Five Eyes on 5G

They seemed as excited as I am about this emerging investment theme, but they were also a little uneasy. They wanted to know more about Huawei Technologies, the Shenzhen-based company that has become the leading manufacturer of 5G telecommunications infrastructure. They were aware of growing concern about the security of 5G networks that rely on its equipment, and worried about the downside risk that entailed.

“You might hear bad news about Huawei at some point,” I told them. “But you know what? It will tell us that the world is waking up to just how strategic an asset 5G is going to be for the global economy. It will likely be the starting gun for this investment theme.”

Two weeks later, Huawei’s Chief Financial Officer was arrested in Vancouver.

If 4G Was the Bicycle, 5G is Space Travel

When 4G connectivity arrived a decade ago, it introduced us to smartphones, video-conferencing and high-definition TV. The internet and social media went from something you did on your PC to something you did on your handheld devices.

If 4G was the bicycle, 5G is space travel. Among its many new features, 5G enables “Massive MIMO” technology: multiple inputs, multiple outputs. That is not only about devices downloading data at a faster rate, it’s about devices sharing data with one another in real time, without that split second of 4G buffering—the so-called “internet of things.” And that implies a lot more than being able to Facebook on a smartphone or play 3D computer games.

If cars could communicate with curbside sensors and other cars smoothly in real time, self-driving vehicles would become a reality. Surgeons would be able to operate remotely using 5G-connected robots. Your refrigerator could tell your phone that you’re out of milk, your phone could order some from the supermarket, which would deliver it in a self-driving van. Similar inventory management at the corporate level would enable the smart warehouse. At the social level, thousands upon thousands of machines could communicate with one another to make the smart city.

None of this happens without the step up to 5G. That makes it mission-critical to tomorrow’s economy, tomorrow’s productivity, tomorrow’s competitiveness. “I want 5G, and even 6G, technology in the United States as soon as possible”, tweeted U.S. President Donald Trump in February.

No wonder it has started to cause tensions and generate headlines.

Privacy and Security

Security is the issue behind those headlines. In addition to requesting the arrest of Meng Wanzhou in Canada, the U.S. has banned its government agencies from buying Huawei equipment and has urged its “Five Eyes” partners and the European Union to consider doing the same, ostensibly because China’s authorities could compel the company to share data routed through its products.

Is security the real issue, though? It is difficult to see why the same concerns do not apply to Huawei’s international competitors, Nokia and Ericsson. After all, these companies have an overwhelming incentive to maintain access to China, where 5G networks with huge growth potential are likely to be up and running as early as next year. That could give China leverage, should it need it.

Ultimately, we believe what’s going on right now has more to do with economic competition—specifically, allowing time for badly lagging U.S. telecom companies to catch up with Huawei.

That appears to be the perception at the official level in the U.K. and Germany, too. After initially considering a Huawei ban, both countries in the past two weeks have instead moved toward either a cap on Huawei equipment or bilateral “no spy” deals with China to avoid hampering their 5G rollouts.

The Arrival of the Theme, Not Its Disruption

The wider investment community is increasingly adopting the same view.

When Meng was arrested in December, 5G-exposed stocks were volatile even by the standards of the wider market turmoil. By last week, as the Huawei CFO sued Canadian immigration officers for wrongful detention and the company itself sued the U.S. government over its equipment-purchasing ban, many of those stocks were up 30 – 50% from those lows. Underlying earnings are beginning to reflect fast-growing orders out of China, South Korea and Japan.

The biggest beneficiaries have been companies very close to the heart of the 5G value chain, such as the sector’s key semiconductor suppliers or providers of simulation tools and testing software for wireless networks. But we have also seen price appreciation when one or two suppliers are dominant in a technology less directly linked to 5G. Examples would be manufacturers of foldable organic LED screens or radio frequency identification trackers, providers of communications and instant-messaging software, and even real estate companies that own cellphone towers and datacenters.

I said it back in November and here I will say it again: you’ll read a lot more Huawei and 5G headlines over the coming months, and not all of them will seem like “good news.” But, in our view, the market signal is emphatic: the news flow of the past five months marks the true arrival of the 5G investment theme, not its disruption.