Diving into the hype: is 5G really accretive to smartphone demand?

Investors entered 2020 with high hopes for a ‘5G super-cycle’; COVID-19 brought this to a grinding halt. As momentum resumes, we assess where 5G smartphone technology is; how much it adds to smartphone device costs and how this may change; draw implications for smartphone and smartphone component/semiconductor markets. Altogether, we view 5G as accretive to smartphone revenue driven by Application Service Provide (about 9% in 2021-25E), but not by smartphone units, as well as component content revenue (about 5%) and within this, particularly radio frequency (RF) semiconductor (about 24% accretion). We reach that conclusion leveraging UBS Evidence Lab’s smartphone survey, our proprietary smartphone teardown analysis (33 models), expert calls and the combined expertise of 38 UBS research analysts.

UBS Evidence Lab’s October 2020 smartphone survey showed 5G still ranked among low priorities of smartphone users. Be as it may, 5G appears to be growing in importance, especially in China and the US. Compared with 4G, we estimate 5G adds US$18-25 in costs for sub-6GHz models and additional US$50-plus for mmWave. We also expect costs to decline faster for sub-6GHz 5G than mmWave.

We forecast 5G smartphone sell-in of 246m units in 2020E (19% of total smartphone units), 442m in 2021E (33%), and 1,135m in 2025E (80%). For components, there are material add-ons in 5G, in particular Radio Frequency parts. As such, we view 5G as overall positive for semiconductor demand, as well as module makers (notably antenna in package for mmWave). However, 5G may pressure margins for OEMs, as well as pricing and margins for non-essential components and assembly. We believe 5G could bring both average revenue per user and capex upside for telcos. For the overall internet sector, 5G bandwidth gain and lower latency should accelerate user acquisition/engagement.