New infrastructure is just starting, 5G is just beginning, and the key year for smartphones is 2021

"New infrastructure" is one of the core keywords of the economy and society in 2020, and public opinion has attached great importance to it throughout the year. Especially after the outbreak of the epidemic, in order to distinguish it from the previous reinforced concrete infrastructure model, "new infrastructure" with 5G as the main form, which aims to inject lasting impetus into the future development of my country's economy, was put on the agenda. On top of this, new concepts such as 2020, the first year of 5G mobile phones and the year of digital take-off, flooded the market.

Now that a year has passed, what are the achievements of the new infrastructure and what impact will it have on related industries? We will do a series of interpretations next. This article will start with smartphones: At what stage are 5G phones at?

At the beginning of 2020, we predicted the scale of 5G mobile phone users (access to 5G network): the total number of users for the whole year would be roughly over 50 million.

The main analysis framework is: based on the initial scale of 4G network users, the user conversion rate of a single base station is calculated. Taking into account that 5G coverage is weaker than 4G, and considering factors such as the increasing population density in the urbanization process, it is roughly estimated that the number of 5G users converted by a single 5G base station is 73. The annual target of 700,000 5G base stations will bring more than 50 million users.

This is a set of rational data analysis, which seems a bit out of tune with the view that 5G would explode in the market at that time. Some people also criticized me for "not understanding the multiplier effect of an emerging industry at all". So did we make a conservative mistake?

According to data from the Ministry of Industry and Information Technology, as of the end of November 2020, the number of mobile Internet users was 1.34 billion, and the total number of 4G users reached 1.29 billion. The difference between the two is exactly 50 million, which is roughly the number of 5G network users.

According to authoritative media reports, the total scale of 5G base stations in my country in 2020 also achieved the expected 700,000 as scheduled, which means that the conversion rate of a single base station is roughly the same as our prediction a year ago.

The above is not just for showing off (of course showing off is also very important), but to further illustrate the following question: Has the explosion point of 5G mobile phones really arrived? After all, in 2020, 5G mobile phones have become an important selling point for mainstream manufacturers. No 5G mobile phone, no 5G, grabbing the market in advance, but on the other hand, it is difficult to truly feel the impact of 5G on mobile phone use in real life.

According to the data from the Ministry of Industry and Information Technology, we have compiled data on the scale of 5G network users and mobile phone users, as shown in the figure below.

Regarding the above figure, we first explain the data as follows: the scale of 5G network users from February to May is obtained from mobile Internet-4G users, which ignores the interference of non-mobile users such as IPTV on data. Therefore, there may be a certain expansion in the number of network users during this period, and because it has been a year, we will not consider the interference of 5G mobile phone replacement on data.

If the above factors are excluded, the overall judgment is: the growth of 5G mobile phones in 2020 is far greater than the number of users connected to the network, and the penetration rate of 5G network users has not increased with the increase in mobile phone sales. There is even downward pressure on the penetration rate in November.

Why is this?

Over the past year or so, mobile phone manufacturers' flagship and non-flagship phones have been actively moving towards 5G. This is certainly due to the need to be the first to occupy the 5G market and the need to demonstrate strength through marketing gimmicks, but there is also the short-term profit drive of using 5G selling points to increase prices.

Taking Xiaomi as an example, although the mid- and low-end mobile phones in the overseas market have diluted the ASP data (price of a single mobile phone) to a certain extent, overall, the ASP has been in an improving range throughout 2020. The improvement of this part of the data in the domestic market is quite important. In other words, the continued promotion of 5G mobile phones in the country is of great significance to Xiaomi's mobile phone to increase ASP, improve gross profit, and expand revenue and growth range.

However, by comparing the industry, it is not difficult to find that users' enthusiasm for accessing 5G networks has not yet been ignited, and most users who buy 5G mobile phones still choose to run 4G networks. On the one hand, the construction of 5G base stations is still in its infancy, and there are many signal blind spots. Users have not yet fully experienced the smoothness and high speed of the network; but on the other hand, it also reveals that the 5G strategy implemented by mobile phone manufacturers in 2020 is to a certain extent too "advanced", and 5G has become a redundant technology for many users.

We seem to be able to understand it this way: the purpose of manufacturers' semi-forced promotion of 5G mobile phones is not only for long-term track reasons, but also to improve gross profit margins with 5G in the short term.

Still according to the data from the Ministry of Commerce, from January to December 2020, a total of 163 million 5G mobile phones were shipped in the domestic market, and a total of 218 new models were launched, accounting for 52.9% and 47.2% respectively. Manufacturers are making every effort to compete for the 5G market.

In this context, considering the frequency of mobile phone updates, I believe that some mobile phones may not be able to fully demonstrate their 5G capabilities until they are eliminated.

After summarizing the current situation in 2020, we still have to look forward. After all, 5G is an irreversible trend. With the continuous advancement of base station construction, the real outbreak of 5G will come sooner or later.

The point is that according to data from the Ministry of Industry and Information Technology, the growth of 4G users has been quite slow, as shown in the figure below:

As of the end of November 2020, the number of 4G users nationwide was 1.292 billion, a year-on-year increase of 1.3%, and a net increase of 10.34 million from the end of last year. At the same time, the number of mobile Internet users increased by 3% year-on-year. The number of 4G users is gradually approaching its peak, and thereafter will be a turning point for 5G users.

The Ministry of Industry and Information Technology's "5G Development 2021 Outlook White Paper" disclosed: It is expected that the four major telecom operators will continue to increase their investment in 5G networks in 2021, which is expected to be 1.5 to 2 times that of 2020, and 5G base station construction will reach a climax in 2022.

We estimate that there will be around 1.5 million 5G base stations in 2021. Using the conversion rate of a single base station verified at the beginning of our article, we roughly estimate that after 2021, the number of 5G network users will exceed 100 million, and the proportion of users who actually use 5G networks will exceed 8% of the total mobile phone users.

After 2022, this figure may exceed 20%.

Obviously, after 2021, the mobile phone market will enter a new hand-to-hand battle to compete for 5G network users and strive to gain access to the 5G mobile phone market that will truly explode next. If the 5G mobile phone strategy in 2020 is mainly to show off muscles and test the waters, as well as to improve revenue quality, then after 2021, competition in the 5G market will gradually become fierce, and price wars will come back again.

According to Canalys data, in 2021, 5G mobile phones in Greater China will account for 20% of the unit price below US$200, while in 2020, about 50% of 5G mobile phones will be priced between US$200 and US$399. This not only verifies our previous assertion that "5G improves the profitability of mobile phone manufacturers", but also coincides with the assertion that the above-mentioned 5G mobile phone price war will intensify.

According to Canalys' forecast, 5G mobile phone shipments in Greater China will exceed 300 million units in 2021. Combined with the shipments in 2020, the total 5G mobile phone market will exceed 400 million units. Since the number of 5G network users will just exceed 100 million by then, the remaining users will gradually complete 5G network access after 2021.

In other words, the 5G mobile phone buyers in 2021 are fundamentally different from those in 2020: the latter only passively accept after the manufacturer's strong push, while the former become the reserve force for gradually transitioning to the 5G network. For mobile phone manufacturers, the 5G war in 2021 is extraordinary, and they can only succeed and not fail.

Regarding the discussion about who will stand out from this, we will not make any specific explanation (to avoid being accused of being a draft candidate), but we only suggest that everyone start thinking from the following perspectives:

First, when price wars are inevitable, what other ways can companies use to increase their gross profits?

Although the smartphone industry experienced an early contraction in 2020, with the gradual recovery of economic activity after Q2 and factors such as the use of 5G to improve ASP, the industry as a whole was less affected by the epidemic.

But in 2021, the first thing we see is that if the industry rebounds, especially after the advancement of new infrastructure construction, the demand for communication components will increase, and the prices of raw materials will rebound. The PPI correction of communication raw materials will obviously further challenge the gross profit margin tolerance of the mobile phone industry under the condition of downward customer unit price.

In 2020, we also saw many phenomena among mobile phone manufacturers, from Xiaomi's smart factory to Huawei's disagreement with Tencent Games after the beginning of the year. We not only looked at the industry with a gossipy mentality, but also saw the manufacturers' eagerness to increase efficiency and expand financial resources in order to change the downward trajectory of gross profit margin.

Can the fruits of 2020 win the market in 2021 and beyond?

Second, the cash reserves of the enterprise at this stage;

When the gross profit margin declines, especially in the early market period, expenses such as marketing expenses will be further increased. For the mobile phone industry, a "low-profit" industry, the richness of cash reserves is an important factor in determining the sustainability of competition.

Today, taking the four major manufacturers of VO, Huami and Xiaomi as an example, Xiaomi is listed on the Hong Kong stock market, Huawei mobile phones are backed by Huawei Group, and vivo and OPPO are still not listed. Although we don’t know the direct reason why the latter two companies did not choose to go public, after Xiaomi went public, its stock price fell. In the early stage, the market still treated mobile phone companies as hardware manufacturers and gave them extremely low price-earnings ratios.

However, in 2020, under the global monetary easing, stock prices in the mobile phone industry continued to rise, with Xiaomi, Apple, and Samsung all breaking their highs. Companies took this opportunity to obtain low-cost fundraising channels by issuing bonds and reducing holdings. In other words, under the situation of rising global capital prices, listed companies obtained cheap and almost zero-cost financing in the stock market, reserving strength for the subsequent price war.

In addition to raising funds from the primary market, non-listed companies have much higher financing costs than listed companies. Although Huawei is not listed, the group's support for it is no less than that of listed companies.

Vivo and OPPO were initially good at offline distribution systems. Over the years, they have formed a team of agents that can fight tough battles. They also have the conditions to obtain invisible financing from agents (such as issuing bonds or extending accounts payable, etc.), but we are also concerned about where the margins of the above methods are.

Finally, we still notice that there are many people who are full of unrealistic fantasies about the new infrastructure in terms of concept. They always talk about new infrastructure and subversion, as if all problems can be solved with just one slogan. According to the information from the Ministry of Industry and Information Technology, from the perspective of base station construction alone, 5G investment is about 1.5 times that of 4G, and the overall investment scale in the country will reach 1.2 trillion, with an investment cycle of more than 8 years.

By 2019, the cumulative investment of operators in 4G has reached 800 billion yuan, and the cost has not been recovered so far. Taking into account the cost of base stations, the burden of operators and the rate of return, we must have a clearer understanding of 5G. This is indeed related to the efficiency of the future macro-economy and the development and transformation of micro-enterprises. However, we must also see that this is not a panacea that can be achieved overnight or solve all problems. Instead, we need to be down-to-earth and balance finance, efficiency, and medium- and long-term goals. We should look to the future, live in the present, and avoid being too ambitious.