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Global Telecommunications Competition Poses Challenges

April 2004
By Robert Fonow

Changes in the marketplace could affect military capabilities.

The international telecommunications system is re-balancing into four major centers of innovation: the United States, China, India and an expanded Europe. If current trends persist, the United States may be hard pressed to maintain an advantage in communications technologies and services and could find its ability to prosecute information warfare highly constrained.

The United States may remain the leader in telecommunications technologies, but its leadership is being challenged as the result of a trend toward a subsystem of regional telecommunications master hubs. In the past three years, software companies in India, such as Wipro and Infosys, have won significant contracts that traditionally would have been awarded to U.S. companies. Reliance Telecom, part of a large Indian conglomerate, recently purchased the FLAG international fiber optic cable system, positioning the company to provide a wide array of global telecommunications services to Indian and other clients, particularly in the Middle East.

The main focus of India’s industrial policy for the past 20 years has been on information services provided over advanced telecommunications networks. Recent reform of its regulatory processes and privatization of state assets are leading to accelerated access to new services. In addition, India has spawned a number of indigenous companies that compete internationally with the best U.S. and European companies. Many of these firms are on the cutting edge: knowledge-based industries such as pharmaceuticals, biotechnology and software, including telecommunications software.

Chinese companies are likely to replace Western companies as the vendor of choice for infrastructure expansion in developing countries. The list of major competitive wins for telecommunications infrastructure projects in Africa by Huawei and ZTE in 2003 and early 2004 is impressive. Affordable equipment manufactured and designed in China provides a financially attractive alternative to equipment manufactured in Europe, Japan and the United States.

The Organization for Economic Co-operation and Development (OECD) ranked China third in the world in total research and development spending in 2001 at $60 billion. Chinese spending in this area has grown rapidly from less than 0.6 percent of the gross domestic product (GDP) in 1996 to 1.1 percent in 2002. Money spent on research and development is frequently taken as an indicator of the efforts by companies to innovate and develop knowledge-based industries. The OECD’s inflation-adjusted figures show that research and development spending in China has been expanding by 10 to 15 percent per year, a much higher rate than that in most OECD countries. According to statistics in the 2003 United Nations Conference on Trade and Development World Investment Report, China will begin to approximate U.S. GDP and research and development capabilities between 2015 and 2020. Much of this funding will be focused on telecommunications and Internet technologies.

Real annual growth rates in the European Union have stagnated at about 1 percent for the past three years, and information technology is an important factor in the U.S.-European Union productivity gap. However, European technological momentum is increasing as more countries comply with common regulatory policies implemented by the European Commission. This will accelerate as more countries are added to the European Community.

Europe already has sectors of innovation in telecommunications that lead the world. Finland is the most wired country in the world and home to one of the world’s leading cellular telephone innovators, Nokia. Sweden leads Europe in per capita research and development investment. GSM, the European cellular telephone standard, is the most widely used system in mobile networks outside of the United States and the system with the widest international roaming capability.

Russian scientists produce innovative technologies when capital resources are available. One important development to watch is research and development collaboration among Russian, Chinese and Indian companies. ZTE, a leading Chinese telecommunications manufacturer, established a research facility in Moscow in 2004 to take advantage of Russian engineering expertise. Technical ties between India and Russia are long-standing.

Two critical changes in the international telecommunications infrastructure are factors in the re-balancing of the system. First, a significant shift has occurred in infrastructure ownership. In Asia two years ago, for example, as much as 85 percent of the Asian undersea services infrastructure was owned by U.S. investors. This has changed dramatically. Chinese interests have bought the assets of Level 3, PSINet, Asia Global Crossing and Global Crossing, all at substantially reduced prices from the initial capital paid by Western investors.

Second, research and development is no longer an exclusively national function. According to Dieter Ersnt, a researcher at the East West Institute in Honolulu, the international telecommunications network has facilitated the rise of international scientific research consortia in a variety of disciplines, including research in telecommunications technologies. There is a growing global dispersion of skilled engineers, scientists and researchers, many trained in U.S. universities, who work together via the telecommunications network.

The argument that the United States will retain its innovative edge because it welcomes immigrants or provides opportunities for education to the world’s best students or scientists becomes meaningless when international intellectual consortia of the highest caliber can combine their respective intelligence across any distance at a keystroke. It also is not certain that today’s division of international labor—high value-added design and system integration in the United States and low-cost manufacturing and routine software coding in developing countries—will remain a viable model when many countries will have sophisticated university engineering and design departments.

When technological conditions change, the economic, social and political relationships premised on them change as well. A consequence is the closing of the technology gap between the United States and other countries, especially in Europe, India and China, including the gap in classified broadband communications. This would give regional competitors, criminal networks and terrorists a competitive advantage in information warfare. At the very least, U.S. technical and military power, especially aspects that are based on international communications networks, may be severely constrained.

A key issue is outsourcing. Analysts at Forrester Research estimate than 3.3 million information technology jobs will move overseas within the next 12 years. More than half of Fortune 500 companies are outsourcing software development or expanding their own development centers outside of the United States. By the end of 2004, 10 percent of all information technology jobs at U.S. information technology companies and 5 percent of other types of companies will move off-shore, according to the Gartner Group, a research and analysis firm that specializes in high-technology trends. This is happening in all businesses that depend on telecommunications. Indian and Chinese companies provide the same quality of work for 15 to 25 percent of the cost of a Western employee.

This trend is not just about losing jobs. It is about losing the ability to produce and maintain the entire fabric of a sophisticated national information infrastructure, which is especially important as information warfare and network warfare become the dominant strategic battlespace.

Within 10 years, China and India will have the capability to develop an offensive information warfare capability. This is not idle speculation. It is based on the evidence of their prodigious efforts and achievements in the past 20 years in catching up with most of the world in information technology and telecommunications. This does not have to be a broad-based information or network warfare capability, but one that follows basic military doctrines on asymmetric warfare.

In a strategic environment dominated by information and network warfare, the security of the United States depends more than ever on the education of its population. No human resources can be left to stagnate or fail to reach their optimal capability because of a lack of opportunity or outdated conceptions of leadership and organization. This is especially true in the military.

The United States faces an enormous human resource deficit within 10 years. Demographics indicate that the United States simply will be vastly outnumbered by nations with people interested and educated in science, engineering and technology. Currently, there are 8 million post-secondary students in India and approximately 14 million in China. At least another 5 million are enrolled in reasonably good undergraduate institutions in other countries. There are 13 million university and college students in the United States. In a global economy, these conditions will depress wages in the United States’ technology sector and are likely to force good students into careers other than engineering and information technology. This poses particular problems for the military services tasked with information warfare missions.

At the level of elite university education such as MIT, Stanford and the more prestigious technical universities and colleges, the United States will continue to have exceptional technological capability. But the advent of information warfare takes the concept of total warfare to a new level of societal integration and requires a broader based approach to technical education at the tertiary level.

The human resource and training functions of the military will have to change to ensure a very high degree of information warfare capability. More junior military officers should be sent abroad to technical master’s and doctorate degree programs, to civilian universities in Islamabad, Bucharest, Moscow and Shanghai, not just Oxford or Bologna. However, an information warfare capability that depends on “knowledge workers” will be far too large to depend entirely on a degreed officer corps for its technical excellence. More effective use of enlisted military personnel is required, including degree level, intensive, and fast-track training programs for those with the potential to benefit from them.

In addition, more U.S. citizens need to learn the languages, communications lifestyles and intellectual patterns of people in other countries. Future leaders need to understand how people in different cultures will be using the Internet and other advanced digital communications services.

The United States will maintain its overall leadership in technology during the next 10 years. However, by the early years of the next decade, China, India and an expanded Europe will have equal capabilities in many areas, especially those in telecommunications-related technologies essential to effective information and network warfare. At the same time, the United States is putting increasing emphasis on all aspects of information and network warfare. An information domain that is not dominated by the United States and is constrained by three other powerful regional information powers may put limits on a number of important strategic and tactical programs.

To prepare for this outcome, the United States must constantly re-evaluate its rules of engagement with these emerging information powers. Much more research is required not only in technology but also in the way the United States prepares its next generation of military leaders for engagement in a much different world.

Robert Fonow is the managing director of RGI Limited, a management consulting and strategy analysis firm in Oakhill, Virginia, that specializes in the international telecommunications, Internet and broadband communications industries.