The article below is from our BRIEFINGS newsletter of 01 July 2019
The race to roll out 5G networks is accelerating across the globe, with US-China trade tensions putting equipment makers in the spotlight. For China, the transition to faster wireless should bring a wave of opportunities for technology stocks, from increased semiconductor demand to a surge in consumer device upgrades, says Goldman Sachs Research’s Allen Chang. We sat down with him to learn more about the scope of the opportunity and how trade tensions could impact rollout.
Let’s start with your view on 5G’s impact on the smartphones market. How do you see that impact evolving over the next few years?
Allen Chang: Strong consumer demand for 5G’s high speeds and fierce competition between brands to offer upgraded features should support a ramp-up in 5G smartphone shipments over the next few years. That said, our shipment assumptions are more conservative than the industry estimates, mostly due to concerns over the high price of 5G devices and services in the initial period as well as the limited commercial availability of 5G networks before mid-2020. While we expect China to boast 4.9 million 5G base stations by 2030, consumers might be discouraged from upgrading if 5G reception is limited to certain areas.
You are positive on 5G’s influence on the telecom equipment sector. Why?
AC: 5G is helping kick off a new investment cycle for wireless infrastructure in the region. We expect China to invest more than $150 billion its 5G network through 2025, with 5G wireless systems accounting for three quarters of the mix. That’s more than the country’s $100 billion investment in 4G from 2013 to 2018, an increase driven in large part by the higher number of 5G base stations and higher initial cost of 5G equipment.
How else will this upgrade cycle differ from the move from 3G to 4G?
AC: You saw 3G boosting the internet experience and 4G further enhancing it, especially the video experience. Next-generation 5G will upgrade data speeds, enabling multi-party video calls and augmented-reality calls, and help expand mobile cloud services. We think the 5G upgrade cycle will be more widespread. The speed of data transmissions means 5G will extend beyond smartphones into multiple sectors, including the Internet of Things, artificial intelligence, augmented reality, virtual reality, robotics, drones, autonomous driving, smart factories, smart cities and smart homes. This wide range of potential applications should encourage numerous, differentiated parties to participate in 5G development.
What about trade tensions? Assuming the US maintains its restrictions on trading 5G related technologies with China, how could that affect rollout?
AC: From our view, the US-China trade tensions could potentially drive new dynamics in the competitive landscape in part by narrowing the addressable market for Chinese brands overseas and intensifying their competition in those countries with better trade relationships with China. Should trade tensions further escalate, China could see potential delays in its own fifth-generation rollout – although the long-term structural upgrade to 5G remains intact. So all in all, we think this is a case where the transition would be delayed, not derailed by trade tensions.
Shifting back to the opportunities--how will the introduction of 5G affect demand for semiconductors?
AC: Telecom operators, equipment makers, and devices makers will all likely boost their demand for semiconductor chips in the coming years as they look to upgrade their systems and technology for the 5G era. Advances in artificial intelligence, machine learning, electric vehicles and autonomous driving should also support this growing demand. While we acknowledge near-term weakness due to elevated inventory levels across the IT supply chain, we are confident in the long-term growth outlook.