Even if people around the world spend more time than ever on their mobile devices to play, zoom, tweet or snap, global smartphone demand is expected to drop by around 15% this year due to the health crisis and its economic consequences. The adverse conditions are even reportedly leading Apple to mull a delayed launch for its 5G-enabled iPhone.
That being said, some fresh data from Asia and more specifically from China provide reasons to be upbeat about the 5G technology takeoff and the smartphone upgrade cycle. In Q1, China Mobile doubled its 5G subscriber base to 31.7 million and China Telecom added 12 million 5G subs for a total of 16.6 million.
Even if part of this initial success can be attributed to local features (massive network investments with associated marketing, availability of less than $300-priced smartphones), the quick takeoff bodes well for the adoption of 5G in the US and European markets.
It’s worth reminding that just a few weeks ago, before the health crisis, many investors talked about an upcoming « super cycle » for Apple driven by 5G handsets. Even if the Covid-19 pandemic will arguably slow down the launch of 5G in Europe and the US, the thesis about a massive smartphone upgrade cycle over 2021-2023 remains intact in our view and the expected weakness of smartphone sales in 2020 could be due in large part to consumers holding off on purchases of 4G phones to focus on future 5G devices.
A strong adoption of 5G devices would have two positive consequences as far as our investments are concerned. First, that would materially increase the addressable market of radio-frequency semiconductor companies as the semi content in a 5G device is estimated to be 40% larger than in a 4G device. Specialty semiconductor companies like Skyworks, MACOM or Mediatek would be the main beneficiaries of this boom. Second, that would stimulate the already elevated investments in telecom and networking infrastructure with optical equipment, data centers and cloud services in the spotlight.
Even if consumer adoption will be essential in the takeoff phase, we keep seeing 5G mainly as the building block of many upcoming disruptive technologies and as an enabler of new industrial applications. 5G brings many crucial improvements like a high density of connections (for the Internet-of-Things) or slicing (proprietary bandwidth allocation) for critical services like autonomous vehicles or smart cities. These benefits will push the productivity rates of many industries to new levels.
