The fourth industrial revolution is known for the significant advances we expect in technology, especially AI (artificial intelligence), driverless transport, etc. In fact, we still underestimate the sheer range of areas of our economies and our lives that will be changed by technology driven disruption.
The most important enabler of this revolution is 5G technology, which places it at the epicentre of the geopolitical confrontations that are building now.
There are many attributes that make 5G so crucial, but the two principal areas are latency and slicing.
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 virtually in real time.
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 in real time of other vehicles’ movements on the roads.
The other key differentiating factor of 5G architecture is 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 infrastructure.
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, we have seen that US companies are blocked from buying Chinese equipment for communications infrastructure and the US is very blatantly and explicitly trying to get all third countries to fall into line.
Australia and New Zealand were the first countries to ban Huawei from installing their hardware for the provision of 5G, at the request of the United States. For many countries, the US request is very uncomfortable, especially since they have not been offered any evidence of bad behaviour by Huawei.
Huawei is a world leader in 5G hardware and provides high specification product at a significantly lower cost than Western competitors. Against that, the US administration has been inconsistent in its messaging. At one point, Huawei was named as a national security risk; some weeks later, there followed an offer to recant the characterisation in exchange for a good trade deal with China. When this was not forthcoming, the demand was re-issued. The seemingly erratic demands to block Huawei have led many countries to go ahead with what seems the obvious choice (green on the map). The countries in pink are doing their own due diligence and so far, their security services have declared that they believe the threat is perfectly manageable.
Effectively we are already seeing the development of two different and non-interoperable standards for 5G. Already, value chains have been disrupted and Huawei has accelerated its programme to develop its own operating system.
For investors, the implications are clear: Firstly, capital expenditure will be significantly higher in 5G development and implementation may be slower than necessary. Secondly, less competition from Huawei logically implies higher prices for 5G customers in the West. However, for many countries the cost of not choosing Huawei for 5G will be considerable, because it implies the additional cost of taking out the existing 4G network (put in by Huawei) in order to be compliant with new anti-Huawei regulations.
The winners are the high specification memory producers like Samsung Electronics, SK Hynix and TSMC which will be valued increasingly highly by all sides. Meanwhile Ericsson & Nokia will win in the West while Huawei will be unopposed in the 80+ countries of BRI (Belt & Road Initiative).
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). The opinions contained in this document are those of the named manager(s). They may not necessarily represent the views of other Martin Currie managers, strategies or funds. It does not constitute investment advice. The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.