Bottom line: China’s telcos won’t accelerate their 5G network building even if licenses are issued earlier than expected this year, though foreign equipment suppliers could benefit if Huawei is hobbled by the US-China trade wars.
What a difference a decade makes. That’s about how long has passed between China’s issuing of 3G wireless licenses and the upcoming issue of 5G licenses two generations later. I remember in the 3G era how China dragged its feet forever, and finally issued licenses several years after the rest of the world. This time around it appears to be moving more quickly, driven by what appear to be political and economic factors.
The topic has popped into the headlines again this week with word that China’s telecoms regulator will “soon” issue 5G licenses. (English article) The signals coming from the Ministry of Industry and Information Technology (MIIT) have been pointing to a release of licenses this year all along. But this could mean that will happen sooner rather than later, since many were previously expecting licenses toward the end of the year.
We’ll take a look shortly at how this will affect China’s big three telcos, which will now be charged with building 5G networks that will cost tens of billions of dollars. We’ll also look at the likeliest beneficiaries, which would mostly be the big telecom equipment suppliers including hometown giants Huawei and ZTE (HKEx: 0763; Shenzhen: 000063), as well as global giants Ericsson (Stockholm: ERICb), Nokia (Helsinki: NOKIA) and Samsung (Seoul: 0005935).
But first let’s delve into the geopolitics that’s pushing this topic higher and higher onto China’s priority list, as well as the country’s previous track record in 3G and 4G. As I’ve said above, China was a bit of a foot dragger on 3G about a decade ago, rolling out its system several years after the rest of the world.
Part of the delays were due to an industry restructuring that reduced the number of carriers from 4 to 3 at that time. But another part was simply that China wanted to wait for the technology to mature in other parts of the world before spending billions of dollars on it at home. The 4G era was similar in terms of timing for license issuing, as China was dickering around with its own homegrown standard called WCDMA, which ultimately ended up getting left by the wayside.
Front of the Herd
That brings us to 5G, where China is really jostling to be at the front of the herd, even though South Korea and the US have already formally rolled out limited service. China’s big change of heart owes to two reasons, including its wanting to support homegrown players like Huawei and ZTE. That desire has only become stronger in the current US-China trade war, since the US has banned Huawei and ZTE equipment from its networks.
The other reason for China’s enthusiasm is the growing importance of wireless high-speed data transmission to a wide array of cutting-edge applications that will power many services of the future. Those include the likes of self-driving cars, tele-medicine and many Internet-of-things applications. All of those and many others are targeted for strong state support in China, which sees such areas as critical in the transition from a manufacturing to services economy.
China’s three telcos, China Mobile (HKEx: 941; NYSE: CHL), China Unicom (HKEx: 762; NYSE: CHU) and China Telecom (HKEx: 728; NYSE: CHA), have already begun building trial 5G networks, and have mostly announced their capex plans for this year. That means they’re unlikely to alter those plans just because the regulator moves up the issue of licenses by a few months, since unexpected heavier spending would cut into their 2018 profits.
From the equipment supplier point of view, all the names I mentioned above look to be big beneficiaries of the move. In the past I would have said Huawei would be the biggest beneficiary, though the company could get tripped up this time by US sanctions against it that appear to be at least partly politically motivated. That could spell some new opportunity for global players Ericsson, Nokia and Samsung. But that said, I do suspect that Huawei will get back into the picture when the US and China settle their trade difference, perhaps by the end of the year.