How China can win the 5G challenge (China Watch)

By Luigi Gambardella

The Chinese economy is continuing to grow faster than other industrialized countries, but it is increasingly facing the challenge of keeping its competitive edge.

More than ever, innovation and digitization have become the engines of economic growth. According to the World Bank, a 10 percent increase in high-speed internet penetration brings about additional economic growth of 1.3 percent and promotes the “democratization of innovation”.

5G is the next wave of digital innovation. 5G is not merely an issue of increasing the speed of mobile internet (up to 100 times faster than 4G), allowing, for example, downloading movies in just a few seconds. The genuine and more profound revolution brought about by 5G is that this new communication standard will enable mass deployment of the “internet of things”, connecting billions of intelligent devices – fridges, cars, garage doors, central heating, to name a few – as well as the introduction of new services requiring a minimal delay in electronic transmissions, such as driverless vehicles or remote surgery making use of augmented reality. Such quick transmission of data is key for the further digitization of the manufacturing industry. An example is the massive introduction of industrial robots in factories.

Moreover, 5G is particularly required for the modernization of the logistics and transport industries. China needs 5G, and needs it immediately if the country does not want to lose its competitiveness in the manufacturing industry to new emerging economies like Vietnam.

Why should the Chinese government intervene? No one doubts that Chinese mobile operators will deploy 5G in the more developed regions of China alongside the main communications links. Probably these regions will be the first in the world with the new, high-speed connectivity available. However, the risk is that the less profitable regions and areas will be left with the current, slower networks because no operator has a commercial interest in making the high upfront capital expenditures to cover these areas, at least within a reasonable timeframe.

China Unicom and China Telecom – the country’s second and third largest State-owned mobile operators respectively – studied the possibility of sharing 4G base stations and fiber networks. However, they eventually continued to deploy separate networks in parallel to that deployed by China Mobile. Nevertheless, these separate networks are making use, in many areas, of the same towers, which are operated by China Tower Corp, a joint venture set up by these three mobile operators to provide construction, maintenance and operational services for telecommunication towers and ancillary facilities.

In the meantime, a new player entered the picture: China Broadband Network Co, a joint venture launched by regional cable TV operators.

However, 5G will require a much denser network – with radio-transmitters in nearly every street, possibly integrated into lamp posts. The cost of deploying parallel radio-access networks will therefore be difficult to recoup outside the densest populated areas. Chinese policymakers should therefore carefully consider the risk of an emerging digital divide, which in turn could further increase internal migration to the main cities in China and cause congestion in those cities.

The good news is that solutions are available. A first possibility would be that the three mobile operators would broaden the scope of their joint venture, China Tower Corp, and entrust it with the acquisition and deployment of 5G base stations and the 5G radio-access network, which would then virtually be split between the three shareholders making use of dynamic “software-defined network” solutions. This approach would also allow private financing for the deployment of 5G base stations and reduce the requirements for capital expenditure from the mobile operators.

A second, more radical option would be to entrust the deployment of 5G to a new public-private joint venture, a new company that could be named “China5G”, independent from the incumbent mobile operators. China Broadband Network Co, together with the electricity distribution companies, could be the core shareholders of the new company, taking into account the synergies possible between intelligent street lighting and base station deployment. This option would have the major advantage of providing a level playing field for the current virtual network operators and facilitating the launch of new services. New Chinese and European companies may be entering the residential market, offering new services to Chinese consumers, ranging from e-commerce to new services based on big data, artificial intelligence, virtual reality and augmented reality.

To conclude, deploying only one network means lower costs and higher efficiency, which increases competition, with a positive effect on price reduction, increased quality and choice for consumers. Today there are only three State-owned mobile operators competing in the Chinese residential market, each with its own mobile network. In the future, with a single network, several new players may enter the market, increasing the level of competition with the powerful incentive to focus on the development of new services. The unique network can eliminate the digital divide.

In addition, if China goes for the second option, the new company would have an interest to also take the needs of further wholesale clients into account, beyond those of the traditional mobile operators, and in particular the needs of the vertical industry – auto, transport, logistics, industry, health and the internet players. All would have access to the new network under the same conditions without discrimination.

Luigi Gambardella is the president of ChinaEU, a Brussels-based organization that promotes digital cooperation. The views do not necessarily reflect those of China Watch.

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