By Jordan Link, Washington Post–
Last month, the U.S. Agency for International Development (USAID) announced a new plan to offer loans and financing to help countries make their telecom purchases from vendors based in democratic nations. The goal, according to USAID, is to help countries reduce their dependence on Chinese telecom giant Huawei and other Chinese suppliers.
Early analysis suggests the incoming Biden administration may continue to see Huawei’s growing dominance as a security threat. While offering U.S.-backed loans to compete with Huawei marks a significant change in how Washington aims to push against Huawei’s success, there’s more to the company’s global reach than Chinese state-backed export loans. Beijing’s domestic support and influence in international organizations also help Huawei gain a competitive advantage.
How might this U.S. move impact the global telecom equipment market? Here are three things to know.
1. Loans are key to Huawei’s global presence
The Center for American Progress (CAP), a Washington, D.C.-based think tank, recently published a report that analyzes the industrial policy tools Beijing uses to support Huawei.
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A key part of Huawei’s global success has been what Beijing refers to as “iron triangle” loans. Here’s how this works: Chinese state policy banks provide loans to mobile network operators across the globe to finance their purchases of Huawei equipment. Access to these loans has allowed Huawei to bundle telecom equipment with financing packages other global competitors are unable to match.
CAP mapped all loan-backed projects involving Huawei around the world that were verifiable using public sources. From 1997 to 2019, Chinese banks have lent $14.8 billion for 99 different projects involving Huawei across the globe. The Export-Import Bank of China financed 56 of these loans, while the China Development Bank financed 25 loans. Huawei itself offered three loans, while two loans came from the Bank of China, and three loans involved a consortium of Chinese banks. CAP was unable to identify the lender for 10 projects.
Africa was the largest regional borrower, with 57 loans totaling $4.7 billion. In Europe, CAP found 14 loans supporting Huawei projects totaling $4.4 billion. In Asia, China made 15 loans worth $2.2 billion. A private company in Brazil accounted for all $1.4 billion lent in South America. The only North American loans identified went to two private telecom operators in Mexico, totaling just under $1.4 billion. The Pakistani government and a private company in Kuwait signed $375.4 million in loans in the Middle East. Governments in the South Pacific received a total of $378.49 million in loans for Huawei projects.
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While 71 of the 99 loans were signed by partner governments, the loans private companies signed were worth more money, on average. For example, the average loan size of a Huawei deal signed by a government partner was $81.5 million, while the average loan size of a Huawei deal signed by a private company is $342.1 million.
These loans are Huawei’s gateway to the global telecom market — but they’re only one piece of a complex, interlocking puzzle.
2. Huawei also receives preferential treatment within China’s borders.
At home, Beijing has provided the company guaranteed market share, while cheap credit from Chinese state banks reduces Huawei’s operational costs.
For example, during China’s upgrade to 4G technology, central authorities reportedly ordered China’s state-owned operators to buy at least 70 percent of their equipment from Huawei and ZTE, another Chinese telecom equipment manufacturer. This policy gave Huawei the largest share of the largest mobile network in the world, thus boosting revenue and research and development expenditures.
Beijing also appears to support Huawei with domestic loans for general operational support. For example, multiple Chinese media outlets reported that in 2019 Huawei received a five-year 14 billion renminbi loan (just under $2.1 billion) from a consortium of five state-owned banks: the Bank of China, China Construction Bank, China Development Bank, China Merchants Bank and the Industrial and Commercial Bank of China.
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3. Beijing’s efforts to influence global standards also give Huawei a boost
Chinese officials have also influenced the standardization process, with the goal of increasing Huawei’s share of the emerging global 5G standards. These technical standards make it possible for networks and devices to operate together across borders.
Companies with technologies that define the majority of global standards also receive licensing fees from other competitors. When a company receives more royalties for its technology, it is then able to offer lower prices — which gives it a competitive advantage.
To capitalize on this dynamic, Chinese leaders are now preparing to launch the China Standards 2035 initiative, which will likely be a central part of the Chinese government’s 14th Five-Year Plan guiding economic priorities from 2021-2025. This initiative was previewed in a document published by China’s National Standardization Committee. The China Standards 2035 initiative seeks to increase Chinese participation in and influence over standardization bodies like the International Telecommunication Union (ITU), with the goal of producing beneficial outcomes for Chinese companies such as Huawei.
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Beijing has also directed officials and companies to “participate in the governance of international standards organizations and the formulation of major policy rules.” By January 2020, Chinese companies had submitted 32 percent of the 5G technical contributions accepted and approved at the 3GPP consortium for mobile broadband standards — U.S. companies contributed just 14 percent.
As countries around the world gear up for the shift to 5G and other technologies, these findings suggest Huawei’s access to Chinese state-backed loans make it tough to beat in global markets. Even if competitors can match Huawei’s prices, China’s state banks offer deals that commercial banks are unable to match by providing lower interest rates and longer grace periods for payment.
If USAID follows through with alternative financing for telecom equipment, it could help level the playing field for U.S. and other companies trying to compete with Huawei. But preferential treatment at home and international support through Beijing’s standardization campaign may leave U.S. loans with relatively limited effects.
Jordan Link is the China policy analyst for national security and international policy at American Progress. He focuses on understanding the strategic and economic challenges that the Chinese Communist Party presents for the future of American foreign policy. Follow him on Twitter @TheJordanLink.