Just last summer, we were heralding the “dawn of 5G”, the latest generation of wireless internet technology that promises faster speeds and greater capacity. This year was supposed to see the technology launched at scale, as the installation of network infrastructure ramped up, and a new wave of 5G-enabled devices came to the market. But Covid-19 is threatening to slow the 5G revolution, not simply because of physical barriers to rolling out new equipment, but also the hit to consumer demand. It is not simply a case of ‘if you build it, they will come’. Few people would baulk at the idea of faster internet. But the willingness to purchase new devices to take advantage of this is questionable, especially as we enter an unprecedented global recession. This could disrupt the virtuous circle supposed to propel 5G’s momentum – more demand for 5G devices spurs investment in infrastructure and associated technologies.
The next wave of smartphones
Prior to this crisis, global smartphone demand was already slowing. 5G technology was expected to kickstart the market, but coronavirus could stymie the march forward. Strategy Analytics predicts smartphone sales will drop by more than a fifth this year as consumers hold onto their devices for longer, seeing newer models as ‘nice to have’ rather than essential.
Smartphone market leader Samsung (KRX: 005930) has already launched 5G-enabled phones, but all eyes are on when Apple (US:AAPL) will enter the fray. It had been expected to unveil the iPhone 12 in September, but a key question is whether its supply chain can deliver amid the recent disruption. A spate of product launches suggests the pandemic is not slowing it down. This includes the new ‘budget’ iPhone SE, which could appeal to more price-conscious consumers during these uncertain times. But having been months in the pipeline, these products were probably ready to ship.
China may be the final destination for product assembly, but Apple sources components from across the world. While most essential components are available from multiple sources, the company still relies on single suppliers for some items and favours outsourcers in Asia where restrictions on movement are still in place.
Apple's global supply chain: top 200 suppliers (dark blue)
Source: Apple
The Nikkei Asian Review has reported that Apple is considering delaying the launch of its 5G handset “by months”, not just because of potential supply chain issues, but the prospect of weak demand. “Apple has one shot at its first 5G launch,” say analysts at Wedbush. “Tepid success out of the gates due to a lukewarm consumer appetite would be a disaster scenario.” They place the probability of an autumn release at 10-15 per cent. But, unlike Goldman Sachs, which recently moved it to a ‘sell’ rating based on an anticipated drop in iPhone sales, they remain bullish on the stock believing the market has priced in a delay. The shares are almost approaching bargain status (by Apple standards) at 21 times forecast 2021 earnings.
Breaking down the tech
As the cornerstone of the technology-driven economy, semiconductors are involved in every level of the 5G network, from mobile phones to network infrastructure. But the ‘corona-crunch’ will leave manufacturers producing smartphone chips particularly vulnerable in the short term. This is further bad news for Qualcomm (US:QCOM), with news website Axios reporting that Google is exploring making its own chips for future Pixel phones. Meanwhile, Taiwan Semiconductor Manufacturing Company (US:TSM) derives almost half its net revenue from the smartphone market, counting Apple among its customers. Its significance to supply chains makes it a bellwether for the global technology industry. TSM expects the semiconductor market (excluding memory) will be, at best, flat in 2020. But it still intends to increase capital expenditure to $15bn-$16bn (£12bn-£13bn) this year, believing “5G as a multi-year megatrend is still strong”.
Intel (US:INTC) might be more insulated, having sold its smartphone modem business to Apple last year. It is focusing on “cloudification” as more software is used in mobile networks.
Telecoms equipment – a global power struggle
Geopolitical power is increasingly linked to technological advancement and 5G is the latest battleground. The telecoms equipment manufacturing industry is dominated by a handful of companies that can afford huge research and development costs and enjoy dependency on their hardware. The number one global player is Chinese tech giant Huawei.
The US is determined to stall Huawei’s ascent, arguing it is a Trojan horse enabling Chinese espionage – claims Huawei has repeatedly denied. US attorney general William Barr has even suggested the US and its allies consider taking a financial interest in European rivals, Nokia and Ericsson. Having been placed on the “entity list” last year, US companies are restricted in the business they can conduct with Huawei. According to Reuters, further measures are being prepared, potentially barring foreign companies using US chipmaking equipment from supplying Huawei without a licence.
As US sanctions bite, this escalation would not go unanswered. Eric Xu, Huawei’s rotating chairman, recently told CNBC that: “The Chinese government would not sit there and watch Huawei being slaughtered. I believe there would be countermeasures.” A potential Pandora’s box, this could see US devices locked out of the Chinese market. Meanwhile, China is likely to accelerate development of its own chip supply chain and turn to alternatives such as Samsung and MediaTek (TPE: 2454).
The UK has drawn fire following the government’s decision to allow Huawei a limited role in developing its 5G network. New legislation will be proposed capping the company’s market share at 35 per cent and excluding it from “safety-related and safety critical networks”. The US has taken a hard line, suggesting the UK’s move could undermine intelligence sharing and a post-Brexit trade deal.
Boris Johnson is also facing pressure from his own party to reverse the decision. The passage of a relatively minor piece of telecoms legislation in March was used as a protest proxy, passing by just 24 votes – the government’s majority is 80. But telecoms consultancy Assembly Research believes a total Huawei ban could delay the UK’s 5G roll-out by two years and cost up to £6.8bn. BT (BT.A) estimates it will cost £500m over five years just to comply with the cap on Huawei’s involvement.
Despite the US’s best efforts, Huawei is likely to become an even bigger player in the 5G era as its looks to lead global standards. Shunning it based on political expediency could risk missing out on cutting-edge technology.
Checking in with UK telcos
Coronavirus has inevitably impacted the UK’s 5G roll-out. First and foremost, there is the practical barrier of social distancing. “There is going to be the challenge of putting up masts and cables,” says Paolo Pescatore, founder of media and telecommunications consultancy PP Foresight. Mr Pescatore believes the disruption will also affect wider supply chains and pose additional logistical difficulties, for example obtaining permits for digging up roads to deploy cables.
That’s before mentioning the 5G conspiracy theories that have ripped across Europe, prompting vandalism of mobile phone masts across the continent. Vodafone (VOD) has seen 20 masts attacked by arsonists so far. To be clear, this latest 5G myth has been labelled “the worst kind of fake news” by Stephen Powis, medical director of NHS England.
BT has been prioritising ensuring connectivity of sites such as hospitals. “That has, of course, had an impact on things such as our 5G roll-out in this period,” the chief executive of the consumer division, Marc Allera, told Bloomberg News. Mr Allera believes the commitment to 5G infrastructure and new devices from handset vendors remains intact. But he has questioned demand: “How is the consumer going to react when we come out of the crisis. How much demand are they going to have for these high-end smartphones?”
Vodafone has asked the government to abandon the upcoming 5G spectrum auction and instead allocate radio frequencies evenly across UK network operators at the reserve price. It believes this would provide “more certainty in these highly turbulent times” while ensuring continued 5G roll-out. Under this proposal, the total number of lots would be distributed for just over £1bn, a discount that would help limit cash flow pressures.
Vodafone cut its dividend by 40 per cent last year, although there’s no word yet on whether the payout will survive this crisis. BT has yet to amend its dividend, but broker Berenberg expects it will be scrapped. Both companies were already facing balance sheet strain pre-coronavirus and pension deficits won’t make life easier.
IC buy tip Spirent Communications (SPT) appears better positioned. A recent update indicated some Asian service providers it works with are looking to accelerate 5G deployment to meet increasing demand. The telecoms testing group is also pushing ahead with its final dividend.
