Asia: Leading the race to 5G
A white paper from Frost & Sullivan and Principal.
Two of the top-three global innovation clusters are in Asia, according to 2017’s Global Innovation Index, which measures patent-filing activity for these clusters in addition to their overall innovation potential. These clusters include Tokyo-Yokohama in Japan and Shenzhen- Hong Kong in China—both of which rank higher than number three Silicon Valley (San Jose-San Francisco) in the United States.¹ If this comes as a surprise, it shouldn’t. From Tencent, Alibaba, and Xiaomi in China to Softbank and Rakuten in Japan, and Bharti Airtel in India, countries in Asia are producing innovation powerhouses, particularly in the digital economy and telecommunications space.
This trend is likely to continue, especially as countries in Asia lead globally in the development of 5G—the next generation of mobile communication technologies. 5G promises more robust networks that will be 10 times faster than current 4G networks. 5G networks will also have greater capacity to support growth in emerging digital applications, such as smart cities, autonomous vehicles, and the Internet of Things (IoT), which many countries in Asia are aggressively pursuing. While countries driving 5G in Asia have specific motivations for supporting implementation, they are all investing in the ultimate goal of ensuring sustainable, long-term economic growth through digital advancement. For investors seeking to avoid the high cost of U.S. tech stocks, Asia presents strong alternatives, with more opportunities sure to come as 5G accelerates digital transformation in the region. Here, we will discuss the motivations and expectations for 5G in the four Asian economies exerting the greatest regional influence on this technology’s development. These economies include Japan, South Korea, China, and India.
The 5G landscape in Asia
Within Asia, South Korea and Japan are likely to be the first nations in the region to commercialize 5G. Both are attempting to capitalize on the upcoming Olympic Games in 2018 and 2020, respectively, where 5G will be showcased as an enabler of new forms of content delivery. However, one notable aspect of 5G in Asia is that, unlike in other regions, initial network uptake will not be limited to developed countries. Rapidly developing countries, such as India and China, will be important market leaders as well because of the massive size of their populations and growing middle classes. Even if a small portion of consumers and businesses in these countries adopt 5G at first, the likelihood of reaching profitability earlier is high. Further, ambitious digital initiatives in both countries have spurred strong government support of 5G rollout.
Indicators that Asia will set the global benchmark in 5G are evident. Piloting of 5G technology has already taken place, and small commercial launches are expected in South Korea by 2019, with larger rollouts unfolding in China and Japan by 2020. Rollout in India is not expected until after 2020 due to financial and infrastructure-related challenges, but mobile network operators are already strategizing ways to leapfrog to 5G. Despite delays compared with countries like South Korea and China, once commercialized, uptake should be relatively swift in India given strong backing from the Indian government, spectrum availability, and a large, addressable, market driving scale.
Device compliance is another indicator of Asia’s market readiness for 5G. Device manufacturers in Asia, such as ZTE, have already unveiled 5G-ready smartphones, further underscoring Asia’s commitment to 5G development.3
As a whole, Asia is likely to account for just under half of all 5G subscriptions globally through 2022. By 2022, we expect regional revenue from 5G subscriptions to reach $4.5 billion and subscriptions to grow to over 280 million (or 49% of global totals).⁴ While this will represent only a fraction of all mobile subscriptions, growth for such a short period will be healthy.
5G motivations for Asia’s developed economies
Developed countries in Asia, such as Japan and South Korea, have aggressively pursued 5G. Japan was home to some of the earliest 5G trials in the world, and Japanese mobile network operators (MNOs) will spend a reported $46 billion combined on networks to commercialize 5G by 2020.⁵ A critical motivation for these operators is the search for revenue streams outside of smartphone subscriptions. 5G will provide the data transfer rates and capacity needed for new applications such as widespread adoption of autonomous vehicles and the Industrial Internet of Things (IIoT)—which refers to the IoT in non-consumer settings, such as in factories or manufacturing centers. And Japanese operators, like many of their counterparts in other regions, see the potential in 5G networks to support these new revenue sources. Further, Japan’s government has dedicated close to $300 million to promote the IIoT, alongside other technologies like big data, artificial intelligence, and robotics.⁶ To enable these technologies, the government is promoting the development of faster fiber-optic cables to better handle the backhaul needs of 5G networks. What is emerging in Japan is a concerted effort on the part of both MNOs and the government to usher in a well-connected, highly automated world. For these reasons, by 2022, we expect Japan will contribute 12.9% to regional revenue for 5G subscriptions.⁷
The South Korean government is also driving the development of emerging technologies, having allocated $1.6 billion in funding to support 5G networks alone.⁸ In addition, the South Korean Ministry of Science and Technology has formally announced that it will further work to accelerate the commercialization of 5G networks.⁹ South Korea, like Japan, is interested in pursuing 5G to ensure that its economy is prepared for the next wave of digital innovation. The South Korean government is facing difficult unemployment challenges for young workers (15 to 29 years old). The success of 5G will be one factor contributing to the creation of new jobs, especially for the younger generation, if it leads to the sort of entrepreneurial activity that will arise as the IIoT and other connected applications grow.
Another precipitating factor for the South Korean government’s early involvement in 5G development is the shoring up of conglomerates, such as Samsung and LG, in the global 5G market. Providers of proven 5G technology stand to gain greatly from infrastructure investments made in the next decade. The 2018 Winter Olympics in PyeongChang will provide a stage for showcasing 5G innovation from companies such as Samsung and Korean telco KT. Plans include real-time viewership of sporting events from an athlete’s perspective, holographic displays, and 360-degree virtual reality viewing of the games in real time.
But the economics surrounding Japan’s and South Korea’s interest in 5G moves beyond gains from serving as global forerunners. Both nations face the daunting realities of rapidly aging demographics. By 2025, in Japan, the proportion of people over age 65 will approach 30%; in South Korea, it will be above 20%.10 For both countries, population decline also looms. Older, shrinking populations threaten economic destabilization, with fewer workers and higher social burdens in terms of healthcare costs and pensions. In this type of environment, 5G investment becomes an economic necessity. Its critical function in providing the connectivity to enable more sophisticated and widespread automation and robotic technologies will help maintain production levels, grow GDP, and ensure older populations are cared for.
5G motivations for Asia’s developing economies
Strong backing from the government is helping propel 5G in China. For instance, 5G is cited as a strategic priority in the government’s 13th Five-year Plan. The government has also awarded grants to technology heavyweights ZTE and Huawei, which have received a reported $72 million for technology development, mostly around 5G.¹¹ Further, China’s largest telecommunications providers, all of which are majority state-owned, will spend up to $411 billion for 5G rollout by 2030.¹² While connecting applications such as smart cities and autonomous vehicles is important to China’s interest in 5G, the IIoT will be 5G’s most critical use case in support of China’s Made in China 2025 (MIC 2025) initiative.
MIC 2025 is an ambitious set of goals aimed at cultivating innovation and advanced manufacturing, especially for products to be sold within China’s domestic market. In many ways, MIC 2025 presents a strategy for confronting China’s rising labor costs, which threaten its manufacturing competitiveness. 5G is fundamental to this plan both in terms of controlling the market for 5G components and in establishing the connectivity networks necessary to further propel robotic automation in smart factories. It is uncertain if this strategy will work. Criticisms of MIC 2025 stem from China’s overcapacity problem, government interference in the market, and other policies that may slow investment in Chinese manufacturing (such as those that impact intellectual property).¹³ However, these challenges will not stop China from implementing 5G networks; we anticipate China will contribute 48.8% to regional 5G subscription revenue by 2022, while the Chinese government estimates adoption of 5G will contribute 3.2% of mainland GDP by 2025.14; If estimates are correct, economic impacts will affect the entire 5G value chain, from MNOs to technology vendors, and chipset and handset manufacturers.
China is not the only developing economy within Asia interested in the benefits of 5G. Talk surrounding 5G in India is growing—albeit in support of slightly varying priorities. India is experiencing twin growing pains: rapid urbanization and the need to foster a knowledge economy that will help tackle poverty through economic growth. The government has embarked on two strategic initiatives to address these challenges: India’s Smart Cities Mission and Digital India. 5G will be central in achieving these government-backed initiatives, which are aimed at easing the stress of urban population growth and closing the digital divide. Developing the IIoT through India’s Make in India campaign, which will help diversify India’s economy by expanding its manufacturing sector, and capitalizing on India’s strong IT sector are also drivers of 5G development.
To advance 5G, the Indian government has established a 5G forum with a budget of approximately $76 million dedicated to 5G research and development.¹⁵ Private-sector activity includes a memorandum of understanding, signed by Nokia and Indian telcos Airtel India and BSNL to develop 5G, which complements Nokia’s placement of an IoT-related 5G lab in Bengaluru.¹⁶
Despite the excitement, India still has significant infrastructure challenges that will restrain 5G deployment, including the lack of a robust backhaul network to connect cellular subnetworks to core networks. Further, the majority of mobile subscriptions are still 2G, although these will increasingly migrate to updated networks. Moreover, MNOs have already begun considering the potential to leapfrog from 2G or 3G directly to 5G. Despite initial infrastructure challenges, Frost & Sullivan estimates that India’s 5G economy will grow quickly between 2020 and 2022, accounting for 24% of total subscription revenue by 2022. Government and MNO backing coupled with India’s sizeable population will help accelerate return on infrastructure investment.17
Implications for the investment community
As Asia is demonstrating, the race for 5G comes down to preserving economic growth. In terms of developed nations, such as Japan and South Korea, investors should take comfort in the welcoming of technology that will help buoy long-term economic precariousness caused by aging populations. Further, increasingly automated and connected factories that help neutralize the advantage of lower labor costs in developing nations will make manufacturing in developed countries more attractive.
Developing countries like China and India are taking steps to ensure competitiveness by confronting corruption, improving quality standards, encouraging innovation, building infrastructure, and digitizing their manufacturing sectors. Although both countries have a lot of work to do, if successful, their large populations and expanding middle classes will attract investment, especially as manufacturing site selection becomes more dependent on proximity to end markets. 5G will push high-tech manufacturing in these countries, but it will also serve as a catalyst for adjacent technologies, including blockchain, which will increase transparency and build trust, attracting additional foreign (and retaining domestic) investment. China and India are bound to experience growing pains associated with their respective transitions in manufacturing; however, long term, they remain growth prospects.
Investors should also note that 5G-enabled smart city development throughout Asia will present attractive real estate investments. 5G will also establish Asia, particularly China, as an epicenter of development in autonomous vehicles and connected infrastructure. Further, as 5G and the IIoT grow in Asia, particularly in the manufacturing sector, their influences will ripple across the region. Countries like Vietnam, Cambodia, and the Philippines will follow suit in the adoption of 5G, increasing overall supply chain efficiency in the region.
2 Frost & Sullivan. 2017. 5G in Asia-Pacific: Forecast to 2022. https://cds.frost.com/p/297734469/#!/ppt/c?id=P967-01-00-0000&hq=5g%20in%20asia
3 Asha McLean. February 2017. “ZTE unveils ‘Gigabit’ phone, partners with Intel for 5G IT baseband unit.” ZDNeT. http://www.zdnet.com/article/zte-unveils-gigabit-phone-partners-with-intel-for-5g-it-baseband-unit/
⁴ Frost & Sullivan. 2015. 5G in Asia-Pacific: Forecast to 2022.
⁵ Nikkei Asian Review. 2017. “Nationwide 5G Mobile Coverage Coming to Japan in 2023.” https://asia.nikkei.com/Business/Companies/Nationwide-5G-mobile-coverage-coming-to-Japan-in-2023
⁶ Frost & Sullivan. 2016. Role of Governments in Promoting the Industrial Internet of Things (IIoT) in Asia-Pacific. http://www.frost.com/p95d; Communications Today. August 2017. “Japan to Upgrade Fiber Optic Networks for Future 5G Deployment.” http://communicationstoday.co.in/14917-japan-to-upgrade-fiber-optic-networks-for-future-5g-deployments
⁷ Frost & Sullivan. 2017. 5G in Asia-Pacific, Forecast to 2022.
⁹ Ministry of Science and Technology (South Korea). 2017. “Long-term National Strategy for the Intelligence Information Society Unveiled.” Science and Technology Newsletter. No. 25. http://english.msip.go.kr/english/msipContents/contentsView.do?cateId=msse44&artId=1325782
10 Frost & Sullivan. 2015. The Global Future of Work: The Future Labor Force. http://www.frost.com/nf03
11 Adam Rosenberg. September 2017. “China places big bet on 5G.” Techpolis. https://techpolis.com/china-places-big-bet-5g/
12 Central Committee of the Communist Party of China. 2015. The 13th Five-Year Plan for Economic and Social Development of the People’s Republic of China. http://en.ndrc.gov.cn/newsrelease/201612/P020161207645765233498.pdf; Bien Perez. June 2017. “Why China is Set to Spend US411 Billion on 5G Mobile Networks.” South China Morning Post. http://www.scmp.com/tech/china-tech/article/2098948/china-plans-28-trillion-yuan-capital-expenditure-create-worlds
13 The European Union Chamber of Commerce. 2017. China Manufacturing 2025: Putting Industrial Policy Ahead of Market Forces. http://www.europeanchamber.com.cn/en/china-manufacturing-2025
14 Frost & Sullivan. 2017. 5G in Asia-Pacific, Forecast to 2022; Perez. June 2017.
15 ET Bureau. September 2017. “India to Deploy 5G by 2020, Sets up High Level Forum of Telecom and IT Ministries.” Economic Times. http://economictimes.indiatimes.com/news/economy/policy/india-to-deploy-5g-by-2020-sets-up-high-level-forum-of-telecom-and-it-ministries/articleshow/60839946.cms
¹⁶ Danish Kahn. April 2017. “Airtel and BSNL Working with Nokia to Transform Networks to 5G.” Economic Times. http://economictimes.indiatimes.com/tech/internet/airtel-and-bsnl-working-withnokia-to-transform-networks-to-5g/articleshow/58100246.cms
¹⁷ Frost & Sullivan. 2017. 5G in Asia-Pacific, Forecast to 2022.