Yesterday we noted the Ericsson Mobility Report, a bi-yearly collection of data on mobile communication that is a definitive source of information on the space, particularly 5G, where over the last few years, hard data has become a bit politicized.  We pull a few more interesting tidbits from the report to share with investors.  The table below shows 5G subscriptions by region for 2020, 2021 and 2027 (forecast) and the CAGR for each over the 2021 – 2027 period.  Overall 5G subscription growth between 2021 and 2020 is expected to be 143.1%, while over the 2021 to 2027 period, it is expected to moderate to 36.9%, with China growing at the slowest rate (19.1%), while Central/Eastern Europe grows the fastest at 120.5%, and when looking at 5G subscription share, which we show in Fig. 6/Fig. 7, China’s share drops from 69.1% in 2021 to 29.9% of global 5G subscriptions in 2027, although it remains more than twice the share of 2nd place holder, South East Asia & Oceania.
Mobile subscriptions, over the 2021 – 2027 period have a 1.6% CAGR and smartphone subscriptions have a CAGR of 3.7%, with the difference between total and smartphones being feature phone subscriptions, which see a CAGR of -7.7% over the period.  With the obvious fact that most of mobile subscription growth is coming from 5G subscriptions it is not surprising to see negative growth in feature phones, which tend to be smaller and technologically simpler than typical smartphones, and would be less likely to be 5G enabled, at least until the additional cost of 5G hardware reaches parity with 4G.  4G subscriptions themselves have a CAGR of -6.0% during the same period, with only two regions seeing subscription growth (South East Asia +0% & Sub-Saharan Africa +9.9%), the regions where feature phones are the most popular, implying that while 5G subscriptions will grow in those areas, 4G will still remain a popular mode.

​Earlier this month both AT&T (T) and Verizon (VZ) agreed to defer the launch of 5G services on C-Band spectrum (3.7 to 3.98 GHz), a portion of the 5G spectrum that they acquired during the last auction, until early January.  The postponement was at the request of the FAA who claims that the new service could interfere with altimeters used on aircraft  This comes in contrast to the FCC examination and approval of the band, finding no evidence to support the FAA’s claims, making sure that a wide spectrum guard band is left unused adjacent to the C-band spectrum.  That guard band is twice the width requested by the airlines to make absolutely sure the altimeters are protected.
What makes this a bit unusual is that the C-band spectrum is already being used in ~40 countries for 5G, with no reported altimeter problems, while the FAA recently stated, “Tick, tick, tick” in a Tweet, alluding to the eventual disaster they expect to occur, which has riled many, including a number of those normally critical of wireless companies and how they treat their customers.  One wrote that even after the FAA acknowledged that it had no proven evidence of interference from C-band operation, it continues to use contacts in Congress to wage a battle against the FCC ruling, which stated that “…further analysis is warranted on why there may even be a potential for some interference given that well-designed equipment should not ordinarily receive any significant interference (let alone harmful interference) given these circumstances..”
While the FAA is creating a logjam for 5G, they have also released a bulletin this month suggesting that “radio altimeter manufacturers, aircraft manufacturers, and operators voluntarily provide to federal authorities specific information related to altimeter design and functionality, specifics on deployment and usage of radio altimeters in aircraft, and that they test and assess their equipment in conjunction with federal authorities.” In other words, lets upgrade those altimeters, although they also indicated that such upgrading could prove costly to the industry, which seems to be listening to its constituency rather than facing the reality that such C-band issues have been under review for the last 4 years.  Those defending the FCC’s allocation of the C-band also cited a 2012 report by a White House advisory council that suggested methodologies for spectrum management that consider both transmitter and receiver characteristics because receiver (altimeters) constrain effective spectrum usage.
Rather than a battle between agencies for some sort of political cache, it would seem that if the US is in a battle for 5G dominance (why is still a question), it would seem better to work out such inter-agency differences before allocating and selling such spectrum.  The aviation industry has been under pressure due to travel restrictions during the pandemic and is likely quite sensitive to any suggestion that costs might need to increase, but scare tactics are not the best idea for helping to increase consumer confidence about aviation travel.  In the real scheme of things, the cost of a new and updated altimeter, although not necessarily needed, is likely far less than the cost of lobbyists….

​Samsung Electronics (005930.KS) has been a leader in the 5G smartphone race, releasing the 1st 5G smartphone, the Galaxy S10 5G in April of 2019, but has been lagging behind Chinese brands, who have pushed the technology given the aggressive 5G base station buildout that has taken place across the country.  Samsung has lost share in China, not only because of 5G, although that is seen as a contributing factor.  Based on Samsung’s current 2021 smartphone lineup (there are at least two more models slated for release this year), 5G capabilities are available in all flagship models (Z Series & S Series), but only in 33% of Samsung’s mid-tier (A Series) models, 27.3% of its lower-priced models (M Series), and 33% of its lowest tier models (F Series).
Samsung is expected to push 5G into all of its 2022 A series models next year in order to attract more users in both China and Europe, where EU members have a ‘unified’ plan for 5G buildout through 2027, have implemented 5G in at least 24 of the 27 EU countries, and are expected to have almost 36m subscribers by the end of this year (Western Europe).  Samsung will continue to provide 4G LTE versions of such new models for those areas where 5G has yet to be implemented.  While 5G is a bit of a different animal from other smartphone features, this is in keeping with Samsung’s plan to push down features that might have appeared only in flagship phones in the past, to lower priced models and will likely push down high pixel cameras, larger batteries, and IP67 (water/dustproof rating) to all or many of the A series phones. 
Samsung will also be pushing the connectivity aspect of the company’s smartphones, expanding their ability to share information with other Samsung products, from Smart Tags™ to appliances, and given the broad Samsung CE ecosystem, using the smartphone platform as a control point for many of those products, is an advantage few of its competitors have.   Moving such connectivity from flagship phones down to mid-tier phones will be a viable way for Samsung to counter Chinese smartphone brands, most of whom do not have more than a few CE products outside of smartphones.  The trend with Chinese CE companies is to use a ‘smart screen’ (aka a connected TV) to control and monitor CE products, but this limits consumer reach.  Given that smartphones are rarely out of reach to consumers, a phone that offers connectivity to a wide selection of CE products become more indispensable to consumers, and bringing that down to phones under $500 should help Samsung to regain some share in 2022.  LG Electronics (066570.KS) has a similar connectivity system (ThinQ) but will no longer be producing smartphones.

Our primary 5G indicators, with a focus on device and smartphone growth, continued again in October, with both easily staying above trend lines.  Device growth was 5.2% m/m and up126.6% y/y, while 5G smartphone count was also up 5.2% and up 128.2% y/y, putting it up 1000% over a two year period, but the growth was not limited to phones, as 5G laptops grew 5.3% m/m to 122.2% y/y and 5G tablets grew 8.7% m/m to 257.1% y/y.  On an overall basis, 5G smartphone growth has slowed from last year’s aggressive pace, with an average m/m increase of 7.7% this year vs. 14.9% last year over the same period, with a 6.7% average for Q3.  We expect somewhat slower m/m growth in upcoming months as the denominator increases, with 1Q and 4Q 2022 seeing the strongest quarterly 5G smartphone growth.
 

​According to China, China is the leader in 5G based on the number of 5G base stations implemented across the country, and most would agree that China has been very aggressive building out its 5G infrastructure since it began carrying out its plan toward commercialization of 5G in June 2019.  But according to Japanese press, China has slowed down its build out due to the fact that Huawei (pvt) and ZTE (000063.CH), China’s largest 5G base station suppliers, have run out of components due to US trade sanctions placed on both companies that limit global suppliers from selling any product made in the US or produced using US software or hardware. 
The Nikkei Asian Review has stated that “China’s efforts to build 5th generation wireless communications infrastructure have lost momentum because equipment manufacturers have used up American-made parts and components, forcing relevant merchant suppliers to turn to the US and European markets.”  The article quoted Murata (6981.JP) chairman saying that Chinese companies’ demand for parts to prevent network interruptions has declined and another communications component manufacturer stating that since the summer of 2020 it is no longer supplying parts to Huawei.
According to the Chinese Ministry of Industry Information Technology the current number of 5G base stations in China (10/19/21) is 1.159m but the joint resolution of 10 departments focused on 5G development have set a goal of 18 base stations per 10,000 people by 2023, which would target the number of base stations at that time to be 2.52m based on a 1.4b population estimate.  In the first year of implementation (actually ½ year) 130,000 base stations were put into service.  Last year 600,000 were added, at a speed that was about 2x the 2019 rate and this year’s target for new 5G base station adds is 1m, however based on the MIIT numbers, the total installations for this year will be ~500,000 for a total of 1.23m units at year end..  This would imply 645,000 new 5G base station adds in both 2022 and 2023 to meet China’s goal, but does prove out that construction of new base stations has slowed from 2020 levels.
The bigger question is why has the rate of new 5G base station installation slowed?  Is it because Huawei and ZTE have run out of chip inventory and are unable to procure new silicon from suppliers who fear producing same would put them in the sights of US trade officials?  More than likely this is not the case, and while Huawei and ZTE have certainly been affected by the US trade sanctions in their smartphone businesses, early on Huawei stated that their biggest priority (this is all before the final portion of the trade sanctions were put in place) was making sure it had a stockpile of the silicon needed for its 5G base station products and began building such inventory through massive purchases from Taiwan Semiconductor (TSM) as far back as 4Q 2019.  Estimates that Huawei’s orders from TSM before the final sanctions were more than 2m units and Huawei has stated that its base station component inventory was sufficient to cover construction through this year and beyond and had eliminated other US components from their base station products early in 2020.
It all comes down to who you believe.  Japan (mostly Nikkei Asian Review) continues to tout the idea that Hauwei and ZTE are out of components, causing a slowdown in 5G roll-outs, while China says 2020 was the ‘big push’ year and is still on track to meet its goal.  Huawei does have the option of using locally produced communication silicon from SMIC (688981.CH) or other Chinese suppliers, which would be based on the same chip design developed by Huawei affiliate HiSilicon (pvt), although NAR says this could be inferior to TSM components.  Given that there is little chance we would be able to see and identify BOM sources for Huawei base stations placed on the Mainland, we have no way of confirming that Huawei is still using TSM silicon, nor do we take NAR’s view that blanket statements by Japanese suppliers hold weight, so it seems we will have to wait until the end of 2Q 2022 to see if MITT’s data indicates that China is still on track to meet its goal.  In the interim we watch peripheral data sources for any clues as to where Huawei’s base station inventory lies and whether the implementation slowdown is forced or in line with plan.
  

September saw an increase in almost all of the 5G indicators that we track.  Overall device offerings increased 7.0% m/m and 138.7% y/y, with a 2 year increase of 721.7%, while 5G smartphones increased 9.4% m/m and 161.5% y/y (1175.6% over two years).   5G CPE devices increased 6.2% m/m and 59.3% y/y and routers, laptops and tablets all increased m/m.  Only 5G in-vehicle routers remained flat m/m, but that is a product that tends to be based on vehicle model releases.
Despite the rather weak smartphone market, 5G smartphone offerings continue to grow, and in China, where even against easy comparisons, smartphone shipments are only up 12.3%, 5G smartphones made up 47.4% of new models in August and will likely reach over 50% into the holiday season.  In terms of 5G itself, the ratio between sub6 and mmWave phones remains consistent at ~55%/45%, with sub6 the leader, which is surprising given the far more extensive buildout of sub6 5G capacity.  We expect that the cost of dual modem and antenna systems has dropped to the point where the decision to offer both is the logical choice to satisfy as many customers as possible.
 

​China Mobile (601728.CH) is the world’s largest telco by subscribers (945.5m as of 6/2021).  As such, they let some of the biggest telecom projects globally, all of which are within China or Hong Kong.   Earlier this year China Mobile let an equipment contract for its 5G 700MHz network project worth a maximum of 7.5b yuan (~$1.16b US), which was won by Huawei (pvt), and strangely enough China Mobile has just awarded the service part of contract to, you guessed it, Huawei, which would total out the project at ~$2.32b US.  Huawei does have to share both contracts with local competitor ZTE (000063.CH) at a 50/50 split, but the totals are large enough that even 50% of the deal is a significant amount.
While the equipment part of the contract was open to competitive bidding, the service segment was only open to two bidders, Huawei and ZTE in order to maintain brand support service for the equipment, but there was likely a bit of a bias toward using Huawei and ZTE as they both remain on the US trade sanctions list and have seen their global telecom business severely limited by US pressure.  While open bidding procedures were used for the equipment part, it seems that unless Huawei and ZTE were going to low-ball bids, they were going to get the contracts, as while China Telecom has publicly trading shares, the company is actually state owned, and therefore directed by the government toward serving the good of the people, which in this case means keeping Huawei’s and ZTE’s telecom businesses strong despite US intervention.  It’s nice to have a population of 1.45b behind you, even if they don’t know they are.

The three mobile carriers in South Korea have worked together to complete the construction of a mmWave wireless 5G network in the subway.  Don’t get excited, we are not talking about the possibility of adding mmWave 5G to the 4/5 or the 1/2/3 in New York City, but a small segment of the Seoul, South Korea Subway line #2.  The network will give users Wi-Fi service that is ~10 times faster than the current 4G network, which averages download speeds around 71Mbps, with expectations that the system can be further optimized to provide download speed up to 1 Gbps.
The system has 26 base stations installed next to the track bed, 10 receivers which are mounted on the trains, and 20 Wi-Fi 6E routers in the passenger cars.  The receivers capture the signals from the base stations and convert it to Wi-Fi which is transmitted to the Wi-Fi routers in each passenger car via optical cable.  The track 5G signal is not accessible to 5G smartphones but only to those on the Wi-Fi network.
What makes this a bit unusual is that there has been considerable controversy over the use of mmWave frequencies in South Korea, with the government in 2020 said to be downplaying mmWave in lieu of low and mid-band 5G, which has a slower speed but a longer transmit range and therefore a less expensive buildout. The subway system, which is scheduled to begin next month, has been spearheaded by the Ministry of Science who coordinated the necessary cooperation between the country’s three major carriers.
 While the system in Seoul is a test bed, we would be happy to get a consistent 5G mobile signal for more than a few minutes anywhere in the US, and that would be at much slower sub6 frequency bands, but the bigger question would be do we really need mmWave 5G on the subway?  Looking at the collection of subway denizens below (just the tip of the iceberg), the necessity to livestream such content to Instagram (FB) followers seems a bit less than necessary…

​Yesterday we noted the growth of 5G smartphones in China during August and today we dig a bit further into the global 5G market for clues as to share and direction.  Based on data that breaks down 5G shipment share in 1Q and 2Q, it seems that global 5G smartphone shipments are moving from upper-tier priced models to lower-tier models as less expensive 5G chipsets find their way into lower priced phones, particularly the $200 - $400 tier (Figs. ½) and summarized in the table below.

Taking it one step further, again looking at the $200 - $400 price tier, we can see what brands have made share gains over the last year by comparing current 2Q share against last year.  While a number of vendors saw share increases y/y in 2Q, the most interesting change was from the ‘other’ category, which decreased from 32% to 11%.  This was likely a function of the inclusion of Huawei (pvt) in the category as the company faced very significant share loss due to US trade sanctions.  Only the Honor (pvt) brand lost share y/y, but this was likely a result of its spin-off from Huawei into an independent organization, so we believe the share loss that can be attributed to Huawei was captured almost completely by Chinese 5G smartphone brands, particularly Vivo (pvt), where 5G shipments increased from 28% of sales in 2Q last year to 80% this year.

​China’s smartphone shipments declined by 15.2% m/m and by 9.6% y/y in August.   Looking at the year thus far shipments have been 227m units, up 29.5% y/y but against the very weak early COVID-19 days last year.  The quarterly comparisons for this year are 1Q, up 100.2% y/y, 2Q down 26.9%, and thus far in 3Q up 7.7%.  But from a more qualitative point of view, the first four months of this year were volatile in the Chinese smartphone market, averaging 31.4m units/month and m/m swings between -45.6% and +65.6%, while the next four months have been relatively steady, averaging 25.4m units/month, with swings between -16.4% m/m and +11.8%.
There was a big jump in new models released in August, increasing from 26 in July to 57 in August, while this in itself is not unusual in that 3Q is usually the peak quarter during which new smartphones are released, but going back as far as 2017 September has always been the strongest month for new smartphone releases in China.  That would imply an even greater number of new models released on th Mainland in September (typically the increase of new models released in September on a m/m basis has been between 28.8% to 100%) unless the desire to anticipate the release of Apple’s (AAPL) iPhone 13 family pulled in many of those releases (we believe the former).
5G smartphone shipments in China were 17.69m units, down 22.5% m/m and up 9.4% y/y in August, a relatively weak month after a strong July, leading to a 72.8% share of total shipments.  While a bit on the low side in terms of absolute 5G shipments, 5G shipments have maintained a share above 70% since February of this year and we expect little change from that metric going forward, especially under the above assumption that September this year will see an increasing number of new model releases in China.  The share of 5G models out of all new models released in China this year has been averaging about 50%, which we also expect to stay consistent for the rest of the year.
 All in, shipments were as expected, to a bit lower, which reflects the increasing concerns over the economic effects of a resurgence of COVID-19 in China and a tight component market.  Based on our expectations for the remainder of the year, we expect total mobile shipments in China to be 333m units, up 8.1% over last year, but down from our original estimate (late 2020) of 364.3m units, which would have been up 18.3% y/y.    Based on our revised estimate, we expect 5G shipments in China to be between 248m and 255m units this year, which would be up between 53% and 56.7% y/y.