The Real 5G Winner Could Be China

This article originally appeared on Barron’s by Tae Kim.

The technology industry is counting on fifth-generation wireless, or 5G, to be the next big growth driver for all kinds of new products, from phones and chips to software and sensors. But 5G remains an amorphous idea, and the short-term beneficiaries are no longer quite so clear. 

The tech industry expects 5G to deliver speeds 10 to 40 times faster than current 4G LTE networks. Advocates expect its lower latency and data-rate capabilities to drive a new era of killer applications. But Wall Street analysts are suddenly questioning the payoff. 

This past week, Goldman Sachs analyst Rod Hall wrote that 5G wouldn’t offer much to consumers by 2020. That’s when Apple (ticker: AAPL) is widely expected to release its 5G-enabled iPhones. “5G is a brand, not a feature,” Hall wrote to clients. “We do not believe that 5G offers consumers much in the way of additional utility.” He thinks that other 2020 iPhone features—augmented reality, a new design, and an improved camera—will prove more important to consumers.

The dilemma is that most popular smartphone uses, including social media, video streaming, and games don’t require 5G’s capabilities. “Smartphone download speeds are already sufficient for even 4K video streaming, and latency decreases to one millisecond are not perceptible for humans,” Hall wrote.

KeyBanc Capital Markets recently cited weak Google search interest for 5G, at least relative to prior upgrade cycles around 3G and 4G. 

John Carmack, the chief technology officer at Oculus, Facebook’s (FB) virtual reality unit, recently said that the industry has a “tough marketing problem” in promoting 5G. Carmack was the mastermind behind programming some of the gaming industry’s biggest technical achievements, including Quake and Doom.

“They sort of got a problem of how to sell 5G,” Carmack said on an August podcast. “Fundamentally, it is just a bigger pipe…It should be this relatively boring thing. They need a way to make it sexy in some way.” Virtual reality is often cited as a selling point for the technology. The problem is that VR doesn’t require all that much in the way of real-time data transfer, so it’s not an ideal use for 5G. 

Amid all of the questions, chip maker Qualcomm (QCOM) sent its lead executive on 5G standards, Lorenzo Casaccia, to Barron’s offices this past week to talk about the technology’s evolution and the company’s excitement about its future.

He played down concerns as to whether 5G eventually would get the killer applications it needs to drive adoption. Before 4G, it was hard to foresee the success of Uber Technologies (UBER), Instagram, and Snapchat, he said. “I have no doubt people will figure out what to do with it. I don’t think human creativity will stop with Instagram and Snapchat,” Casaccia said. “With 5G everything is better: much better latency, higher data rates, and increased reliability.”

5G is coming together differently than earlier wireless standards. While the leap to 4G involved a fight between competing standards—LTE and WiMax—5G has already unified around one standards body known as 3GPP. Casaccia added that this ultimately should make the fifth-generation wireless transition cheaper and more efficient, with every hardware, software, and equipment maker on the same standard from the start.

The first big opportunity for 5G may be in corporate applications. Goldman’s Hall, for instance, remains optimistic about its benefits in the enterprise. “Reduced latency to levels usable by high-speed machinery and automated vehicles might also open up new revenue opportunities for the carriers,” he wrote. “IoT [internet of things] sensors reliant on batteries will gain lifespan, and automated cars also gain specific functionality, allowing for vehicle-to-vehicle communication.”

Even if the 5G opportunity takes more time to play out in the U.S., there is still a powerful near-term investment opportunity for the technology: Chinese infrastructure.

Multiple Wall Street analysts are getting more optimistic about China’s 5G buildout. For instance, Rosenblatt Securities notes that local governments in the Asian country are providing subsidies to “speed up 5G network deployments.” As a result, Rosenblatt says, more than 300 cities in China will have 5G networks by the end of next year. Even Hall, the Goldman Sachs 5G skeptic, expects 120 million 5G smartphones to ship next year, largely because of China’s aggressive buildout.

In a report this past week, Piper Jaffray analyst Harsh Kumar cited a Chinese think tank that sees China-based companies spending $411 billion on 5G networks from 2020 to 2030. Of the 600,000 5G base stations expected to be rolled out worldwide next year, Kumar says half will be deployed in China: “We expect 2020 global [5G] deployments to largely be driven by the Chinese market.” 

So what’s the best way to play the 5G ramp in China? The U.S. government has made American exposure to Huawei Technologies, China’s 5G leader, nearly impossible. U.S. companies are currently banned from sending parts to Huawei. 

The best way for U.S. investors to tap into China’s fifth-generation wireless explosion is through Taiwan Semiconductor Manufacturing (TSM). The foundry makes many of the chips that Huawei uses in its 5G infrastructure products.

5G may come together slowly in the U.S. market, but China is serious about winning the race. Savvy investors can profit from the rivalry between the two giants.

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