Andy Budden (Capital Group) | The impact 5G will have on a wide range of industries is likely to be bigger than we’ve seen with any previous generation of mobile telecoms.
Each previous new generation of network has produced a big jump in speed. And we will certainly see this with 5G, which is estimated to be between 10 and 100 times faster than 4G.
But 5G is about much more than quicker phone downloads. It brings lower latency, greater network capacity, and significantly extends battery life. In time, this will produce a robust network in which millions more devices will communicate with one another remotely 10 to100 times faster than at present, and it is what opens the door to 5G’s full potential: the capacity for machine-to-machine communication.
What is the timeframe for 5G?
The initial impact will be gradual. Most countries are not yet actively rolling out 5G infrastructure. However, there has been initial build-out in the US, the UK and other parts of Europe, and much more extended implementation in China, South Korea and Australia. China now has at least partial 5G networks in 50 cities and is accelerating 5G implementation. Part of the government’s unannounced fiscal stimulus as a result of COVID-19 could be accelerated spending on 5G infrastructure, and there may also be 5G phone subsidies.
Why is global adoption slow?
To some extent, there is an inevitable lag – 4G took six years to achieve 90% penetration. In the case of 5G rollout, it is partly down to physics: 5G is a high-performance network because of its high frequency, but its shorter wavelengths are more readily absorbed by objects, meaning that the 5G signal doesn’t travel well through buildings and is even absorbed by plants and rain. In practical terms, it needs more base stations much closer together.
Putting a 5G system in place will take some time. It’s not going to be the immediate revolution that some expect.
So what are the opportunities in 5G at the moment? Is it really investable?
Three levels of 5G beneficiaries
A helpful framework for the journey through 5G investment over the next five years is to think of the 5G companies in three layers:
These are the telecom companies that provide 5G services. While research suggests incremental revenues for telecoms will grow, they are expected to remain relatively small in dollar terms until the middle of the coming decade, when a real acceleration is anticipated, which could in principle be attractive.
But there is a problem: building the infrastructure to access those revenues is going to require massive, upfront capital expenditure, compressing the margins of telecom companies and making them a less-than-compelling 5G investment.
• 5G enablers
This second layer comprises the organisations building infrastructure and providing the components necessary to take part in 5G. I believe this is currently a much more attractive area than the providers. The demand for cell towers, network equipment, devices, components and data storage requirements over the next few years could see very significant growth.
Within this segment, the semiconductor industry is likely to be a beneficiary of 5G. High-performance applications such as 5G require even smaller semiconductors. The essential technology required to manufacture these semiconductors is highly specialised, and ASML, which is the global leader in manufacturing the machines that produce the 7nm (nanometer) and lower-node chips, could see higher demand as 5G gains traction.
Device and component makers that produce memory chips, OLED display screens, mobile phones and consumer electronics (or the Internet of Things) are positioned to benefit from the increased connectivity of 5G. Companies like Samsung have been developing end-to-end 5G offerings.
Data centre providers are also likely to see growing demand from 5G adoption. These data storage centres allow enterprises to take advantage of 5G mobile networks when accessing cloud infrastructure, while improving network and application performance over low latency connections. Companies like Equinix enable connections between digital ecosystems globally.
• 5G users
These comprise the third level of beneficiary, and this is the area where 5G is potentially a gamechanger because it will enable devices and machines to talk to each other with accuracy and speed. Known as Machine Type Communication (MTC), this technology comes under two main headings.
Massive MTC is where lots of devices exchange large amounts of data but do not necessarily require exceptionally fast response times. Applications could include logistics or smart agriculture. The second category is critical MTC, where not only ultra-reliability is needed but also speed – think of factory automation, autonomous vehicles and traffic safety.
While some of these themes such as factory automation are already familiar to the market, 5G could accelerate the trend. Similarly, autonomous vehicle development is already making significant headway, but 5G could enable autonomous vehicles to start communicating with one another more effectively, allowing greater safety, efficiency and reducing emissions.
Across industries, 5G is expected to lead to a flood of innovation. In health care, it could allow not just online consultations with doctors but monitoring of health conditions and remote surgery. In the energy sector, 5G could enable remote facility inspection or repair, and smart grids. Then there is telebanking – being able to speak with a bank teller securely using 5G and, in addition, establishing vastly enhanced security for accessing financial services.
Virtual and augmented reality – VR and AR – are usually associated with entertainment, but they have massive potential in the maintenance of industrial facilities, where they could improve efficiency through faster repairs.
Where are the possible investable opportunities?
There are a number of listed companies that fall under the ‘5G enabler’ category. Importantly, though, they are positioned not just for growth associated with 5G but for wider secular growth trends around digital disruption. We believe many of these companies represent attractive investment opportunities right now for long-term future growth.
While the real game-changing opportunity could be among the companies that become the ultimate ‘users’ of 5G, this segment is still in its infancy. That means we must be very careful about how we invest in 5G and for that reason, the concept of a narrow investment focus on 5G has limited appeal. The ability to flexibly invest across different themes and ensure that the investment theme evolves over time, just as the investment opportunity evolves, is likely to be a more robust approach to tapping into this exciting trend.