SINGAPORE (July 9): Having control over technology equates to having control over the world. The race for technological dominance has expanded to digital supremacy and next–generation communication networks, which have become the core of technology development. The adoption of and reliance on technological devices due to convenience are only at infancy stages of multi–year trends. However, the Covid–19 crisis has expedited the process.
The 5G communication standard will spur new demand for an entirely new wireless experience, user interface, ecosystem and more importantly, the development of new technology. The establishment of 5G infrastructures, devices and new technology standards presents new investment opportunities in semiconductor and upstream integrated chipset design in the process of redefining broad ranges of connected services.
5G–connected cities have become a reality as countries step up their efforts to join the bandwagon. At the end of 2019, 85 cities in South Korea, 57 cities in China, and 50 cities in the US were already connected with 5G networks, and the number will continue to snowball.
5G is one of the factors that will determine who wins and loses the next phase of technological dominance. It is a crucial element in shaping the world of hyper–connectivity, facilitating the interlinkages for everything with everyone anytime, and anywhere. The Global System for Mobile Communications Association (GSM) forecasts the 10 countries with the largest number of smartphone connections would have a combined total of 4.4 billion users by 2025. With working from home (WFH) now a new paradigm, the need for a new communication standard has thus become a reality. The role of advanced communication technology can only become bigger and exceedingly irreplaceable.
The growth of 5G penetration is aided by the escalating number of devices. Ericsson projects that, in the first five years, the uptake for 5G subscription will be much faster than that of 4G LTE, its predecessor which was first launched in 2009. Ericsson forecasts the world will have 2.5 billion people with 5G subscriptions (see figure 1) mainly driven by strong demand from North Asia by 2025.
While global mobile phone connections are peaking, 5G will replace and displace the current wireless standard to become the mainstream standard where the migration will happen within the existing subscriber base.
The 5G network and the devices linked to it can simultaneously manage, interact with, and regulate multiple tasks and devices with highly reliable efficiency. The network can interconnect with machines, data, devices, and execute tasks at the same time, without compromising the reliability.
IC design and semiconductor sectors are the main beneficiaries 5G presents new investment opportunities on application processor (AP) manufacturers, communication integrated circuit design firms, and semiconductor supply chains. The market size for radio frequency (RF) alone, according to Ericsson, will grow to US$26.2 billion ($36.5 billion) by 2025 — from US$17.4 billion currently — at a compound annual growth rate of 8.5% riding on the new demand for 5G and peripheral chipsets.
In the larger scheme of things, global semiconductor market value is projected to reach US$730 billion by 2026, according to Fortune Business Insights. This is driven by semiconductor usage in wireless communications, consumer electronics, smart devices, data storage and analytics, Internet of Things (IoT), artificial intelligence, health care, automotive and industrial automation.
In wireless communication architecture, the new trend is to have a multifunctional single chipset programmable and logic applications integrated with modem functions. In essence, this blends the smartphone AP with wireless baseband capability into a single wafer chip or a combination of system on chip (SOC), which in turn interconnects with other semiconductor components. The SOC solutions provide unmatched technical capabilities which include processing, connectivity, data analytics, graphic imaging, and content searching. This new development is further enhanced with the invention of sub10 nanometre (nm) circuitry wafer chips.
With SOC taking centre stage, communication and data processing semiconductors will be among the main beneficiaries with the annual total addressable market expanding to more than US$350 billion by 2022, estimates PWC (see figure 2). Wireless mobile networks, long controlled by specialised hardware, will increasingly emphasise functions run on chipsets embedded with programmable software. Meanwhile, the rising popularity of wearable devices globally will further boost the demand for communication chips.
The eventual rollout of Industrial IOT and the growing push for autonomous cars are driving the need for higher bandwidth and more sophisticated data networks. As such, demand for mmWave band chipset and equipment will likewise increase massively. Race for technology leadership Being the world’s single largest mobile phone market, China has great motivation to develop its own ecosystem for 5G and semiconductors in order to be self-reliant. Furthermore, China can capitalise on its highly popular domestic online e-sports arena and expand its reach to benefit from the massive global e-sports market, riding on its new leading-edge technology capability.
Knowing the importance and its potential, the world’s two largest economies are competing neck and neck in the 5G technology race, propelling new developments in wafer nodes, semiconductor chips, logic and memory integrated circuits, and mammoth supply chains, sparing no effort in reshaping and controlling the innovations of tomorrow’s world.
Against this backdrop, investment catalysts are plentiful for listed IC design and wafer foundry firms. The combined market value of communication IC design firms and wafer foundries has risen to more than US$650 billion, as they become attractive investments for investors.
Telcos’ perspectives
A major distinction between 5G and its preceding wireless standards will be the larger spectrum bandwidth required by the former. Spectrum is a core component for wireless connections and telco operators need to obtain the legal access rights to occupy dedicated bandwidth from their respective authorities, through intensely competitive biddings.
There are three major spectrum ranges with specific functionalities:
1. Low bandwidth (below 1GHz) — large area coverage, suitable for low data usage
2. Mid bandwidth (between 1GHz and 6GHz) — suitable for urban coverage, for moderate data usage
3. High bandwidth (above 6GHz) — ideal for 5G-specific millimetre mm Wave for large data rates, ultra–low latency, and large capacity for simultaneous multiple connections. The ideal operating frequency for full–fledged 5G effects is on 26GHz and above
In order to roll out 5G, telco operators are pressed to acquire additional high bandwidth spectrum capacity from their respective authorities, at sky-high prices. Operators will then rollout 5G networks which are independent of existing mobile networks, further adding to the start-up costs in providing 5G services.
Such requirements will dilute returns on investments at the early stages of network rollout owing to:
1. High spectrum fees paid
2. Fresh rounds of high capex to install the 5G network
3. New cycle of massive handset subsidies
4. Content provision to attract bundled subscriptions
5. Marketing activities to convince existing users to switch to 5G
Capex burden on telco operators 5G works well on high spectrum where the increase in frequency facilitates higher transmission speed and larger capacity for data, but the area the signals can cover will correspondingly shrink. This means a larger number of base transmission stations will be required — good news for the semiconductor industry but not so for the telco operators. Besides incurring enormous upfront spectrum fees, telco operators will be saddled with multi-year escalating general mobile capex and 5G–specific capex (see figure 3).
Absence of pricing power
Average revenue per user (ARPU) has seen consistent decline even with the introduction of 4G-LTE services since the start of the decade. Industry players may struggle to reverse the structural headwinds, as they continue to be burdened by sustained and sizable capital expenditure outlay, persistently high operating costs, and severe lack of pricing power. The telco operator fraternity will find itself trapped with deteriorating profitability over the next few years, unless they are able to find new avenues to monetise their services y capturing subscriber base, usage volume and value-add services.
The cycles of industrialisation and technology development have long proven that an unrivalled ecosystem and in–depth supply chains are the fundamental elements for any innovation to sustain its success and dominance. We conclude that the progression of 5G will hinge upon the complementary existence of and symbiotic relationship with:
1. Integrated circuit development
2. Semiconductor development
3. New mobile devices
4. Content providers
5. Internet of Things
6. Cloud computing
