The New Reality of

International

Telecommunications Strategy

Robert C. Fonow 

Center for Technology and National Security Policy 

National Defense University

January 2006 
The views expressed in this report are those of the authors and do not reflect the official 

policy or position of the National Defense University, the Department of Defense, or the U.S. 

Government. All information and sources for this paper were drawn from unclassified 

materials.

Robert C. Fonow is managing director of RGI, Ltd, www.rgiltd.com. 

Defense & Technology Papers are published by the National Defense University Center for Technology and 

National Security Policy, Fort Lesley J. McNair, Washington, DC. CTNSP publications are available online 

at http://www.ndu.edu/ctnsp/publications.html.

 ii 
Contents 

1. Introduction............................................................................................................... 1

2. International Telecommunications.......................................................................... 4

Perceptions ................................................................................................................. 4 

China........................................................................................................................... 5

India ............................................................................................................................ 9 

Russia ....................................................................................................................... 10

Chapter Summary ..................................................................................................... 12 

3. Changing Structures of Telecommunications Production: The Emerging 

Dominance of China ................................................................................................... 14

Overview ................................................................................................................... 14 

Semiconductors......................................................................................................... 15 

Software Development .............................................................................................. 17 

Implications ............................................................................................................... 19 

4. Capital and Finance in Chinese Telecommunications ........................................ 21

Private Equity in China .............................................................................................. 21 

Corporate Investment................................................................................................ 23 

Problems of Capital and Innovation........................................................................... 24 

Chapter Summary ..................................................................................................... 25 

5. A Potential Leapfrog Technology? IPv6 as a New Model of Chinese 

Technical Leadership ................................................................................................. 26

IPv6 Defined.............................................................................................................. 26 

Why is IPv6 Important? ............................................................................................. 26 

United States and Chinese Competition in IPv6........................................................ 27 

Chapter Summary ..................................................................................................... 30 

6. Tentative Conclusions: Strategic Geopolitics of the International 

Telecommunications System..................................................................................... 31

New Conceptions of Strategy.................................................................................... 31 

Vulnerabilities in Telecommunications and Network Warfare.................................... 32 

Conclusion ................................................................................................................ 33

 iii 
 iv 
1. Introduction 

Until recently, the United States was the undisputed leader in all aspects of international 

telecommunications operations and innovation. The United States was the progenitor of the 

undersea cable infrastructure and satellite system, and American companies led the advancement 

of commercial global telecommunications networks. The United States was the hub of the 

Internet, the best known sub-network of the international telecommunications system. Today, 

though, Internet hubs are being replicated in several geographical regions.1

 More importantly, 

every major American telecommunications company has retreated extensively from the 

ownership of fundamental international network assets. This has important strategic implications 

for American defense communications, logistics, commerce, and diplomacy. 

The international telecommunications system is in transition from U.S. dominance to distributed, 

regional dominance. Europe has become the first continent with its own complete and integrated 

hub to provide services for Internet customers on a technical basis equal to the United States; 

more bandwidth exists between European cities than between Europe and the United States. 

Intra-regional links between Asian networks, particularly China’s telecommunications expansion 

beyond the mainland, are progressing quickly, and interest is growing in inter-regional links 

between Europe, Russia, China, and the Middle East, which would form the first stage of 

Eurasian telecommunications integration. Within five to ten years, the United States will be only 

one of several regional telecommunications centers, and not necessarily the most powerful and 

influential. 

China is becoming the greatest regional competitor to U.S. network interests, producing its own 

chip designs, software and protocols, commercial applications, and, eventually, military tactics 

based on these innovations. This rise may be augmented by Indian and Russian intellectual 

resources, as well as those from numerous transnational corporations, many of them 

headquartered in the United States. 

The United States is the relative leader in telecommunications today, but the relationships are 

changing quickly. Microsoft, Oracle, and Intel are likely to remain world technical leaders, but 

American commercial success and military dominance, which increasingly depends on 

dominance in networking technology, are being undermined by several developments: 

• Rapidly increasing technical expertise in countries and societies as diverse as China, 

India, Russia, Israel, Eastern Europe, and the European Community. 

• Transfer of commercial technologies and outsourcing of their manufacture, which puts 

the United States outside many of the main threads of technical and services innovation. 

• Education demographics that indicate that the United States will be only one of several 

equally innovative countries within ten years. Numerous statistics suggest enrollments in 

 

1

 “Global Internet Geography 2005 Executive Summary, Primedia Corp.” 

www.telegeography.com/ee/free_resources/gig2005_exec_sum-01.php 
university-level technological education of approximately 2.5 million students in China, 

2.4 million in Russia, 1.9 million in India, and 1.7 million in the United States.2

 Each of 

these countries has world-class centers of excellence and relationships with centers of 

excellence in other countries. A diffused international telecommunications system has 

accelerated the spread of knowledge. 

• The capability of competitive nations to develop “leapfrog technologies” in international 

telecommunications. Some of these technologies have the capacity to constrain the 

capability of the United States to maintain commercial and military supremacy, 

especially in network-centric warfare.3

American leadership is particularly threatened in the telecommunications technologies that make 

up the underlying routing and protocol fabric of the Internet. Countries capable of challenging 

the United States have invested heavily in networks. China in particular has a network 

infrastructure that is as good in its critical cores as the current American telecommunication 

system and shows every possibility of surpassing it in the next several years. In fact, potential 

competitors already have surpassed the United States in many ways in the use of the new 

technologies in commercial applications, as anyone familiar with wireless-handset development 

and use in Japan, Korea, and China knows. 

This paper considers the relative decline of American telecommunications leadership from

geopolitical and technical perspectives. This decline is important to recognize and understand 

because it is masked by the achievements of the American economy and U.S. military successes 

since the end of the Cold War.4

 

The five sections of this paper cumulatively describe the present situation and its likely 

development over the next 10–15 years. Section one explores current perceptions of potential 

technological competitors and adversaries and discusses development philosophies and technical 

advancement in telecommunications in China and, to a lesser extent, Russia and India. 

Section two analyzes some of the major factors that have made China America’s biggest 

telecommunications competitor, including centralized state planning, technology transfer, the 

development of the Chinese microprocessor industry, and the Chinese takeover of global 

telecommunications hardware engineering. Software development in China, a more recent 

emphasis of the Chinese government, also is addressed. 

 

2

 In telecommunications system operations, these numbers do not include the high number of adjunct technicians 

running billing systems, network-monitoring facilities, and provisioning systems necessary to run a modern complex 

national telecommunications capability. 

3 This is a paper about geopolitics, not a primer on network-centric warfare, an area in which fluid definitions can be

applied to warfare on strategic, operational, and tactical levels. Wherever possible, I use the term

telecommunications-based warfare because I think the term network-centric warfare is too closely associated with 

the Internet conceived as a global, unitary network. Telecommunications-based warfare does not depend entirely on

the Internet. For example, if the Internet were to experience a catastrophic failure during naval actions near the coast 

of China, significant command and control could be accomplished with high-frequency radios and specialized 

modems. Older technology is sometimes the most robust. 4

 Peter J. Hugill, Global Communications since 1844, (Baltimore and London: The Johns Hopkins University Press, 

1999). 

2
Section three briefly examines the process of financing technological development in China. 

State-supported finance and access to private equity are related to models of research, 

innovation, and product development in the Chinese telecommunications industry. 

Section four discusses Chinese emphasis on developing a leading position in IPv6―the 

underlying protocol of the next-generation Internet and a potential leapfrog technology―and 

concludes that China is integrating IPv6 technologies into a new political economy that is 

consistent with Chinese goals for regional economic and political dominance. 

Section five suggests the possibility that China, based on its demographics, educational 

resources, and recent rapid progress, will surpass the United States in technological innovation in

telecommunications. Among other consequences, this development threatens America’s 

increasingly network-based defense strategy. 

The paper does not argue that the United States will necessarily become a victim of other countries’

successes, but it does suggest the need for greater awareness of the growing technical power, particularly

in telecommunications, of economic competitors and potential adversaries. To paraphrase a leading 

geopolitical thinker of another age, Halford Mackinder, “Information is power, and whoever rules the 

world’s telecommunications system commands the world.”

3
2. International Telecommunications 

Perceptions 

In a recent report, The International Telecommunications Union (ITU) describes a future of 

constant global innovation and growth, particularly in telecommunications services and the 

increasingly small and mobile access devices that will drive the industry.5

 Virtually all 

manufacturing of these devices will be in China. The Chinese telecommunications industry will 

service the most dynamic new markets as more people around the world integrate low-cost 

telecommunications into their daily activities. More engineers and technologists, especially in 

China, India, and Europe, will gain an understanding of the underlying technology, and more and 

more capital will follow the highest returns in intellectual capacity at lowest cost. Several 

countries will approach parity with the U.S. in telecommunications technology innovation in the 

next ten years. 

This means the pace of international technical innovation will accelerate. Already the rate of 

change is so fast it is impossible to get a fix on the status of networks in transition. It is only 

possible to get a fix on perceptions, or misperceptions, which develop and change more slowly. 

One common misperception is that there is a global telecommunications network. This is not 

quite precise. There is an international system of telecommunications that corresponds with the 

international system of states. In the international telecommunications system, including the 

Internet, applications such as financial transactions, web searches, and email are operated on a 

meta-idea of globalization but rely on a physical set of private networks owned by businesses 

and governments within sovereign states. So, at every level of strategic and commercial 

interconnection, this global network is as much competitive as cooperative. 

Another common misperception is that the United States somehow controls this non-existent 

global telecommunications network. Much of the world’s network infrastructure is really owned 

by businesses and governments of other countries. Virtually every American telecommunications 

operating company has retreated from active ownership of international telecommunications 

networks.6

 This is not simply a matter of ceding commercial dominance: it has implications for 

U.S. military operations. In periods of high traffic, which often accompany a crisis, it is 

estimated that up to 90 percent of Department of Defense (DOD) traffic is carried on networks 

owned and maintained by entities in other countries.7

 These countries have the capacity to inhibit 

or disrupt U.S. telecommunications outside American borders at any time. 

 

5 “The Portable Internet,” International Telecommunications Union, Geneva, September 2004. 6

 The last American international telecommunications company with its own assets around the world, the Los 

Angeles-based Infonet Services Company, was sold to British Telecommunications PLC in May 2005. 7

 Lawrence Greenberg, "Danger.com: National Security in a Wired World", in Economic Strategy and National 

Security: A Next Generation Approach, ed. Patrick J. DeSouza (Boulder, CO: Westview Press, 2000. It's impossible 

to put a precise figure on the amount of military traffic passing through international networks at any time. A recent 

4
Still another misperception is that the United States maintains and will continue to maintain 

technological leadership in telecommunications technologies. While the United States might still 

be considered the global technological leader, it is unlikely to maintain this position. Western 

Europe, China, India, and Russia, either alone or in bilateral or multilateral combinations, have 

the capability to match or exceed the United States in specific areas of telecommunications 

innovation. The telecommunications manufacturing industry has almost entirely moved to China 

and, therefore, is substantially controlled by China. 

The following sections explore several of the issues surrounding telecommunications geopolitics 

and technology innovation in the United States, China, Russia, and India. 

China 

It is widely believed in the United States that China does the low-end manufacturing and the 

United States operates in the higher reaches of the economic value chain, doing the thinking, 

design, systems integration, and selling. However, China already has the components in place to 

become the most sophisticated telecommunications society on the planet in the next ten years. It 

already possesses the world’s largest fiber optic networks, cellular and mobile networks, national 

Internet, terrestrial access networks, third- and fourth-generation test beds (3G and 4G cellular 

networks with high speed data capacity), and telecommunication manufacturing capability. 

The U.S.-China Economic and Security Review Commission, mandated by Congress to produce 

annual reports on U.S.-China relations, is concerned that as China’s economic power expands, its 

ability to acquire advanced U.S. technology and production facilities will increase exponentially. 

Unfortunately that only considers part of the problem. China is eclectic in its pursuit of

technology. The United States is not its only target: China applies the same strategies to collect 

technological know-how to every country with a developed technical infrastructure.8

What does all this mean? According to John Gage, a leading American technologist and Sun 

Microsystem’s Chief Technology Officer, it means China is becoming an innovative competitor 

via a "technology explosion."9

In China, the last five years have seen an incredible explosion of innovation and 

experimentation, as the Chinese Education and Research Network (CerNet) has linked a 

thousand universities, courses teaching Java to millions of students have proliferated, and 

a new generation of companies such as Huawei and UT Starcom10 have emerged as world 

competitors in networking and distributed systems. 

 figure puts the amount at 70% for a major U.S. international exercise. Appendix A, page CRS-34, "Network Centric 

Warfare: Background and Oversight Issues for Congress," Clay Wilson, March 18, 2005. 8

 U.S.-China Economic and Security Review Commission, Annual Report, June 2004. 9

 China’s “Technology Explosion,” John Gage, Red Herring, May 15, 2004. 10 UT Starcom is in fact a U.S.-based company, but most of its production and sales are in Asia. 

5
Because innovations are inevitable when you have a large group working in technology 

areas, as China has, the impact of CerNet will be considerable. The connection linking 

Chinese universities is now at 10 gigabits between some campuses, and it reaches out to 

tens of millions of Chinese students and faculty.11 Add to that the explosion of the 

wireless network, with nearly 300 million mobile users in China, and you have a caldron 

right now: a center of innovation that is supported by very inexpensive 

telecommunications 

China has standardized on open source, with Linux as a core component, and we’re going 

to see a round of innovations in provision of mobile services that require high bandwidth 

because China now has it. When you visit any university, you find a hardworking and

dedicated group of students. And enrollments in science and engineering are rising, in 

contrast to the U.S. 

 

It’s true of all high-tech companies in the United States; if you analyze the work force 

you’ll find 10, 20, maybe even 30 percent are of Chinese origins, with strong links back 

to their university on the mainland. If you examine the technical journals, like the 30 or 

so published by IEEE, you will notice the number of articles published by Chinese has 

gone up by a factor of 10 over the past four to five years. These are peer-reviewed, high 

quality, advanced engineering journals. I think the last five years have transformed the 

interaction of Chinese engineering with the rest of the world. 

 

Couple this rate of innovation with the increasing Chinese and international capital resources 

being allocated to applied research in China, and the seriousness of the potential competition 

becomes apparent. The investment growth curve in science and technology appears to be 

accelerating. Extrapolation from information available from the Chinese Ministry of Science and 

Technology yields an estimate of $33 billion in 2005, growing at approximately 25 percent a 

year. 

China's Commercial Strategy 

As always in a large bureaucracy, where one sits shapes ones views. The Departments of 

Commerce and State view China as a necessary and manageable commercial partner. The U.S. 

Trade Representative and Department of Defense see a strategic competitor and, eventually, a 

threat to the United States in both trade and military affairs. Americans tend to think we drive 

events. Actually, U.S. government perceptions and actions have been largely irrelevant to 

China’s takeover of the telecommunications industry. 

At the United States and China Telecommunications Summit, June 17, 2004, Secretary of 

Commerce Evans described the United States and China as the world’s primary engines of global 

telecommunications growth. Such statements are flattering to the Chinese and always result in 

appreciative smiles and nods all around. In return, as in most conferences, Chinese commercial 

and government leaders acknowledged that the United States is the global technical leader and is 

likely to remain so for a long time. Based on my personal experience in China, this is universally 

stated by every technical leader at almost every meeting with foreigners. But it is becoming 

 

11 U.S.-China Economic and Security Review Commission, “China as an Emerging Regional and Technology

Power: Implications for U.S. Economic and Security interests”, Greg Lucier, testimony on February12–13, 2004

6
apparent that no one in the Chinese technical or political leadership believes it any more, 

especially for the middle or long term. 

No sense of threat or confrontation is evident in a commercial conference sponsored by the 

Department of Commerce. It is a collaborative meeting of engineers, scientists, and academics 

interested in the general promotion of technical knowledge and the economic benefits that can be 

derived from it. The meetings are always collegial and friendly. Information is freely and usually 

condescendingly offered by U.S. participants to the Chinese. Both sides openly discuss national 

industrial policy. But the alert participant will notice clear cultural differences in approaching 

telecommunications development and may begin to understand how China has advanced so 

quickly in so many areas. 

Even in the era of the socialist market economy, China maintains significant elements of a 

planned command economy.

 12 Although state planning is antithetical to the free market model 

by which many Westerners judge the Chinese economy, it works in many sectors, including 

telecommunications. 

The Chinese have used several methods to reach their current high standard of 

telecommunication development. 

• Extensively detailed Communist Party Five-Year Plans that are a pivot of the national 

industrial policy for telecommunications. 

• A restrictive regulatory policy that prevents foreign operators from competing with 

indigenous operating companies, such as China Telecom and China Netcom, thereby 

providing closed markets for Chinese equipment suppliers. 

• Joint ventures and wholly owned foreign enterprises that bring sophisticated technology 

to China in return for market access. 

• A system of university-affiliated enterprises that provide state-funded research for 

industry, a funding system that developed when companies had very little access to 

capital. This relieves corporations of the financial burden of R&D and permits the 

government to allocate innovation to select enterprises. These operations are focused 

mostly on technology transfer and product development. As of mid-2002, there were over 

5,000 enterprises of all types affiliated with Chinese universities. 

• Government-to-government foreign cooperation agreements with the United States, 

Russia, India, Israel, and several other European and Asian countries. 

 

12 In many ways the current Chinese economy can be explained by a reference to Lenin's 

New Economic Policy, a state capitalist model dominated by democratic centralism, except that under Deng Xiao 

Ping the ideas and structure had time to mature. The idea that China is emerging into unfettered free-market 

capitalism and eventual popular democracy strikes me as unfounded in Chinese history or culture. 

7
• Education of Chinese engineers abroad, who then return with new knowledge. Many 

work for the newest and most innovative Chinese information technology (IT) 

companies. 

• Commercial espionage.13

• Sophisticated collection programs of publicly available research publications and webbased research. 

• Internally generated innovation, R&D centers, and research parks. The Zhonguancun 

high-tech zone in Beijing is reported to have 10,000 companies, though most of them are 

quite small and often employ only a handful of people. Only 12 percent of these 

companies are foreign owned. Technical zones in Shanghai and Guangdong province 

provide China with a diverse, regionalized, technical base, each zone increasingly 

producing technical innovation. 

• Large-scale piracy, which continues to characterize intellectual property rights (IPR) 

protection in China and is a major concern for U.S. exporters of high-tech goods and 

services. While the central government has instituted laws to strengthen IPR protection, 

enforcement has suffered from a lack of government coordination and from local 

protectionism and corruption. 

The American style of planning and funding technological development is largely iterative. It is 

based on a relationship between funding and market results. Virtually all economic growth in the 

American economy, and indeed all industrial economies, comes from incremental improvement 

in productivity, products, and markets, not from exciting new enterprises and businesses based 

on radical new technologies. In the United States, telecommunications funding is conservative 

and goal driven. Capital is invested with a goal to maximize return on investment within the 

existing telecommunications technological and regulatory structure. Products like iPod and 

Blackberry, while commercially successful in the United States, are considered to be behind the 

design curve in leading Chinese companies.14 

The sources of new industries and new commercial opportunities come from radical market- and 

technology-based innovations that create markets.15Technical innovation often comes from the 

interaction of talented communities of engineers and scientists. And almost all the conditions that

were present in Silicon Valley in the 1990s, a period of intense innovation in the United States, 

are present in Beijing and Shanghai today. 

Until very recently, and despite some similarities to the American model, Chinese technology 

development derived from a different philosophical orientation. The Chinese science and 

technology community has a deep interest in understanding the historical dynamics of 

 

13 Trade Secrets Law Forum, www.rmarkhalligan2.com maintains an active bulletin board on trade secrets and

commercial espionage, including Chinese activities. 14 Many of the early developments in packet switching and other telecommunications derived from military

research. 15 Executive Summary, “U.S.-China Seminar on Technical Innovations,” George Mason University, Summer 2002. 

8
technology development. Perhaps this is a residual Marxist component of Chinese technical 

thought; if there is a component of historical determinism in technology development, knowing 

how it works could save a lot of time and money. 

Of course, this will change as a new generation of technologists, often trained in American 

universities, becomes ascendant. And it became apparent in 2005 that the Chinese are indeed 

incorporating a more iterative model into the socialist market economy. Thus, the country is 

combining the advantages of a command economy, which gives a national priority to 

telecommunications development, and the iterative, intellectual processes and growing funding 

capabilities of a Western development model. In a number of telecommunications technologies, 

the Chinese have moved quickly from imitation to incremental design improvements, to 

indigenous innovation. This is evident in the evolution of technological capability in such 

Chinese telecommunications companies as EastCom, Huawei, and China Putian, which are large, 

export-oriented telecommunications system manufacturers16

India 

Until recently, India, as a putative neutral country, was on the margins of U.S. interests. In the 

last several years, as India’s software development capabilities and growing regional influence 

have become increasingly evident, American interest has grown. 

India has a highly developed technical capability that is different from China’s. India’s technical 

plan appears to be market driven, providing low-cost, advanced, software-support services to 

multinational companies. There is no indication yet that India is interested in becoming a global 

leader in the development of telecommunications manufacturing and services standards, which is 

a goal of China. Current estimates indicate national telecommunications and IT revenues at 

between $14 and $17 billion. This is important, because telecommunications and IT are so 

closely intertwined in India. The applications that run on the physical infrastructure of the 

international telecommunication system, and the back office functions, such as billing, order 

entry, maintenance scheduling, fault reporting, are IT functions. These are functions that can be 

modularized and resold, therefore are dependent on excellent administrative management, a 

practice that Indian companies like Wipro and Infosys have mastered. 

The industry has been highly export-oriented since the first leased lines (privately purchased 

portions of circuits) between the United State and India were used for software development in 

the mid-1980s at Carnegie-Mellon University. Domestic demand accounts for less than one-fifth 

of output. IT products—mainly software—accounted for 11 percent of current-account receipts 

and 19 percent of goods exports in 2002/2003. The most important market is the United States, 

which absorbs about 60 percent of India’s software exports.17 

India has several major privatized telecom groups. The most significant are the Tata Group, 

which is almost wholly domestic, and the Reliance Group, which is particularly aggressive in 

 

16 Robert Fonow, “Beyond the Mainland: Chinese Telecommunications Expansion,” Defense Horizons 29, 

(Washington, DC: Center for Technology and National Security Policy, July 2003) 17 Economist Intelligence Unit Viewswire, New York, Jan 13, 2004

9
India and internationally. Reliance Infocomm, owned by the Reliance group (which is controlled 

by the Ambani family, India’s largest business group) is building an 85,000-kilometer, fiberoptic network linking 750 towns and cities. The network is part of a $3 billion investment in 

Reliance Infocomm in the past two years. It is designed to service the data needs of broadband 

customers and is currently used mainly for Reliance’s fixed-line and mobile telephony 

applications. Reliance has over 25 million cellular subscribers. 

India missed out on the bandwidth boom of the late 1990s, which put vast international capacity 

across the Atlantic and Pacific but left India relatively isolated. This is changing rapidly. 

According to Telegeography, India’s international submarine capacity will have grown from 31 

Gbps in 2001 to 541 Gbps by the end of 2004. This is still a minor percentage of global 

bandwidth, but if a company or government is sending traffic to South Asia, it will go over 

Indian owned and managed telecommunications resources, an important geopolitical 

consideration. 

In January 2004 the Reliance group completed the acquisition of the globe-spanning FLAG 

undersea cable system, and in March 2004 announced a new cable project between the Middle 

East and India. The new cable system, called FALCON, will provide 15 terabits of capacity from 

Egypt and around the Gulf in a self-healing network that will link to India and Hong Kong and 

China by 2005. Tata Group recently announced the acquisition of Tycom’s submarine cable 

assets. Indian companies now own and control a major undersea fiber-optic sector of the South 

Asian telecommunications infrastructure linking the Middle East and Singapore. 

Bandwidth capacity prices from the United States to India are still five to ten times higher than 

on the U.S.-Hong Kong route. The increase in capacity and number of competing cable systems 

will drive down the price of bandwidth to India, making Indian software development even 

cheaper for American and European corporations. Elsewhere in Asia, prices declined by 60 

percent or more in the last year. This decline is likely to be repeated in India, which will make 

the country an even stronger competitor for outsourced labor from the United States and Europe. 

India now controls the flow of telecommunications traffic in South Asia.18 It should not be 

considered a client of the United States. At the Global Strategic Review of the International 

Institute for Strategic Studies in Geneva in September 2005, very senior Indian officials were 

explicit that India would keep a balanced approach to politics, diplomacy, and commerce with 

both China and the United States, specifically stating the United States would not be able to use 

its relationships with India to counterbalance Chinese interests. In 2005 there emerged dramatic 

growth in the cooperation between Chinese and Indian telecommunications equipment suppliers 

and software developers.19

Russia 

 

18 See www.telegeography.com, free resources, maps for an indication of traffic flows in South Asia and the Middle 

East. 

19 Howard W. French, "India and China woo cross-border business", International Herald Tribune (New York

Times), November 8, 2005. 

10
The Soviet Union was an early competitor with the United States in telecommunications 

switching technologies but eventually lagged behind. Currently, Russia has no major 

international competitor companies in the telecommunications equipment sector. However, it 

does have numerous smaller manufacturing and assembly companies in the router and ancillary 

networking equipment markets that produce capable products. Some bilateral research, 

sponsored by China Putian, Huawei, and ZTE corporations, is being conducted between Chinese 

and Russian telecommunications research institutes, but on a scale that is not likely to result in 

leapfrog technologies. 

The Russian telecom press continues to register disappointment that Russia, for all of its 

remarkable engineering talent, lags behind China and India in telecommunications and software 

development. A predicted breakthrough as a primary destination for outsourcing didn’t happen. 

This is a consequence of the structure of the telecommunications and information technologies in 

the country. India has been a code-writing shop, selling low-cost, routine software services by 

the hour. Russian programmers are hardware and system integration engineers, often trained to 

work on massive, complex projects involving the country’s energy industry and the space and 

military sectors. As a consequence, Russia can’t compete with the Indian outsourcing sector for 

routine coding, which is basically a rote, organizational model. Some Russian technologists 

believe that their future lies with product development (the Israeli model) rather than offshorecontracted programming (the Indian model).20 

The best prospects for Russian software are related to product-oriented and system-integration 

business models rather than order-oriented man-hours sold at the lowest cost. For example, the 

Russian company SPIRIT licenses furnished software products to Japan Radio Corporation, 

NEC, Nortel, Samsung, Texas Instruments, Toshiba, and other leaders of international computer 

and telecommunications markets. In 2001, SPIRIT entered into a strategic relationship with 

Texas Instruments (TI) for the largest, licensed, software export deal in Russian history. The 

market-leading TI C54 Digital Signal Processor (DSP) has SPIRIT’s integrated telephony 

software embedded in the processor. The DSPs are included in cell phones, wireless access 

systems, fax machines, modems, personal digital assistants, etc. for major suppliers around the 

world.21 With access to capital and a clearly developed strategy, Russian companies can be 

innovative and service the largest international technology companies. But this is rare. 

Russia has a legacy of advanced education, including one of the highest literacy rates in the 

world, a tradition of high-tech research and development, competitiveness, and mathematical 

skills. Russian software executives believe that quality is higher in Russia than in India and that 

labor costs are lower. Some analysts believe that the world’s best—and also cheapest—

programmers are in Russia. Russia’s software industry lacks brand value, management, and 

marketing expertise, but clearly has the capability to make rapid advances under better 

management and with access to capital. Some of the obstacles to progress are lack of interaction 

between companies for fear of poaching employees, language barriers (e.g. relatively few 

technicians with good English skills), and outdated management techniques. In addition, 

training, education, and R&D in software are at low levels. 

 

20 The comparison of “the Israeli model” and “the Indian model” is the shorthand description used by Russian 

telecommunications writers. 21 Mr. Sviridenko’s interview is on www.outsourcing-Russia.com, accessed on August 27, 2004. 

11
High-tech corridors are emerging in and between St. Petersburg, Moscow, and Novosibirsk. 

Geopolitically this means a path of industrial production and trading along the old Silk Road and 

the reemergence of a sophisticated line of commercial centers from Shanghai to Madrid. U.S. 

exports to Russia totaled only $2.5 billion in 2003, up 2.2 percent over the previous year. That 

makes Russia the 38th-ranked market for American goods. Russia exports to the United States 

totaled about $8.6 billion in 2003—up 25 percent, mainly because of a rise in energy prices.22

Growth will come from Eurasian economic interaction, and Russian companies will provide the 

IT and telecommunications that bridge the continent. 

Today, the telecommunications and information technology businesses in Russia display uneven 

signs of stability and progress. Certainly in Russia’s favor is that in the Dot Com era it didn’t 

over invest in telecoms.

23 As a result, the country is seen as a good destination for development 

capital. A surge in the flow to Russia of unsecured loans insured by the European Credit Agency 

(ECS) is underway, mainly for large investments in telecommunications. Russian telecom

companies will borrow more than $500 million under ECA guarantees this year. MTS is seeking 

bids from banks for a mandate to raise up to $350 million. Vimplecom, the other big player, is 

expected to borrow a similar amount, and Megafon is in talks with banks for a $150 million 

transaction. To finance telecommunication network rollouts, ECA-backed loans are the cheapest 

available to Russian borrowers.24

In telecommunications, Russia is served by several large, competing operating companies and is 

unique among modern countries in the remoteness of much of the country in relation to a 

relatively small population. As a consequence, in contrast to WLAN/Wi-Fi development 

common in Western Europe, new services in Russia are pushing newer technologies like 

WiMax, or Wi-Fi networks engineered to have some of the range of WiMax, capable of 

supporting 70Mbits per second date rates at a typical range of up to 30 miles. WiMax has the 

potential to complete the infrastructure buildup within Russia, where as many as 50,000 villages 

don’t have widely available phone service.25

Russian telecommunications is at an inflection point. The industry has the potential to develop 

sophisticated, value-added services and could be the leader in long-range, wide-bandwidth 

wireless applications. But the country must overcome a number of problems including 

corruption, capital allocation to promising industries, and improvement of management and 

financial reporting.

Chapter Summary 

What is happening in China, and to a lesser extent in India, is the internationalization of

knowledge being reflected back at the United States. The American companies operating in the 

 

22 Alan M. Field, Journal of Commerce, April 26, 2004, 1. 23 John Waggoner and Sandra Block, “Where in the world are today’s hottest markets,” USA Today, April 5, 2004. 24 Simon Pirani, “Through the Looking Glass,” Trade Finance, April 2004. 25 EBN, “Russia’s weak IT base draws investors.....”, Nicolas Mokhoff, Manhasset, NY, Nov 24, 2003, p.4, now

known as Electronics Supply & Manufacturing, www.my-esm.com, published by CMP group. 

12
market economic system have sold or traded their intellectual property to any bidder that could 

lower manufacturing cost and maximize profits. The intellectual output of large cadres of Indian 

and Chinese engineers, trained in American companies, and at taxpayer expense at publicly 

supported universities and research institutes, is now being arrayed against us―with unknown 

and unpredictable consequences. 

Today, China is the optimal country for manufacturing telecommunications equipment, including 

Internet and other data communications equipment. China can design and produce equipment 

from chip level up. As equipment gets smaller, and profitability is based on highly customized 

products, China will become the main source of new product development while remaining the 

key manufacturing country for global markets. This is because it possesses a vast supply of 

highly educated and cheap technical labor. 

India is a production line for low-cost coding but will move up the value chain. However, 

because it doesn’t have a manufacturing base, the software it produces is used on equipment and 

systems produced elsewhere, and it will probably always be a secondary source of innovation, 

primarily focused on support software functions. 

Russia is not yet a competitor on the scale of China and India. Russia can develop into a 

formidable technical innovator very quickly with access to capital, improved management 

training, and open access to markets in the telecommunications industry. The country possesses 

all the tools to be a leader in telecommunications technology and software development. Its 

under-utilized intellectual resources are vast, and significant numbers of scientists and engineers 

are world class. Thousands of Russian engineers have experience in large-scale program

management. This skilled workforce is largely underemployed and poorly paid. 

My recent experience in telecommunications development in Russia in 2004 and 2005 suggests a 

market that is still struggling to find its place in the global competitive system. There is an inertia 

and resistance to process change in Russia that does not exist in the United States, China, and 

India. There is a very real question whether existing regulatory and management structures will 

permit the imagination and entrepreneurialism necessary for success as cellular networks reach 

saturation in Russia, and further growth and profits in mobile, land line, and fixed wireless 

depends on the development of value-added services. The heavy hand of bureaucracy and 

political favoritism, combined with a prideful sense among many Russian managers that Western 

or Chinese management practices have little relevance to Russia, is a continuing drag on IT and 

telecommunications development, especially beyond metropolitan Moscow. 

In summary, the United States is not the unassailable leader in telecommunications equipment 

and services any longer. India has strengths in software development and outsourcing. Russia has 

strengths in large-scale system integration and long-range, high-bandwidth networking. But 

China is the most important competitor, a thriving hybrid model of capitalism and commandeconomy planning, with impressively growing technical resources. The next sections examine 

the factors that make China such a current and future telecom power. 

13
3. Changing Structures of Telecommunications 

Production: The Emerging Dominance of China 

Overview 

China has a unique combination of competitive advantages: a booming market for electronics 

products and services; the world’s largest pool of low-cost, specialized, and easily retrainable 

skills; the emergence of sophisticated lead users and test-bed markets; the ability of government 

policymakers to learn from the achievements and mistakes of Japan, Korea, and Taiwan; and the 

ability to quickly adjust its own national and local policies. In the past few years, China has 

experienced explosive growth in IT exports and is now the third largest IT exporter (up from

tenth in 2000). The production of these exports is highly concentrated in a few clusters in the 

Pearl River Delta, the Yangtze River Delta, and Beijing. The location-specific advantages of 

these clusters shape China’s overall technological trajectory, as well as the development of its 

innovative capabilities. 26 These developments indicate a profound change in international 

competitive telecommunications relations. 

Chinese government officials believe the United States and Japan reached their leading positions 

in the IT manufacturing industry because they were able to grasp and monopolize the design of 

integrated circuits and key components. Therefore, strengthening the development of core 

technologies, especially in the design and production of integrated components, became vital in 

the coordination between manufacturing and service industries in China.27 

In this process, foreign telecom firms have been required to provide substantial financing, 

telecom equipment, and know-how as part of Sino-foreign technology transfer in return for 

access to sales channels. Until very recently, most American companies gained market access in 

relation to the amount of technology transferred to China. The Chinese purpose is to get not the 

equipment, but the know-how that comes with making the equipment. This explains why the 

value of a joint venture has been measured according to the level of human resources that 

Western companies send to the venture in China to expedite technology transfer. 

Fiber grids and next-generation telecommunications networks, with their intellectual genesis 

abroad, are installed in every Chinese province. China has numerous telecom R&D labs funded 

by the Chinese government whose role is to integrate, adapt, and test foreign equipment that is to 

be connected to the national network—and to imitate and improve these technologies, often 

through reverse engineering. As a consequence, China now produces domestically developed 

fiber optic cables, telecommunications switches, and routers that compete with foreign-made 

 

26 Dieter Ernst and Barry Naughton, "China's Emerging Industrial Economy, Insights from the IT Industry", Paper 

for East-West Center Conference on China's Emerging Capitalist System, August 10-12, 2005. This is an up-to-date 

and comprehensive analysis of the nature of the Chinese IT industry. 27 10–Year Plan and Long Range Plan 3.1.6, Chinese University of Hong Kong translation of Chinese Version, 

provided by APCO China 

14
brands in China. Huawei commands the greatest market share in the PRC for optical systems 

equipment, outselling Lucent and Alcatel. Huawei’s Cisco-look-alike routers sell around the 

world at 50 percent of the price of comparable Cisco equipment. 

R&D in China now is sufficiently robust to develop communications systems and the software to 

run them. R&D activity includes integrating foreign technology with local systems and making 

foreign technology compatible with Chinese technical standards.28 This latter form of knowledge 

transfer (systems and standards integration capabilities) in particular could be useful to China’s 

defense modernization goals, especially in telecommunications command and control systems. 

The two most important technologies of China's pursuit of a leading position in global 

telecommunications are semiconductors and software. Both industries have benefited from a 

concerted Chinese government effort to bolster the country's competitive position. 

Semiconductors 

Semiconductors are the foundation technology of modern telecommunications equipment. They 

are the microprocessors or computer chips that execute the software commands that drive the 

system. In the semiconductor sector, U.S. government analysts judge China now to be at most 

two years behind leading American semiconductor manufacturing technology—and only one 

generation behind the commercial state of the art, and closing fast. A significant percentage of 

global semiconductor production now resides in China. More companies are placing their design 

and production in Asia, particularly in China, a development that will only hasten China’s 

telecommunications rise. Several structural changes in the semiconductor industry are facilitating 

and encouraging this shift. 

Physical proximity of intellectual assets is considered vital to innovative chip design, a process 

that creates the greatest value in the electronics and telecommunications industries. In research 

related to the semiconductor industry, Keith Pavitt distinguished cognitive and organizational 

dimensions of technological complexity. As for the cognitive dimension, a chip is “made up of 

numerous components and subsystems whose interactions are often non-linear and therefore 

impossible to predict.” Therefore the closer the interaction among key developers working in 

close proximity, the more likely something useful will result from theory. One can deduce from

this that the more the semiconductor industry concentrates in Asia, the more innovative ideas 

will emerge there.29

Dieter Ernst, an evolutionary economist at the University of Hawaii East West Center, argues 

that chip design is moving to Asia in direct response to design methodology changes (systemlevel integration through modular design and new organization of automated “design factories”). 

Both changes have dramatically increased the cognitive and organizational complexity of design. 

This makes it less likely that a single company will exclusively handle all stages of the design of

a chip. Instead, many companies contribute based on their specific areas of expertise. As a result, 

 

28 Kathleen Walsh, Foreign High Tech R&D in China (Washington DC: Stimson Center, 2003), provides a 

comprehensive political economy analysis of the Chinese software business in the early 2000s. 29 Pavitt is quoted in Ernst. See note 31 below. 

15
integrated forms of design organization, where almost entire integrated circuits (ICs) are 

designed within a single firm, are giving way to vertical specialization, where stages of IC design 

are outsourced (dis-integration of firm organization) and relocated across national boundaries 

(geographic dispersion). Much of the dis-integrated geographic dispersion is now relocating in 

China and other Asian economies. 

China is also attracting more semiconductor production because of the strides it has made in 

entering the global market for chip design. It appears that during the “global” downturn in the IT 

industries in the years 2001–2003, Asia’s leading IT exporting countries seized upon new 

opportunities to create commercially successful innovations in the production of hardware, 

software, and services, including semiconductors. 

Asia, excluding Japan, is the fastest growing market for electronic design automation (EDA) 

tools. In 2000, Asia’s EDA tool market grew 24 percent compared with 6 percent growth in 

North America, 13 percent in Europe, and 17 percent in Japan. A survey conducted in January 

2003 suggests that, excluding Japan, Asia’s share in the global production of chip design has 

increased from practically nothing during the mid 1990s to around 30 percent in 2002; North 

America’s share is 60 percent.30 By 2008, Asia’s share is projected to grow to more than 50 

percent. Most of the growth will be in China. 

Design complexity is low for a simple, single-layer IC but rises substantially for a multi-layer 

device. China has carefully but quickly moved up the ladder of complexity in IC design. 

Combined with the experience in detailed product design and engineering that Asian firms have 

accumulated in the fabrication of high-precision components like ICs, board-level design has 

given rise to a broad portfolio of design implementation capabilities. This explains why Asian 

original design manufacturers (ODMs) like HonHai and Mitac from Taiwan and NamTai from

Hong Kong compete successfully with the leading U.S.-controlled global electronic 

manufacturing services (EMS) providers, like Flextronics and Solectron.31

Another enabling factor in rapid development of the Chinese semiconductor business was the 

emergence of global vendors of design-automation tools, such as Synopsis, Cadence, and 

Mentor. Application-specific integrated circuit (ASIC) design requires well-defined procedures 

to develop and use cell libraries that contain design modules. To do this cost-effectively, a new 

design methodology was developed. The design requirements were implemented in a software 

language that inscribed digital circuits at the register transfer layer, which is more deeply 

imbedded in the design of the chip. Access to increasingly sophisticated EDA tools was critical 

to implementing this new design. As these tools became available on the market, albeit at a very 

high price, they provided entry opportunities for Asian design companies. And as the effective 

use of these tools required tweaking and adjustments, Asian companies were able to accumulate 

a broad set of capabilities related to the implementation of these increasingly automated design 

methodologies.32

 

30 www.isupply.com 31 Dieter Ernst, “Complexity and Internationalisation of Innovation—Why is Chip Design Moving to Asia?,” EastWest Center, Honolulu, Hawaii, forthcoming in International Journal of Innovation Management, special issue in 

honor of Keith Pavitt (Peter Augsdoerfer, Jonathan Sapsed and James Utterback, guest editors) 32 Ibid. 

16
Three other developments are further accelerating the growth and expanding the scope of IC 

design in Asia. First, global firms are expanding and upgrading their design centers in Asia as 

part of their global design networks. Second, leading Asian firms are emerging as new sources of 

IC design in pursuit of strategies to upgrade system development and standard-setting 

capabilities, especially in China. Third, smaller Asian firms are attempting to enter global design 

networks as specialized suppliers, primarily of design implementation services. 

In addition, all major global systems companies are expanding their Asian IC design centers to 

establish their own reference or platform designs as de facto module standards,33 especially for 

the next developments, 3G and 4G networks. This reflects the growing importance of Asia as a 

major growth market for existing IT products and services. In addition, China, Taiwan, and 

Korea now play leading roles as global test beds and launch markets for innovations in mobile 

telecommunications and digital consumer systems. This will accelerate as portable Internet 

devices become more common and eventually ubiquitous.34

China’s attempt to develop an alternative 3G digital wireless standard, called TD-SCDMA (time 

division synchronous code-division multiple access) created a strong motivation to expand Asian 

IC design activities. The TD-SCDMA standard, one of three 3G standards approved by the ITU, 

was developed by Datang Telecom, a state-owned enterprise (SOE), and the Research Institute 

of the Ministry of Information Industry (MII), with technical assistance from Siemens. TDSCDMA has been slow to market, and the Chinese government is holding up 3G licenses until it 

is ready to compete commercially with other GSM and CDMA standards. The system is 

expected to enter production soon and may become a standard used more in developing 

countries, especially if China, as expected, underwrites or subsidizes Chinese suppliers. 

Nevertheless, the momentum in China created by TD-SCDMA has facilitated in China the 

creation of the largest and most diverse 3G and 4G test beds in the world. Combined with the 

other developments noted in this section, it indicates that China will be a key source of wireless

products and applications in the future. 

Software Development 

As noted earlier, telecommunications and IT are inter-related. The term telecommunications 

systems describes the physical infrastructure; the applications and back office functions are 

provided by IT services. China’s software development related to the telecommunications and 

Internet industries lags behind the United States in a number of significant ways, but it is 

improving. 

Although there is certainly good programming in China, it is still a developing field. As recently 

as 15 years ago it was impossible to study for a degree in China in software or computer science 

as independent disciplines. Compared to the United States, India, and Russia, Chinese software 

companies are small and still generally imitative. Some observers in China also believe that the 

 

33 This refers to packaged software modules that can be sold for re-use in a variety of applications under 

development. 34 “The Portable Internet,” an ITU Report on the Internet, September 2004.

17
industry suffered catastrophically in the dot.com and telecommunications collapse of 2000, 

which lead many promising programmers and developers to seek work outside the 

telecommunications sector. That the industry has recovered so quickly is evidence of the 

enormous educational and highly mobile human resources available to Chinese policymakers. 

As a strong supporter of the software industry, the government offers incentives that range from

tax concessions to research grants. On the other hand, as a regulator, it often makes decisions 

that restrict access to funds or technologies and tend to restrict the industry’s natural growth and 

progress, especially in areas such as financial system practices and regulations. Internet content 

development is widely accepted to be closely monitored and controlled. Ultimately, China values

order more than market efficiency. 

The government has established a series of administrative guidelines that, in effect, give large, 

SOEs an advantage over their private-sector competitors. These advantages include access to 

bank financing. In the telecommunications industry, contract applicants for government work 

must obtain a Certificate of Capability and Quality, issued by the Ministry of Information 

Industry (MII) at national, provincial, and municipal levels. The standards set for this certificate 

have nothing to do with projects executed or objective work process considerations, but are 

based strictly on such traditional measurements as number of engineers, total net assets, 

registered capital, and annual revenues. In China, it is very difficult for most private-sector 

companies to meet these requirements. 

The main difference between software companies in China and those in developed countries is 

that few Chinese companies depend on the features of their products for competitive advantage. 

Competition is based on price, distribution, and relationships. This is beginning to change in the 

major cities where international business standards are more common, particularly in the eastern 

coastal regions. 

Custom software development and integration shops are numerous and cover the entire range in 

terms of size, geographic coverage, technical capabilities, and other corporate measures. 

They tend to be industry-focused and regional. To make inroads into their respective industries, 

they must have strong domestic relationships with the industry, which can result in technical 

mediocrity, because purchases are based on measures other than technical merit. Relationships

are still primary in China. 

Yet, domestic software producers can be competitive with foreign suppliers in several industries, 

from tax collection to hospital information systems. The language barrier and reluctance of 

foreign vendors to localize their offerings are strengthening this trend. Domestic products tend to 

be less expensive and have fewer functions than similar foreign products but are often adequate 

for the job they are asked to perform. Domestic solutions are often based on open source code 

that is repackaged for the Chinese market. 

Foreign-owned labs in China place much more emphasis on finding product applications for 

their theoretical findings, following the iterative model described earlier. Researchers are 

working on computer graphics, speech recognition, text translation, and value-added 

telecommunications services using interactive voice response. 

18
A conservative estimate is that as many as 300 foreign research centers, mostly software 

engineering, have been founded in China in the last three years. The Chinese Ministry of 

Commerce claims 600, with expectations of 200 more per year.35 

In computer software, Chinese companies such as Founder, Red Flag, UFSoft, Neusoft, Kingdee, 

and Top Group are both partnering and competing with foreign, high-tech leaders such as 

Microsoft, Oracle, IBM, and Sun Microsystems.

36 In telecommunications software, Huawei, 

Zhongxing, Datang Telecom, and Nanjing PTIC are high-tech competitors that are quickly 

gaining ground in China and in foreign markets against foreign equipment suppliers such as 

Lucent, Nortel, Alcatel, and Cisco. 

Implications 

 

Approximately 86 percent of R&D in global information technology and telecommunications 

still takes place in industrialized countries, with the United States occupying the lead position 

with 37 percent. The United States remains ahead in the most prized areas of technological 

innovation, as far as these can be measured by patent statistics. The U.S. innovation score 

measures the number of patents granted by the U.S Patent Office, multiplied by an index that 

incorporates the value of these patents. Since 1985, the U.S. innovation score has more than 

doubled and far exceeded that of any other country. In 2002, all 15 leading companies with the 

best records on patent citations were based in the United States. Nine of them were in the IT 

sector. 

But there is evidence of an accelerating strengthening of Asian capability in technological 

knowledge creation. In a handful of emerging centers of excellence in Asia, sophisticated 

innovation and research capability appear to have followed the earlier development of electronics

manufacturing capability. For the first time, Chinese companies submit and are awarded more 

patents than foreign joint ventures or wholly foreign-owned enterprises in China. Huawei, which 

claims to have continuously invested more than 10 percent of its revenues in R&D, states that it 

now owns 46 Wide-band Code Division Multiple Access (WCDMA) basic patents, accounting 

for 5 percent of all WCDMA basic patents in the world. 

Global macro economic factors also work to Asia’s, and especially China’s, advantage. As a 

result of the 2001-2003 downturn in the global IT sector, winning design contracts from global 

chip set makers has become increasingly difficult and costly for western design houses. This 

trend reflects the extremely cautious approach of chip set makers to new product development. 

For IC design, this implies that improving performance features is combined with a relatively 

conservative approach to design that helps to improve manufacturing yields. 

Interviews by Dieter Ernst show that Asian system companies are more willing to use new and 

unconventional chip designs. Their concern is whether these designs will enable them to reach 

 

35 “Let a Thousand Ideas Flower: China is a New Hotbed of Research”,

www.nytimes.com/2004/09/13/technology/13China.html. 36 See Walsh for a wider assessment of Chinese technological trends. 

19
their main objectives: to improve both speed-to-market and market penetration. This approach 

sets the Asian system companies apart from the global market leaders, who are more cautious 

and unwilling to shoulder the higher costs and risks of innovative designs. A shift in the market 

for more sophisticated and innovative chip sets may provide a further, powerful incentive for 

more of the large manufacturers and design houses to relocate to the region. 

The growth of the low-cost, base software and semiconductor industry in China, which provides 

the underlying technologies for all telecommunications equipment and applications, has 

immediate consequences. It permits experimentation in product design and development that will 

result in new products and services designed, manufactured, and competing in global markets. 

PT Expocomm, the largest telecommunications exhibition in China, is held annually at the 

Beijing International Exhibition Center. Previously the stars of the show were American and 

European companies, which often invested several hundred thousands of dollars in impressive 

displays. In October 2004 and 2005, PT Expocomm was primarily a Chinese show. Few 

American and European companies even bothered to show up. At both shows, the most 

important in the world’s largest telecommunications market, only a handful of American 

companies exhibited. 

The design, quality, and cost of Chinese-produced telecommunications equipment, especially 

handheld and remote access devices, now equals or surpasses common global standards. Chinese 

design criteria and advanced manufacturing processes enable Chinese manufacturers to produce 

a wide variety of products to satisfy individual customer or user requirements. It is important to 

understand that the newest mobile technologies, which will have military capabilities equal to 

handheld wireless capabilities used by U.S forces, will mostly be produced in China. Few major 

American companies compete, at least so far, in this sector of the telecommunications market. 

Those that claim advanced capabilities almost certainly have a significant portion of their 

products manufactured in China.

20
4. Capital and Finance in Chinese 

Telecommunications 

Access to capital is one of the key factors in telecommunications innovation. Until very recently, 

China's capital markets were undeveloped, and it was very difficult, especially for innovative, 

entrepreneurial companies, to get funded. This explains to some degree the heavy role in capital 

allocation played by the Chinese government. The situation remains dire for many promising 

companies, because government funds often go to politically powerful industry groups. 

However, success is bringing capital accumulation and more vehicles for funding are quickly 

becoming available. This will accelerate the rate of technical innovation in China. 

Today, internally generated profits―especially from manufacturing export firms―re-invested 

into product development, are becoming the most important sources of funding for technological 

innovation. External sources of funds are mainly from local and central government and banks. 

Equity markets and external equity financing channels, including private equity, play a relatively 

small but growing role in technological innovation. As the balance changes, corporate foreign 

direct investment will play a diminishing role. 

Private Equity in China 

Private equity is used to fund start-up companies as they attempt to introduce new technologies 

or methods into the marketplace and move toward break even, eventual profitability, and funding 

through an initial private offering (IPO). Start-ups are high-risk investments in any country and 

even more so in China, because its recent transition to capital markets is reflected in an 

underdeveloped corporate legal system. So, in China, money for start-ups usually is not available 

from lending agencies, such as banks or bond issuers, which depend on stable payments. This 

means that private equity investors are often the only ones with money to fund entrepreneurial 

companies, 

Private equity investors encounter challenges at every step of the process, including identifying 

companies to invest in, performing due diligence, negotiating terms, and exiting their 

investments. 

The first problem is finding the deal. Despite its authoritarian, centralized political governance, 

China is a fractured market. Each region, province, and industry has different regulatory and 

taxation requirements. The high-tech industry has several geographical zones, each very large 

and with numerous potential opportunities. Often, accounting is deficient or practices inefficient,

making valuation of companies difficult. 

The second problem is that negotiating deals is extremely difficult. Chinese entrepreneurs and 

experienced finance specialists often can’t agree on valuations―the price of the investment. 

Third-world entrepreneurs are notorious for attempting to overvalue their assets, leading to 

21
tedious negotiations over unrealistic expectations. Chinese firms often benchmark their 

valuations based on similar firms in America, while equity firms and private investors stress the 

different risk factors. 

The third problem, which is related to the second, is that national growth rates are a factor in 

valuation. Valuations for Chinese firms may be boosted disproportionately by China’s overall 

growth prospects. 

Gaining control can be difficult, and Chinese entrepreneurs are unyielding. Even in larger 

companies, major investors find it difficult to gain board seats, and minority shareholder rights 

are widely ignored. 

Another problem is finding and keeping a strong management team. Many Chinese managers, 

especially those who speak English and work for foreign companies, change jobs frequently for 

higher pay. 

Finally, channels for exiting an investment are narrow. The Shanghai and Shenzen stock markets 

almost exclusively list SOEs. Chinese firms often look for strategic buyers to provide liquidity—

typically foreign corporations looking to acquire new capabilities or the opportunity to snap up 

smaller, innovative firms. Hong Kong and New York stock markets are much more open to IPOs 

than are Chinese stock markets. 

Private equity investors have been cautious about investing in China. Even in developed 

countries there is very little legal redress for private equity losses, but money lost in China is 

truly money lost. As the legal system develops to protect investors, there is more interest in 

private investment in China. Historically, the level or amount of private equity invested in a 

country or industry has been a leading indicator of innovation. So far, most American venture 

capital firms have done no more than a handful of deals in China.37 

Today, most capital in China is from internal sources, though this is changing. According to the 

China Business Review, “China is the most important growth market for private equity in 

Asia.”38 But China’s financial markets and major banking companies are poorly equipped to 

fund its growth. Chinese banks loan much of their money to SOEs and lack the credit tools to 

analyze the credit risk of new firms with unproven technology. 

In fact, it may be easier today for Chinese high-tech startups to get funded by American funding 

companies, especially private equity firms, than it is for American start-ups. Investment is a herd 

activity. The sense among private investors today is that China is the place to be, the center of 

future capital growth, and that the American economy is in decline, especially in high-tech, 

communications related businesses. Twenty-five percent of high-tech IPOs on Wall Street in 

2004 were Chinese companies. And indeed there is an intensity of activity in current Chinese 

telecommunications development that is not as apparent in the United States. 

 

37 Business Week, June 14, 2004 38 “Private Equity in China: Risk for Reward,” The China Business Review, July-August 2004, pg.48. 

22
Despite China’s clear lead in attracting foreign direct investment, for example corporate 

investment in developing new subsidiaries, India attracted more private equity annually until 

2003. India’s predictable laws, multiple stock exchanges, and recent entrepreneurial history are a 

strong draw. But global investment firms are reacting positively to new Chinese regulations and 

perceived openness to private business. According to the Asian Venture Capital Review, China 

attracted $1.3 billion in private equity in 2004, 30 percent more than in 2003. As much as $1 

billion of that capital was in the form of venture capital. Carlyle Asian Ventures, for example, is 

planning to invest between $750 million and $1 billion in China in the next two years. 

Private equity investors are directing their capital to three categories: first, to the hundreds of 

SOEs that are selling, restructuring, or privatizing parts of their assets; second, to established 

private businesses, which typically manufacture for domestic and international supply chains; 

third, to entrepreneurial start-ups in information technology, telecommunications, and 

biotechnology. 

Corporate Investment 

China remains a favorite destination of corporate capital investment. Actual foreign direct 

investment (FDI) rose to nearly $60 billion in 2004. Contracted FDI, deals that are signed but not 

yet completed, jumped even higher, to $73 billion in the same period.39

However, FDI figures deserve closer analysis. In the late 1990s, actual and contracted FDI 

numbers matched as firms invested as fast as they could sign deals. Although the absolute sums

have grown, a gap has emerged and widened. Not all the deals that are signed materialize, 

evidence that an increasing number are turning sour. 

There are foreign companies making good money in China, but the business environment is 

difficult for foreigners. Navigating China’s opaque bureaucracies and maze of ever-changing 

rules, finding trustworthy local partners, understanding that Chinese officials at the highest levels 

demand much but offer little in return for their support, and battling piracy and outright fraud 

continue to take up more time, energy, and money than in any other major market. 

The growing spread between signed deals and actual investment can mean two things. One is 

that foreign companies are tired of losing money in a country that only wants their money to 

develop its own economy and places structural barriers to earning revenues in China. Another is 

that the Chinese government departments that approve the deals are becoming more selective. As 

their own high-tech companies become competitive internationally in a particular sector, there is 

less need for foreign funding or technology transfer in that sector. Increasingly, the only plans 

and deals authorized are those that fill technical gaps and facilitate the ability of the Chinese 

industrial sector to compete internationally. The Chinese government plays a mercantilist, zerosum game. 

 

39 “Fools Rush In,” The Economist, August 7, 2004, pg.50.

23
Problems of Capital and Innovation 

Chinese technocrats and financial specialists dealing in corporate finance are still struggling with 

the requirement of transitioning from a tightly controlled, command economy to a predominantly 

market economy. Firms have to distribute R&D capital carefully to obtain the correct balance of

imported and indigenous technology. This supports the well-known Chinese innovation model of 

imitation-improvement-innovation. When companies have adequate capital accumulation, which 

many now have, then they can support indigenous R&D directed at indigenous innovation. 40 

Financing technical innovation in China is cumbersome and complex. China, like all major 

economies, is struggling to understand the best ways that government and private investment can 

spur innovation. There are five core issues facing China in financing innovation. 41

• Most funding for technology development in the phase between invention and 

innovation comes from corporations, the Beijing central ministries, and a small but 

growing number of wealthy private equity investors—not venture capitalists. The 

issue remains one of transparency into the innovative process and accounting 

practices. 

• Markets for allocating risk capital to early-stage technology ventures are not efficient. 

• Despite market inefficiencies, many institutional arrangements have developed for 

funding early-stage technology development. Funding mechanisms have evolved to 

match the incentives and motivations of entrepreneurs and investors; there is a lot of

cross investment among companies in the same industry group, much like the 

Japanese keiretsu, Sumitomo, Itochu, and Mitsubishi . 

• The conditions for success in science-based, high-tech innovation are concentrated in 

a few geographical regions, indicating the importance in this process of innovationinvestor proximity and networks of supporting people and institutions. These areas 

include Shanghai-Hangzhou-Suzhou; Taiwan-Shenzen-Guangzhou; Beijing 

(Haidian)-Tianjin. 

• Only a fraction of R&D spending in corporations is dedicated to early-stage 

technology development, though the amount varies among firms and within 

industries. 

Taken together the current state of funding, which lacks flexibility, can lead to mistakes in 

product development. In the middle 1990’s many telecommunication manufacturers in China 

assumed that the router market was owned worldwide by Cisco and there was no point in 

competing against them. Huawei, with access to large amounts of government funding, has 

 

40 “Financial Performance of Technical Innovation in China,” Prof Jian Gao. A three-part study of the structure of 

financial sources and performance of technological innovation in China, U.S.-China Seminar on Technical 

Innovations, George Mason University, May 2004. 41 Ibid. 

24
proved that this was an error by competing effectively against Cisco, particularly in developing 

countries. 

 

Chapter Summary 

Many promising Chinese technical companies have problems raising money, especially small 

and mid-size entrepreneurial once that are often the source of new ideas. However, there are 

changes taking place that will facilitate innovation. In 2002, a collection of private equity firms 

founded the China Venture Capital Association to boost bargaining power and promote 

entrepreneurial rights. Its fifty members include such leading investment companies as Carlyle, 

Newbridge Capital, and Goldman Sachs. In January 2003, the PRC clarified the Venture Capital 

Regulations, which are rules governing private equity investments.42 Those changes promote 

investment in high technology and address issues of capital formation, capital contribution, and 

application procedures. In addition, investors are optimistic that the gradual emergence of a 

professional managerial class will help private equity firms build new businesses. 

Loosening capital controls and easing the ability of foreign investors to repatriate profits would 

be welcome changes for foreign investors and would accelerate Chinese innovation. Also, 

loosening listing requirements for IPOs for small- and medium-size companies will provide 

capital for growing companies and create new exit opportunities for private investors. 

 

42 China Business Review, July-August 2004. p.24

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5. A Potential Leapfrog Technology? IPv6 as a New 

Model of Chinese Technical Leadership 

IPv6 Defined43

IPv6 stands for Internet Protocol version 6. The Internet has been using IP version 4 for 

addressing since it was invented. Eventually, all IPv4 domain addresses will be in use. The 

problem is considered serious in China, which was allocated relatively few IPv4 addresses. 

IPv6 will allow expansion beyond the current limitation of four billion addresses to a number 

that approaches infinity in our current understanding of networked technologies. IPv6 

functionally determines the addressing schemes and hierarchies of the next generation Internet 

IPv6 also allows for greater inherent security, as well as improved support for mobile users and 

wireless devices, which is where almost all telecommunications and Internet product 

manufacturing and services growth is centered. 

Why is IPv6 Important? 

The importance of IPv6 goes far beyond mere technological advantage, especially in China. 

• It has an expanded addressing scheme that permits several different levels of security. 

The impact of individual levels of security within IPv6 probably is known, but not the 

impacts of security elements used in diverse combinations. So it is possible that a country 

that assumes leadership in this technology may find new ways to provide security and 

encryption that will give it competitive, strategic, and tactical advantages. This is one of 

the few ways that a country could achieve telecommunications dominance today. 

• As noted in section one, John Gage, Sun Microsystems Chief Technology Officer, sees 

China as an intellectual Internet cauldron. The atmosphere in China resembles that of the 

San Francisco Bay area during the PC revolution of the early 1980s. By the end of this 

decade, with perhaps 50 million technicians, support specialists, and university level ITeducated, ardent, and explorative users under the age of 30 experimenting with IPv6, 

important innovations are likely to emerge. 

 

43 An excellent introduction to the technical and network complexities of IPv6 is available in Clay Wilson, "Network

Centric Warfare: Background and Oversight Issues for Congress, Appendix A, CRS Report for Congress, Mar 18, 

2005. 

26
• IPv6 provides the basis to interconnect so many new technologies, even mundane 

technologies like refrigerators and home lighting systems, that it could permeate a society 

in ways that are beyond our current political and social understanding. 

• IPv6 may be more than a simple technology. It may be a melding of technology and 

social systems, used to create more controls or used to undermine those imposing 

controls. In China, IPv6 may be a social utilitarian technology that can meld Chinese 

political life together in a way IPv4 could not because of its address limitations. 

• IPv6 is a source technology of what the ITU describes now as the Portable Internet, the 

next stage in Internet development. The Portable Internet can level the field in a variety 

of telecommunications services that provide the backbone for numerous corporate and 

industrial processes. 

• Taking the lead in IPv6 also is consistent with China’s long-range plans for technical 

leadership in standards development and manufacturing. Virtually all the worldwide 

manufacturing of portable Internet products will be in China. 

Innovation in the social forms of production—which include, inter alia, trade, education, and the 

social and geographic distribution of wealth—are just as important as innovations in the material 

forces of production.44 Within the international telecommunications industry, IPv6 may develop 

into something new—a set of products and services that eventually develops into a ubiquitous 

and technologically convergent social mesh, especially in major business centers like the 

Chaoyang District of Beijing or the Bay Area of San Francisco and San Jose. 

American-Chinese Competition in IPv6 

The Chinese government has identified IPv6 as a foundation technology of Chinese Internet 

expansion and manufacturing supremacy. In the United States, the Department of Defense is the 

leading proponent for IPv6; there is only limited interest in IPv6 for commercial applications. In 

China, there seems to be a government and telecommunications industry commitment to the 

technology as a basis for building both a strong internal network and a robust export capability. 

Is a battle brewing in the social forms of production between the American defense industry and 

the Chinese commercial telecommunications industry for primacy in IPv6 and next generation 

networks? 

China and IPv6 

According to We Hequan, Vice President of the Chinese Academy of Engineering,45 the Chinese 

government is on track to build one the world’s largest native IPv6 networks by the end of 2005 

 

44 See Hugill on the relationship between global trade, telecommunications, and perceptions of power. 45 IPv6 Summit, Beijing, March 2004. IPv6 summits are sponsored by the IPv6 Forum and commercial enterprises 

and are held in several cities worldwide each year; China and the United States hold annual summits. The purpose is 

to discuss standards development, products, and general acceptance of the protocol. See www.ipv6.net.cn/summit/ 

2005/index_en.jsp. 

27
and to conduct application trials in an attempt to realize the construction of the first next 

generation network and next generation Internet in an integrated manner 

The term next generation Internet (NGI) usually refers to upgrading the current Internet with 

improved security, quality of service (QoS),46 convenience, and manageability. The term next 

generation network (NGN) comes from the telephone world and also concerns scalability, 

mobility, manageability, and QoS. Moving to Internet protocol from time division multiplexing 

(TDM), the current technical protocol of the telephone industry, is a clear objective for NGN and

is well underway. Voice over IP (VoIP) has already surpassed TDM for domestic long distance 

communications in China in numbers and minutes of calls wherever VOIP telephony is 

available. 

The Chinese government has conducted trials on NGI and NGN separately but intends to merge 

the two. The large-scale IPv6 test network currently in development in China will be used for 

interoperability testing of connected devices, as well as for developing mechanisms for QoS, 

security, and accounting. 

In 2003, eight Chinese government ministries, including the National Development and Reform

Commission (NDRC), MII, Ministry of Science and Technology, and Ministry of Education, 

launched the China Next Generation Internet Project (CNGI) to start construction of IPv6 

networks. As part of the project, the China Education and Research Network (CERNET) and five 

telecom carriers were put in charge of building six national IPv6 backbone networks covering 39 

areas in China by the end of 2005. These networks will ultimately be linked together and serve as

the basic infrastructure for future IPv6 networks.47

In addition to CNGI, the MII also launched the IPv6 Telecom Trial Network (6TNet) in May 

2002 for application and service trials and for eventually rolling out commercial services. 

Testing based on the 6TNet is designed to permit telecom operators to come up with 

commercially viable services and applications, such as video conferencing, VoIP, and presencelocation services. The 6TNet is also being used for the testing of IPv6 equipment, on which the 

approval and issue of sales licenses are based. 

For domestic Chinese vendors, early entry into the IPv6 market and development of IPv6 

equipment opens up the possibility of setting standards and profiting from royalty payments. The 

Chinese government will support domestic vendors in setting standards and will give them

priority for equipment purchases. 

The Chinese government has made limited investments in CNGI and sponsors such events as the 

annual Global IPv6 Forum in Beijing. An estimated $150 million has been spent by the Chinese 

government on IPv6 trial equipment, and this is expected to increase dramatically as large-scale 

test networks are populated by IPv6 routers and servers. BDA, a research firm based in Beijing, 

 

46 Quality of service in telecommunications networking has come to mean the ability to classify different services 

according to priority and the importance of reducing latency across a network. For example, a voice call gets a 

higher priority than a data call, because packets must arrive in close sequence for voice over IP to be intelligible. A 

data stream for, say, a spreadsheet can take longer to get to its destination, though the difference is in milliseconds, 47 BDA China Ltd., Fang Meiqin, May 31, 2004. 

28
believes that IPv6 routers will become the majority of new installations in China beginning in 

2006. 

With the IPv6 market expected to grow significantly in the near future, domestic vendors like 

Huawei, ZTE, Harbour Networks, and Tsinghua Bitway have all started R&D on the technology. 

Huawei is the most aggressive and claims in sales literature that all of its routers support IPv6 by 

mid 2004. In Telecom Expo 2005 in Beijing in October 2005 it was clear that IPv6 was a major 

marketing and technical aspect of both the conference and product exhibitions from virtually all 

the major telecommunication designers and manufacturers in China. 

The United States and IPv6 

The United States does not have a national telecommunications policy explicitly focused on 

IPv6, but the United States government has promoted the concept for several years. John 

Osterholz, then-director of the DOD Office of Architecture and Interoperability, told the IPv6 

Summit in June 2003 that DOD would phase out purchases of IPv4 network technologies by 

autumn and begin trials of equipment and applications based on IPv6 for the Internet. This is 

consistent with the building of the Global Information Grid (GIG), which is meant to be a fully 

distributed, available, and secure network to support warfighting abroad and ensure homeland 

security. 

Plans were outlined for moving the entire DOD IT infrastructure—the world’s largest with an 

annual budget exceeding $30 billion—into IPv6 compliance by 2008. Such a change, based on 

the expectations of a particular technological development, required a broad-based change in 

procurement practices. Virtually the entire commercial Internet infrastructure, which includes 

IPv6 summit attendees Cisco, HP, Nokia, and the Verio division of NTT Japan, was provided 

with detailed specifications on the networking standards DOD plans to support. 

Historically, DOD commissioned vendors to build proprietary infrastructure. But the DOD need 

for immediate, global access to secure, real-time information has moved the requirement from an 

infrastructure of data links between proprietary systems to a global network built on the next 

generation of open systems, which is an underlying foundation of the GIG. 

However, many U.S. manufacturing and services providers see only a marginally compelling 

reason to make an early move to IPv6. They invested heavily in IPv4 infrastructure and want to 

see returns on this investment before moving forward with a new technology. This means that 

IPv6 development in the United States, driven only by DOD, may be slow. A future can be 

envisioned where much of what is planned for the GIG will be manufactured and tested in China 

before it is sold to DOD by U.S. based vendors. 

Testimony at Congressional hearings in June 2005 indicates that the Department of Defense is 

proceeding cautiously with IPv6. IPv6 capability is mandated for purchase of new equipment, 

but IPv6 technology is not now used in tactical systems. Significant interoperability testing is 

required and underway. IPv6 will be implemented as budgets and mission requirements permit.48

 

48 Statement by George G Wauer, Director, Architecture and Interoperability, Office of the Assistant Secretary of

Defense for Networks and Information Integration and DOD Chief Information Officer, before the House 

Committee on Government Reform, June 29, 2005.

29
At the IPv6 summit in Reston,VA, in early December 2005, it was reported that mid-level 

government IT specialists were still indicating a lack of senior leadership direction in IPv6 

implementation.49

Chapter Summary 

Great care must be taken not to exaggerate any particular technical development and assign to it 

qualities it does not possess. American software designers were leaders in the development of the 

IPv6 protocols, and many of the software modules used in IPv6 products in China currently are 

licensed from U.S. companies. However, the history of Chinese technological suggests that this 

will change. Chinese companies will follow their standard model of technical development: 

license, imitate, incrementally improve, and finally innovate in IPv6 product development. 

The strategic concern is different than anything the United States has faced before. IPv6 is a 

political and social phenomenon in China. Up to now, China has been generally imitative. IPv6 

is the first techno-intellectual platform that will permit the hundreds of thousands of engineers 

and software designers educated and being educated in China to develop sets of their own 

products on what is becoming a global foundation of telecommunications technology and 

protocol. 

Given the U.S. emphasis on military applications, IPv6 is one area where military competition 

between China and the United States is likely. 

 

49 See www.usipv6.com for reports on the conference.

30
6. Tentative Conclusions: Strategic Geopolitics of the 

International Telecommunications System 

New Conceptions of Strategy 

This paper argues that the international telecommunications system is in transition from U.S. 

dominance to distributed, regional dominance. While India and Russia have great potential, 

China will be the greatest regional competitor to U.S. interests. China’s telecommunications rise

has many important economic, social, and political implications for the United States. Among 

these is the need for the Defense Department to carefully consider both how it assesses Chinese 

capabilities and how it plans to use telecommunications networks in the future. 

The perception that the United States is still the global telecommunications leader is dangerous 

insofar as U.S. defense planners fail to accurately assess China’s future military capabilities. 

With the ability to collect and share information a vital part of any modern military, China’s 

capacity to improve the PLA in this area must be considered. Yet, most recent writing on China 

and the PLA still analyzes China’s hard-asset defense industries. A good example of this genre, 

and a well-produced and thoughtful article in its issue area, was published by John Frankenstein 

for The Atlantic Council in early 2003. According to Frankenstein, when the People’s Republic 

of China was established in 1949, its economy and industrial base was demolished, yet within 

twenty years the Chinese defense industrial complex (CDIC) was producing a full range of 

relatively modern military equipment, including strategic weapons. But the sector did not keep 

pace with modernization, and today is regarded as an industrial dinosaur, unable to achieve that 

most meaningful metric in this era of economic reform, profitability. More importantly, the 

CDIC has not been able to design and produce the systems the Chinese military deems necessary 

in future, with the result that China has become dependent on foreign sources for key 

technologies and weapons system. The Chinese are not unaware of CDIC shortcomings, but the 

various attempts to resolve the sector’s problems—reorganization and “conversion”—have been 

only marginally successful. 50 The assumption is that China remains behind the U.S. in important 

military technologies.

What this line of thinking doesn’t consider fully, and what this paper has stressed throughout, is 

that the foundations of Chinese strategic capabilities are changing dramatically, and that China 

and other countries are in the process of taking the lead in several technologies that are critical to 

telecommunications-based warfare. Key telecommunications technologies for warfare are 

outside the CDIC, though closely allied with it, but the arms-length distance has enabled the 

high-tech telecommunications sector to advance with much less bureaucratic interference, and 

the success is obvious at any large Chinese telecommunications exhibition.51

 

50 “Globalization of Defense Industries: China”, John Frankenstein, The Atlantic Council, Occasional Publications 

Series, Feb. 2003 51 James Mulvenon and Andrew N.D. Yang, eds. “The People’s Liberation Army in the Information Age,” RAND

Corporation, 1999. 

31
This success will find its way into the military. Since the late 1970s, Chinese leaders have 

believed that a broad-based modernization of the whole economy will sustain long-term military 

modernization. During the 16th Party Congress in 2002, China’s leaders reaffirmed their primary 

commitment to economic development and continued support for military modernization. In 

practice, this translates into the intersection of civilian and military technical development. For 

example, the Chinese Academy of Sciences conducts research with various institutions on 

engineering, remote sensing, semiconductors, and lasers throughout China in cities with a strong 

defense industrial base. As a result, there is close collaboration with the military on “applied 

research with products funded or developed for use by the military.”52 

Vulnerabilities in Telecommunications and Network Warfare 

While sizing up China’s growing telecommunications capabilities, U.S. defense leaders must 

also consider what vulnerabilities this rise creates in their own plans. Telecommunications are a 

crucial part of the transformation of U.S. forces, especially to the degree that they will operate in 

a network-centric manner. Network-centric warfare (NCW) puts an especially high premium on 

the ability of the entire force, from individuals to divisions, to communicate quickly and 

securely. The diffusion of telecommunications capabilities, and especially China’s progress and 

potential in this area, has created two sorts of vulnerabilities. First, several components of NCW 

are subject to threat, especially at the physical layer of cables, co-location facilities, and 

software. Secondly, DOD may soon be in a position of relying on other nations, including China, 

a potential adversary, to supply technology and equipment that is vital to modern warfighting. 

The Internet and what is described as the global telecommunications network are meta-concepts. 

The terms are convenient shorthand, but in fact there are no such unitary edifices. The global 

telecommunications network certainly has worldwide applications, but it consists of a web of 

private networks with strong national ownership. These private, independent networks are 

increasingly national and regional as the largest telecommunications companies retreat to protect 

their home markets in an era of unregulated competition. Some planning scenarios for NCW

ignore the fact that the network relies on a fragile, international, physical infrastructure that is 

almost completely beyond the control of U.S. military authorities. In telecommunications-based 

warfare, where the battlespace includes the international telecommunications network, traditional 

military tactics become dependent on the switches, routers, and software algorithms that provide 

direction and intelligence. When the technology and software algorithms belong to China or 

India, the rules of the game change. This obvious fact is not understood very well, or perhaps is 

just not acknowledged. 

The emerging reliance on international networks in military operations should thus be considered 

very carefully. The United States no longer has control of the international telecommunications 

system in any essential or meaningful way, especially outside the continental United States. The 

United States only has the use of the international telecommunications network for military 

 

52 “Annual Report on the Military Power of the Peoples Republic of China,” (Washington, DC: Office of the 

Secretary of Defense, July 28, 2003)14. Available at http://www.defenselink.mil/ 

news/Jun2000/china06222000.htm

32
purposes in any country at the pleasure of the host government. Most DOD traffic crosses other 

national networks, including those of every potential adversary. Foreign nationals control U.S. 

military information once it leaves the United States. Substantial amounts of U.S.-origin traffic 

for Asia passes through nodes in Shanghai, Hong Kong, and other facilities in Asia owned by 

Chinese or Chinese-invested companies. The same is true in the Middle East or Europe. Critical 

U.S. military traffic may be safe in the sense that it is encrypted, but it can be blocked by other 

countries that control much of the routing infrastructure. 

Telecommunications-based strategies thus rest on a fragile infrastructure that can be crashed by 

anyone with a serious intention to do so. Not only can national governments deny their networks 

to U.S. use, but vulnerable network points are easily located and destroyed by any reasonably 

informed terrorist organization, and certainly by any state adversary with its own 

telecommunications infrastructure. Chinese and Indian computer experts, among others, 

understand this and most likely have the know-how to control traffic patterns in an escalatory 

process geared to political goals. 

A second major area of network vulnerability is that the diffusion of telecommunications 

capabilities raises the prospect U.S. military operations will depend on foreign-manufactured 

equipment at the end of foreign-managed circuits run by foreign contract engineers. It is reported 

that U.S. Department of Defense planners are buying dark fiber and secure collocation facilities 

and hiring contract workers overseas to manage the GIG. However, dark fibers are unlit circuits 

on the same cables everyone else uses; there is no such thing as a secure collocation facility 

anywhere, including the United States, and one cannot really expect a foreign national to be loyal 

to the United States if the host country turns into a competitor or adversary, or decides it does not 

want to participate in a particular action. 

Much of the equipment and software that supports telecommunications-based military operations 

is based on open systems. All potential adversaries have the same equipment and operating 

systems. Unless trends change dramatically, most of the equipment for telecommunicationsbased warfare is produced in Asia, especially China, under contract to U.S. companies that 

increasingly are manufacturers in name only. The leading American companies selling NCW

equipment and services are, increasingly, the assemblers and sales distribution channels of 

Chinese manufacturers. 

Conclusion 

American conceptions of telecommunications-based warfare have been conditioned by the belief

that the United States is the leader in networking and telecommunications technologies. If the 

United States retains the lead today, that lead is narrow and may disappear, even if the United 

States puts massive resources into staying ahead. This outcome will be a function of human 

resources and capital. Europe, China, and India together massively outweigh the United States in 

human potential and capital resources. Many of the technologies developed by these countries 

are at least as good as those designed and manufactured by American companies (think 3G). And 

they are unquestionably dual-use technologies. 

33
The world is much more balanced economically and technically than is supposed or 

acknowledged. Many countries now have sufficient asymmetric capabilities to constrain U.S. 

telecommunications-based warfare in a strategic crisis, simply by exercising their ownership 

prerogatives of turning the system off or redirecting traffic. With regard to China, the question, 

“How is China responding to American military transformation?” misses the point. China is 

responding in every way—science, technology, education, new approaches to military officer 

training, capital allocation, etc. China has systematically used a mercantilist economic and 

regulatory policy to acquire the predominant position in the global production of network 

equipment—the routers, the wireless technologies, and the microprocessor technologies that 

underpin them. 

Global telecommunications is no longer the monopoly of any one country. American defense 

policies will have to adjust to this profound change in the strategic environment. 

34