarios, which is also the defect of the NSA model.

Therefore, if China's 5G commercialization is to realize the mission of enabling vertical industry applications, assisting industrial upgrading and economic transformation, and becoming a new engine for the transformation and upgrading of social digital economy and all walks of life, only the SA architecture that supports 5G application scenarios such as uRLLC and mMTC can undertake this task.

Initially, the choice of SA standard for 5G network deployment was a general consensus in China's communications industry, especially among communications operators. In the process of formulating the 5G SA standard, China Mobile made a very significant contribution. It not only led the formulation of the overall architecture standard for a version of the 5G network, but also launched the "5G SA Breakthrough Action" and "5G SA Sailing Action" in February and June 2018 in collaboration with global partners such as Huawei, Ericsson, Nokia and Intel to promote the implementation of the SA standard.

At the same time, China Telecom also released the "China Telecom 5G Technology White Paper" in June 2018, officially announcing that "taking into account factors such as network evolution, existing network transformation, business capabilities and terminal performance, the independent networking SA solution is preferred."

Huang Yuhong, president of China Mobile Research Institute, revealed in an interview after 3GPP officially approved the SA standard in June 2018 that during the discussion period of the standard formulation, many foreign operators chose the non-standalone (NSA) architecture, but China Mobile insisted on the standalone (SA) version because "we believe that NSA is not a complete core network, and it uses the 4G core network for transformation. If 5G wants to bring new functions, it is not only to improve the air interface rate, but also to bring more important capabilities, such as slicing and edge computing, which all need SA to achieve. Therefore, we have invested a lot in SA, and we are also actively promoting the industry to complete the SA standard in a timely manner."

The industry consensus was suddenly broken in February this year. At the GTI 2019 International Industry Summit held in Barcelona, ​​Li Zhengmao, Vice President of China Mobile, unexpectedly announced that China Mobile would start "large-scale deployment" of NSA in 2019. Although Li Zhengmao also emphasized in his statement that China Mobile would "accelerate the maturity of SA end-to-end industry", China Mobile, as an important contributor to the 5G SA system architecture, suddenly changed its direction and decided to abandon SA and choose NSA for 5G "large-scale deployment" still caused a stir in the industry.

Although the official reason given by China Mobile is that the development of SA faces many challenges such as the immaturity of the industrial chain, it is not new that the SA standard was frozen later than NSA and that chips and terminals supporting SA were launched later than NSA.

Moreover, in the context that operators in South Korea and the United States have already taken the lead in commercial trials and commercial pre-launch publicity on NSA, the Chinese communications industry generally hopes that China Mobile and China Telecom, as representatives of advanced operators, can fully promote the SA industry chain to achieve the global launch and large-scale deployment of SA networks in the Chinese market as soon as possible, thereby highlighting the 5G industry influence of the Chinese communications industry. However, China Mobile suddenly turned to launching the "large-scale deployment" of NSA in 2019 at an international exhibition, which was indeed unexpected and failed to live up to the industry's expectations!

Moreover, with China Mobile's shift, China Telecom was forced to follow suit under the pressure of 5G competition in the market promotion of "you have it, I must have it too". At the March earnings conference, it announced that it would adjust its 5G strategy from the original "preferentially choose the independent networking SA solution" to "simultaneously promote the development of NSA and SA" to expand the scale of trials. In addition, China Unicom chose NSA, which had a lower initial investment, early on due to its limited financial and technical strength. The three major Chinese operators unexpectedly turned to NSA in unison, and in the global 5G competition, the SA first strategy was changed to NSA following, following the footsteps of South Korea and the United States.

Giant companies deploy NSA on a large scale

Although the reasons behind China Mobile's sudden shift to large-scale deployment of NSA are unknown to the outside world, it is worth noting that before China Mobile suddenly decided to deploy NSA on a large scale in 2019, in China's communications industry, Huawei, which occupies an absolute mainstream position in the field of communications equipment, made 5G strategy adjustments earlier than China Mobile.

Huawei, which has taken the lead in China's 4G market, has greater "ambitions" for the global 5G market. It has invested heavily in 5G research and development very early, and hopes to take advantage of the favorable opportunity of upgrading the communication network to 5G to expand its share advantage in the local market to the global scope. Therefore, in a short time after 3GPP established the 5G standard, Huawei was ahead of other competitors and launched a full set of 5G commercial network solutions based on NSA non-independent networking in September 2018 to support overseas operators to build 5G networks as soon as possible.

In China, Huawei closely followed the deployment of the Ministry of Industry and Information Technology and the SA pace of the three major operators. Within three months after the SA standard was frozen, it quickly completed new product development, end-to-end environment deployment and functional testing. It was the first to complete the industry's 5G wireless side system function verification for SA, and launched a 5G commercial system based on independent networking (SA) in March 2019.

According to Yang Chaobin, president of Huawei's 5G product line, Huawei, with its strong R&D capabilities and mature commercial products and solutions, can flexibly select networking architecture based on the different paces of the NSA and SA industries and the actual network construction strategies of operators.

Therefore, Huawei's initial 5G strategy was to take the lead in launching 5G network construction in overseas markets that chose the NSA architecture, and to occupy a larger market share by relying on the first-mover advantage of NSA products in order to realize 5G investment as soon as possible; in the domestic market that chose the SA architecture, it took advantage of the opportunity that SA could break the original 4G supplier structure to further expand the domestic market share and gain an absolute share advantage over its main competitor ZTE in 5G.

However, as the international situation changed, Western countries led by the United States began to use national security as an excuse to ban Huawei from entering their own 5G markets. In particular, after US allies such as Australia, New Zealand and Japan responded one after another, Huawei's offensive in the overseas 5G market was hindered. The European market, where it has a large share of the 4G market, also began to conduct rounds of security reviews on Huawei under pressure from the United States. This directly delayed the procurement progress of Huawei's 5G and even 4G equipment, resulting in Huawei's original plan to seek investment and realize its investment as soon as possible in the overseas 5G market first launched by the NSA. The strategy was hit. The direct consequence was that Huawei's operator business sales revenue showed a negative growth of -1.3% in 2018.

At the same time, affected by this, Huawei's inventory in 2018 increased by 31% year-on-year to RMB 94.5 billion. Specifically, its finished product inventory increased by 55% year-on-year, and it is obvious that its products are unsalable.

What is more serious is that due to the increase in inventory and the continued increase in investment in 5G research and development, Huawei's cash flow from operating activities in 2018 decreased by 22.5% year-on-year, a decrease of RMB 21.7 billion.

Therefore, for Huawei's operator business, in order to get rid of the adverse operating impact of the slowdown in overseas sales on the company, returning to the domestic market to drive the acceleration of 5G network construction has become an inevitable choice. However, under the SA architecture selected by domestic operators, due to the late introduction of standards, product solutions are still in the testing and verification stage, and the relevant industrial chain is still in the process of climbing. It will take at least until 2020 to truly achieve large-scale deployment and commercial use.

However, for Huawei, which is in urgent need of reducing inventory, improving cash flow and accelerating the realization of 5G investment, even half a year seems too long to wait. Therefore, relying on the influence of mainstream wireless suppliers and the leading technology monopoly advantage of 5G solutions, driving domestic operators to achieve large-scale deployment of 5G NSA as soon as possible has naturally become a way out for Huawei's operator business to get out of trouble.

Huawei's consumer business can also fully cooperate with Huawei's operator business to achieve its goals. This is also the second problem that needs to be solved to promote the commercialization of 5G in China: whether 5G terminals that support SA networking can be supplied as soon as possible.

At the MWC2019 communications exhibition in February this year, Huawei launched its self-developed 5G chip Balong 5000, which is the world's first multi-mode terminal chip that supports SA and NSA networking. Based on the Balong 5000 chip, Huawei simultaneously launched the world's first folding screen mobile phone MATE X that can support both SA and NSA networking.

Since Qualcomm has to wait until the third quarter of 2019 to release the multi-mode chip Snapdragon X55 that supports SA networking, domestic mobile phone manufacturers such as ZTE, Xiaomi, vivo, Oppo, etc. can only launch mobile phones that only support NSA based on Qualcomm's single-mode chip Snapdragon X50 at this stage. Therefore, Huawei is currently the only 5G mobile phone manufacturer capable of providing 5G mobile phone manufacturers that support SA networking.

Although there are many voices in the industry calling for Huawei to open up its chips to the outside world, including Professor Li Jinliang, a senior expert in the communications industry, who also wrote an article to persuade Huawei to "consider the whole country as a whole and hope that Huawei will supply 5G mobile phone chips that support SA to domestic terminal manufacturers with conditions, so that a batch of high-end 5G mobile phones can be put to use on the market", but for Huawei, which urgently needs to deploy NSA on a large scale in the domestic market as soon as possible to solve the operator business problems, this is clearly courting disaster.

As a result, Huawei, which has temporarily achieved a technological monopoly in SA chips, has basically controlled the timing of SA commercialization. On the one hand, before the supply of Qualcomm X55 chips, even if the three major operators want to do SA network testing, they can only find Huawei phones to use; on the other hand, Huawei's Vice Chairman Hu Houkun emphasized in public that Huawei "has no intention and plan to turn chips into an independent business at this stage", implying that Huawei's SA chips will still insist on self-production and self-use.

Huawei, which has been stuck in the supply of SA chips and terminals, has been pushing for the strategy of large-scale deployment of NSA in the domestic market for its own interests, and has also been effectively supported by multiple factors such as the right time, the right place, and the right people. Because of the public suppression by the US government, Huawei has received unanimous support from all walks of life in China and has taken advantage of the local market. At the same time, the voice of the communications industry to use 5G to celebrate the 70th anniversary of the National Day has become increasingly loud, which has also provided Huawei with the right time. In addition, local governments have regarded 5G innovation as a local business card. As a leading 5G company, Huawei advocates accelerating the construction of 5G networks, which coincides with the local governments that are eager to seize the 5G dividend and require local governments to work hard to implement 5G, and has been widely supported in terms of people.

Therefore, although outsiders have no way of understanding Huawei's specific operation process, the final result is that Huawei's 5G strategy adjustment has been a great success in the domestic market. China Mobile's 5G plan has taken the lead in turning to large-scale deployment of NSA, and it will also complete the preemptive move in the first half of 2019.

Large-scale deployment of NSA will slow down China's 5G commercialization plan

Given China Mobile's influence in the industry, global operators' rush to deploy NSA in 2019 means that the direction of the domestic 5G industry chain must shift to NSA as soon as possible, because the overseas 5G industry chain has already formed a first-mover reserve on NSA, and the passiveness can be imagined. At the same time, Qualcomm, which was originally driven by domestic operators and required to come up with SA chips as soon as possible, can also breathe a sigh of relief and temporarily relax the dividends that can be realized in the Chinese market as soon as possible by mass production of the NSA chip X50.

But at the same time, China's ambition to take the lead in SA network construction and commercial business of 5G as soon as possible may also be relaxed, and China's 5G commercial plan to use SA to drive the vertical industry application market and drive the upgrading of industries such as the Internet of Vehicles and Industrial Internet as soon as possible may be slowed down.

Based on the established fact that China Mobile announced its shift to NSA-scale deployment, Professor Li Jinliang, a senior expert in the communications industry, gave a compromising suggestion on the choice of China's 5G network deployment path in his article "Enlightenment from South Korea's Challenge to 5G Commercialization": "In order to respond to the national 5G development strategy and realize 5G commercialization as soon as possible to celebrate the 70th anniversary of the National Day, the NSA standard should be selected for local small-scale construction first; in order to realize true 5G and give birth to a huge commercial blue ocean, the SA standard is urgent; weighing the pros and cons, it is recommended that my country should clearly define independent networking as a goal, start small-scale NSA deployment in local areas in 2019, and at the same time accelerate the maturity of the SA end-to-end industry to realize the SA-based target network."

However, under the influence of Huawei's massive 5G publicity campaign and customer-driven capabilities, Professor Li's advice to only "deploy NSA on a small scale in local areas" seems so weak and powerless.

During the two sessions this year, Chen Li, general manager of Shanghai Mobile, proposed to promote the trial use of 5G in Shanghai first, and said that Shanghai Mobile will complete the construction of no less than 5,000 5G base stations across the city by the end of September. According to the "Three-Year Action Plan for Shanghai to Promote the Construction of New Generation Information Infrastructure to Help Improve the City's Energy Level and Core Competitiveness (2018-2020)", by the end of 2020, Shanghai will deploy 10,000 5G base stations on a large scale. By the end of September this year, more than half of the 5G base stations have been built. However, due to the SA timetable, these 5,000 base stations can only use the NSA architecture. Once completed, how can we talk about "achieving the SA-based target network"?

For operators, the transition from NSA and the ultimate evolution to the SA target network means at least three complex transformation and upgrades of the original network until the NSA terminals are completely withdrawn from the network. Each transformation and upgrade means a new round of cost investment and more complex network risks. Moreover, as the SA industry chain matures, in order to realize the support of 5G networks for industrial applications such as uRLLC and mMTC as soon as possible, in theory, the NSA transition period should be compressed as short as possible, but this also means that the NSA construction costs invested by operators in the early stage will soon become a waste of investment.

Therefore, from the perspective of protecting investment, the larger the scale of NSA deployment in the early stage, the lower the enthusiasm of operators to promote SA evolution in the later stage. Since NSA-based 5G terminals cannot be used on SA-based 5G networks, the more 5G mobile phone users are developed after the NSA scale trial commercialization, the longer the NSA architecture will be online, and the more complex the 5G network that operators need to operate and maintain will be, and the higher the investment in the later stage will be. Within the limited scope of operators' fixed capital expenditures, every extra dollar invested in NSA means one dollar less invested in SA.

Huawei 5G: "When I bloom, all other flowers die"

But for Huawei, this is another story. Domestic operators' accelerated deployment of NSA in 2019 will not only benefit Huawei's short-term interests in reducing its overseas inventory and accelerating 5G monetization, but also the multi-level investment of operators in network transformation, evolution and maintenance will form a medium- and long-term guarantee for Huawei's business growth.

In addition, domestic operators accelerating the large-scale deployment of NSA will also help Huawei achieve greater market share in 5G.

First, it eliminates the threat of new market entrants. Since the construction of 5G NSA networks needs to be anchored to the original 4G wireless network, it is inevitable to maintain the original 4G supplier structure. Huawei, which has a large market share in the domestic 4G market, will certainly benefit. However, it is a fatal blow to China Information and Communications Technology, which has just completed the merger of central enterprises under the leadership of the State-owned Assets Supervision and Administration Commission.

The original intention of China Information and Communications Technology's merger was to use the industrial capabilities of FiberHome and the R&D strength of Datang to seek to reverse the embarrassing situation of 4G's failure in the 5G market. The SA architecture driven by policy guidance and industry consensus requires the construction of a new 5G network independent of 4G, which could have provided all market participants with an equal opportunity to participate in the competition. However, driven by Huawei, the three major operators all turned to the large-scale deployment of NSA, which means that China Information and Communications Technology had just stepped onto the stage of 5G competition and had not had time to complete its debut, and the stage under its feet had collapsed. China Information and Communications Technology is like this, not to mention Samsung Electronics, which has been eager to use 5G to enter the Chinese communication equipment market. The budding of its hope was directly strangled in the bud by Huawei's NSA strategy.

The second is to expand the advantage over existing market competitors. ZTE, Huawei's competitor in the domestic 4G market, suffered business suspension and a major reshuffle of senior management in 2018 due to sanctions from the US Department of Commerce. Its current focus is still on internal adjustment and restoring customer confidence. The immaturity of the SA industry chain originally provided a valuable time window for it to accumulate 5G strength, but Huawei's drive for operators to accelerate the large-scale deployment of NSA in 2019 caught ZTE off guard and it has already suffered a loss in customer response.

For the two foreign manufacturers in the Chinese market, since South Korea and the United States have already taken the lead in 5G NSA commercialization and started to develop users, Ericsson and Nokia, which are the dominant suppliers in these two markets, are facing huge customer contract pressure to speed up the supply and construction of 5G networks. Therefore, the focus of the global supply system will inevitably shift.

Therefore, after successfully driving the three major operators to accelerate the scale deployment of NSA in China, Huawei's 5G NSA inventory prepared for overseas markets has become an advantage of sufficient supply in China, which is bound to seize the initiative in key cities and key regions where 5G is first launched, helping it to gain a unique advantage in the domestic 5G market competition. This is probably why Huawei's Vice Chairman Hu Houkun confidently stated at the 2019 Global Analyst Conference that Huawei's operator business is expected to achieve double-digit growth in 2019.

Huawei's unique advantage in the current domestic 5G market is driven by the influence of mainstream wireless suppliers and its technological monopoly in 5G products and chips, which has driven operators to change their established 5G architecture choices. The consequences may be the delay of the commercial use of SA, which is the real 5G, in the Chinese market and the delay of the innovative development of vertical industries and emerging 5G businesses. This "unique" position that hijacked the entire 5G commercialization process in China with the selfish interests of one company not only failed to bring a colorful spring to the 5G industry, but also brought the bleak chill of "my flowers blooming and all other flowers dying" as Huawei's 5G dominates the world.

The Ministry of Industry and Information Technology should give strict guidance to operators on 5G network construction

In 3GPP's 5G standard, SA is a new architecture with a brand-new design concept. While introducing new network elements and interfaces, it will also adopt new technologies such as network virtualization and software-defined networking on a large scale, and then combine it with the new 5G NR air interface technology. The technical challenges faced in protocol development, network planning and deployment, and interoperability will surpass 3G and 4G systems, reaching a historical high.

However, only by overcoming such technical challenges can the SA-architecture 5G network provide more diversified new business scenarios such as mMTC and uRLLC that are currently not supported by 4G networks, so as to achieve the deep integration of 5G communication technology and vertical industries, promote the upgrading of industries such as the Internet of Vehicles and Industrial Internet, and promote the development of related industries in China and the mature industrial value.

As mentioned above, the global competition of 5G will be a deep competition with a long time period and a wide range of industries, rather than a game that can be won or lost in one place at one time. Faced with the challenges of the technical difficulty of SA architecture and the immaturity of the industrial chain, Chinese telecommunications operators, who bear the historical responsibility of driving industrial development with the network first, should play a greater role, regardless of temporary gains and losses, and not be disturbed by external factors. They should maintain the determination that 5G should have in empowering vertical industries, move forward bravely in the direction of being the first to deploy SA architecture networks, and explore feasible business models for new 5G services.

Just as the industry has called for, "Only communications operators who dare to adhere to the SA direction and explore true 5G business models can open up new space for their long-term development in the process of China's 5G commercialization, enhance and exert their industrial influence in the process of China's 5G commercialization, and ultimately become industry leaders in the development of 5G and subsequent mobile communication technologies!"

Therefore, it is recommended that the Ministry of Industry and Information Technology, as the competent authority of the communications industry, take the promotion of my country's 5G commercialization process as its goal, and in conjunction with the issuance of 5G licenses, give strict guidance on the technical path selection for operators' 5G network deployment:

1. China Mobile and China Telecom, which have strong technical and financial strength, must shoulder the heavy responsibility of launching the first 5G SA network in the world. Therefore, they should limit their large-scale deployment of NSA at this stage and focus on promoting the mature cultivation of the SA industry chain and catalytic innovation of vertical industry applications, so as to build my country's position in 5G communication technology and 5G industry.
2. For China Unicom, which is piloting the hybrid operator reform, considering its financial situation and the backwardness of the 4G user market, it can be agreed that it will take the lead in trialing NSA deployment in 5G network construction as a tribute to the 70th anniversary of the National Day, and further support disadvantaged operators through the 5G first-mover advantage in the eMBB business scenario, so as to promote the long-term balanced and healthy development of my country's communications operation market.

China's 5G commercialization and industrial development requires the entire communications industry to maintain its focus, and requires communications operators to take on more responsibility and courage!

About the author: Laojie 1972 (senior communications industry professional)