5G: Short-term pain, Long-term gain during COVID-19 May 21, 2020
The arrival of 5G, the fifth-generation network, had always been the talk of the town before the COVID-19 pandemic threw global markets into disarray. Disruptions to supply chains, 5G hardware production delay and major economies sinking into recession have inevitably caused the 5G buildout to take a short-term hit. However, amid the COVID-19 pandemic, we may see some opportunities for 5G’s long-term growth.
5G and its benefits
The primary aim of 5G is to reduce maintenance costs and energy consumption. It is expected to deliver speeds up to 100 times faster than typical 4G technology. Therefore, many people may generally see 5G as having increased speed and bandwidth. Combined with the use of cloud, users with technological devices such as mobile phones and computers will be able to significantly depend less on its internal memory and reduce the need to install large number of processors.
One other benefit is its low latency, which generally means faster response times. As information is delivered at a faster rate, this will allow autonomous vehicles to react faster, leading to better and safer performance. This will also bring about a breakthrough in the medical industry as remote medical consultation as well as surgical procedures can be performed effectively over long distances.
Moreover, 5G density will also enable up to 100 times more connected devices in the same physical space as compared to 4G. As we witness an increase in connected devices in the Internet of Things (IoT) industry, 5G density plays a crucial role in allowing a greater exchange of real-time information with the devices. In addition, with countries transforming into smart cities, information collected through sensors placed at different points in the city, can be utilised and shared to improve quality of life.
Short-Term Impact on 5G Buildout
With the current COVID-19 pandemic, several countries in Europe have been forced to postpone 5G spectrum auctions originally scheduled at the start of 2020. These countries include Austria, France, Spain and Portugal. Supply chain disruptions have also caused components shortage for telecommunications networks. In addition, 5G requires small cell base stations to transmit and receive the higher band radio frequency spectrum. The usage of these sites will require site permitting and licenses which are usually issued by the municipal government agencies. With recent cities in lockdown, we may see delays in this process as some may consider site infrastructure licensing as a non-essential service.
On the demand side of things, new smartphones demand has dropped sharply with the COVID-19 pandemic. According to Strategy Analytics, global smartphone shipments dropped 38% year-on-year in February, which is the largest fall ever in the smartphone market. As economic conditions remain uncertain in the near term, consumers and enterprises may cut back on spending and conserve cash. This will lead to a decline in consumer interest for 5G as smartphone upgrades tend to be deemed as discretionary purchases, with 5G phones charging a premium over 4G counterparts.
Pockets of Opportunities
Despite the near-term challenges, I see some opportunities for 5G’s long-term growth. During the COVID-19 pandemic, human contacts are minimised to reduce the risk of human-to-human infection. To achieve that, China has been widely implementing 5G technology for practical applications.
We have seen unmanned drones being deployed to broadcast pandemic prevention measures, spray disinfectant and conduct thermal imaging checks on residents. Hundreds of autonomous vans are also deployed to sanitise the streets. The use of 5G networks has also extended to the education sector where it facilitates broadcasts to an extensive number of students through a national cloud learning platform. In the medical field, more than 100 hospitals adopted 5G systems to do remote medical consultation amid the COVID-19 outbreak. 5G-enabled robots also assisted practitioners in taking care of hospitalised patients. All in all, this COVID-19 crisis has provided an opportunity for 5G applications to be tested across various industries. With social restriction measures in place for the foreseeable future, we may see more and more countries adopting the 5G technology to minimise human contact.
The COVID-19 situation has also shaped the way we look at remote working and digital workplaces. As working from home and holding virtual meetings become more common, 5G will be highly sought after for its speed and bandwidth. The way of life after this pandemic will not be the same as pre-COVID-19 and 5G are poised to ride on the next wave of growth.
Standing on a Strong Base
Before the pandemic, 5G was set on a path of strong growth. Based on the latest Ericsson Mobility Report, the number of mobile broadband subscriptions in Q42019 grew by around 130 million to reach a total of 6.3 billion, a year-on-year increase of around 9%. Mobile data traffic grew by 49% between Q4 2018 and Q4 2019, fuelled primarily by a rise in video content viewing. As users are spending more time streaming and sharing videos, I will expect this strong growth to continue as video-streaming evolves further into 360-degree video and augmented/virtual reality.
On the commercial front, a 2018 study by International Workplace Group (IWG) found that 70% of professionals globally telecommute at least one day a week. For an increasingly mobile workforce, 5G is crucial in providing real-time collaboration between employees. When video conferencing no longer experiences lags, we should be able to see an increase in productivity for online meetings. With the COVID-19 pandemic, the trend of telecommuting has been accelerated tremendously as companies are forced to adopt remote working with lockdowns in place. We have seen video call surges on all messaging platforms, including WhatsApp, Google Hangouts and Zoom. According to Zoom CEO, Eric Yuan, the number of people taking part in Zoom meetings daily has eclipsed 200 million in March 2020, up from just 10 million at the end of last year. With telecommuting ingrained in work culture in future, 5G will be highly sought-after.
A report by Fortune Business Insights indicates that the global market for IoT, which was valued at $190 billion in 2018, is forecasted to reach $1.11 trillion by 2026 at a 24.7% compound annual growth rate (CAGR). With a growing number of IoT devices, which essentially means higher number of connections within the same network, they will need to depend on 5G to ensure proper functioning. No doubt the pandemic may cause a fall in demand for IoT devices as consumers tighten their belts during this economic slowdown. However, I believe that this creates only a short-term demand shock. With major economies reopening gradually, we should see a corresponding path of recovery in demand for these technological products.
In conclusion, 5G may be the next wave of growth that should not be ignored. Despite the short-term challenges presented by the COVID-19 pandemic, I see pockets of opportunities which will spur higher demand for 5G after the crisis is over. If investors wish to ride on the 5G growth, they may consider the following ETFs to include in their investment portfolios.
|Top 5 Holdings
|Global X Internet of Things ETF
|Developed market companies that facilitate IoT industry
|DexCom IncSTMicroelectronics NVSkyworks Solutions IncGarmin LtdAdvantech Co Ltd
|The Pacer Benchmark Data and Infrastructure ETF
|U.S. Real Estate related to data and infrastructure
|Equinix IncCrown Castle InternationalAmerican TowerDigital Realty TrustCyrusOne Inc
|Defiance Next Gen Connectivity ETF
|Companies tied to development of 5G networking and communication technologies
|Nokia Oyj ADRAnalog Devices IncQualcomm IncTelefonaktiebolaget LMNXP Semiconductors
|First Trust Indxx NextG ETF
|Global equities related to next generation digital cellular technologies
|Digital Realty TrustSBA CommunicationsEquinix IncAdvanced Micro DevicesCrown Castle International
|VanEck Vectors Video Gaming and eSports ETF
|Global firms involved in video gaming and esports
|NVIDIA CorpTencent HoldingsAdvanced Micro DevicesNintendo Co LtdActivision Blizzard Inc
|Communication Services Select Sector SPDR
|US telecommunication + media/ entertainment S&P500 components
|Facebook IncAlphabet IncAlphabet Inc Class CT-Mobile US IncElectronic Arts Inc
|Global X MSCI China Communication Services ETF
|Chinese large- and midcap communication services companies
|Tencent HoldingsChina Mobile LtdNetEase IncBaidu IncChina Tower Corp
|SPDR S&P Telecom ETF
|U.S. telecommunications companies
|Bandwidth IncVonage Holdings CorpT-Mobile US IncArista Networks IncCiena Corp
Information updated as of 8 May 2020
About the author
Yeap Jun Rong
Phillip Investor Centre
Mr Yeap Jun Rong joined Phillip Securities since 2017, and currently manages a portfolio of over 10,000 trading accounts as an Investment Specialist. Apart from his dealing role, Jun Rong also frequently conducts seminars to empower his clients with financial knowledge in the field of both fundamental analysis and technical analysis. He also regularly features in different media platforms such as Channel 8's Morning Express show and provides market commentary for various newspaper like LianHeZaoBao (联合早报) and Business Times. Jun Rong graduated from National University of Singapore (NUS) in 2017 and holds a Bachelor’s Degree, majoring in Economics.