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Who Lost Lucent?: The Decline of America’s Telecom Equipment Industry

As America transitions to 5G wireless networks, the U.S. intelligence community sees the Chinese telecom giant Huawei as a systemic security risk. In response, President Trump has banned the use of Chinese 5G equipment in U.S. networks. But despite these measures, there is still deep concern that eventually Huawei will dominate global markets, displacing the other major 5G providers, Europe’s Ericsson and Nokia. To address this challenge, a number of proposals have been floated, including that the U.S. government buy shares in Ericsson or Nokia or provide incentives for U.S. companies to produce 5G gear.

Few, however, are asking why there is no American telecom equipment company. After all, in the 1970s the two largest telecom equipment manufacturers were U.S. companies: Western Electric and ITT. Even in the late 1990s, the two largest were still based in North America: Lucent and Nortel (headquartered in Canada but employing tens of thousands of workers in the United States). In 1999, Lucent was almost three times larger than its next two rivals and was the sixth largest company in America in terms of capitalization. Nortel ac­counted for over one-third of the capitalization of the Toronto Stock Exchange. By 2008, however, Nortel was bankrupt, and Lucent was a sliver of its former self, having been sold off to Alcatel, a French company, which was later bought by Finland’s Nokia.

What happened? How did America go from the world’s leader to not even an also-ran in the span of just two decades? Equally troub­ling, why did no one sound the alarm bell when there was still time for action?

Economists say America lost its telecom equipment industry (firms that make the hardware and software that enable wireline and wireless telecommunications) because it naturally lost comparative advantage as the economy shifted to industries like internet services. Business administration scholars blame bad management. Neither view explains what really happened.

The answer lies in the fact that other nations saw the industry as strate­gic and they fought to protect and promote their own companies within this sector. Nowhere is this more true than in China, where, without “innovation mercantilist” policies, Huawei and ZTE (the other major Chinese competitor) would not exist today. Indeed, as Huawei’s founder Ren Zhengfei himself admitted in 2002, without Beijing’s policy of protecting Chinese companies from aggressive foreign competition at home, “Huawei would no longer exist.”1 And if Huawei did not exist, Nortel and possibly Lucent would still be with us today.

While other nations were promoting and defending their industry, U.S. policymakers put their abiding faith in free markets. As the U.S. International Trade Commission (ITC) wrote in 1991, “The United States has never had a Federal policy to promote the communications sector and is unlikely to, given its tradition of and support for free-market policies.”2 It was this view that enabled sixty years of injuri­ous antitrust enforcement that systematically weakened both Western Electric (the predecessor of Lucent) and Bell Labs (the world-class laboratory supported by AT&T and Western Electric). If no industry is more important than any other industry, and if international com­petition is not real, why not aggressively work to break up the leading telecommunications company in the world? For over sixty years, the Justice Department did everything it could to weaken Western Elec­tric, completely discounting national security, competitiveness, and innovation concerns, even as other U.S. government agencies were sounding warning bells. As such, it is not an overstatement to say that, without the aggressive antitrust policies of the U.S. government, America would still be the world leader in telecom equipment.

In addition, after the rise of neoclassical economics and the con­sumer movement in the 1970s, policymakers believed they knew the optimal market structure: competition. The 1996 Telecommunications Act was the culmination of this hubris. As a result of this legis­lation, not only were tens of billions of dollars in capital spending poured down the drain, but Lucent and Nortel were driven off a cliff, stupidly financing the equipment investment of hundreds of telco entrants that soon went bankrupt.

Finally, finance-driven anglosphere capitalism led Lucent and Nortel to make decisions that ultimately led to their downfall: they cut R&D budgets to meet share price targets, and they were unwilling to suffer the pain of keeping core business assets in place during the 2001–2 downturn so that they could rebound when the market recovered. European firms—particularly Ericsson, which was con­trolled by banks, not short-term equity investors—could and did take the longer-term view and thrived in the 2000s.

Today, without massive infusions of government subsidies, or transformative technological changes like the rise of software-defined networks, America will not be able regain competitiveness in this industry. Once these assets—including talent—are gone, they are virtually impossible to recover. But it is not too late to learn important lessons from this epic industrial failure and apply them to the advanced industries the United States still has left, including aerospace, biopharmaceuticals, and semiconductors. This will require an overthrow, however, of the prevailing Washington economic ortho­doxy, which holds that the United States does not compete economically on a national level, and that no industry is more important than any other. It is time for a new national consensus, one that holds that some industries are too critical to fail and that government needs a robust national industrial strategy. Let us hope that it is not too late to learn these lessons, for it would be beyond tragic if in a decade or two someone has to write an article asking, “Who Lost Boeing, GM, Intel, and Pfizer?”

The Rise and Fall of the American Telecom Empire

It was in telephony that a century-old America would first assert what would eventually become global technological leadership. On February 14, 1876, just hours ahead of Elisha Gray (who went on to found Western Electric), Alexander Graham Bell filed a patent appli­cation describing his method of transmitting sounds. Bell received his patent twenty-one days later—back then the Patent and Trademark Office processed patents quickly; today, there is backlog of 540,000 applications.3 And with that, the telephone age was born.

The new Bell Telephone Company needed telephones and equip­ment. It turned to a number of vendors, but it soon became evident that one firm, Western Electric Manufacturing Company, was the best. Western Electric originated in Cleveland, Ohio, in 1869, when Elisha Gray and Enos Barton launched a company to manufacture telegraph equipment for Western Union. In 1872 they moved the company to Chicago. After Bell Telephone became American Tele­phone & Telegraph (AT&T), it acquired a controlling interest in Western Electric. For the next 120 years, Western Electric was AT&T’s wholly owned subsidiary, making telephones, telephone switches, and other equipment.

As telephony grew—faster in America than anywhere else—AT&T grew. By the turn of the century, AT&T and Western Electric dom­inated the U.S. market. By 1900, Western was manufacturing in Aus­tria, Belgium, Canada, China, Germany, France, Italy, Japan, the Netherlands, Russia, and the United Kingdom. And by 1913, it dom­inated the global market, holding 59 percent of the global market for equipment.

It soon became clear that growth depended on technological ad­vancement. So in 1907 AT&T and Western combined their engineering departments and in 1925 established Bell Laboratories. Much has been written about Bell Labs as the world’s most successful industrial laboratory. From its founding in 1925 to its divesture in 1995, it averaged one patent per day, and by 1995 it was averaging three patents per day.4 Fortune called it “the world’s greatest industrial laboratory.”5 It was responsible for some of the most im­portant inventions of the twentieth century, including cellular tech­nology, digital switches, fiber optics, lasers, the transistor, solar cells, satellite communication, undersea cables, and the UNIX operating system.6

What made the U.S. telecom system the most envied in the world was the close relationship between Bell Labs, Western Electric, and AT&T. The needs of AT&T informed the science at Bell Labs and the engineering at Western Electric, and the innovations from both went into AT&Ts network. For example, just three years after Bell Labs invented the transistor in 1947, Western Electric began commercial production. This leadership meant that twenty-one of the top twenty-three semiconductor innovations between 1951 and 1964 were Ameri­can—with nine from Western Electric, five more than the runner-up, General Electric.7

While Western Electric was the most internationalized U.S. com­pany, it was part of a regulated monopoly, AT&T, at which the trustbusters in the Justice Department had long looked askance. Because of pressure from the antitrust bureau, in 1925 AT&T sold its foreign manufacturing subsidiary to a smaller American firm, Inter­national Telephone and Telegraph (ITT). Led by its charismatic foun­der, Colonel Sosthenes Belm, ITT grew to one of the world’s lar­gest multinationals. By 1972 it accounted for 60 percent of French tele­communications equipment exports, dominated in the UK, and had a monopoly in Spain.8 It was also highly innovative. In the late 1970s it developed the first digital telephone switch, the System 12, at its R&D center in Connecticut. So for half a century America was home to the two largest telecommunications companies in the world: Western Electric and ITT.

But a third company would also become a leader: Nortel. Northern Telecommunications was established by Western Electric to serve the Canadian telecommunications market, in part because of the high tariff wall the Canadian government had erected.9 But again, because of pressure from the Department of Justice, Western was forced to sell off Northern to Bell Canada. Eventually renamed Nortel, the company grew rapidly, especially after AT&T was broken up in the early 1980s. By 1999 it had become the second largest telecom equip­ment provider in the world.

As late as 1997 the U.S. produced one-third of all telecom equip­ment in the world, with exports of $13.1 billion and a trade surplus of $3 billion.10 This was to be the high-water mark.

And while I will not discuss in detail the decline of Motorola, it is worth noting that its history follows a similar pattern of innovation, dominance, and collapse. This Chicago-based maker of wireless phones and networking equipment was the first company to produce a cellu­lar phone and communication system, and until 1998 it was the world’s largest producer of cellphones. But Motorola eventually exit­ed the business, selling its mobile infrastructure business to Nokia in 2010, which itself exited the business soon after.

The Birth and Death of Lucent Technologies

Since AT&T’s formation, the Justice Department had sought to break it up, to “sever some limbs,” as one attorney called it.11 It was only with the rise of neoclassical economics the 1970s, however, with its focus on consumer welfare and competitive markets, that the political winds shifted in the DOJ’s direction. Realizing it could lose in court and wanting to get into new markets, AT&T agreed to a consent decree in 1982, according to which it spun off its local telephone business into seven regional Bell operating companies (RBOCs). But because AT&T was now competing with the RBOCs to sell local phone service, management decided that it was also necessary to spin off its telecom equipment division as a separate company; the new company would then have a better chance of selling to the RBOCs. So, in 1995, Lucent Technologies was formed.

At first the future seemed bright. As Lucent’s 1997 annual report touted,

Lucent Technologies had an extraordinary first year as an inde­pendent company. We grew our business to record levels and strengthened our company for future growth and market lead­ership. Now, as the two words on the cover of this annual report say, we’re reaching higher.

The company told its shareholders that these numbers would “likely grow as technological advances and deregulation continue to expand the global market.”12 It also expected to grow because it “was generat­ing 23 percent of its revenues outside the U.S., but it held only 3 percent of the non-U.S. market.”13 In 1999, Lucent was the world’s largest telecommunications equipment company, earning $38.3 billion in revenue, making $4.8 billion in profits, and employing 153,000 workers, while controlling more patents than any other company.

The expectations for the future were high. As one industry analyst noted, “Lucent is positioned to be the technology company that de­fines the decade—and quite dramatically, the beginning of a millennium.”14 Likewise, a 1998 International Trade Commission report stated that, “according to some analysts, Lucent experiences a global competitive advantage over EU producers of network telecommunications equipment in leading-edge technology.”15

But trouble was brewing under the surface. With the dramatic falloff in telecom equipment spending in 2000, Lucent’s revenues fell from $30 billion to $12 billion two years later. In 2001, it lost $16.1 billion; more than the sum of all its profits to date, and then lost an­other $7 billion in 2002. Its stock price fell from $65 in September 1999 to just 76 cents in September 2002.16

As the market rebounded, by 2004 its stock price was up to $3.17, and it earned $2 billion in profits. But it struggled, particularly as other companies, including an emerging Chinese company named Huawei, starting taking market share. By 2006, Lucent’s revenues had fallen by more than 75 percent from their peak to $8.8 billion, and its employment was down more than 80 percent. As William Lazonick and Edward March note, “both figures were lower than those of its three major rivals [Alcatel, Ericsson, and Nortel], even though all of the companies had gone through wrenching declines as the Internet boom turned to bust in the early 2000s.”17 Finally, a shell of its for­mer self, Lucent merged with French national champion Alcatel in 2006. But one year later, Alcatel’s stock had lost 44 percent of its value, and in 2015 Nokia paid €15.6 billion for Alcatel-Lucent.

Nortel’s story is similar. For most of its life, Nortel primarily served the modestly sized Canadian market. It was not until the court‑ordered opening up of the U.S. market in the 1980s that its U.S. sales took off. And after the 1996 Telecommunications Act, it grew rapidly, doubling its revenues between 1997 and 2000. But like Lu­cent, Nortel provided equipment on credit, and as one study notes, “the rapid increase of physical and human resources led to an increase in overhead and duplication.”18 Nortel went from being valued at $136 billion in December 1999 to just $14 billion in April 2002.19 Lagging behind foreign competitors, including Huawei, it closed its doors in 2008.

We should not forget ITT. After it bought the foreign assets of Western Electric, telecommunications services and equipment were its major businesses. But by the late 1950s corporate America was caught up in the conglomerate merger wave, with companies seeking to grow by buying completely unrelated businesses. This was in part due to stricter limits imposed by U.S. antitrust authorities on conventional mergers. As a result, ITT entered a wide array of businesses, including car rental and insurance, and acquired a huge amount of debt.20 The high interest rates of the early 1980s, coupled with threats from newly minted corporate raiders, meant that it had to sell off units, and telecom equipment was the first to go. ITT sold its telecom equipment business in 1986 to Alcatel Alsthom, a subsidi­ary of the state-owned French corporation Compagnie Générale d’Electricité (CGE), forming Alcatel NV, the world’s second largest telecommunications company. One analyst called the purchase “the most important development in CGE’s modern history.” With that, the second largest U.S. player was gone.

The conventional view is that these companies either failed or were acquired as a result of poor management. If their leaders had just been better, the story goes, things could have turned out differently. Tim Dempsey, a former Nortel HR executive, writes that “the fear-based culture, and the leadership system that it engendered, created an environment that enabled poor decisions as inevitable [sic].”21 This is a comforting story, as it suggests that major corporate failures are somewhat random, the result of bad personnel choices. But it does not hold up. If Nortel had bad leadership—the same leadership that was supposedly responsible for its demise—how had it grown to become the second largest telecom equipment company in the world?

A related view is that these companies were made up of “Bell­heads,” not the “Netheads” of Silicon Valley who were transforming the world with internet technology.22 But these companies didn’t lose to Silicon Valley companies, which were not able to enter the telecom equipment business successfully. They lost to European and Chinese “Bellheads”—companies that were tightly linked to telecommunications services. And besides, both Lucent and Nortel vigorously em­braced internet technology, like broadband communications.

To be sure, management and cultural factors played a role. But they are deeply inadequate as explanations. In reality, the failures stem from a combination of the unique challenges imposed by the Anglo-American economic system, systemic failures of U.S. government policy, and strong—and in the case of China, aggressive—for­eign industrial policies aimed at acquiring U.S. market share.

Anglo-American Capitalism: A Hostile Environment

It is striking that no Anglo-American nation is home to a competitive telecom equipment provider. The United Kingdom had several firms until the 1980s, but they either went out of business or were bought by continental European firms. And of course, Canada and the United States lost ITT, Western Electric/Lucent, and Nortel.

This is not by happenstance. Anglo-American capitalism, particularly its emphasis since the 1980s on maximizing short-term earnings and share price while limiting investments in physical assets, makes it harder for firms to focus on long-term growth. One survey of U.S. executives found that 78 percent admitted to sacrificing long-term value to gain short-term earnings benefits.23 As the CEO of ITT wrote, many CEOs “forgot that business and industry cannot max­imize profits for the long term by being concerned, primarily, with the results of the next three-month period. Whatever happened to long-term planning, development scenarios and a vision of the future measured in years?”24

But ITT itself succumbed to this temptation by selling its telecom equipment assets, in part to focus on the faster-growing services market and to make itself less attractive to corporate raiders. AT&T had already done likewise when DOJ demanded its breakup in the early 1980s. It could have spun off its long distance service and be­come a local telephone company, while still keeping Bell Labs and Western Electric. Had it done so, it is likely that Western Electric would be alive and well today, since it would have had strong, loyal customers in the RBOCs. Instead, AT&T chairman Charles Brown spun off the local Bell companies, which he thought were slow grow­ing, in order to be able to enter into the rapidly growing computer industry.25 As one analyst writes, “AT&T wanted to shed the stodgy regulated operating companies and the equipment and service restric­tions that accompanied its regulated monopoly status. Operating companies generated no sizzle with Wall Street. The Information Age was upon us, and AT&T had to unleash its technology to go head-to-head with the likes of IBM.” But it did not work. AT&T’s Computer Systems division turned into “the boat anchor that never turned a profit,” and the lack of results became “a corporate embarrassment.”26

While AT&T’s leaders thought they were acting in the interests of shareholders, they were in fact acting in the interest of only short-term shareholders. By separating Western Electric and Bell Labs from the local operators, they severed the hundred-year-old, two-way learn­ing system that had enabled robust innovation. Over time it became obvious that “without the operating company experience AT&T was losing its way in bringing technology to market. It was losing its ability to manage Western Electric, NCR, and Bell Labs.” This sever­ing was particularly problematic because “a major technology shift beyond digital switching was underway, and they were unable to chart its course.”27

It was even worse because Western Electric now had to compete much more vigorously for the RBOC purchases. Western Electric had previously been assured of a stable market, because the Bell oper­ating companies bought from them. But after the breakup of AT&T, Western Electric was just one more competitor, and after it became Lucent it also had to compete for AT&T’s business. This is why both Ericsson and Nortel identify the breakup of AT&T as the key enabler of their rapid growth in the American market.28

Once Lucent was formed, Wall Street pressures became even more intense and led to a set of ultimately catastrophic decisions. Before the breakup, Western Electric was part of a regulated monopoly. That enabled both Bell Labs and Western Electric to invest heavily in fac­tors necessary for long-term success. But once Lucent was a freestanding company it no longer had that support.

Lucent reveled in its new freedom: as one Lucent employee proclaimed, “hooray, we’re free at last from AT&T.”29 But that free­dom brought new expectations for rapid growth. Indeed, from its first days, Lucent branded itself as a growth company rather than an income stock in order to ensure that its stock price kept rising—a grave error. This meant, as one former Lucent executive wrote, “to keep Wall Street happy, Lucent needed to produce strong and sus­tainable results.”30 He went on to note that it

would have a very difficult time voluntarily saying that the upcoming year’s objectives need to be lowered. . . . In hindsight, moderating lofty growth expectations in a well-articulat­ed and reasoned manner would have been more desirable than ultimately missing expectations—let alone continuing to set, and strive for, subsequent goals which could also prove to be unattainable.31

While rising stock values were helpful in recruiting technical talent who could otherwise go to work for fast-growing Silicon Valley com­panies, short-term share price appreciation was also in the more self-serving interest of Lucent’s executives. As William Lazonick and Edward March note, “when Henry Schacht stepped down as chair­man of the company in February 1998, he cashed in stock options for a gain of $65 million, after less than two years on the job. In that fiscal year, Rich McGinn, the new chairman and CEO, generated $3.6 mil­lion from exercising stock options as part of his total remuneration of $25.3 million.”32

Stock appreciation became an obsession. A 2000 profile of Nortel CEO John Roth reveals him to be absorbed by the market values of his company and its competitors and concluding an interview by checking Nortel’s stock price on his browser.33

Both Lucent and Nortel knew that they needed rapid growth to ensure rapid stock price appreciation, and so they both demanded unrealistic quarterly sales growth targets. This led Lucent to reward its management and its sales force for “booked sales” rather than “collected sales,” which led them to agree to unfavorable terms just to get deals signed before the end of the fiscal quarter.34

An even faster way to grow was to buy other companies. Both Lucent and Nortel’s leaders were lured by the siren song of the internet, seeing telecom as a mature business compared to corporate data networking. The vision of Richard McGinn, who became CEO of Lucent in 1997, was to be “a high-tech growth company in an industry historically plagued by slow growth and gradually evolving product lines.”35 Roth was also convinced that Nortel needed to be more like internet companies. Both gazed with longing at fast-grow­ing Cisco; if they could emulate it, they thought, their share prices would surely appreciate even more quickly.

As a result, they shelled out tens of billions of dollars for acquisitions. In just five years Lucent acquired nearly forty companies, including spending over $20 billion for Ascend Communications.36 Nortel spent $9.1 billion to acquire Bay Networks in 1998, even though an internal Nortel analysis showed that Nortel had never made a financially successful acquisition.37 Almost all these acquisitions were subsequently written off or divested at a significant loss. This meant that, when the tough times came in the early 2000s, both companies were short on cash to tide them over until the market rebounded.

Acquisitions are not inherently bad, but companies should buy at a reasonable price, and the acquisitions should support their core com­petencies. Telecom was not Silicon Valley, however, and the trend towards “everybody provides everything” was never real. Cisco does not make telecom switches and Ericsson makes very little corporate data gear. In putting rapid growth above all other goals, Lucent and Nortel thought they could expand into a wholly different industry. Ultimately, it cost them their core business.

Moreover, in an effort both to cut costs and to improve their return on assets (a key measure used by Wall Street), both companies decided to get out of the business of making products. As Yishai Boasson wrote, Lucent’s “chosen strategy came to be the Virtual Manufacturing Strategy. This strategy meant Lucent was to sell most of its twenty-nine manufacturing facilities to the EMS [electronics manufacturing services] industry, while at the same time outsourcing its manufacturing requirements.”38 Nortel went down the same path. One study of the fall of Nortel notes that its outsourcing of manufacturing to Flextronics with a long-term contract “limited flexibility in terms of future manufacturing decisions.”39 And as Harvard Business School professors Gary Pisano and Willy Shih have noted, such outsourcing weakens the link between R&D and production, making it harder for companies to innovate.40

This push for rapid growth and higher margins also changed the nature of Bell Labs. As one analyst has noted, “Bell Labs with Lu­cent’s bright red innovation ring hanging over the door in 1996 was a very different entity from that which historians eulogize.”41 In fact, it had become a wholly different place:

With the advent of the Lucent spin-off, the corporate wall was removed totally. While there was effectively a “Bell Labs” organization, it was in many cases simply a scattering of hetero­geneous organizations within Lucent. This further reinforced the shift in values from technical competence to shareholder value. . . . Projects not directly associated with current revenue generating products became increasingly difficult to fund. . . . R&D decisions became driven by business executives attuned to investment community motives and incentives, and poorly trained in the underlying technology and development process­es. In doing so they traded their technical soul for mediocrity.42

Finally, short-term pressures meant that when the market turned sharply south in early 2001, Lucent and Nortel cut too deeply. As Lazonick and March write, “failing to sustain revenue growth and with a falling share price, Lucent attempted to address ‘shareholder value’ with the disposal of assets.”43 One financial analyst commented at the time, “Lucent is in a tough position. . . . They have two choices. Don’t cut [headcount] and sustain losses in the hopes the industry eventually turns around. Or, make the swift, necessary cuts to return to profit. It would be best for everyone, especially the employees, if they got there quickly.”44 In fact, it was worse, as cuts only accelerated the decline.

Lucent CEO Henry Schacht summed up the problem when he said, “our execution and processes have broken down under the white‑hot heat of driving for quarterly revenue growth.”45 He went on to note the consequences of a purely revenue-focused approach:

Our growth objectives could not be sustained on a long-term basis. . . . We had placed too much emphasis on short-term rev­enue growth and not enough on long-term value creation. . . . We developed an ever-increasing emphasis on quarterly revenue generation that drove ever-increasing short-term decisions . . . often at the expense of long-term needs.46

Wall Street analyst Thomas Lauria notes that if Lucent and Nortel “could have accepted lower earnings growth rates, they could have invested more in research and development. The new products that could have been developed organically, as opposed to products that were acquired, could have strengthened their long-term competitive positions.”47 As Lazonick and March point out, “the irony for a com­pany like Lucent . . . is that it could have used the speculative stock market of the Internet boom to sell stock on the market to pay off debt or augment the corporate treasury.”48 But that would have been antithetical to the financialized system of U.S. capitalism.

The Advantages of Sweden’s National Capitalism

In his classic 1965 book Modern Capitalism, Andrew Shonfield tried to make sense of the distinctly different flavors of capitalism that had evolved in the post–World War II era, including the German model, in which large banks played a key role in allocating investment, the Japanese model of state-led industrial policy, and the American and British models of largely free market capitalism, albeit leavened with a growing social welfare state.49 These varieties have led to different outcomes for telecommunications equipment competitiveness.

A 1991 International Trade Commission (ITC) study, commissioned by Congress in response to its prescient concern that the divestiture of AT&T would reduce U.S. competitiveness, stated:

[The] causes of this problem include the quarterly demands of stockholders, an overabundance of managers trained in finance rather than engineering, and differences in company structure. In general, members of the industry said that firms with long planning horizons and little pressure from stockholders for immediate profits would be more competitive in the long run because these firms would be able to invest more in research and development and would enjoy more flexibility in marketing strategies.50

The report went on to note that “Japanese and some European firms are willing to sacrifice immediate profits in the expectation of obtain­ing much larger profits in the future in these less developed nations.”51

Nowhere was that more evident than at Ericsson during the 2001–2 crisis. Ericsson was started in 1876 by a mechanic named Lars Magnus Ericsson, and he began producing telephones two years later, but only because Alexander Graham Bell had failed to obtain a patent in Sweden. Helped by Swedish government support and modest in­dustrial espionage against Western Electric (including alleged patent infringement), Ericsson emerged as a viable competitor and grew considerably over the years.52

With the telecom equipment crash of 2001, Ericsson’s sales also took a hit. But it emerged from the crisis to become the global leader, at least until Huawei’s rise. This was not just a case of Ericsson being fortunate enough to have a visionary CEO; it had to do with how the company was financed.

The origin of Ericsson’s financial advantage can be found in the late 1920s, when Ivar Kreuger, the famous Swedish “match king” and international financier, was able to acquire a majority ownership stake in the firm. Ultimately, Krueger’s house of cards collapsed (he fa­mously shot himself in a Paris hotel), and the Swedish government stepped in to save Ericsson. As part of the deal, ownership passed to three major institutions: a major Swedish Bank; Sweden’s Wallenberg family, one of the richest families in Europe; and ITT, which had acquired shares in dealing with Krueger.53 But under Swedish law, ITT could only buy class B shares with few voting rights. The two main Swedish entities owned class A shares with as much as twenty times the voting control as class B stock.

As recently as 2000, Ericsson was 51.4 percent foreign-owned, but foreigners had only 1.2 percent of the votes. Even today, the bank and the Wallenberg family own most of the company’s voting stock.54 This arrangement allows the company to focus on long-term value creation. Indeed, as David Bartal recently noted in his study of the Wallenberg family, “they act in the long term and have not succumbed to chasing after profits for each quarter of the financial year.”55 Bartal goes on to observe that “the Wallenbergs could cash in their chips at any time, as most other wealthy and powerful families have done. Nothing stops them from selling off and moving somewhere with a better climate than Sweden, and lower taxes.”56 But they don’t because they and the bank are committed to the economic welfare of Sweden. This is presumably why, when asked in 1996 if his family has too much power, family head Peter Wallenberg replied, “what is bad about that? Is there not value in somebody hanging around when times are poor?”57

And indeed, that is exactly what Ericsson did, even with a drastic decline in sales in 2001 and 2002 that led Ericsson CEO Kurt Hellstroem to complain, “it’s so gloomy it’s almost unbelievable.” Ericsson cut far less than Lucent and downsized in a deliberate way that left its organizational capabilities intact. While its sales fell by 49 percent from 2001 to 2003, its R&D employment fell by only 34 percent. Ericsson’s view was that they would suffer whatever finan­cial losses were needed for them to emerge as the industry leader. As Hellstroem stated, “we are the main player. We’re going to be the last one to give up.”58 So rather than take the advice of U.S. stock analysts to “make the swift, necessary cuts to return to profit,” Ericsson kept more of its core capabilities, including key technical talent, in order to take advantage of the inevitable rebound. And it did that because its controlling shareholders—the bank and the Wallenberg family—took the long view.

Antitrust Orthodoxy

Perhaps more than any single area of government action or inaction, a strong case can be made that it was seventy-five years of relentless effort by the federal government to break up AT&T that was the principal factor in the industry’s downfall.

Because of the Bell patents, by the first decade of the twentieth century AT&T had a significant share of the U.S. market. To address government concerns, AT&T came to a settlement with the attorney general in 1913, known as the Kingsbury Commitment, in which AT&T agreed to divest the controlling interest it had in Western Union and allow independent telephone companies to interconnect with its long-distance network in exchange for the government not breaking it up. The 1921 Willis-Graham Act effectively established AT&T as a natural monopoly, stating that “there is nothing to be gained by local competition in the telephone industry.” And in 1934 Congress established the Federal Communications Commission and charged it with regulating interstate telephony (intrastate telephony was already regulated by the states).

Despite congressional wishes, the Justice Department’s antitrust bureau viewed AT&T with suspicion; after all it was a monopoly, and the bureau’s mission was to prevent monopoly. As a result, in 1925 it forced AT&T to divest Western Electric’s foreign assets, even though foreign governments could apply their own antitrust laws to these foreign divisions. This ended forty-three years of overseas manufacturing, with ITT purchasing the assets.59 Perhaps because this was a century ago, its significance is ignored today. But imagine if Western Electric had been allowed to continue to own those assets: it would have had much greater economies of scale, including for R&D, and it would have slowed the growth of foreign competitors, since the assets sold ended up in European hands. Indeed, absent this forced divestiture, America would likely still dominate the sector.

Not content with this divestiture, in the 1930s the Federal Trade Commission and the Department of Justice began a forty-year effort to separate Western Electric from AT&T. World War II stymied their efforts, however, as it became clear how important Western Electric and Bell Labs were to the war effort. But once the war ended, the antitrust efforts reemerged. In 1949, the Truman administration’s DOJ filed a second antitrust suit, claiming that AT&T was “conspir­ing with Western Electric to restrain trade in the manufacture, distri­bution, sale, and installation of all forms of telephone apparatus in violation of the Sherman Antitrust Act.”60 Attorney General Tom Clark said breaking Western into three equally sized companies would lower the cost of equipment.61 But this argument ignored not only any decrease in economies of scale, but also that AT&T had a strong interest in ensuring that Western Electric was efficient. For example, in a 1945 hearing before the California Public Utility Com­mission, Western Electric showed that the prices it charged AT&T were 45 percent below those of competitors selling to other phone companies.62

As the case dragged on, “Engine” Charlie Wilson, secretary of defense under President Eisenhower and former CEO of General Motors, played a key role. He wrote the attorney general a letter expressing serious concerns that a breakup would destroy Western Electric’s “usefulness for the future.”63 Due to the rising Cold War with the Soviet Union, the Justice Department agreed to a settlement in 1956: AT&T would restrict its business to regulated telecommunications but would license its portfolio of patents for free to any U.S. company and license any new patents for a reasonable royalty.

In 1947 Bell Labs had invented the transistor, arguably the most important technological breakthrough of the twentieth century.64 Because of the 1949 antitrust suit, Bell Labs provided detailed infor­mation to other companies on how to make transistors. As noted in a report from the Brookings Institution, “the antitrust suit against AT&T in 1949 must have influenced the company’s policy of swiftly disseminating its new technology. An apparent attempt to monopolize or even dominate the new industry could have easily jeopardized its case.”65 This had unforeseen consequences: in 1952 ten foreign firms (and twenty-five American firms) paid $25,000 in advance roy­alties for an eight-day seminar and a 792-page manual on how to make transistors.66 Two of these ten firms were Siemens and Ericsson, the leading European telecom equipment companies, who gained valuable information that allowed them to shift much more rapidly to new switches.67 As the ITC noted, the decision opened “the door for new entrants to commercialize AT&T’s technology.”68 It went on to note that “such technological diffusion enabled other firms, including foreign manufacturers, to narrow the technological gap and even ad­vance ahead of U.S. firms in some areas.”69 As former Lucent CEO Rich McGinn stated, “we gave that stuff away to the world, and many companies have prospered.”70

The 1956 consent decree had a second negative impact: it required Western Electric to divest itself of its Canadian division, Northern Telecom. And twenty years later, in an effort to stave off further antitrust action, Western Electric provided information and assistance to Northern Telecom, enabling what was now its rival to develop an advanced digital switch. By requiring Western Electric to spin off and then help Northern Telecom (later renamed Nortel), the Justice De­partment created a robust competitor. In the 1990s and early 2000s this enabled Nortel to take critical market share from Lucent, con­tributing to its demise.

But the DOJ was just warming up. As Steve Coll notes in The Deal of the Century, the antitrust bureau never gave up after the 1956 settlement, maintaining and adding to its files, waiting for the right moment to act again.71 And act again it did in 1974, when it launched a third antitrust suit, even though there was little evidence of a prob­lem at the time. Prices were regulated and the United States had both the best phone system in the world and the most advanced firm, West­ern Electric. A Wall Street Journal op-ed summarized the situa­tion: “if there is a problem that justifies all this, we can’t find it.”72

This time the policy environment was more conducive to the trust­busters. The emergence of a new faith in unregulated markets, prom­ulgated by a new generation of neoclassical economists and supported by a burgeoning consumer movement, both of which focused on short-term consumer welfare, gave the Justice Department’s argu­ments new life. Once again the Defense Department was opposed to the breakup, and Secretary of Defense Caspar Weinberger came out against it on national security grounds. In addition, Commerce Sec­retary Malcolm Baldridge argued the suit was putting American lead­ership in telecommunications in jeopardy, as did a Reagan administration cabinet task force on telecommunications.73 But this was not the 1950s. The DOJ now ignored the concerns of other agencies and pressed ahead. After a decade of wrangling, AT&T settled and agreed to break up the old Bell system, severing the local telephone business from long distance service. Western Electric and Bell Labs were com­bined into the AT&T Technologies division.

The severing of the RBOCs meant they were no longer obligated by their parent company to purchase equipment from Western Elec­tric. Now they looked for other providers, including foreign companies like Ericsson, Siemens, NEC, and Nortel. A Nortel executive credits the divestiture with providing the key opportunity for it to expand its U.S. market share at a time when the Canadian market was closed to non-Canadian firms.74 For example, four of the RBOCs formed a joint procurement consortium and in 1996 agreed to buy Alcatel’s ADSL system for broadband applications rather than Lu­cent’s.75 Spinning off Lucent also meant that AT&T Wireless adopted the GSM standard instead of the CDMA standard that Nortel and Lucent used, reducing the market share of these companies. The sep­aration also meant that the RBOCs were “unable to send clear signals to manufacturers about the technological path” they wished to follow with future equipment.76

The separation also hurt Bell Labs. At the time, Bell Labs had the best of all possible situations: it had the commercial focus, drive, and flexibility that a government lab often lacks, but it also had the long-term focus and interest in broad technological challenges that an industry lab often lacks. Further, it received support from telephone ratepayers for needed innovation. Indeed, the ITC noted that this R&D support constituted “another form of competitive advantage” for the United States.77

When the case was brought in 1974, Bill Baker, a leading Bell Labs scientist, was asked what it would mean if the government won. His response was prophetic: “I think that Bell Laboratories as we know it now would just disappear.”78 He was right. The dramatic change in the research conducted by Bell Labs following the resolution of the case has been summed up in a report from the National Research Council:

Prior to the restructuring of the telecommunications industry in 1984, the Bell System’s research labs played a dominant role in long-term, fundamental telecommunications research for the United States. Post-restructuring, industrial support for such research has declined, become more short-term in scope, and become less stable.”79

This is not to say that competition is bad and monopoly good. In areas like the Federal Communications Commission’s “Computer 1” and “Computer 2” decisions, which allowed competition in non-telephone services such as computer-based communications, opening up competition spurred innovation. But the sixty-year attack on Western Electric did the opposite.

Regulatory Failures

Even with the breakup of AT&T and pressures of short-term finan­cial results, Lucent might have survived had it not been for the federal government’s massive disruption of the telecommunications market through the 1996 Telecommunications Act.

After the introduction of competition in long distance through the breakup of AT&T, economists and consumer groups set their sights on the next target: competition in the “local loop,” despite the fact that, in the years before cable, internet, and cellphones, local telephony remained a natural monopoly. In response, Congress passed legis­lation to require the RBOCs to open up their networks to competitors. The Act promised “to promote competition and reduce regula­tion in order to secure lower prices and higher quality services for American telecommunication consumers and encourage the rapid de­ployment of telecommunications technologies.” But it was never clear how this was to come about. Having new companies string new tele­phone lines would naturally only raise prices, not lower them.

While the legislation did not spur competition, it did spur the waste of unprecedented amounts of capital, as companies raised and spent tens of billions of dollars to compete with Ma Bell. By the end of 1999, more than two thousand of these new Competitive Local Exchange Carriers (CLECs) had raised $82 billion in capital.80 As a result, total capital expenditures in the industry increased from $56 billion in 1997 to $120 billion in 2000, and half of Lucent’s carrier business was from new entrants.81

As Lisa Endlich notes, Lucent management bet that “CLECs would survive as the customers of choice, and began to adapt the com­pany to suit their needs.”82 This led to two problems. First, Nortel and Lucent “experienced unprecedented acceleration,” which in turn led to unprecedented deceleration when the CLEC industry died an inevitable death (their business model of building their own networks had never worked, nor had the model of leasing lines from the RBOCs).83 Both companies dramatically downsized, hurting capacities and morale.

On top of that, in order to capture the CLEC growth, Lucent allowed them to finance many of their purchases. As one article notes, “at some point, Lucent wasn’t selling equipment anymore; it was giv­ing stuff away and labeling it a sale.”84 And Nortel did the same thing: “Nortel engages in vendor financing, which involves selling equipment on credit . . . customers say Nortel’s financing offers reached as high as 130 per cent.”85 By 2000 Lucent had extended $1.5 billion in financing to its customers, with Nortel trailing only slightly at $1.4 billion.86

That was money that could have been used to weather the storm of the 2001–2 market downturn. Instead, Lucent and Nortel fell into a death spiral. At Nortel “the cumulative effect of its previous decisions forced it to become internally focused—dealing with massive down­sizing, financial restatements and regulatory issues.”87

In contrast, European providers did not go through this traumatic cycle of growth and decline because they depended on the more stable European market. For example, from 1999 to 2003 Ericsson’s sales fell only 45 percent, compared to 78 percent for Lucent.88

There was one other noteworthy regulatory mistake: aggressive Securities and Exchange Commission (SEC) enforcement, particularly in the case of Nortel. For much of the 2000s, the SEC investigated Nortel for financial improprieties, even though the courts exonerated the company. As an Ottawa Star reporter concluded, “From 2001 to 2006, Nortel’s board and senior management were focused on dealing with restatements, investigations, crisis management and reputational management. As a result, they ignored the fundamental requirement to satisfy customers’ needs and commercialize new products.”89 En­forcement of financial regulations is important, but regulators should also take into account issues of competitiveness.

U.S. Foreign Policy Failures

Maintaining competitive advantage in industries when other nations are fighting for their own advantage requires foreign policies that both support domestic companies in foreign markets and that push back against the protectionist policies of other nations. Unfortunately, the federal government has either not believed that other nations could challenge the United States economically or did not care, put­ting foreign policy concerns above competitiveness.

After World War II, the U.S. government, focused on rebuilding Japan, pressured Western Electric to help not only the Nippon Elec­tric Company (NEC), its subsidiary, but virtually the entire Japanese electronics industry to modernize. The occupation forces had West­ern Electric lead a series of in-depth quality courses for major Japa­nese companies, including Fujitsu, Hitachi, NEC, Sanyo, and Tosh­iba. One study reported that Japan got a reliable telecommunications system “in no small part, because of a process of global knowledge transfer involving representatives of an American firm [Western Elec­tric] that provided a broad range of managerial and technical capabilities.”90 One Japanese CEO referred to these courses as “the light that illuminated everything.”91 The study notes that, “as Japan began to advance into the ranks of the technological elite, the visitors departed and the hosts embraced their independence. In this respect, the . . . expe­rience fit a long-standing pattern of Japanese techno-national­ism.”92

Besides being asked to help foreign competitors, U.S. firms faced systematic market access challenges. The United States was first to open its markets to competition, and this provided an important opening for foreign firms in America that U.S. firms did not have abroad. In virtually all other nations, governments ran the telecom network and usually bought equipment from local producers. A 1991 ITC report stated, “Because no other countries have witnessed the radical changes in regulation and competition that occurred in the United States in the past several decades, government procurement activities in other countries have largely resulted in much more closed communications equipment markets than in the United States.”93 For example, Bell Canada could only seek bids from a foreign company if Nortel was not interested in bidding. In Germany between 1994 and 1998, 99.5 percent of the telecom equipment Deutsche Telekom pur­chased was from German firms. In France, the Netherlands, and the UK the domestic share was 100 percent. In Japan, the import penetra­tion ratio for foreign telecom equipment was just 1 percent in 1980, compared to 13 percent in the United States.94 The president of NTT, the national telecom provider, stated in 1981 that “the only thing NTT would buy from the United States was mops and buckets.”95

But U.S. policymakers and economists looked at these countries as misguided: if they didn’t want the best equipment at the best value, that was their mistake. As a result, Western Electric and later Lucent not only faced much more import competition than their competitors, they had less access to foreign markets.

The United States also consistently self-sabotaged its domestic tele­com industry with export controls—something the Trump administration is continuing to this day in its efforts to cut off the supply of semiconductors to Huawei. Historically, government limitations on the export of U.S. telecom equipment were usually counterproductive: although countries of concern were still able to purchase equip­ment, they were just not buying it from U.S. firms. As the ITC noted, “the stringency of the U.S. export-control regime has reportedly created significant problems for the U.S. communications equipment manufacturers.96 For example, while Lucent could not sell equipment to Russia and eastern Europe, Ericsson and South Korean companies could. Moreover, other nations, such as Japan, expedited their export control decisions, allowing them to beat U.S. firms in winning con­tracts. After the Tiananmen Square massacre, the U.S. im­posed an embargo on equipment exports to China. As we discuss below, this embargo just spurred the Chinese government to launch a major domestic industrial policy effort for the manufacturing of telecom equipment.97

Moreover, the U.S. government has done relatively little to help U.S. companies sell overseas. In 1946 ITT asked for financial help to buy a telecom company in Mexico that was owned by Ericsson. While the Department of Defense supported it, the Truman administration turned ITT down, deeming it an inappropriate role for gov­ernment. The federal government has consistently provided little ex­port financing. A U.S. Export-Import Bank study found that U.S. telecom equipment companies were often at a disadvantage and lost sales because of a lack of concessionary financing.98 In 1987, other OECD nations provided seventeen times more export credits than the United States did. For example, in 1986 Ericsson beat out Lucent for an $88 million contract for cellular communications systems because of a tied aid credit, by which Sweden provided foreign aid but tied it to purchases from Ericsson.99 French, German, and Japanese governments often assisted their companies in arranging financing pack­ages before a contract was even awarded.

The U.S. government also did not do enough to defend U.S. com­pany interests in foreign markets. Chile and Brazil expropriated ITT’s phone assets with virtually no payment. France forced ITT to sell their assets to the government for about one-tenth of their value.100 And the British and Spanish governments pressured ITT to sell their domestic equipment makers.

Finally, the U.S. government largely took a hands-off approach to technology standards. While the federal government rightly supports voluntary, industry-led standards-setting processes, it did not do enough to push back when other governments chose standards to fa­vor their domestic competitors. As mentioned above, this could be seen in the competition between two standards—CDMA and GSM—in 3G wireless. Lucent and Nortel chose CDMA; Alcatel, Ericsson, and Siemens chose GSM. To support the latter, the Conference on European Post and Telecommunications Administrations dictated that EU cellular networks use GSM and encouraged foreign cellular providers to adopt GSM. Consequently, European equipment com­panies gained valuable economies of scale.101 As the ITC noted, “many industry representatives felt that all suppliers to the U.S. mar­ket were handicapped by the lack of a central standard-setting apparatus in the United States.102

In contrast to America’s refusal to pursue an industrial policy, our competitors provided financial and political support to their domestic telecom industries. As the ITC noted, “government R&D policy in many nations, with the exception of the United States, allocates funds or offers special incentives to the communications equipment indus­try.”103 For example, Europe’s esprit and RACE programs funded communications equipment R&D. Many nations allowed telecommunications equipment to be depreciated over shorter periods, encouraging more purchases.104 Most other nations, including Japan, Germany, and France, maintained large commercial embassy staffs that included communication industry specialists in order to support their domestic companies. And most nations used tariffs to protect their firms: Can­adian tariffs were 10.2 to 17.5 percent in 1979 for telecom equipment, compared to 8.5 percent for the United States.

In some cases, foreign governments even owned their telecom companies. For example, ITT sold its European assets to CGE, which was majority owned by the French government; CGE became Alca­tel, and later bought Lucent. So the French government was involved in the purchases of the two largest American equipment companies. As one French official at the time of the ITT sale said, “for us the deal is a part of industrial strategy . . . Americans only saw it in financial terms.”105

Chinese Mercantilism

There was a long history of policy errors—by omission and commission—that weakened North American telecom equipment firms, but the nail in the coffin was made in China. As digital communications technologies became more complex in the 1990s, firms needed greater economies of scale to survive. When Lucent struggled to rebound after 2002, they faced a strong headwind from China, particularly in the form of competition from Huawei. As a 2004 Wall Street Journal article noted, “the Chinese incursion comes at a time when the in­cumbents are still smarting from the recent, three-year bust that has claimed hundreds of thousands of jobs in the West.”106 Chinese ex­ports of telecom equipment increased from $19 billion in 2000 to $124 billion in 2006, while U.S. imports increased from $71 billion to $129 billion in 2008.107 Today, Huawei and ZTE together claim 38 percent of the global telecom equipment market, leaving that much less for North American and European producers.108 Without the rise of Huawei (and ZTE), it is likely that either Nortel or Lucent or both would have survived the 2000s.

It would be one thing if China’s telecom equipment dominance were the result of market forces: America could chalk up its losses to bad management or lack of comparative advantage. But market forces had little to do with it; government forces changed the shape of the industry. Indeed, without an often unfair and predatory industrial policy, China today would have no viable telecom equipment indus­try. As Peter Nolan wrote of Huawei in 2001, “compared to the global giants in the field, such as Lucent, it stood little chance of winning in direct competition, without considerable state support.”109 He concluded that “the mythology surrounding these companies attributes their relative success to their ‘success in market-place competition,’ not to government support. The blunt reality is that, in most cases, relative success required both high entrepreneurial achieve­ments as well as state support.”110

In 1979, China designated the telecommunications industry as a strategic sector in which it sought “absolute control.”111 But it took China three decades to get that control. By the early 1980s China’s Post and Telecom Industrial Corporation controlled twenty-eight equipment factories, but the industry’s technological backwardness was holding back China’s progress. The Chinese Communist Party initially allowed domestic phone companies to buy foreign gear to make up for this deficit. But it quickly pivoted to telling foreign companies that, if they wanted to sell in China, they had to manufacture their products in China in joint ventures (JVs) with Chinese firms. As a result, the proportion of the Chinese telecom equipment market provided by imports fell from 100 percent in 1982 to 0 percent in 2000, with 60 percent from foreign-Chinese JVs and 40 percent from indigenous suppliers.112

When China joined the World Trade Organization in 2001, many trade policy experts believed that China would cease forcing companies to trade technology for market access. Nolan offers a typical summary of this view: “the conditions on which China has agreed to enter the WTO constitute a dissolution of China’s right to implement an industrial policy in this sector” because the agreement “prohibits the Chinese government from directing telecoms operators about the sourcing of their equipment.”113 In fact, nothing changed.

It cannot be overemphasized just how important the Chinese JVs were. Without them Huawei would at best be a local Chinese player, and Nortel and Lucent would still exist. These JVs were extensive:

In order to be successful in the [Chinese] market it would be essential for Western manufacturers to work out joint venture agreements with indigenous Chinese companies, manufacture locally, and work out extensive technology transfer agreements. As a result, numerous manufacturing joint ventures with Chi­nese companies were forged and business moved ahead quite nicely, with the communist nation buying equipment from every western vendor imaginable.114

Why did foreign firms agree, in the words of Lenin, to sell the Chi­nese the rope with which to hang themselves? The answer is Chinese monopsony: the government controls the market. In the 1970s, Chi­na’s Ministry of Posts and Telecommunications approached virtually all foreign telecom equipment companies to explore opportunities for tech transfer through joint ventures. All refused, not wanting to give China their valuable technology. But one broke ranks: Belgium’s Bell Telephone Manufacturing (BTM) company, an ITT subsidiary. It agreed and transferred the System 12 technology, at the time the most advanced in the world, to China.115 The Belgian government even provided long-term financing to the Chinese business partner and agreed to transfer technology for component and chip production. As one Chinese analyst wrote, “that was remarkable. At the time no other supplier was prepared or able to offer the transfer of such ad­vanced technology.”116 One sticking point was that such technology transfer—as opposed to the sale of telecom switches themselves—was restricted under rules set by the Western Bloc’s Coordinating Com­mittee for Multilateral Export Controls (cocom). But the Belgian government and ITT aggressively lobbied the U.S. government and other members for an exemption. BTM not only transferred key technology to their partner, Shanghai Bell, but like Western Electric in Japan in the late 1940s, it extensively trained managers and engi­neers.

The Chinese government then dictated that domestic telephone companies should buy equipment from Shanghai Bell, provided gen­erous subsidies to buyers, and reduced Shanghai Bell’s taxes and tariffs for imported components. This sent a clear signal to foreign companies that, if they wanted to sell in China, they had better get in line and form JVs. In addition, to encourage more JVs, the government set quotas on the import of telecommunications equipment for each firm. As Nolan writes, “the size of the quota was linked to a company’s performance in localizing production and transferring technology to Chinese companies.”117

Not surprisingly, other companies fell in line. In 1988, Siemens formed a JV with a factory owned by the Ministry of Electronics Industry to establish the Beijing International Switching System Cor­poration. In 1993 and 1994, Siemens set up fourteen JVs.118 Ericsson, Fujitsu, Lucent, Motorola, NEC, and Nortel all formed JVs. By 1998, Lucent had six JVs.119 In the early 2000s, a number of JVs to transfer wireless technology were also established: Alcatel and Datang, Erics­son and ZTE, and NEC and Torch.

Huawei directly benefited from JVs. Motorola and Huawei set up joint laboratories for communications system research in 1997. In 2000, Huawei and Lucent established a joint lab to focus on microelectronics and optoelectronics. That same year, NEC and Huawei established a “3G Internet Open Lab” in Shanghai in order “to create an open platform to support the 3G mobile developments in China and to provide end-to-end total mobile solutions for mobile operators.”120 Huawei and Siemens entered into a JV for wireless.

These JVs provided extensive help to Chinese firms. As one case study of what was presumably Nokia (the name was changed to ensure anonymity) found:

A major technology transfer project was started in mid-1998 to bring in the latest technology and this has resulted in all mobile switching equipment for the Chinese market being supplied by NHT in association with its subcontractors in China and the local partner. . . . A large number of employees went to Europe for between one and three months in 1998 as part of the major technology transfer project. . . . The second phase of technology transfer was to further develop the company’s subcontractors. . . . Local companies such as Huawei have this type of assistance.”121

Alcatel, Ericsson, NEC, Siemens, Sony Ericsson, Nortel, and Motorola also established freestanding R&D centers in China that trained thousands of engineers and surely led to technology being siphoned off to domestic Chinese companies.122

But JVs and labs not directly involving Huawei also played a key role in supporting its growth. This was because the Chinese government made sure that JVs benefited not just the direct Chinese partner but the entire domestic industry. For example, Chinese industrial ministries organized engineers from other indigenous firms to get training or job rotations at the JV firms. In the Shanghai Bell JV, the training was done because of favors granted by the Ministry of Posts and Telecommunications.123 As one study notes:

The presence of many JVs in China fostered the diffusion of technology know-how across the country. . . . There was a broad-ranging knowledge transfer and exchange involving R&D, production, subcontracting, marketing, after-sales services, and local human resource training. Shanghai Bell and other joint venture establishments fostered the diffusion of technological know-how across the country.124

Shanghai Bell also cooperated with local universities and research institutes. The Chinese general manager of the JV facility stated that the Shanghai Bell JV had been a “big school,” fostering a great num­ber of qualified engineers in China. In addition, the Chinese government, in part through the Ministry of Post and Telecommunications and the state-owned Louyang Telephone Equipment Factory, formed a consortium to work with Shanghai Bell to develop indigenous digital switches, which were subsequently copied by Huawei.125

As Xiaobai Shen writes, “technological learning has not been solely confined to Shanghai Bell. Rather it has been widely spread through both informal and formal channels to System-12 users, com­ponent producers and other related agents.”126 Similarly, a recent working paper from the National Bureau of Economic Research notes that “critical know-how from Nokia has been transferred to Chinese multinationals [including Huawei] via these employee trans­fers.” It finds that telecom equipment JVs had very high rates of technology spillovers to Chinese firms that were not themselves partners in the JV.127

Why did Western companies agree to do this? Were they naïve? Some may not have fully appreciated the consequences of this tech­nology transfer, but a RAND Corporation study found that the opposite was typically the case:

Foreign market entrants are fully aware that these technology co-development relationships with Chinese companies are aid­ing domestic partners at their expense, but they feel that they have no other choice, given the structural asymmetries in the market. . . . Motorola’s chief of network solutions in China, even told a Western reporter that he has no doubt that Huawei plans to use its partnership on GSM technology to replace Motorola’s base stations with its own one day.128

When asked why Nortel established a massive R&D facility in China, the CEO explained that it was the direct result of Chinese government policy: he had been told that, unless he promised that Nortel would open an advanced technology lab in China, his company would not be able to sell to the Chinese telecommunications providers. In short, as in Mario Puzo’s The Godfather, the Chinese government made these firms offers they couldn’t refuse.

China’s Shift to Indigenous Innovation

Joint ventures were always a means for China to fulfill its long-standing goal of building its own domestic industry with Chinese-owned firms. When Ren Zhengfei, Huawei’s founder and CEO, met with Communist Party general secretary Jiang Zemin in 1994, he told the party leader that a country without a domestic telecom switch industry was like a country without a military. “Well said,” Jiang re­plied. By 1996, under Ren’s prodding, the Chinese government shift­ed its industrial policy to supporting its own telecommunications equipment companies.129

This was accomplished in part through the direct funding of Chi­nese firms. In the early 1980s, the Chinese Communist Party called on the People’s Liberation Army to make more contributions to the economy. As a result, the PLA funded commercial technology devel­opment projects, including the development of telecom switches, at a time when Ren Zhengfei was a member of the PLA. Before long, China had more than one hundred government research institutions with over six hundred thousand technicians and specialists who were engaged in various types of R&D related to the production of tele­communications equipment and other high technology goods.130

Through various government agencies, including the Ministry of Posts and Telecommunications (MPT), China paid for the development of the HJD-04 digital switch, the first digital switch made by a Chinese organization. Under the leadership of MPT, technological knowledge of the HJD-04 switch was diffused throughout the nation­al telecom equipment industry, and the HJD-04 development team provided consultancy services to domestic telecom equipment firms, in particular to Huawei and ZTE. In fact, the HJD-04 directly led to the development of Huawei’s C&C08 switch, their first entry into the market, as well as ZTE’s first digital switch.131 Qing Mu and Keun Lee describe this process in their study of technological diffusion:

After the development of the HJD-04 in 1991, knowledge dif­fusion was further amplified through the inter-flowing of engi­neers or related persons, which finally led to successive devel­opment of four other types of digital automatic switches (C&C08, EIM-601, ZXJ-10 and SP-30) by other indigenous firms. The later development of other types of digital switches by firms such as ZTE (Zhongxing), Datang, and finally Huawei, all benefited from knowledge diffusion via inter-firm mobility of skilled engineers. For example, Huawei’s location at Shen­zhen and its higher salary levels attracted skilled manpower from the Great Dragon (original manufacturer of HJD-04). Consequently, many skilled young engineers who had mastered or at least had some knowledge of the HJD-04 system left the Great Dragon for Huawei (or ZTE). They contributed to the R&D of another digital switching system, C&C08, in Huawei.132

Once China had developed domestic capabilities, it set up import barriers. It stopped arranging loans to import equipment and applied steep tariffs to imports—15.6 percent in 2001.133 Moreover, China has consolidated its telecommunications service providers into three giant companies in order to foster “indigenous innovation” that encourages “relevant departments, enterprises, and institutions to give priority to indigenously innovated products,” and it has ordered “state-owned assets management departments” to “use indigenous innovation as a key criterion in assessing telecom operators.”134 It continues to do the same in wireless communications, guaranteeing Huawei and ZTE each one-third of the market for 5G contracts.

In addition, Huawei and ZTE have benefited from direct government aid. ZTE was involved in nineteen R&D projects funded by China’s 863 Program, which aimed at the development of advanced technologies, and Huawei also received state funding. In 1996, ZTE was chosen by the Ministry of Science and Technology as one of the enterprises to spearhead the high-tech Torch Program. In 1998, the State Economic and Trade Commission designated ZTE as a National Center of Technology Development.

The government also legally granted domestic producers priority status for funding and provided them with low-interest loans and other financial advantages. Huawei and Datang (another leading Chi­nese provider) were designated National Key Laboratories, granting them preferential access to funding that had previously been reserved for research institutes and universities.135 Furthermore, Huawei has long benefited from a deeply undervalued Chinese currency, which provided it with a 25 to 35 percent price subsidy.136 And the company saved as much as $25 billion in taxes between 2008 and 2018 due to state incentives to promote the tech sector.137 It also benefited from significant low-cost financing from Chinese government banks. Duan­jie Chen relates the 1996 event that spurred this policy:

When Chinese Premier Zhu Rongji learned that the company was short of funding for its global expansion plan during his visit to Huawei, he immediately instructed the accompanying heads of the four major commercial banks: “In order for the Chinese program-controlled switchboard to compete on the global market, we must provide buyer’s credit.” . . . He also instructed the bankers to provide direct financial support to Huawei. The buyer’s credit immediately provided Huawei with direct access to bank funding for receivables from its sales. . . . And the direct bank loans from all major banks in Shenzhen immediately relieved Huawei from past funding hurdles and helped pave its way for skyrocketing growth till this day.”138

Two years later the China Construction Bank lent Huawei 3.9 billion renminbi in buyer’s credit, representing 45 percent of the total such credit it extended that year.139 As the Wall Street Journal reported, “Huawei had access to as much as U.S. $75 billion in state support over the past 25 years, including grants ($1.6 billion), credit facilities ($46.3 billion), tax breaks ($25 billion), and subsidized land purchases ($2 billion).”140

Chinese telecom equipment companies have long been eligible for preferential interest rates on export credits from China’s Export-Import Bank and the China Development Bank.141 As the U.S. Ex­port-Import Bank concluded, “most of the terms and conditions of their [China Exim Bank’s] financing did not and do not fit within the OECD guidelines.”142 Chinese banks have also made loans to bail out foreign telecom service providers that buy equipment from Chinese companies. One study found that “since 2015 China has provided more funding each year to support its exports than the OECD’s 36 member-nations combined.”143 As China rolled out its Belt and Road Initiative to support Chinese exports in emerging markets and parts of Europe, Huawei benefited substantially. Indeed, in a 2016 speech a senior Chinese official, Zhang Yansheng, noted, “without the Belt and Road Initiative, there wouldn’t be Huawei.”144

Chinese providers also benefited from the state’s strong-arming of input suppliers to lower their prices. In 2015, China’s National De­velopment and Reform Commission fined Qualcomm, the world’s largest producer of smartphone chips, $975 million for purportedly using its dominant market share to overcharge Chinese telecommunications firms for its patent royalties (something the EU, Japanese, and U.S. governments concluded it was not doing). In addition, it forced Qualcomm to offer 3G and 4G licenses at a lower price in China than Qualcomm’s normal wholesale figure. This not only provided Huawei with a substantial subsidy, it cut revenue from a competitor, as Huawei, through its HiSilicon group, was (and is) also seeking to produce chips.

Finally, the rise of Chinese equipment firms cannot be understood without accounting for the role of intellectual property theft. Many Chinese companies used IP theft as a way to accelerate their technological capabilities. Datang Telecom, a leading equipment provider, stole technology from Lucent.145 In 2008, Hanjuan Jin, a former Motorola employee, was stopped at O’Hare Airport with over a thousand Motorola documents in her possession—she was traveling to China on a one-way ticket. In the same year, Motorola filed a lawsuit alleging that five former workers had shared trade secrets by email with Lemko Corporation, which then passed them on to Huawei.146 According to federal prosecutors, Lemko was building wire­less technology for Huawei based on Motorola’s technology.147

There have been many other allegations of IP theft by Huawei, including that the company had stolen Cisco router source code. Commenting on the lawsuit filed by his company in response, Cisco general counsel Mark Chandler wrote, “this litigation involved allega­tions by Cisco of direct, verbatim copying of our source code, to say nothing of our command line interface, our help screens, our copy­righted manuals and other elements of our products.”148 A U.S. Jus­tice Department case against Huawei lays out a similar pattern of alleged theft:

To obtain the intellectual property of the Victim Companies, the IP Defendants sometimes entered into confidentiality agree­ments with the owners of the intellectual property and then violated the terms of the confidentiality agreements by mis­appropriating the intellectual property for the IP Defendants’ own commercial use. . . . On other occasions, the IP Defendants used proxies such as professors working at research institutions or third-party companies, purporting not to be working on behalf of the IP Defendants, to gain access to the Victim Com­panies’ nonpublic intellectual property. Those proxies then impermissibly provided the Victim Companies’ nonpublic proprietary information to the IP Defendants.149

Perhaps the most egregious known case involves Nortel. In 2010 Brian Shields, the head of cybersecurity for Nortel, found that Chi­nese hackers had been inside Nortel computer systems since at least 2000.150 Moreover, when the Canadian Defense Department took over the Nortel building after it went bankrupt, they discovered that listening bugs had been planted.151 As one telecom industry veteran said, “by 2004, it was clear to many that Huawei was copying Nor­tel’s telecom hardware, and even its instruction manuals.”152 Shields stated that “nobody would be interested in these kinds of documents other than a competitor. . . . In my opinion, looking at what the hackers went after, it is likely these documents made it to Huawei.”153

This would explain why Huawei’s R&D spending was significantly less than Nokia’s and Ericsson’s, and why, despite persistently lower R&D spending as a ratio to gross profit prior to 2012, it main­tained a higher rate of patenting. As Chen notes, Huawei had over 3.7 times the number of patent families as Nokia from 2003 to 2012 (28,726 patent families compared to Nokia’s 7,675); and it had three times as many as Ericsson from 2011 to 2014 (18,177 patent families compared to Ericsson’s 6,107).154 She suggests that one explanation for this is that Huawei was able to obtain IP without having to con­duct the R&D to develop it, as Nokia and Ericsson did.

Why Did the West Ignore
Telecom Equipment Mercantilism?

So why did Western governments let Huawei and ZTE take over the global market through unfair practices? There are three main reasons.

First, few Western analysts and leaders believed China posed a competitive threat. A 1998 ITC report stated, “foreign companies are well positioned in the Chinese market as the leading suppliers of tele­communications products such as switches, transmission equipment, cellular equipment, and satellite equipment.”155 A few years later one expert wrote that “under the terms of China’s accession to the WTO, the Chinese IT industry will find the competition with large global corporations, especially those based in the U.S.A., extremely se­vere.”156 At the 2004 China-U.S. Telecommunications Summit, Sec­retary of Commerce Donald Evans stated, “as I survey the IT land­scape, I see an amazing opportunity for the Chinese and American people.”157 What Evans should have said is “as I survey the IT land­scape, I see an amazing opportunity for Chinese firms.” Five years later, at a hearing of a congressional commission on U.S.-China trade, Daniel Blumenthal stated, “the idea that Huawei is going to very soon catch up to our leading telecom in terms of the value they create is, I think, farfetched.”158

Second, most economists and policymakers simply didn’t care whether America lost industries, because they did not consider any industry, including telecom equipment, to be strategic. As James Lewis writes,

what is amazing is that the United States has seen this problem coming for 15 years. In 2002, the Department of Defense began asking how we would deal with a global supply chain in tele­com and the risks this creates. There is a still classified 2003 National Security Agency “Telecommunications Study” that asked how the United States would manage the risk from glob­alization. It turns out that the approach we chose was to ignore it.159

Third, even when policymakers were concerned and wanted to take action, they usually balked for fear of Chinese government retaliation. In 2011, Karel De Gucht, the EU’s trade commissioner, announced that the EU was planning to bring a WTO case against China for subsidies to telecom equipment companies and product dumping. But the commission withdrew the case purportedly because of complaints from national governments representing Siemens and Ericsson, who in turn feared retaliation by the Chinese government.160 Indeed, a key reason why China lets these companies keep some market share in China is precisely to have leverage over them, so they will push back against any EU trade actions.

Lessons for the Future

The loss of the North American telecom equipment industry was not inevitable. While management errors did not help, those errors were made in the context of an American capitalist system that made long-term investing more difficult. Even more important were government policy decisions: overly aggressive antitrust actions, top-down re­structuring of markets, a lack of a domestic industrial strategy, and an utter failure (at least until recently) to challenge Chinese technological mercantilism.

Absent massive subsidies, it is probably too late to resurrect an American equipment industry. It is possible that so-called software-defined networks will be transformative and shift innovation from hardware, where China leads, to software, where the U.S. is competitive. But it is too early to tell. In any case, if the United States does not want to rely on Huawei in ten years, it will have to work to ensure that producers in allied nations, especially Ericsson and Nokia, survive and even thrive.

But it is not too late to save existing advanced technology leaders still in the United States, including in the aerospace, automobile, in­ternet services, life sciences, semiconductor, and related sectors. The long history of the fall of the North American telecom equipment industry provides at least five lessons for policymakers today.

Lesson 1: focus more on competitiveness in antitrust regulation. For almost a century, U.S. antitrust regulators gave virtually no consideration to competitiveness. In part this was due to the dominance of the consumer welfare standard rather than the total economic welfare standard, which includes considerations of firm competitiveness. Antitrust authorities in the United States and Europe need to reorient antitrust regulation to include considerations of innovation, industrial policy, and trade. One way to do this is to ensure that the Defense and Commerce Departments are integrally involved in decision-mak­ing. But antitrust officials also need to stop reflexively looking at any company that has become strong as a problem, and to understand that this strength may be critical for U.S. competitiveness (and to U.S. consumers in their role as workers and taxpayers); something hope­fully they will take into account when considering what do about so-called Big Tech.

Lesson 2: resist government-orchestrated structural change. The telecom bubble, which played such a key role in the fall of Lucent, was caused by policymakers who thought they knew the best way to restructure an industry through regulation. After several hundred bil­lion dollars’ worth of destruction, it became clear that they did not. Rather than use regulation to drive competition, policymakers ought to let technological innovation drive Schumpeterian “creative destruc­tion.” Cellular, cable, and internet technology all emerged to provide competition to local and long-distance telephony and would have done so without the 1996 Telecommunications Act.

Lesson 3: push against quarterly capitalism. The U.S. system does well in enabling the growth of disruptive entrants. It does less well at enabling long-term competitiveness once these firms become more mature, particularly if they are in capital-intensive industries. As such, policymakers need to find ways to combine the best of American capitalism—getting rid of old assets and supporting new innovators—with the best of the European model—longer-term support of capital-intensive industries. One place to start would be to ensure that the tax code better rewards investment in capital equipment and R&D, while taxing dividends as normal income and also reducing incentives for stock buybacks.161 In addition, it is necessary to change the definition of “socially conscious investing” to go beyond issues of race, gender, and environment, and include U.S. national competitiveness. Wealthy investors should be as proud of investing in critical U.S. firms for the long term as they are of donating money to charity.

Lesson 4: adopt an advanced industrial strategy for the United States. The days when America was so strong economically and tech­nologically that it could afford to lose advanced technology industries are long gone. America is in desperate need of a sophisticated, ad­vanced industrial strategy that recognizes that some industries are “too critical to fail.” In particular, Congress should act in four sub­stantive areas: support for R&D targeted to key technologies, tax incentives for key building blocks of advanced production, financing for domestic scale-up, and the addition of a competitiveness screen for regulation.162

Lesson 5: join with our allies to fight against Chinese innovation mercantilism. For all of its economic and foreign policy failings, the Trump administration did wake the elite up to Chinese innovation mercantilism. It is necessary to build on this initiative and to stop thinking about Chinese companies as normal competitors. Rather, they represent a form of mercantilist competition in which the state and the private sector are systematically joined to accomplish the state’s goals. While the Trump administration is the first to push back against Chinese mercantilism, its unilateral approach has failed. Only a coherent push with our allies—akin to how the allies resisted the expansion of the Soviet Union—will have any chance of succeeding.

The United States invented the telecommunications equipment industry. Not all that long ago it dominated the industry. Today all that is left is a massive trade deficit and key vulnerabilities in a critical technology. But the history of America’s loss of its telecom dominance can provide not only a wake-up call but a road map for action. Going forward, America cannot afford to make this mistake again.

This article originally appeared in American Affairs Volume IV, Number 3 (Fall 2020): 99–135.

Notes
1 Alberto F. De Toni, International Operations Management: Lessons in Global Business (New York: Routledge, 2016), 128.

2  Arona Butcher et al., Global Competitiveness of U.S. Advanced-Technology Manufacturing Industries: Communications Technology and Equipment, USITC Publication 2439 (Washington, D.C.: U.S. International Trade Commission, October 1991), 4–26.

3  “USPTO Director Looks to Decrease Patent Backlog by Improving Workforce Efficiency,” Federal News Network (WFED), June 12, 2018.

4  Thomas J. Lauria, The Fall of Telecom: A Wall Street Analyst’s True Story of the Telecom Industry (self-pub., Lulu.com, 2007), 99.

5  Francis Bello, “The World’s Greatest Industrial Laboratory,” Fortune (November 1958).

6  Jon Gertner, The Idea Factory: Bell Labs and the Great Age of American Innovation (New York: Penguin, 2012), 270.

7  John E. Tilton, Highlights of International Diffusion of Technology: The Case of Semiconductors, Brookings Research Report 118 (Washington, D.C.: Brookings Institution, 1971).

8  Rand V. Araskog, The ITT Wars: An Insider’s View of Hostile Takeovers (New York: Henry Holt, 1989), 98.

9  K. W. Taylor, “Tariffs,” in Encyclopedia of Canada, ed. W. Stewart Wallace (Toronto: University Associates of Canada, 1948), 6:102–8.

10 Robert Carr et al., Telecommunications Equipment: U.S. Performance in Selected Major Markets, Office of Industries Staff Research Study 24 (Washington, D.C.: U.S. International Trade Commission, December 1998).

11 Bill Hogan, “AT&,” Washington Post, November 9, 1986.

12 Carr et al., Telecommunications Equipment.

13 Lauria, The Fall of Telecom, 121.

14 Lisa Endlich, Optical Illusions: Lucent and the Crash of Telecom (New York: Simon & Schuster, 2004), 94.

15 Carr et al., Telecommunications Equipment.

16 Endlich, Optical Illusions, 6.

17 William Lazonick and Edward March, “The Rise and Demise of Lucent Technologies” (Paper presented at the conference on Innovation and Competition in the Global Communications Technology Industry, insead Fontainebleau, August 23–24, 2007), 2.

18 Jonathan Calof et al., An Overview of the Demise of Nortel Networks and Key Lessons Learned: Systemic Effects in Environment, Resilience, and Black-Cloud Formation (Ottawa: Telfer School of Management, University of Ottawa, March 2014), 3.

19 Peter Curwen, “Assessing the Meltdown in the Telecommunications Sector,” info 4, no. 5 (October 2002): 26–38.

20 Araskog, ITT Wars, 6.

21 Tim Dempsey, No Fear: Tales of a Change Agent; or, Why I Couldn’t Fix Nortel Networks (self-pub., CreateSpace, 2014), xiv.

22 Steve G. Steinberg, “Netheads vs. Bellheads,” Wired, October 1, 1996.

23 John R. Graham, Campbell R. Harvey, and Shiva Rajgopal, “The Economic Implications of Corporate Financial Reporting,” Journal of Accounting and Economics 40, no. 1 (2005): 3–73.

24 Araskog, ITT Wars, 9.

25 Stephen B. Adams and Orville R. Butler, Manufacturing the Future: A History of Western Electric (Cambridge: Cambridge University Press, 1999), 202.

26 Doug Pitt, “What Really Happened to Lucent Technologies?,” US Phoenix.

27 Pitt, “What Really Happened?”

28 Luria, Fall of Telecom, 287.

29 John J. Keller, “Unlikely Team: An AT&T Outsider and a Veteran Join to Run New Spinoff,” Wall Street Journal, October 14, 1996.

30 Lauria, Fall of Telecom, 144.

31 Lauria, Fall of Telecom, 309.

32 Lazonick and March, “Rise and Demise,” 51.

33 Trevor Cole, “The Speed of Light,” Globe and Mail Report on Business Magazine, March 31, 2001. See also Fabrice Taylor, “The Story behind Nortel’s Fall,” Globe and Mail, November 17, 2001.

34 Endlich, Optical Illusions.

35 Endlich, Optical Illusions, 17.

36 Yishai Boasson, The Telecommunication Industry: Cisco and Lucent’s Supply Chains (master’s thesis, MIT, 2005), 64; Lauria, The Fall of Telecom, 147.

37 Dempsey, No Fear.

38 Boasson, Telecommunication Industry, 73.

39 Calof et al., Overview of the Demise, 2.

40 Gary P. Pisano and Willy C. Shih, “Restoring American Competitiveness,” Harvard Business Review (July/August 2009).

41 Endlich, Optical Illusions, 69.

42 Pitt, “What Really Happened?”

43 Lazonick and March, “The Rise and Demise of Lucent Technologies,” 37.

44 Lauria, The Fall of Telecom, 294.

45 Endlich, Optical Illusions, 230.

46 Lauria, The Fall of Telecom 316.

47 Lauria, The Fall of Telecom 317.

48 Lazonick and March, “Rise and Demise,” 35.

49 Andrew Shonfield, Modern Capitalism: The Changing Balance of Public and Private Power (Oxford: Oxford University Press, 1965).

50 Butcher et al., Global Competitiveness, 3–8.

51 Butcher et al., Global Competitiveness, 5–13.

52 Ericsson engineers visited a telephone switching exchange in Boston in 1885 and, even though they were prohibited from seeing the wiring of the exchange, they were able to enter surreptitiously on a Sunday and obtain “the forbidden fruit,” according to John Meurling and Richard Jeans, The Ericsson Chronicle: 125 Years in Telecommunications (Stockholm: Informationsforlaget Heimdahls, 2001), 61. In addition, Western Electric alleged in the 1920s that Ericsson deployed automatic telephone exchanges in violation of Western’s patents.

53 David Bartal, The Empire: The Rise of the House of Wallenberg (Stockholm: Dagens Industri, 1996), 14.

54 In 1996 the Wallenberg family’s holding company, Investor AB, owned 4 percent of Erickson but controlled 39 percent of voting power. In general, in Sweden the control multiplier in 2000 was 22 (class A stocks have 22 times more voting rights than class B); see Bartal, Empire, 11.

55 Bartal, Empire, 9.

56 Bartal, Empire, 170.

57 Bartal, Empire, 176.

58 Karl Ritter, “Mighty Ericsson’s Descent Is a Blow to Swedish Ego,” Los Angeles Times, September 2, 2002.

59 S. Shiva Ramu, Cyberspace and the Repositioning of Corporations (Himayatnagar, Hyderabad: Universities Press, 1999), 149; Endlich, Optical Illusions, 81; “ITT: Know What’s Behind the Logo,” Multinational Monitor 3, no. 1 (January 1982).

60 Lauria, Fall of Telecom, 68.

61 Alan Stone, Wrong Number: The Breakup of AT&T (New York: Basic Books, 1989), 73.

62 Stone, Wrong Number, 72.

63 Adams and Butler, Manufacturing the Future, 158.

64 Sharon Gaudin, “The Transistor: The Most Important Invention of the 20th Century?,” Computerworld, December 12, 2007.

65 Tilton, Highlights of International Diffusion, 76.

66 Tilton, Highlights of International Diffusion, 75; Bo Lojek, The History of Semiconductor Engineering (New York: Springer, 2007), 34.

67 Derek Cheung, Conquering the Electron (New York: Rowman & Littlefield, 2014), 205.

68 Butcher et al., Global Competitiveness, 4–5.

69 Butcher et al., Global Competitiveness, 3–6.

70 Endlich, Optical Illusions, 11.

71 Gertner, Idea Factory, 271.

72 Quoted in Stone, Wrong Number, 9.

73 Stone, Wrong Number, 325.

74 Dempsey, No Fear, 68.

75 Lazonick and March, “Rise and Demise,” 43.

76 Butcher et al., Global Competitiveness, 3-6.

77 Butcher et al., Global Competitiveness, 3-6.

78 Gertner, Idea Factory, 300.

79 National Research Council, Renewing U.S. Telecommunications Research (Washington, D.C.: National Academies Press, 2006), 2.

80 Endlich, Optical Illusions, 86; Qing Hu, and C. Derrick Huang, “The Rise and Fall of the Competitive Local Exchange Carriers in the U.S.: An Institutional Perspective,” Information Systems Frontiers 8, no. 3 (July 2006): 225–39.

81 “We Have the Technology,” Economist, October 1, 1998.

82 Endlich, Optical Illusions, 90.

83 Lauria, Fall of Telecom, 312; Dempsey, No Fear, 68; Endlich, Optical Illusions, 228.

84 Roger Lowenstein, “How Lucent Lost It,” MIT Technology Review, February 1, 2005.

85 Taylor, “Story behind Nortel’s Fall.”

86 Standard & Poor’s Industry Surveys: Communications Equipment 167, no. 51 (December 1999).

87 Calof et al., Overview of the Demise, 4.

88 Analysis of Lucent and Ericsson corporate annual reports.

89 Dempsey, No Fear.

90 Stephen B. Adams and Paul J. Miranti, “Global Knowledge Transfer and Telecommunications: The Bell System in Japan, 1945–1952,” Enterprise and Society 9, no. 1 (March 2008): 97.

91 Adams and Butler, Manufacturing the Future, 155.

92 Adams and Miranti, “Global Knowledge Transfer,” 97–98.

93 Butcher et al., Global Competitiveness, 5–14.

94 Harold M Graves et al., Changes in the U.S. Telecommunications Industry and the Impact on U.S. Telecommunications Trade (Washington, D.C.: U.S. International Trade Commission, June 1984), 40.

95 William R. Nester, American Power, the New World Order and the Japanese Challenge (London: Macmillan, 1993), 360.

96 Butcher et al., Global Competitiveness, 4–23.

97 Peter J. Buckley, Jeremy Clegg, and Hui Tan, “The Art of Knowledge Transfer: Secondary and Reverse Transfer in China’s Telecommunications Manufacturing Industry,” Management and International Review 43, no. 2 (July 2003):
67–93.

98 Butcher et al., Global Competitiveness.

99 Butcher et al., Global Competitiveness.

100 Araskog, ITT Wars, 122.

101  In 2000 there were 304 million GSM phones in existence, and only 130 million TDMA or CDMA phones. See Meurling, Ericsson Chronicle, 368.

102  Butcher et al., Global Competitiveness, 5–13.

103 Butcher et al., Global Competitiveness, 5–13.

104 Butcher et al., Global Competitiveness, 4–18.

105  Paul Lewis, “Phone Superpower Arising in France,” New York Times, August 25, 1986.

106 Christopher Rhoads and Charles Hutzler, “China’s Telecom Forays Squeeze Struggling Rivals,” Wall Street Journal, September 8, 2004.

107 World Trade Organization, International Trade Statistics 2009 (Geneva: World Trade Organization, 2009), 90; World Trade Organization, International Trade Statistics 2011 (Geneva: World Trade Organization, 2011), 107; World Trade Organization, International Trade Statistics 2014 (Geneva: World Trade Organization, 2014), 96.

108 Scott Bicheno, “Chinese Vendors Continue to Gain Share in the Global Telecoms Equipment Market,” Telecoms.com, March 2, 2020.

109 Peter Nolan, China and the Global Business Revolution (London: Palgrave Macmillan, 2001), 795.

110 Nolan, China and the Global Business Revolution, 863.

111 United States Senate Committee on the Judiciary, The Industrial Reorganization Act: Hearings before the Subcommittee on Antitrust and Monopoly of the Committee on the Judiciary, United States Senate, Ninety-Third Congress (Washington, D.C.: Government Printing Office, 1973).

112 Qing Mu and Keun Lee, “Knowledge Diffusion, Market Segmentation and Technological Catch-Up: The Case of the Telecommunication Industry in China,” Research Policy 3, no. 6 (August 2005): 764.

113 Nolan, China and the Global Business Revolution, 792.

114 Lauria, Fall of Telecom, 126.

115 Xiaobai Shen, The Chinese Road to High Technology: A Study of Telecommunications Switching Technology in the Economic Transition (New York: St. Martin’s, 1999), 64.

116 Shen, Chinese Road, 64.

117 Nolan, China and the Global Business Revolution, 796.

118 Ji Li, Kevin Lam, Gongming Qian, “High-Tech Industries and Competitive Advantage in Emerging Markets: A Study of Foreign Telecommunications Equipment firms in China,” Journal of High Technology Management Research 10, no. 2 (Autumn 1999): 295–312.

119 Ulaş Emiroğlu, “Catch-Up with Generative State: Lessons from Chinese Telecom Equipment Industry,” tekpol Working Paper Series STPS-WP-15/03 (Middle East Technical University, Ankara, December 2015): 6.

120 Peilei Fan, Made in China: The Rise of the Chinese Domestic Firms in the Information Industry (master’s thesis, MIT, 2003).

121 David Bennett, “Nordica and Danaudio in China,” in Business Case Studies in Operations Management, ed. Tom Batley (Auckland: Pearson Education, 2002), 253–62.

122 William C. Hannas, James Mulvenon, and Anna B. Puglisi, Chinese Industrial Espionage: Technology Acquisition and Military Modernization (London: Routledge, 2013), 57.

123 Mu and Lee, “Knowledge Diffusion.”

124 Mu and Lee, “Knowledge Diffusion”; Zixiang Alex Tan, “Product Cycle Theory and Telecommunications Industry—Foreign Direct Investment, Government Policy, and Indigenous Manufacturing in China,” Telecommunications Policy 26, no. 1–2 (February–March 2002): 17–30; Eric Harwit, “Building China’s Telecommunications Network: Industrial Policy and the Role of Chinese State-Owned, Foreign and Private Domestic Enterprises,” China Quarterly, no. 190 (June 2007), 311–32.

125 Mu and Lee, “Knowledge Diffusion.”

116 Shen, Chinese Road, 153.

127 Kun Jiang et al., “International Joint Ventures and Internal vs. External Technology Transfer: Evidence from China,” NBER Working Paper No. 24455 (Washington, D.C.: National Bureau of Economic Research, June 2020): 37.

128 Evan S. Medeiros et al., A New Direction for China’s Defense Industry (Santa Monica: RAND Corporation, 2005), 246.

129 Nathaniel Aherns, “China Competitiveness: Case Study Huawei,” CSIS, February 2013, 6.

130 Carr et al., Telecommunications Equipment.

131 Emiroğlu, “Catch-Up with Generative State,” 9.

132 Mu and Lee, “Knowledge Diffusion.”

133 Marc Bacchetta and Bijit Bora, “Industrial Tariff Liberalization and the Doha Development Agenda,” WTO Discussion Papers No. 1 (Geneva: World Trade Organization, 2003).

134 Quoted in Michael O. McCarthy, “Background Material for US-China Economic and Security Review Commission” (June 6, 2012), 8.

135 United States–China Economic and Security Review Commission, “China’s Industrial Policy and Its Impact on U.S. Companies, Workers and the American Economy” (Washington, D.C.: United States-China Economic and Security Review Commission, May 2009), 129.

136 Phil Garton and Jennifer Chang, “The Chinese Currency: How Undervalued and How Much Does It Matter?,” Economic Roundup, Spring 2005 (Canberra: Australian Government Treasury, December 2005), 83–109; China Power Team, “Is the Renminbi Undervalued or Overvalued?,” China Power, February 11, 2016.

137 Robert Clark, “No One Wants to Talk about Huawei’s State Subsidies,” Light Reading, January 9, 2020.

138 Duanjie Chen, Huawei Risk Is a China Risk: Why Canada Needs to Ban Huawei’s Involvement in 5G (Ottawa: Macdonald-Laurier Institute, March 2020), 17.

139 Bruce Gilley, “Huawei’s Fixed Line to Beijing,” Far Eastern Economic Review, December 28, 2000–January 4, 2001, 96.

140 Chuin-Wei Yap, “State Support Helped Fuel Huawei’s Global Rise,” Wall Street Journal, December 25, 2019.

141 Quoted in McCarthy, “Background Material,” 8.

142 McCarthy, “Background Material,” 9.

143 Ryan Mcmorrow, “Huawei a Key Beneficiary of China Subsidies That US Wants Ended,” Phys.org, May 30, 2019.

144 Xiaofei Liu, “Zhang Yansheng: ‘Without BRI, There Wouldn’t Be Huawei’”(张燕生:没有一带一路就没有华为), China.com, accessed December 31, 2019.

145 Andrew Backover, “Feds: Trio Stole Lucent’s Trade Secrets,” USA Today, May 5, 2001.

146 Phil Wahba, Helen Chernikoff, and Sinead Carew, “Motorola Sues Huawei, Lemko for Trade Secret Theft,” Reuters, July 21, 2010.

147 Jeff Ferry, “Top Five Cases of Huawei IP Theft and Patent Infringement,” Coalition for a Prosperous America, December 13, 2018.

148 Ferry, “Top Five.”

149 United States of America v. Huawei Technologies Co., Ltd., et al., Cr. No. 18-457 (S-3) (AMD) (E.D.N.Y. February 13, 2020), 4.

150 Jameson Berkow, “Nortel Hacked to Pieces,” Financial Post, February 25, 2012.

151 Tom Blackwell, “Did Huawei Bring Down Nortel? Corporate Espionage, Theft, and the Parallel Rise and Fall of Two Telecom Giants,” National Post, February 20, 2020.

152 Iain Marlow, “Nortel Turned to RCMP about Cyber Hacking in 2004, Ex-Employee Says,” Globe and Mail, February 15, 2012.

153 Brian Fung, “How China’s Huawei Took the Lead over U.S. Companies in 5G Technology,” Washington Post, April 10, 2019.

154 Chen, Huawei Risk, 26.

155 Carr et al., Telecommunications Equipment.

156 Nolan, China and the Global Business Revolution, 793.

157 Donald Evans, “Remarks in the China-U.S. Telecommunications Summit,” 2004.

158 United States-China Economic and Security Review Commission, “China’s Industrial Policy,” 64; James Andrew Lewis, “Telecom and National Security,” Center for Strategic and International Studies, March 13, 2018.

159 Lewis, “Telecom and National Security.”

160 Philip Blenkinsop, “EU Holds Fire on ZTE, Huawei Telecom Trade Case,” Reuters, October 9, 2012.

161 Joe Kennedy, “A Budget-Neutral Way to Encourage Business Investment in Research,” The Hill, February 17, 2020; see also Rachelle C. Sampson, “Short-Term Thinking in Corporate America Is Strangling the Economy,” Vox, October 3, 2016.

162 Robert D. Atkinson et al., Digital Policy for Physical Distancing: 28 Stimulus Proposals That Will Pay Long-Term Dividends (Washington, D.C.: Information Technology & Innovation Foundation, April 6, 2020).


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