Tech disruption 30 June 2020, Chief Investment Office GWM, Investment Research

Investing in the 5G+ era 3 The need for 5G The 5G era is upon us. Services are As investors, the question is how to best

already available in select regions, and participate in the 5G wave. In the previ-

5 What does 5G mean rollouts have been planned for the rest ous cycles, most of the upside came at

for entrepreneurs? of the world in the years ahead. 5G isn’t just any broadband upgrade like its pre-

the start due to the substantial infrastruc-ture spending involved upfront. Hence,

9 Where are we in the decessors (1G to 4G); it transforms the the enablers (see below) enjoyed the bulk

5G cycle? way devices connect to the grid and to one another. With 5G, connections are

of benefits. This time it’s different: 5G offers investment opportunities across

11 What does 5G mean expected to be 20x faster than 4G and many years and industries, including both

for investors? latency 90% lower. Such magnificent power could enable applications that

enablers and platform companies. We call this the 5G+ investment opportunity,

weren’t feasible before because of 4G’s with enablers benefiting from a pick-up limitations (i.e., latency is too high). in capex spending and platform compa-Fixed wireless access, autonomous driv- nies benefitting from the economic value ing, immersive augmented and virtual created at the later stages. reality (AR/VR) technologies, artificial intelligence, tele-surgery, massive indus- 5G enablers consist of companies that trial Internet of Things (IoT), data-driven manufacture, install and maintain the agritech and highly connected smart cit- equipment needed for the network ies are areas that we think will ascend in build-out. This predominantly involves this new age. semiconductor equipment producers,

This report has been prepared by UBS AG Singapore Branch. Please see the important disclaimer at the end of the document.

various segments of semiconductor manufacturers, telecom and networking equipment suppliers, and tower opera-tors and telecom service providers. With an expected 20x rise in annual 5G capex spending from 2019 (USD 7.5bn) to 2025 (USD 150bn), we believe the struc-tural leaders in the respective 5G value chain stand to benefit from the multi-year pick-up in spending. And unlike the 4G roll-out, where much of the upside was realized within just a few years, we believe 5G entails a longer runway given its more complex technological nature and higher implementation costs.

But we think more substantial upside lies with 5G platform beneficiaries, which include leaders in smart mobility,

cloud, gaming, media & entertainment, and end-product manufacturers. Akin to how cloud technology today favors cloud platform companies and their ancillary service providers more than hardware companies, with 5G becom-ing more mature, we see outsized gains for platform leaders capable of success-fully building 5G use cases. A study con-ducted by IHS Markit revealed that about USD 13.2tr worth of economic value could be generated from 5G appli-cations by 2035, creating more than 22 million jobs in the network supply chain alone. Autonomous vehicles, the IoT and AR/VR are a few promising examples of applications platform com-panies can develop/are developing to create significant economic value.

Overall, our 5G+ theme holds a diversi-fied selection of these enablers and plat-form beneficiaries. The strategy is long term in nature. The stay/work-from-trend ignited by the COVID-19 pan-demic should catalyze the 5G infrastruc-ture roll-out because it improves last-mile economics as a fixed-broad-band substitute. In this report, we dive into 5G and cover its investment impli-cations, discuss what it means for entre-preneurs, share multiple use cases across industries, and shed light on what makes it different from 4G. For further details on our stock selection, please refer to our “Investing in the 5G+ era” Equity Preference List.

Source: gettyimages

We are once again on the cusp of starting a major cycle with 5G. Rejoice – the end of buffer-ing delays and fuzzy streaming is nigh.

The need for 5G

We are once again on the cusp of starting a major cycle with 5G. Rejoice – the end of buffering delays and fuzzy streaming is nigh!

The wireless industry has been able to reinvent itself at every major industry crossroads. The “app” economy has flourished in the 4G era, supported by the proliferation of smartphones and Internet of Things (IoT) devices.

Driven by a desire to stay connected and multi-task throughout a busy day, most of us have become digital omnivores and demand better connectivity perfor-mance like fast download speeds, high reliability (i.e., stable connections) and low latency (i.e., quick loading times). 5G can meet these increased demands.

”Annual 5G spending to jump from USD 7.5bn in 2019 to USD 150bn in 2025”

5G is in the early days and set to take o� Penetration, in %

120

100

80

60

40

20

0

3G 4G 5G2G

Source: GSMA, World Bank, UBS estimates

Exponential growth in mobile data supported by rising mobile IoT connections

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2018 2019 2020 2021 2022 2023

Mobile data (exabytes/month) 22 31 43 58 79 107

Cellular IoT Connections (bn) 1.0 1.3 1.7 2.2 2.8 3.5

Source: Ericsson, Bloomberg Intelligence, UBS

Evolution of wireless technologies

1G 2G – Analog mobile – Digital mobile

voice services voice services – SMS texting – Advanced phone

to network signaling

– Data rates of 40 Kbps

3G – Introduced packet-

switched data – Limited media

streaming possible (mostly radio)

– Improved internet access (144-400 Kbps)

4G – All IP network – Up to 1 Gbps internet

speed – Enabled multi-media

streaming – Lower latency

5G – 10-100x faster vs. 4G – Higher connection

density – Lower latency vs. 4G – Real-time streaming – Reduced device power

requirements – Network slicing

1983 1991 1998 2008 2018

Source: International Journal of Modern Trends in Engineering and Research, Bloomberg Intelligence, UBS

Tech disruption – June 2020 3

5G versus 4G Don’t think of 5G as just a faster 4G. 5G networks should be viewed less as a network and as more of a platform that can support multiple applications and services on one unified architec-ture without duplicate capital investment.

Here are some ways 5G will be better than 4G:

Faster speeds A 5G cell can theoretically provide ser-vice speeds up to 20 gigabytes. While service to individual users will be lower, likely in the 2–5 gigabyte range, 5G download speeds will be at least 20 times faster than 4G LTE rates. Effective speeds should be higher as well due to the installation of massive MIMO and beamforming technologies (these relate to the antennas in base stations).

Low latency Latency is the time it takes for connec-tions to be made, in other words the lag time. With 5G, latency will be virtually nothing – a millisecond or so. This is a game changer for autonomous driving, telemedicine, industrial automation and digital entertainment.

Greater flexibility 1G through 4G wireless standards were essentially built for purpose, evolving from simple voice to broadband connec-tivity over time. 5G is expected to be a platform that will enable a plethora of applications. Rather than networks that are purpose-built for each one of these applications, 5G networks will serve as a flexible platform that can utilize different services as needed.

Higher capacity Capacity, in the wireless context, relates to the number of devices a network can support. 4G networks can support up to 100,000 devices per square kilome-ter; 5G can support up to a million. Such unprecedented capacity will be needed when networks move from con-necting a few thousand devices in a city block to millions of devices, vehicles and sensors as IoT applications touch every-thing from refrigerators to shoes. To deliver greater capacity, 5G will use new high bands known as millimeter waves. And to maintain a balance with cover-age and capacity, it will leverage the mid-bands from 4G networks (1 GHz to 6 GHz)

5G versus 4G

20x More uniform, multi-Gbps peak rates.

Capacity and coverage vary according to spectrum

Capacity > 10 Gbps

mmWave

Low-band

Mid-band

Source: UBS

Coverage > 99.9%

Bands carrying low-frequency trans-missions have a longer travel dis-tance and can penetrate dense objects like walls easily, but less data can be carried. High-frequency transmissions travel a shorter dis-tance before losing integrity and cannot easily penetrate dense objects, but can carry much more data and have higher capacity.

90% 10x Decrease in latency – Connection density – a game changer. greater capacity.

4G 5G

Latency 10 ms <1 ms

Peak date rates 1 Gbps 20 Gbps

Available spectrum 3 GHz 30 GHz

Connection density 100,000 connections / Km2

1 million connections / Km2

Source: Qorvo, Bloomberg Intelligence, UBS

Tech disruption – June 2020 4

There are six industries that we believe will benefit the most from the transition to 5G.

Source: UBS

What does 5G mean for entrepreneurs? It’s not just consumers that will benefit from 5G’s improvements; entrepreneurs too will likely be afforded opportunities in many industries discussed below.

Let’s explore the technological change 5G will bring about:

– Enhanced mobile broadband The increased speed and greater capacity of 5G networks will deliver richer mobile experiences and potentially open up new applications such as AR/VR, mobile edge comput-ing and upgraded media consump-tion.

– Fixed wireless access Wireless carriers will use 5G to offer fixed wireless access to homes and businesses, supplanting traditional broadband suppliers.

– Massive IoT The greater density, lower power requirements and increased bandwidth of 5G should finally help bring the IoT (i.e., the concept of connected devices or sensors that transmit data through-out the real world) to life, but on a scale that was not feasible before.

– Ultra-reliable, low-latency commu-nications 5G’s resilience and low latency will enable far more powerful industrial automation, robotic, commercial drone and autonomous automobile (through vehicle-to-vehicle communi-cations) applications.

That six industries benefit the most

– Mobility

– Manufacturing

– Entertainment

– Agriculture

– Smart cities

– Healthcare

Tech disruption – June 2020 5

Mobility

Autonomous driving – a key pillar of the smart mobility trend

Along with electrification and ride shar-ing, autonomous driving is a key pillar of the smart mobility trend. Autonomous driving is tiered from 0 (zero automa-tion) to 5 (full automation) and we expect level 5 (i.e., driverless cars) to become a reality in the next decade. Since autonomous driving utilizes cloud-based decision-making based on real-time telemetry data, 5G is the missing puzzle piece for self-driving car adoption because it promises significantly lower latency.

While 4G or LTE technology provides regular updates to vehicles, 5G takes autonomy to next level by enabling real-time navigation and cloud-based deci-sions in case of emergencies. 5G can also transform the urban transport industry by powering human drones. As 5G will likely move us closer to autono-mous driving, it will provide both oppor-tunities and threats to entrepreneurs in the transport industry. Businesses that embrace 5G technology and its applica-tions will be in a better position to seize future opportunities and avoid disrup-tion, in our view.

Read UBS CIO’s Longer Term Investment theme “Smart mobility” for more. > www.ubs.com/cio

Entertainment

Improved streaming experiences The entertainment industry has gotten a major makeover in the past few years with the advent of fast mobile internet. 4G has allowed on-the-go streaming, and 5G should supercharge it. With 5G, hours of high-definition movies and tele-vision shows can be downloaded in sec-onds. This should drive further demand for online streaming business models in video and music, in particular in emerg-ing markets where traditional fixed broadband penetration is low.

Gaming, too, has been revolutionized by broadband upgrades. With the industry shifting its focus away from traditional console and PC gaming, mobile games now constitute more than half of online gaming revenues globally. Cloud gaming is an emerging trend in the industry and 5G, again thanks to its low latency, is set to accelerate the ongoing shift. Cloud gaming democratizes the gaming experi-ence through a centralized base of super-computers, which provide the computing necessary for resource-hungry gaming applications and deliver it to any device.

5G will likely be at the center of the cloud gaming revolution, as it will enable real-time gaming experiences on mobile devices, sparing buyers from sourcing or building expensive PCs or consoles. Entrepreneurs can take advantage of this shift by investing in the cloud gaming ecosystem and avoiding significant expo-sure to traditional console or PC gaming, in our view.

Read UBS CIO report “Shifting Asia: Ahead of the game” and the Longer Term Investment theme “Consumer experience” for more. > www.ubs.com/cio

Healthcare

Remote surgeries and monitoring on the rise.

The global healthcare industry is one of the least digitized, so the rising penetra-tion of technology provides potential opportunities in the emerging smart health, or healthtech, segment. 5G is a key enabler of healthcare’s digital transi-tion, as the increased reliability of 5G and its low latency opens the door for new applications. For instance, thanks to 5G, remote or robot-assisted surgeries should become more prevalent and tele-medicine, which requires highly reliable and high-quality video, should thrive.

With 5G and other digital technologies pushing the boundaries of what’s possi-ble, healthcare is ripe for disruption given its lagging status. Opportunities for entrepreneurs will likely arise incre-mentally, so investing in the right tech-nologies, like 5G, is a good way to take advantage of them.

Read UBS CIO’s Longer Term Investment theme on “HealthTech” for more. > www.ubs.com/cio

Tech disruption – June 2020 6

How 5G will enable the factory of the future

Supply management

AGV Sensors

Assembly line

Sensors

Robot motion control

Operations control

Inventory management

Sensors AGV

Manufacturing

5G to power the factory of the future

The Fourth Industrial Revolution marks a new era in manufacturing, characterized by increased connectivity and automa-tion. The Industrial Internet of Things (IIoT), industrial software, digital twins and most importantly 5G are, or will be, key drivers of this transformation. The heart of this industrial renaissance is the switch to smart manufacturing, for which 5G will empower. Industry 4.0 will use sensor data, machine-to-machine communication and big data technology (including cloud-based platforms) to bet-ter monitor equipment and analyze data – all of which will require remarkably stable and powerful wireless internet connections.

Digital twins and IoT technology pow-ered by 5G can eliminate inefficiencies and save time and money through bet-ter management of production pro-cesses and predictive maintenance. As with every technological innovation, we believe entrepreneurs who embrace smart manufacturing and digitize their equipment should reap the benefits and leave technological laggards in the dust.

Read UBS CIO report “Executives & Entrepreneurs: Industry 4.0 and the IIoT: Winners but also losers” for more. > www.ubs.com/cio

Delivery management

Source: ZVEI

Tech disruption – June 2020 7

Agriculture

Sparking the food revolution

Agriculture 4.0, or smart agriculture, is redefining how, where, and when we grow food. While data-driven agriculture can help farmers to discover innovative ways to grow more with less, poor con-nectivity and the lack of integrated prac-tical solutions have prevented wide-spread adoption. 5G, thanks to its high reliability and low latency, can change this and rejuvenate the smart agriculture industry. For example, 5G can blanket farms – where signals are usually weak – with highly reliable and fast broad-band internet. The newfound connectiv-ity can power agbots and enable real-time control over farm technologies, thus significantly boosting productivity.

The 5G era will likely see drone use in agriculture explode. Drones can be used to produce precise 3D maps for early-soil analysis, assist in seed planting and aer-ial spraying, and gather data to help manage irrigation and nitrogen levels. Like the healthcare industry, agriculture has yet to be truly disrupted – but this may change with 5G, which we believe promises significant innovation ahead and interesting growth opportunities for entrepreneurs.

Read UBS CIO’s “The food revolution” for more. > www.ubs.com/cio

Smart cities nectivity to the next level by building a

A key building block highly reliable and scalable platform with fast and real-time data transfer. for smart cities By allowing operators to slice the net-work into numerous portions that can

To balance the costs of depleting be independently managed or custom-resources with rapid urbanization and ized, governments should be able to sustainable growth, many cities globally better manage traffic safety, traffic are laying the groundwork to become lights, parking and buildings and lever-“smart cities.” In our view, 5G will be a age features like network slicing, which key building block of smart cities. Com- is a software-based application that cre-bined with the proliferation of con- ates virtual networks and edge comput-nected devices and sensors, 5G should ing. For entrepreneurs, 5G will likely cre-help to create a strong ecosystem for ate new business models catering to governments, corporations and the pub- smart cities. lic to fully exploit the potential of tech-nology for everyday services. Read UBS CIO’s “ Shifting Asia: Smart

cities” for more. > www.ubs.com/cio

While today’s sensors and IoT devices are already connected, 5G can take con-

Like all major technological upgrades, 5G is set to spawn many new business oppor-tunities for entrepreneurs that either don’t exist today or are just getting started. The challenge, however, will be staying ahead of the disruption curve that 5G will ulti-mately accelerate. This requires re-evaluating current business models and investing in the right technologies to be 5G-ready. Entrepreneurs in these industries that rely on traditional business models will therefore be at risk of disruption unless they embrace 5G-driven innovation, in our view..

5G allows for tailored use cases through network slicing

High bandwidth

Ultra-low latency

Wireless broadband

Real-time control

Low energy / Low bandwidth IoT sensors

Ultra-high bandwidth Video streaming

Source: Bloomberg Intelligence, UBS 5G network slices

Tech disruption – June 2020 8

Tech Disruption – Where are we

Prices will need to fall sharply to stimulate more demand, in our view, particularly in emerging markets.

Where are we in the 5G cycle? It’s clear by now that 5G is a key enabling technology set to disrupt many business models in the future. But where are we in the adoption cycle? The answer is very early.

Telecom operators have already begun deploying 5G globally, but the full real-ization of it will likely occur in a number of phases over the coming years. Impor-tantly, implementation will require sig-nificant investment in the technology and infrastructure. 5G is indeed expen-sive in comparison to 4G. UBS estimates (see Fig. 2) that over its lifecycle, 5G will cost 30% more to deploy in China than 4G did. This means hundreds of billions of dollars will be invested globally over the next decade to make wireless net-works 5G ready from front- to back-end (see Fig. 1). But we think the investment is worth it – the upside from 5G is sub-

stantial, as it may unleash great waves of disruption upon the global economy, creating business opportunities along the way.

New monetization opportunities Telcos will likely start off monetizing 5G by charging higher fees than 4G, justi-fied in the greater power afforded to users and new features available, and by gaining new business from customers switching to wireless broadband, espe-cially in emerging markets and rural areas. Monetization will really start to gain pace in the long run, when the dis-ruption caused by 5G-enabled technolo-

Source: UBS

gies creates new opportunities in areas like autonomous driving and IoT applica-tions. UBS estimates such new segments will generate close to USD 120bn in rev-enues in the next five years and USD 220bn in the next 10 years (see Fig. 3), in addition to the earnings brought in by global telecom operators.

5G spending to pick up Global telecom operators will gradually roll out 5G networks over the next few years. In the near term, most of the installations will be non-standalone 5G (NSA) that leverages existing LTE radio and core networks for mobility manage-ment. In the medium term, they plan to gradually shift to standalone 5G (SA), giving operators a control plane through the 5G core. US, China, Korea and Japan have a first-mover advantage globally on 5G installations, whereas Europe is lagging. We believe the other markets, including emerging ones, will gradually upgrade their networks to 5G. So, according to our estimates, global 5G coverage could reach 50%–60% by 2025. As highlighted in UBS CIO’s ear-lier report, “Enabling technologies,” we expect global annual spending on 5G to grow from USD 7.5bn in 2019 to USD 150bn – a 20x rise.

Tech disruption – June 2020 9

5G smartphone industry a beneficiary Meanwhile, leading smartphone makers are ramping up their pipelines of 5G-ready devices. Based on the guid-ance from leading smartphone supply chain companies, the industry is target-ing to produce at least 200m 5G smart-phones in 2020, which would likely out-pace subscriber demand. With lackluster demand for smartphones in the past few years, 5G provides a good growth catalyst for smartphone vendors. Chinese brands have a particularly aggressive 5G roadmap, which should help to accelerate momentum in the rest of Asia. One sticking point, how-ever, is that most 5G smartphone prices hover around USD 1,000. So prices will need to fall sharply to stimulate more demand, in our view, particularly in emerging markets (see Fig. 4).

Key forecasts

Fig. 1

Global 5G spend to rise signi˜cantly during 2019–2025 In USD bn

150

120

90

60

30

0

2019 2025

Source: UBS estimates

Fig. 3

5G set to create USD 120–220bn worth of additional revenues in the enterprise segment In USD bn

150

120

90

60

30

0

Connected cars

Source: UBS estimates

2024–2025 2029–2030

Other enterprise solutions

How do telecom operators allocate their capex?

1.7% Others8.7%

Business networks

10.4% Buildings, infrastructure, power systems

5% Support systems

33.2% Transmission networks

Source: China Mobile, Bloomberg Intelligence, UBS

41% Mobile communication networks

Fig. 2

5G spend is expected to cost 30% more vs. 4G in China In CNY bn

1200

1000

800

600

400

200

0

4G cumulative spend 5G cumulative spend

Source: UBS estimates

Fig. 4

5G smartphone prices have to decline to stimulate more demand Average selling price in USD

1200

1000

800

600

400

200

0 2019 2020

4G 5G

Source: IDC, Bloomberg Intelligence, UBS

10 Tech disruption – June 2020

What does 5G mean for investors?

Along with artificial intelligence, AR/VR, big data and cloud, we view 5G as an enabling technology set to accelerate technological disruption across indus-tries. With 5G still in the early days, the next decade should provide both oppor-tunities and risks to investors as 5G adoption increases sharply. Winners will likely be direct and indirect beneficiaries of increased 5G spending and the resulting new business opportunities created by 5G, whereas losers may be telecom operators and legacy business models that fail to adopt their business models to the coming 5G era.

The direct beneficiaries are mainly the technology telecom sectors, including 5G equipment makers, smartphone ven-dors and their component suppliers. With a solid 5G pipeline for 2020, we see interesting near-term growth oppor-tunities in the smartphone supply chain. And as 5G capex gradually broadens out, we see medium-term opportunities in the 5G equipment supply chain. While the rising tide should lift most companies in both supply chains, we think those with better margin profiles and sustainable growth opportunities will be the eventual winners.

Telecom operators that can exhibit pric-ing power and are in a better position to offer wider 5G services to multiple industries should stand out as winners as well, unlike those burdened by increased capex intensity and/or those with limited product offerings. The pros-pects for tower companies are mixed. Rising capex intensity would favor larger telcos, which in turn would reduce ten-ancy ratios for tower companies. Poten-tial diversification of tower companies into valued-added solutions, like fiber build outs or small cells, may offset some of the risks, however.

Indirect beneficiaries include companies in other sectors that can take advantage

of 5G’s superior technology and provide new products and services. These include internet platform companies that can further disrupt traditional busi-ness models, or enterprises that success-fully adapt their business models and expand into new growth segments like smart mobility, smart health, smart cities or smart entertainment.

Meanwhile, telecom operators that fall behind in 5G are at a risk of further mar-ket share losses and deteriorating funda-mentals due to a lack of pricing power. Also, traditional business models that fail to adapt and do not invest in the right digital technologies are at risk given 5G’s impact on the pace of disruption.

Ready for 5G? 1: The ability to move 2: Internet of Things 3: A smart mobile device 4: One of the least digi-tized industries 5: Extreme automation 6: Part of the food revolution 7: Droids 8: Suitable to be worn 9: A delay 10: Not having any wires 11: Emerging part of gaming

1

5 G

2

3 4

5

11

98

10

76

1; mobility 2; iot 3; smartphone 4; healthcare 5; ai 6; agriculture 7; robots 8; wearables 9; latency 10; wireless 11; cloud

Tech disruption – June 2020 11

Publication details

Editor in Chief Sundeep Gantori

Authors Sundeep Gantori

Delwin Kurnia Limas

Project manager Sita Chavali

Editor Aaron Kreuscher

Design Michael Galliker

Cover photo gettyimages

Contact ubs-cio-wm@ubs.com

Learn more at: www.ubs.com/cio

12 Tech disruption – June 2020

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Tech disruption – June 2020 13

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