There’s a far bigger story behind the rollout of 5G technologies — one that could affect your investment dollars. Here’s what you need to know
Did you happen to see this headline yesterday in the Wall Street Journal?
“Senators Urge $1 Billion Plan to Loosen China’s Grip on 5G”
You might be scratching your head, thinking “wait, I thought the U.S. was leading the pack in 5G development.”
It’s complicated …
But the reality is that, for investors like you and me, what’s happening with the unfolding 5G story could make a big difference in whether our 5G investments provide us huge returns … or just mosey along.
You see, there’s a growing divide in the 5G race that threatens to separate U.S. 5G technologies from those of the rest of the world.
If this division continues, U.S. investors might find themselves suffering from something that many Japanese investors know all-too-well … Galapagos Syndrome.
What is that?
Let’s jump in and find out.
***The quest to “beat” Huawei is only part of the problem
Yesterday, the WSJ reported that the proposed Utilizing Strategic Allied Telecommunications Act would direct at least $750 million toward companies developing 5G technology — while creating a separate $500 million fund for companies that deploy “trusted and secure” equipment.
This is a shot at Huawei, the dominant Chinese 5G technology leader.
Huawei is the world’s top supplier of cellular radio equipment with a global footprint in 170 countries and more than 180,000 employees.
U.S. officials have accused the Chinese government of helping Huawei grow internationally by giving the company low-cost loans that result in an edge against U.S. 5G companies.
The WSJ sums it up this way: A bipartisan group of U.S. senators, alarmed by the rise of Chinese electronics supplier Huawei Technologies Co., wants Washington to subsidize firms that could counter China’s 5G advances. Seems straightforward, right? Just get Washington to throw some money at U.S. 5G companies and we’re all good?
It’s not that easy.
See, when we dig deeper, the problem facing the U.S. isn’t one of technology or subsidization — it’s a policy problem. And unless that changes, the U.S. faces a real challenge.
To understand why, we need to first understand how 5G works.
***The nuts and bolts of 5G
As 5G technologies are beginning to be introduced around the world, it’s happening according to a single global standard called 5G-NR.
But what most people don’t understand is that within this one standard, there is a wide range of potential radio frequencies available for development.
Think of it like this …
Our smart phones rely on radio waves that carry signals between our service provider and our phone.
For us to enjoy all the apps we love, providers like, say, Sprint have to buy space in a radio frequency spectrum that will support the transfer of all that data.
But this spectrum is rather wide — and it has different properties depending on which part of the spectrum a provider buys and uses.
For example, on the far-left side of the spectrum, you have low frequencies. Here, the waves are longer and can travel farther distances. They can also travel through walls.
On the far-right side of the spectrum, you have much higher frequencies. Here, the wavelengths are much shorter, as you can see below.
The benefit of shorter wavelengths is they can carry lots more data. The problem is these wavelengths don’t travel very far. Plus, these signals can be blocked by something as small as, say, a tree.
Now, in the middle, we find waves that are a bit like goldilocks … just right.
These frequencies are great because they’re long enough to travel longer ranges and penetrate buildings, yet they’re short enough to carry meaningful quantities of data.
Below, you can see the entire spectrum. Remember, even though the various wavelengths have different properties as we just described, they’re all part of the same 5G-NR standard.
So, what’s the problem here? If the mid-band “goldilocks” spectrums are the best, why not just focus there?
Well, that’s what most of the countries around the world are doing. But not the U.S.
We’re focusing primarily on the right-edge, high-band frequencies — the ones that — though they carry lots of data — don’t travel far and are easily obstructed by objects such as trees.
So, why aren’t we focusing on the sweet-spot spectrum?
Because U.S. defense agencies want them.
The battle between conflicting interests in U.S. 5G development
The Department of Defense has traditionally been one of the biggest users of mid-band frequencies.
Large volumes of the preferred spectrum are reserved exclusively for Pentagon use. As a result, U.S. firms simply have less room to work here.
This isn’t the case in China.
That has led to U.S. carriers focusing on mmWave (another name for the right-edge, high-frequency waves we’ve discussed), along with some limited sub-6 utilization.
“Because large swaths of the sub-6 bands in the United States are not available for civil/commercial use, U.S. carriers and the FCC (which controls civil spectrum in the U.S.) are betting on mmWave spectrum as the core domestic 5G approach,” the (Department of Defense) study points out.
At the end of the day, because the rest of the world doesn’t have this challenge, they’re building out mid-band and high-band all at once. The U.S. is mostly focused only on high-band.
This brings us to the problem … and let’s now introduce Japan into the mix.
***How Galapagos Syndrome isolated Japan from the rest of the world
Japan was once the unquestioned world leader in mobile phone technology.
Before the rest of the world even approached basic 2G internet, the Japanese were enjoying web surfing and texting via e-mail.
By the time 2007 came around, the world at large was embracing the touchscreen revolution — this was quickly replacing flip phones.
But in Japan, their flip phones and mobile networks were so far advanced beyond what the rest of the world had been using, that they didn’t need the touchscreen phones in the same way the rest of the world did.
These resulted in a bit of a technological split between the Japanese and everyone else. Japanese manufacturers continued to focus on Japanese phones with their domestic standards, while the rest of the world went another way.
Japanese manufacturers seem to have a laser focus on the domestic market and produce models that adhere solely to Japanese telecom standards, failing to cater to a broader international market.
The term “Galapagos Syndrome” refers to Charles Darwin and his classic “On the Origin of Species.” In short, Darwin found that the flora and fauna on the Galapagos Islands had undergone evolutionary changes that were distinctly different than the flora and fauna on the mainland — due, in large part, to the isolated nature of the islands.
Japan, similarly, found itself technologically isolated.
And this brings us back to the U.S. and our high-frequency 5G concentration.
***The fear of U.S. isolation
When it comes to any new technology, there is often a pronounced “first mover advantage.”
In other words, whoever arrives at the groundbreaking technology first gets to set the standards that the rest of the world will follow — which is great for the businesses associated with those standards.
The U.S. set the standards for 4G technology. But we’re at risk of not being the first-mover this time around.
The concern is that … other countries will push ahead with sub-6 (the goldilocks spectrum) and create a growing rift between international networks and device-makers, and the U.S.
In particular, Chinese companies like Huawei and ZTE will move to occupy spaces that might once have been dominated by American firms.
“This may bifurcate the global market and result in the majority of the world adopting 5G sub-6 technologies,” the study warns, “which will be dominated by the Chinese equipment and handset manufacturers.”
***So, what can you do as an investor?
Until the situation with spectrum here in the U.S. is a bit clearer, you can always focus your 5G investments on companies that will benefit from a global rollout (as opposed to companies focusing purely on U.S. high-band spectrum development).
One such example is a recommendation from our own Matt McCall in his newsletter, Investment Opportunities — Ericsson. It’s one of the two biggest rivals to Huawei (along with Nokia).
From Matt’s most recent issue:
Ericsson (ERIC) continues to expand its 5G capacity. The company has more than 75 commercial agreements around the world and is active in 24 live 5G networks …
This stock is a potential triple in the coming years with the explosion of 5G.
As a global player, Ericsson won’t be cut-off from any bifurcation between U.S. standards and global standards. Plus, it’s reasonable to assume that as long as the U.S. government is actively warring against Huawei, Ericsson (and Nokia) could benefit.
In fact, on that note, here’s Forbes:
To counter Huawei’s dominant market position in wireless technology, Washington is exploring ways to fund Nokia and Ericsson, two of Huawei’s competitors, as well as looking at how to incentivize new strategic alliances involving Oracle and Cisco, two U.S. companies with operations in the radio frequency space.
It’s a fascinating drama. And frankly, it appears it’s just the beginning of a growing trend of techno-nationalism. Expect to hear more on this in the coming months.
We’ll continue to keep you up to speed here in the Digest.
Have a good evening,