Breakingviews - China's Huawei holds a 5G trump card

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HONG KONG (Reuters Breakingviews) - Huawei is not so easy for Western countries to rip out. The Chinese telecommunications-equipment giant founded by Ren Zhengfei owns a huge trove of next-generation wireless patents. As a global standard for 5G emerges, Huawei technology may become essential to carriers.

For years, the Shenzhen-based company has dominated the mobile infrastructure market, outselling rivals Nokia and Ericsson by offering cheaper alternatives. But U.S. concerns that Huawei equipment could be used by Beijing for espionage has gained traction: officials in the UK and France are purging their own networks of Chinese-made kit. A similar reaction elsewhere will seriously dent a business that generated nearly $43 billion in revenue for Huawei last year, roughly a third of the company's total.

Replacing antennas and mast towers is one thing, though. Even if the likes of Britain's Vodafone and BT remove all existing Huawei equipment - a move the UK government conservatively estimates will cost 2 billion pounds - global carriers will still be dependent on technology from Huawei to roll out next generation networks. Research firm IPlytics has found that the Chinese outfit owns the most 5G-related patents, and of that, roughly 15% of the essential ones.

Simply put, these are technical specifications global carriers can build to in order to ensure different networks are compatible with each other. Having one unified standard will be vital for 5G, which is meant to seamlessly link up billions of machines, cars, and gadgets around the world.

The spoils of Huawei’s patents are mostly in technology for mobile base stations - meaning even if Nokia and Ericsson rebuild Huawei's infrastructure across Europe, they will still have to use expertise from the Chinese group. For now, Huawei doesn't financially benefit much from its intellectual property. It prefers to "cross-license" by exchanging access to its own patent portfolios with those of rivals.

Huawei can stop cross-licensing in markets that it has been banned from, leaving mobile carriers on the hook to pay royalties and fees, which can be a lucrative business. Qualcomm, for instance, which owns the bulk of critical mobile chip technologies, has collected over $17 billion in licensing payments since 2017.

Already this year, the Chinese company has sued Verizon in the United States for patent infringement, and is seeking more than $1 billion, Reuters reports. There’s a risk that Huawei’s technological advantage could be turned into political leverage by Beijing.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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