US and UK Should Partner on a “Multiplier” Fund to Back 5G Startups

June 30, 2020

By Jeff Ferry, CPA Chief Economist

The United Kingdom is close to pulling out of its previous compromise solution for 5G telecom, which involved keeping Huawei at the so-called “edge” of British wireless networks.

(They are still in the core of the fiber-optic network and at the edge of the Internet-to-the-home network.) But recent developments have put the knife into that compromise. UK politicians, and the UK public, have noticed that China had no hesitation in undermining the special status the UK government painstakingly negotiated for Hong Kong in the 1990s. The Chinese Communist Party has no respect for the truth or for other nations, especially those in the west. When you put the current iron fist descending on Hong Kong alongside the ruthless treatment meted out to the Uighurs, the lies and deceptions over the COVID-19 crisis, and the African Union bugging scandal, it’s not surprising the British government does not want a Chinese presence in every telecom cell tower from Cornwall to Scotland.

In light of this awakening, the UK has an opportunity to go a step further and bring their relationship with the US a step closer, help to rebuild the world’s telecom technology, and their own telecom industry by forming a partnership with the US. Such a partnership would help both the US and the UK advance their interests in the telecom space and form a more powerful bulwark against China.

The US and UK governments could form a bilateral committee, composed of a small number of public sector and private sector individuals from each country, backed up with a modest but reasonable budget, say $1 billion to $3 billion from each side. The committee, call it the Advanced Networks Committee (ANC) would commit to provide funding, 50% from each country, to promising startups that met their criteria.  The ANC might commit to make commitments of say $1 billion a year for each of the next three years.  

It’s important to recognize that the overriding need in 5G telecom networks today is for more choice. If you exclude the two Chinese vendors  (Huawei and ZTE), you’re left with just two fully-featured choices for wireless networks, Nokia and Ericsson. Both are lagging Huawei in features and technology, and their prices tend to be higher, so the world’s telecom companies are reluctant to become dependent on those two vendors. Both have a long, illustrious history, which has made them somewhat bureaucratic and slow to change. Fortunately, both have installed new chief executives this year and are trying to overhaul themselves. They should be encouraged to continue that process.

Meanwhile, we need more alternatives to the established vendors. In the US, we have at least three candidates, promising startups that are developing fully-featured 5G wireless systems. But these startups are not finding it easy to raise funds. The US venture capital ecosystem has largely turned its back on the telecom, wireless, and semiconductor sectors, preferring to invest in software, social networking, and other technologies where the risk capital needs are smaller and the payoff is often quicker.

If the US side of a new Advanced Networks Committee would vote to put $100 million into a promising startup, and the UK side matched that $100 million, this could make a real difference and accelerate the development of alternative suppliers of 5G systems. A new source of government-backed funding might attract new entrants into the industry too. It might even provide Nokia and Ericsson with additional incentives to get their houses in order and make their product development efforts more efficient and streamlined.

For the US government, such an arrangement has multiple advantages. First, the “multiplier” effect would mean they would get a $2 bang for every $1 they put in. Next, the key challenge for the next generation of 5G networks is to win in Europe, Asia, Africa, and Latin America. Advice from British officials will provide useful insight into how a network provider can eject a Chinese supplier from a telecom network. I would suggest the ANC include former executives from the telecom, technology or venture capital worlds. Experienced technology professionals, venture capitalists or telecom executive could be a valuable resource for a committee considering future investments. Committee members would be required to have no conflict of interest or financial involvement with any of the funding candidates. Both the US and the UK government suffer from too many politicians and civil servants without sufficient experience of the business world. The ANC could bring in business veterans with the focus and determination to seek and demand real results from their investments.

For the UK government, this arrangement would not only provide the benefits of the multiplier. It should also be structured to give priority to companies doing their product development, and ultimately their manufacturing, in the UK or US. UK prime minister Boris Johnson has said he is determined to use the Brexit initiative to find a way to relaunch Britain into high-tech industries it exited in recent years. Britain and the US are in a sense in the same boat in telecom technology: both had leading companies in the late 20th century (Lucent and Nortel here, GEC and Plessey there) and both lost those companies in the telecom “nuclear winter” years. Today, US startups like CPA member Parallel Wireless are already working with British technology partners. The synergy is there. While the British have had very few global technology leaders, they have been active in developing innovative underlying technologies. Look at ARM, the Cambridge chip designer whose architecture is the basis for chips from Qualcomm, Nvidia, and the upcoming Apple MacBook processors.

The concept of a financial multiplier is attractive, because it is already being used…in China. China has launched two so-called “Big Funds” to fund its development of a semiconductor industry. The first Big Fund was worth $20 billion and launched in 2014. The second Big Fund launched last year with $29 billion of funding. In each case, China uses a multiplier formula by which a powerful government entity, typically the Ministry of Finance, makes the largest single investment and then that investment is matched in various proportions by a host of provincial funds, Chinese banks, and private companies like the Chinese state tobacco company. The first Big Fund has already backed 23 Chinese semiconductor companies.  China experts say China is committed to investing over $100 billion in its fight to become a leader in semiconductor design and manufacture.

Today, China is well behind the US and other leading semiconductor nations like Taiwan. But we should not underestimate China’s determination.

Some say that OpenRAN technology will provide western companies with the edge to overtake Chinese competitors in 5G. OpenRAN is indeed a promising technology: by making certain parts of the wireless network interchangeable, it allows the introduction of cheaper, more efficient servers running software from Microsoft or VMware instead of proprietary software. The major advantage of this approach is that it allows the three US startups mentioned above an opportunity to get into the 5G market more quickly and affordably than if they had to build it all themselves.

But no smart investor places all his bets on one technology. The US and the UK should be backing a range of technologies, in areas including radios, modulation formats, and software, as well as complete networks. The history of the Internet, and the reason why the US has invented some 90 percent of Internet technology, is that the US system supports hundreds of startups, each with its own unique approach. We need to bring that approach back into the world of 5G wireless, and its supporting technologies.

The final point I would make is that the US and the UK have begun work on a US-UK trade agreement. Those negotiations promise to be long, difficult, and sometimes confrontational, especially when it comes to agriculture.  Based on the economic model developed by its UK supporters, the benefits from a US-UK trade agreement are expected to be tiny. It’s crucial to remember that no nation ever found prosperity by driving down the price of consumer products, which appears to be one of the major goals of the UK negotiators. On the contrary, history shows that the path to national prosperity is through building high value-added, high-price, high-profit, high-wage industries.

Here’s a chance for two allies to collaborate and reestablish leadership in the most critical industries of the 21stcentury.

Follow Jeff on Twitter @menloferry

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