Category: 5G FIVG

5G & The Trade Truce

5G in 2019 and the trade truce – where cutting edge technology and national security intersect

July 8, 2019

Market space for 5G - the innovation and infrastructure that should provide faster speeds, more functionality and lower latency in mobile connective technology – both reflects and effects wider trends in international relations, tech stocks and the markets in general. This has been plainly obvious in recent developments in the US-China trade war and the markets’ response.

The potential impact of a move to 5G is imminent and extensive, making stocks and companies involved in this field subject to scrutiny by both investors and political actors. “Thematic investors” have already realized the benefits of concentrating their capital on a group of stocks that reflect the range of potential winners in the 5G rollout. These include tech and communication companies, and those involved in the range of new industries and products set to boom with full 5G capability, such as cloud computing, autonomous driving, augmented reality, eSports and gaming among other areas.

Governments also realize the importance of 5G to their strategic interests and as a crucial element in any forward-thinking domestic security and international foreign policy. Hence Trump’s recent rhetoric about protecting US interests in technology and intellectual property, and his subsequent blacklisting of Huawei, China’s primary supplier of 5G technological equipment, from buying software from US companies without prior US government approval.

So let’s explore where 5G stands half way through 2019 and analyze how the US-China trade war (and truce) fits in.

After many projections and discussions, the first 5G cell phones are now available to buy from Verizon and Samsung. As many promised last year, 2019 has seen the first significant launches of 5G networks in metropolitan spaces. On April 3, Verizon launched in parts of Chicago and Minneapolis and on May 30 Sprint followed suit in Dallas, Houston, Kansas City and Atlanta; with Los Angeles, New York City, Phoenix and Washington DC set to follow by the end of the year. The latter require consumers to have LG's new V50 ThinQ or HTC's 5G Hub in order to benefit fully from the 5G network’s faster speeds, but the direction is clear. Major market actors have been developing 5G capacities for years and are now on the cusp of, or have already launched. While some companies such as Apple are holding back and waiting for infrastructure and bureaucratic obstacles to be overcome, AT&T and Verizon are turning their attention to 5G mobile hotspots, with At&T’s Netgear and Verizon’s Inseego device as their pilots in this area. Companies such as Qualcomm and Intel are advancing 5G modems that will be compatible with network operators and serve smart-home and other devices whose design has not yet been finalized. 20 device manufacturers have already confirmed their use of Qualcomm’s 5G components in their tech.

And where does China fit in?

All these developments must be understood in the international technological context that China has declared its overall readiness for a commercial 5G network to be launched in 2020, which is five years before the US, EU, Japan, Canada and Korea can hope to achieve theirs. Add to this the 5G tech dominance of Huawei, a Chinese company founded in 1987 by former People's Liberation Army officer Ren Zhengfei and closely linked to the Chinese government’s “made in China” industrial upgrading strategy, and you begin to understand the West’s concern that it has lost any potential leadership towards the Internet of Things (IoT). The “made in China” policy aims to shift China’s economy into higher value-added manufacturing sectors, such as robotics, aerospace and energy-saving vehicles. It incorporates an approach that requires foreign companies seeking access to Chinese markets to create joint ventures with, and transfer technology to, domestic firms. Hence the US’s concern over intellectual property “theft”.

Together with anxiety over the West’s loss of first-mover advantage in the 5G network launch, we can better understand Trump’s May 2019 Executive Order on Securing the Information and Communications Technology and Services Supply Chain,’ which included Huawei and 70 affiliate companies on a black list as potentially threatening to national security. It was yet another expression of the simmering trade war between the US and China since 2018, which frontlines Asian tech stocks and especially those linked to 5G.

Markets celebrated the truce, reflecting confidence in a collaborative 5G future.

The announcement in early July by Trump and Chinese President Jinping, of a truce in this economic battlefield, has therefore been welcomed by markets and should offer a reprieve for United States companies that produce and sell in China. These include major 5G players (according to data accrued by Goldman Sachs on the top 20 U.S. companies with the highest revenue exposure to China) such as Skyworks, Intel and Qualcomm. Trump agreed to relax the embargo on Huawei and to refrain from imposing additional tariffs on $300bn worth of goods from China. (In return China has assured the US it will buy more of its agricultural produce). Markets celebrated the news about the trade war truce with the S&P 500 (SPY) gaining 0.77% and chipmaker stocks jumping to reflect confidence in the collaborative 5G future. Huawei is a major customer for American computer chip manufacturers – hence Qualcomm and Intel for example, gained 4.3% and 3.9% respectively on July 1. (According to a CNBC report, these two companies have a 67%, and 42% revenue exposure to China.)

Tension in Chinese-American trade relations persists, revealing both sides’ perception of 5G expansion as imminent and highly important.

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