5G: China's once-in-a-century investment opportunity

In a hospital in Harbin, a city in northeastern China’s Heilongjiang province, a Chinese surgeon is very carefully tapping and swiping on her mobile phone. She is giving instructions to an intelligent robot 9,000 kilometres away in downtown Los Angeles. It is removing the kidney of a cancer patient.

The scene sounds like something from a science fiction movie but for Nokia’s chief executive Rajeev Suri it could become reality “very soon”.

Whether he is right or not depends on one vital development – the launch of the fifth-generation (5G) cellular network, the wireless communication technology that will serve as the backbone for applications including artificial intelligence, connected cars, robotic surgery and even smart cities.

All of the above can be categorised by the sheer volume of data they create. Self-driving cars, for instance, generate 4,000 gigabytes (GB) of data per hour that needs to transferred with ultra-low latency [To read more, click here]. Considering the existing 4G LTE network typically transfers only around 6GB through wireless devices over the same period, it is clearly not capable of supporting the expected next wave of new technologies.

5G promises to transmit data at 1GB per second, possibly faster, and because of this it has the potential to unlock $12.3 trillion of revenue across a broad range of industries, IHS Markit a data and analytics provider, believes. This is equivalent to the consumer spending levels of China, Japan, France, Germany and the UK combined.

The stakes are therefore high and tensions are already rising as countries such as China and the US vie for the economic benefits that technological primacy over 5G could yield, including newly created industries, jobs and increased foreign investment.

While estimates vary as to when 5G can be commercialised, there is consensus it can be achieved within two to three years. 

Historically a non-contestant in the race for superior communications technology, China is widely touted to be the ultimate 5G winner and is tipped to own the biggest share of global 5G connections – up to 40% by 2025, GSMA, the global trade organisation for mobile network operators, forecasts. 

CTIA, a trade association representing the US wireless communications industry, also believes China has the industrial momentum and government support to pull this feat off. The Ministry of Industry and Information Technology estimates China will invest Rmb2.8 trillion ($411 billion) in developing 5G mobile networks through 2030; about 50% more than the US, its nearest rival. 

China Mobile, the country’s largest telecommunications services provider, will launch the world’s biggest 5G trials in five Chinese cities this year as part of the government’s third-phase 5G technology tests. The telco aims to deploy more than 10,000 5G base stations by 2020.

FRIEND AND FOE
The US is feeling the heat of China’s aggressive 5G plans. In particular, Washington is concerned that Beijing could customise technology to make it easier for spying and cyberattacks. If true this poses a major threat to US national security since China is an integral supplier of IT equipment to the US government.

According to an April report from the US-China Economic and Security Review Commission, top American IT manufacturers like Microsoft, Intel, Hewlett-Packard, IBM, Dell, and Cisco have sourced an average of 51% of their parts from China since 2012. These companies are key suppliers to the US government.

As the 5G battle heats up between the two superpowers, China and the US are both keen to protect their own interests through various political and economic sanctions.

US President Donald Trump seized a good opportunity to undermine China’s research and development capacity in the recent saga surrounding ZTE, penalising the Chinese communications equipment maker for illegally selling US technology and equipment to North Korea and Iran and violating the long-standing US trade sanctions on both countries.

In April, ZTE was served a seven-year ban on purchases from US suppliers, dealing a huge blow to the embattled Chinese company that sources nearly 30% of its components from American companies. ZTE is key to China’s 5G commercialisation since it holds the bulk of the country’s patents in radio transmission systems and software-defined networking technologies.

Although the US reached an agreement with ZTE to replace the ban with a $1.4 billion fine, the situation has not improved a lot for the Shenzhen-headquartered company. In particular, the fine – equivalent to twice ZTE’s net profit last year – puts a huge burden on ZTE’s finances and undermines its ability to conduct 5G trials.

In response to the ZTE ban, Beijing has warned it could suspend its antitrust review of Qualcomm’s proposed $47 billion acquisition of Dutch chipmaker NXP Semiconductors, which is seen bolstering US technology in the making of chips for driverless cars, mobile payment devices, as well as sensors for drones and other smart devices. 

Qualcomm is a US chipmaker that does a huge amount of business in China and played an influential role in the country’s deployment of 3G and 4G networks and has a dominant market share in 5G-enabled wireless chips. 

In a separate case, US President Donald Trump blocked the mega $117 billion merger between Singapore-based Broadcom and Qualcomm in March citing national security concerns. Industry experts believe the merger will undermine the ability of the US to commercialise 5G since the combined entity will likely reduce investment and research in the new technology.

CHIP ON SHOULDER
Beijing is acutely aware of Chinese technology firms’ heavy reliance on US technology and its integrated circuit manufacturing capacity. As it stands, China’s road to 5G commercialisation hinges on having sufficient access to the supply of silicon chips, which are the key components of any 5G devices and provide the core technological specifications such as radio frequencies, data throughput and latency.

China, the world’s largest consumer of semiconductors, spent a whopping $200 billion on imports of US chips every year, according to data from the Ministry of Commerce.

That is a stark contrast to the fact that homegrown chipmakers have a combined market share of less than 5% in most categories. With the exception of Semiconductor Manufacturing International Corporation (SMIC), most Chinese chipmakers are yet to achieve the technological level and capacity sufficient to compete with global leading foundries like Intel, Samsung and TSMC.

In order to enhance its technological know-how in chip making, the Chinese government recently instructed local chipmakers to actively pursue US companies. However, most of these attempts ended in vain as the US government increased scrutiny on technology mergers and acquisitions.

In February 2016, US chipmaker Fairchild Semiconductor backed away from a $2.6 billion offer from a Chinese consortium, six months before Global Communication Semiconductors pulled its proposed $226 million takeover by Shanghai-listed Sanan Optoelectronics. Both decisions were likely linked to problems with US approval.

Technology purchases have become tougher since Trump took office at the beginning of last year. Since then, the protectionist US president blocked two major deals involving the sale of Lattice Semiconductor and Xcerra to two government-linked private equity funds in China. 

MADE IN CHINA 2025

The ZTE dispute acts as a timely warning to China over how much the country relies on US technology in its pursuit of 5G. Just a month after the US imposed the sanctions, the Chinese company said its major operating activities had ceased as it stopped receiving materials from Qualcomm, which supplies about half of its demand for chipsets and processors.

The incident also spurred Beijing into increasing its own 5G research and development capability to achieve technological independence, supporting the initiative known as “Made in China 2025” unveiled by Chinese Premier Li Keqiang in 2015.

The Ministry of Industry and Information Technology said in late April it was closing in on a massive funding round for China Integrated Circuit Industry Fund, which some analysts estimate will top $40 billion.

Should Beijing manage to close the fundraising, it will nearly triple the firepower of the state technology fund – established in October 2014 with $21.8 billion – and strengthen its ability to subsidise homegrown technology companies across various stages of the value chain.

TARGET TAIWAN

Another way to upgrade China’s 5G technologies is to acquire chipmakers outside of the US. Companies in Taiwan, a technology manufacturing hub for global brands, are naturally a target.

“A lot of Chinese electronics manufacturers are seeking acquisitions of foreign semiconductor companies to strengthen their supply chains,” Andrew Chen, an industry analyst with Yuanta Securities, told FinanceAsia.

The latest example is China Inc’s participation in the initial public offering in May of Foxconn Industrial Internet, a subsidiary of Taiwanese chip assembly company Hon Hai Precision Industry, which designs internet systems for smart factories. Baidu, Alibaba and Tencent, the Chinese tech giants commonly known as BAT, all subscribed to the IPO.

Analysts also expect renewed Chinese interest in MediaTek, a leading supplier of smartphone semiconductors and processors to mid-tier brands including Lenovo, Panasonic, TCL and Xiaomi. China’s Tsinghua Unigroup openly admitted in 2015 that it was interested in pursuing a merger deal between MediaTek and its portfolio companies Spreadtrum Communications and RDA Microelectronics.

The global race to 5G is entering a new phase as China switches gear and looks to run on its own feet. While it is uncertain whether China will lead all the way to the end, one thing is for sure – China’s ambitions in 5G will be a once-in-a-century investment opportunity that will lead to profound changes in the real economy.