5G - The confluence of technology & geopolitics
18 June 2019
[5G's] sheer scope and transformational power is wholly underestimated and that has led to the signals revealing threats and opportunities for investors to be blocked by the noise
Technology under the radar
Technological advance is typically a function of innovation, invention, capital,
opportunity and relevance. Investors understand this well and have long experience
of successfully investing in new technologies, changing direction as evidence of its
development demands. In this case, however, we also have another, unquantifiable
factor that brings significant distortion and inefficiency: geopolitics.
Experience indicates that new technologies are often misunderstood at the early stages, leading investors to underestimate the
scope and cost of the new technology and overestimate the speed and ease of its adoption. Historically this has been borne out
because almost every new technological advance has ultimately been taken advantage of in ways that were not accurately
anticipated at the outset.
5G, or fifth-generation cellular technology, is similarly misunderstood today; its sheer scope and transformational power is wholly
underestimated and that has led to the signals revealing threats and opportunities for investors to be blocked by the noise. This
is a problem, because 5G will have a long-lasting and long-term indirect impact on investment returns. 5G trials have been held in
several countries, notably in the PyeongChang 2018 Winter Olympic Games1.
The country currently in the lead in 5G development is China, driven by Beijing’s strategic imperative, with the Asia-Pacific region
leading the way in 5G adoption. What is perhaps less clear is the extent to which China dominates these subscriber numbers.
According to a variety of sources, the majority of the 54 million early adopters next year are in China.
Forecast of 5G smartphone subscriptions by region
Forecast as of November 2018. Source: Ericsson Mobility Report and Statista.
Why 5G matters
Equally importantly, the market is missing the extent to which this technology has become the critical terrain over which the
escalating geopolitical struggle between the US and China is playing out.
It is relatively easy to see why this particular technology matters more than the previous ‘upgrades’ to mobile
telecommunications, such as 3G and 4G. What the market has come to expect is higher download speeds with each ‘G’, and the
capability to move more data. Ultimately over the long term, 5G is going to be a rebuild of our mobile communications
architecture from the ground up. However, the first stage is likely to be a deployment on a NSA (Non-Stand-Alone) basis,
overlaying 4G infrastructure.
This means that it is extremely scalable, making it much cheaper and easier for operators to deliver more capacity. It does offer
higher download speeds and more data capacity, but that is not all. One of the critical factors is that it will enable a significantly
higher number of devices to be connected simultaneously per/km.
One of the key advances offered by 5G is extremely low latency, meaning the time it takes to get a response from the server, is
extremely low – virtually undetectable to a consumer. To an enterprise or to an industrial user, this is very valuable indeed, as it
means that instead of connecting devices to the cloud for storage, it becomes possible to use the cloud connection as an
enhancement. Users are able to effectively upgrade the computing power of a device by connecting to the cloud and using much
higher-specification machines elsewhere in their organisation to enable much more complex solutions in virtually real time.
Imagine the possible
This functionality is extremely important, as it suddenly enables the real leverage of the capabilities of cloud computing and thus
enabling exciting new developments in an enormous range of sectors. In healthcare, this means that remote consultations via 3D
holograms and even remote surgery are entirely possible. In transport, it makes the concept of autonomous vehicles much more
realistic – especially considering the need to keep vehicles informed real time of other vehicles’ movements on the roads.
The possibilities are also hugely significant in manufacturing. For example, it is currently necessary to physically wire large
machines on the factory floor to control them centrally, meaning it is costly and time-consuming to disconnect, move and rewire
them if there is a need to reconfigure. With 5G, it will be relatively easy to move them, given the wireless bandwidth and speed of
connection. This is unprecedented, as industrial companies have not typically been at the discussions on the adoption of new
technology. All the above points to the arrival of 5G as a powerful catalyst for the development of Internet of Things (IoT).
Improved latency drives functionality
In these situations, latency and responsiveness are
important, but they also require a very high degree of
reliability. Today’s 4G mobile networks are very efficient, but
work on a ‘best efforts’ basis. So, it is possible for portions of
files to be corrupted and require resending. In contrast, 5G
has been designed to deliver flawlessly; and that is the same
reliability as a wired connection. The offering appears to be
quite compelling: with a private 5G network, machines can
talk to each other with one millisecond latency and
extremely high reliability.
Clearly not everyone will require this degree of latency or
reliability, so the cost of this premium service may well prove
uneconomical for consumers, although the technology
means that the cost per delivery of one megabyte (MB) of
data is dramatically reduced and so it is possible to allow
revenue/MB to fall quite rapidly and thereby drive up
volume of data. For the average consumer, current service
based on the Long Term Evolution-Advanced (LTE-A) version
of 4G is plenty, meaning that it is industry which may
become the early adopter.
Emergency responders, the military, autonomous vehicles,
healthcare and enterprises are the most likely early
adopters. For the military, it’s about faster battlefield
decision making, machines aiding humans through intuitive
processes, automation and integration; real-time information
and drone support control at the company level.
The prospect of high-speed analytics taking in vast amounts
of video and satellite imagery, data on the ground, and
machines very quickly interpreting and providing intelligence
back to people in the field to make decisions are clearly
high-value factors in healthcare, services and industry.
The other key differentiating factor
of 5g architecture will be slicing. This is the key
Area fuelling the current
Geopolitical focus. 5g
Allows the operator
(or presumably the
Infrastructure owner) to
Literally slice a network
Into many smaller, virtual
Slicing the network
The other key differentiating factor of 5G architecture will
be slicing. This is the key area fuelling the current
geopolitical focus. 5G allows the operator (or presumably
the infrastructure owner) to literally slice a network into
many smaller, virtual networks. The logic is that this service
can be customised and enables different service levels to be
provided to different customers. For operators, this is
excellent, as it lowers the marginal cost of providing each
additional ‘slice’, because it all comes from existing
Where it becomes contentious is that it is theoretically
possible for the system to ‘switch off’ certain users at will, or
to focus cyber-attacks on subsets of the network without
affecting the whole architecture. The perception is that 5G
networks will be reliant on a multitude of physical switches
and routers that are uniquely vulnerable to hacking by the
people who build them. Technically, the hacking threat is
probably more acute around IoT. Nevertheless, for this
reason, there is an expectation that US companies will be
blocked from buying Chinese equipment for
So where does this go?
In my opinion, the current US administration’s
confrontational approach to China will not just end when the
next president assumes office. The concern about China’s
ability to penetrate sensitive areas of the country’s
infrastructure is deeply embedded and it is likely this will
persist for a long time. This means that the US will bar
Huawei and other Chinese companies from providing
infrastructure or components for the country’s 5G networks.
Furthermore, as we have seen recently, the White House has
demanded of its allies that they extend a similar ban on
Huawei and other Chinese manufacturers from participating
in their infrastructure. Australia and New Zealand have
already fallen in line and the United Kingdom, Poland and
Germany are feeling the pressure.
There is logic in the
targeting of the members of the ‘Five Eyes’, the intelligence
alliance of five anglophone countries (US, Canada, UK,
Australia and New Zealand) because of the volume of
intelligence they share on a habitual basis. Poland is keen to
host a permanent NATO base with US troops and is trying to
show willing. Independently, France has severed ties with
Huawei following long-established concerns voiced by the
country’s security services. The UK may prove to be the
weakest link here.
Recently, the UK’s intelligence
establishment has indicated that it is sanguine about the
perceived threat, pointedly contradicting the US position.
Besides, once the country leaves the EU, with or without a
deal, the UK will need as many friends as possible and trade
deals will be at the top of the wish lists. A favourable trade
relationship with China would be a significant objective in
Up until now, Germany, the UK and others have set up
laboratories to examine Huawei equipment, searching for
‘back doors’ that might enable the designers to gain access.
Apparently, they have found no evidence to date. But a
specific reason for worry is the 2017 National Intelligence Law
passed in China, which explicitly demands private sector
companies’ cooperation and assistance in the country’s
intelligence work. So, effectively no Chinese company
executive can refuse to help if asked.
Finally, while Korea and China have already allocated
spectrum, there will be many other 5G spectrum auctions and
equipment orders around the world in 2019, raising the tension
significantly in the short term.
Beijing will surely retaliate by banning western companies
from accessing the Chinese market and redouble its efforts to
ensure that all 68 countries which are beneficiaries of Belt and
Road Initiative (BRI) investment will accept Huawei and other
Chinese manufacturers, while blocking US or European
In fact, there are many countries in South East
and Central Asia, and Africa which are happy to use Huawei
due to a combination of technological quality and attractive
financing terms. The prospect of two competing, but probably
deliberately non-interoperable 5G networks is very realistic at
this juncture. China will become a powerful arbiter of
communications infrastructure across an enormous expanse of
the world, fuelling resentment and escalating the nascent
technology ‘cold war’.
The scenario I describe is not good for anyone but sadly
appears very likely. We are going to have to forget the
consensus-based investment of significant sums in 3G and 4G.
In the future we will witness near-complete duplication of
capital expenditure, resulting in potentially suboptimal
technical delivery, potentially with hiccoughs and delays due
to a segregated ‘silo’ approach to development.
As always in
these situations, there will be winners and losers. Clearly
Huawei and its peers will be barred from participating in the
infrastructure of some of the world’s largest developed
economies. Similarly, western companies are likely to be
excluded from around 68 countries around the world.
Conventional wisdom suggests that customers will lose out, as
they will experience limited choice of providers. But it is the
operator who will be prejudiced by the lack of choice over
network infrastructure providers, so this may have cost
implications for capex and cashflow, which in turn may mean
the service could become more expensive to the end
customer than it might otherwise have been.
There is a good
example of this already: Australian telecoms firm TGP was
planning to enter the Australian market as a fourth network
operator and had built out its plans using Huawei equipment –
then, once Australia banned the use of Huawei in its 5G
network, TPG was forced to suspend its network plans.
The winners are therefore likely to be companies such as
Ericsson, Nokia, Qualcomm and other western companies, which can now bid for business in the west with less
aggressive price competition from the Chinese, as well as
enjoying the certainty of their own market dominance in those
same countries. The Chinese companies will probably be
winners in their home market as well as in the 68 countries of
Curiously, neither China nor the US are self-sufficient in the
components needed for their respective technological
evolution. The highest specification producers of the crucial
component of memory, are to be found in South Korea and
Logically, TSMC, Samsung Electronics and SK Hynix, which
dominate the high-specification end of their sectors would
appear to be the clear winners as they will continue to supply
chips to both sides. They also enjoy a structural advantage,
from being neither Chinese nor western. I would expect them
all to come under pressure to pick a side. How much pressure
would depend on the prevailing levels of tension between
Washington DC and Beijing.For those who think this is far-fetched, we already have a long-established history of the
White House applying targeted sanctions to third-country
corporates doing business with Iran. Beijing could conceivably
point to this as accepted precedent.
The best defence for these companies will be to ensure they
remain at the cutting edge of relevant technologies, which
could prove enough for a sustainable period. Of these, expect
TSMC to be the most sought-after partner by both sides of
this conflict, since its dominant position at the cutting edge of
research and development in 5G and smart IoT applications is
unrivalled in the sector.
Perversely, the company’s location in
Taiwan and its significant footprint in mainland China work
simultaneously as a Kevlar jacket and a magnet for potential
belligerence from Beijing. However, I would not expect this to
escalate unless the extreme scenario of an annexation of
Taiwan were to be on the cards.
Finally, for the telecommunications operators, 5G represents a
new source of revenues. In a world where the operators will
have to keep investing significant sums on spectrum auctions
as well as in capital expenditure, industry digitalisation
represents the promise of much-needed relief. Whether this
new revenue source is large enough to compensate for the
higher capex, remains to be seen. But even here, geopolitics
will be an important driver, as each national government’s
imperative may determine the speed, extent and urgency of
5G development, indirectly setting ceilings on returns for
shareholders for some time (the most exposed here are clearly
the Chinese operators).
In the last 70 years, investors have had the relative luxury of
considering only financial and technical information in their
judgement of the fundamentals to inform their investment
decisions. We are now in an era with echoes from 100 years
ago, when commerce was distorted by the relatively
unquantifiable driver that is geopolitics – and this is only the
15G was on display via a drone light show, a connected car in Seoul, and interactive multi-angle HD video streaming.
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