Five driving forces and four challenges for 5G development

At the end of June, MWC19 Shanghai was once again a grand occasion, and 5G became a well-deserved hot spot. People from all walks of life expressed their feelings that the spring of the communications industry seems to have come again. Yang Jie of China Mobile and Li Guohua of China Unicom both mentioned that 5G is not "4G+1G", but a major disruptive technological change and an important driving force for economic and social transformation and upgrading. Human beings will usher in revolutionary changes in production, life and social management methods. So what is 5G? What are the driving forces for the development of 5G? What are the challenges of 5G development?

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1. What exactly is 5G?

5G is no longer just a technology, but an industry, and even more so a basic industry that promotes the development of other industries.

1. 5G is a change in communication technology, not a revolution

From a technical perspective, 5G is a product that continues to develop on the basis of 4G communication technology. In essence, it is just a technological change, not a revolution. The core technologies involved in 5G mainly include two categories: wireless technology and network technology. In terms of wireless technology, it mainly includes Massive MIMO, ultra-dense networking (UDN), D2D, flexible duplex/full-duplex, new multiple access technology, new coding modulation, high-frequency band communication, etc. In terms of network technology, it mainly includes network slicing, mobile edge computing (MEC), SDN/NFV, C-RAN architecture, etc.

The core of 5G technology is to improve spectrum efficiency (the throughput provided by unit spectrum resources in each cell or unit area is increased by 5 to 15 times), energy efficiency (the number of bits that can be transmitted per joule of energy is increased by more than 100 times) and cost efficiency (the number of bits that can be transmitted per unit cost is increased by more than 100 times).

2. The most fundamental change of 5G is that the objects of communication services will change

From 1G to 4G, the main body of communication services is us humans, but the situation will change in the 5G era. It can be predicted that from the beginning of the 5G era, the main body of communication services will gradually shift from people to things, and this proportion will become higher and higher. In other words, from the beginning of the 5G era, it will shift from connecting people to connecting things, from serving people to serving things. Minister Miao Wei of the Ministry of Industry and Information Technology mentioned that in the future, about 20% of 5G facilities will be used for communication between people, and 80% will be used for communication between people and things, and things and things.

It is precisely because of such fundamental changes that 5G will give birth to countless new fields, trigger a new round of industrial transformation, and become a new growth driver for economic development.

3. 5G has three main industrial development lines: consumption, management, and production

From 1G to 4G, there was basically only one main line of development, which was the human consumer market. However, in the 5G era, the situation has changed fundamentally. Overall, 5G has three main lines of industrial development: consumption, management, and production.

The first is the consumer-oriented main line on the demand side, that is, 5G accelerates the large-scale consumer applications such as life entertainment, Internet of Vehicles, automotive electronics, medical electronics, wearable devices, and smart homes. The second is that 5G drives the overall warming of smart city management applications. The three-dimensional urban information collection system based on 5G will be accelerated. Smart cities, smart security, and smart transportation will become a comprehensive platform for application integration and innovation. The third is the production-oriented main line on the supply side, that is, 5G is deeply integrated with traditional industries such as industry, agriculture, and energy, becoming the infrastructure and key elements required for industry transformation and upgrading.

2. Five driving forces for 5G development

The driving force behind the development of 5G comes from five aspects: national strategy, competition among operators, promotion by upstream and downstream equipment vendors in the industry chain, consumer demands, and the need for digital transformation of the industry. The combination of these five factors has driven the rapid development of China's 5G industry.

Driving force 1: National strategy

5G is positioned as a national basic industry. Therefore, all countries are scrambling for the commanding heights of 5G industry development. Whoever occupies the commanding heights of 5G industry development can not only promote the growth of the country's 5G direct and indirect economic output, but also share the dividends of 5G industry development in other countries.

On April 3, 2019, the U.S. Department of Defense released the 5G Ecosystem: Risks and Opportunities for the U.S. Department of Defense, predicting that China's early development of the Sub-6GHz 5G network will drive a significant increase in the market for smartphone and telecommunications equipment manufacturers, as well as semiconductor and system suppliers, and in turn drive the growth of Internet companies' services. China may reproduce the glory of the United States in the 4G field. Therefore, the United States is increasingly anxious and urgent about competing for the leading position in 5G.

All countries in the world have the same understanding of this, so we can see that operators in the United States and South Korea are competing for the title of the first country in the world to launch 5G wireless services. On April 3, 2019, South Korea's three major operators SK Telecom, KT and LG U+ announced the official commercial use of 5G and launched 5G mobile network services, winning the title of "the world's first commercial use". An hour later, the US operator Verizon also officially announced the launch of 5G wireless network services in some areas.

China has become the fifth country in the world to launch 5G services after South Korea, the United States, Switzerland and the United Kingdom. There is no doubt that China is committed to the 5G field. Since the launch of 5G trials in 2016, China has actively promoted the completion of the three stages of 5G key technology verification, technical solution verification, and system networking verification.

According to the 5G Industry Economic Contribution report released by the China Academy of Information and Communications Technology, China's 5G commercialization will directly drive a total economic output of 10.6 trillion RMB and indirectly drive a total economic output of about 24.8 trillion RMB from 2020 to 2025. Such a huge economic output is a reflection of the country's strategic will.

Power 2: Competition among operators

South Korean media reported that the number of South Korean users joining 5G services exceeded 1 million on June 10, 2019, only 69 days before the commercialization of 5G in South Korea. South Korea's three major operators, SK Telecom, KT and LG U+, have launched a "price war" to win users and provide high subsidies for 5G mobile phones. AT&T, Verizon, T-Mobile and Sprint in the United States are actively deploying 5G commercial services due to market competition needs. Taking AT&T as an example, the 5G network deployment is being promoted step by step, with the first batch covering 12 cities and the second batch adding about 10 cities. At the same time, AT&T strives to extend the enterprise solution experience accumulated in the 4G era to 5G, and actively develops innovative applications in vertical industries such as retail, medical care, finance, education, and security.

From the perspective of operators, if you do not actively adopt 5G and your competitors adopt 5G first, your user resources will be lost and your performance will decline, which is an unbearable burden for operators. The pressure of competition forces operators to rush to 5G. Domestic operators are also facing the same situation. Of course, compared with overseas operators, in addition to commercial competition pressure, domestic operators also bear non-commercial universal service obligations, namely ZZ tasks.

In 2019, China Mobile will build more than 50,000 5G base stations nationwide and provide 5G commercial services in more than 50 cities; in 2020, it will further expand network coverage and provide 5G commercial services in all urban areas above the prefecture level nationwide. China Mobile implements the "5G+ Plan", which is to promote the coordinated development of 5G+4G, promote the integrated innovation of 5G+AICDE, promote the co-construction of 5G+Ecology, and promote the extension of 5G+X applications.

China Telecom will build high-quality NSA/SA hybrid networks in more than 40 cities, strive to take the lead in launching SA-oriented network upgrades in 2020, and open up 5G differentiated network capabilities such as SA-based edge computing and network slicing. At the same time, it will accelerate the integration of cloud and network, and give 5G more connotations. China Telecom has launched the "5G Industry Cloud Network Solution" in Shanghai, providing services for six major industries: media, medical care, education, finance, Internet of Things (water, fire protection, and Internet of Vehicles), and video.

China Unicom has implemented the "7+33+N" 5G network construction strategy, namely, achieving contiguous coverage in the seven major urban areas of Beijing, Shanghai, Guangzhou, Shenzhen, Nanjing, Hangzhou and Xiong'an, hotspot coverage in 33 key cities such as Fuzhou and Xiamen, and customizing 5G network specialized networks in N cities, while building various industry application scenarios.

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Power 3: Promotion by upstream and downstream equipment suppliers in the industry chain

The 5G industry chain includes upstream equipment manufacturers, midstream operators, and downstream terminal equipment manufacturers and industry application solution providers.

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In addition to the four well-known system equipment manufacturers Huawei, ZTE, Ericsson and Nokia, upstream equipment manufacturers also include chip manufacturers (optoelectronic chips, computing chips, switching chips, RF chips, etc.), base station antenna/oscillator manufacturers, RF module manufacturers (filters, power amplifiers, RF switches, etc.), baseband module manufacturers, PCB board manufacturers, optical module manufacturers, non-light source device manufacturers, optical fiber and cable manufacturers, small and micro base station manufacturers, tower manufacturers, and bearer equipment manufacturers.

Terminal equipment vendors include smart phones, smart connected cars, smart homes, etc. Industry application solution providers involve various industries, such as Internet of Vehicles, Industrial Internet, smart medical care, smart education, etc.

With 4G construction in China reaching saturation, it is only natural that equipment vendors upstream and downstream of the industry chain will pin their hopes on 5G development.

Taking smartphones as an example, the growth and penetration of smartphones have entered the stock market stage. In the stock market environment, the future opportunities in China's smartphone market lie in the demand for users to upgrade and replace their phones, especially the demand for replacement brought about by 5G technology.

Power 4: Consumer Demand

It took 6 years (1992-1998) for the number of 2G GSM users to exceed 100 million worldwide. It took 5 years (2001-2006) for the number of 3G UMTS users to exceed 100 million worldwide. It took only 3 years (2010-2013) for the number of 4G LTE users to exceed 100 million worldwide, which is only half the user development time of the 2G era. Consumers are becoming more and more receptive to new technologies, especially Chinese consumers. Once 5G networks achieve large-scale coverage, users will quickly switch to 5G.

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At the same time, young people, highly educated adults living in cities are the first to come into contact with smartphones. In China, young adults have the highest smartphone penetration rate. In 2018, 91% of adults aged 18 to 24 and 89% of adults aged 25 to 34 had smartphones. Among this group of people, there are a large number of "digital natives", that is, people who grew up with smartphones and the Internet. Digital natives can recognize and process multiple sources of information at the same time, and naturally have the desire to actively embrace the new generation of information technology. For example, in games, sports, entertainment, online comics and performances, the development of 5G AR/VR services will definitely be enthusiastically sought after by young adults.

Power 5: Industry digital transformation needs

China's economy has shifted from a high-speed growth stage to a high-quality development stage. From the perspective of traditional industries, with rising factor costs, increasing pressure on resources and the environment, continued overcapacity, and the double squeeze of industrialization in late-developing countries and re-industrialization in developed countries, the previous growth model that relied on factor-driven and low-cost competition is becoming increasingly unsustainable, and there is an urgent need for transformation and development.

The digital transformation of industries is one of the important driving forces for China's industrial transformation and upgrading. Digital transformation includes both improving the level of informatization for enterprises at a lower stage of development and achieving digitalization, networking and intelligence for enterprises at a higher stage of development.

Traditional industries such as industry, agriculture, and energy, as well as various industries such as transportation and security, all have a strong desire for digital transformation. Taking the automotive industry as an example, the global market is in a downturn, profits are declining, and sales in the Chinese market will decline by 8% in 2019, expected to be 24.8 million vehicles. In order to meet the challenges, automakers are actively exploring the new four modernizations: "intelligence, networking, electrification, and sharing." In terms of electrification, China's new energy vehicle sales continue to grow, and are expected to reach 1.7 million vehicles in 2019 and 2 million vehicles in 2020.

In terms of networking, the Ministry of Industry and Information Technology issued the "Internet of Vehicles (Intelligent Connected Vehicles) Industry Development Action Plan" on December 25, 2018, which clearly stated that by 2020, the Internet of Vehicles user penetration rate will reach more than 30%, the new car driving assistance system (L2) installation rate will reach more than 30%, and the new car installation rate of connected vehicle information service terminals will reach more than 60%. The development of 5G networks will help the automotive industry achieve this goal.

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In the automotive manufacturing process, there will be more wireless connections in factory workshops. In the future, all intelligent units in factories can be based on 5G wireless networking, and the combination of production processes and intelligent equipment can be quickly and flexibly adjusted to adapt to market changes and the trend of increasingly personalized and customized customer needs. In the automotive use process, based on the large bandwidth, wide connection, high reliability and low latency of the 5G network, comprehensive perception of the car, accurate decision-making, and real-time control can be achieved. 5G will help the automotive industry achieve digital transformation.

III. Four major challenges in 5G development

The development of 5G faces four major challenges: unclear business model, huge investment in construction and operation, multiple paths for technology selection, and dependence on a global supply chain.

Challenge 1: Unclear business model

Operators are facing tremendous pressure from "speeding up and reducing fees" and homogeneous competition. Although unlimited packages can help operators grab users, they also lead to operators increasing volume without increasing revenue, and the gap between traffic revenue and revenue has widened. The ARPU (average monthly revenue per user) of the three major operators has collectively declined. Among them, China Mobile's mobile ARPU value in 2018 was 53.1 yuan, a year-on-year decrease of 8%; China Telecom's mobile ARPU value in 2018 was 50.05 yuan, a year-on-year decrease of 8.3%; China Unicom's mobile ARPU value in 2018 was 45.7 yuan, a year-on-year decrease of 4.7%.

At the same time, the introduction of low-cost unlimited packages has also made users accustomed to low fees, and consumers are not willing to pay. This trend will become more and more obvious in the 5G era.

Therefore, operators must make changes in their business models, from the traffic-based business models in the 3G and 4G eras to seeking new business models in the 5G era.

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At present, the business models in the 5G era are most likely to include two categories: traffic-based and information-based services. The traffic-based model is still an important profit model for operators in the 5G era. The amount of data in the 5G era will show explosive growth.

The data explosion comes from the fact that big video will develop rapidly in the 5G era, and various technical applications such as 4K, 8K, VR/AR/MR, and holographic will be popularized faster. Just as users' consumption habits have changed from text to video, 4K, 8K, VR/AR/MR, and holographic services will be popularized rapidly.

Another reason for the data explosion is that it will no longer be just humans that generate data, but more objects will be connected by 5G networks, and universal digitalization will be born. For example, all the information on car parts will be digitized and transmitted through 5G networks. In the future, each car will generate more than Gbit of data per second.

However, relying solely on the traffic model brought about by the explosive growth of data volume is no longer sufficient to support the huge network construction investment costs of operators in the 5G era. Therefore, operators should actively explore business models based on information services. There may be three different models of information services in the future.

The first mode provides connection-based information services. Operators can use the wide-connectivity characteristics of 5G networks to provide extensive connections between people and things, and between things and things. Taking the automotive industry as an example, in the future, all cars will be able to communicate via 5G networks for V2V (vehicle to vehicle), V2I (vehicle to infrastructure), V2P (vehicle to people), and V2N (vehicle to network). Various infrastructure on the roadside and on the road surface, including traffic lights, smart light poles, digital signboards, etc., will also be digitized and 5G-connected.

The second model provides customized information services based on network slicing. Operators no longer only provide rigid pipelines, but provide elastic pipelines to different consumer users and industry users. The "elasticity" of elastic pipelines is reflected in the fact that pipelines can be customized on demand, that is, pipeline types (large bandwidth, wide connection, high reliability and low latency) and pipeline service levels are dynamically allocable. At the same time, the elastic pipelines in the 5G era will cover end-to-end (from mobile terminals to wireless base stations, to transmission networks, core networks, and business layers can all achieve elasticity). The use of network slicing technology makes all this possible.

For example, for users of the Internet of Vehicles, large-bandwidth network slices can be provided for VR communication services, and high-reliability and low-latency network slices can be provided for remote control services, platoon driving services, etc.

The third model provides business information services based on cloud computing, multi-access edge computing (MEC), cloud-edge collaboration, and cloud-network collaboration. Different types of business application services are provided for different consumer users and industry users using cloud, edge cloud, cloud-edge collaboration, and cloud-network collaboration. It will involve ordinary consumers, government affairs, manufacturing, transportation, logistics, education, medical care, media, police, tourism, environmental protection, and other aspects.

Overall, operators are still actively exploring new business models other than traffic models. Operators have missed the biggest dividends of the Internet in the 3G era and the mobile Internet in the 4G era, and they certainly don’t want to miss the next pot of gold.

Challenge 2: Huge investment in construction and operation

5G construction will most likely be carried out in the urban area first, then the suburbs; hot spots first, then contiguous areas; low frequency first, then high frequency; outdoor first, then indoor; macro base stations first, then small and micro base stations. Actively and steadily promote distribution, and in most cases emphasize reliance on 4G LTE to reduce networking costs and ensure user experience.

But even so, the investment amount (Capex) of 5G construction is huge. In addition to macro base station investment, 5G development also involves a large number of small and micro base stations, optical transmission, core network, multi-access edge computing, etc. It is estimated that China's 5G investment cycle will be ten years, with a total investment amount of 1.6 trillion.

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At the same time, the 5G operating investment (Opex) will also be huge. The power consumption of 5G base stations is 2.5-4 times that of 4G base stations (according to China Tower data, the typical power consumption of 4G base stations is 1300W, while the typical power consumption of Huawei 5G base stations is 3500W, ZTE 3225W, and Datang 4940W), and energy costs such as electricity are getting higher and higher. In addition, the number of 5G base stations will increase, especially the number of small and micro base stations will surge, the site costs will become higher and higher, and the amount of optical fiber will also surge.

Overall, 2021 will be the year with the greatest challenges for operators. Operators are under urgent pressure to find a new 5G business model before 2021 in order to support the huge construction and operation investments in the 5G era.

Of course, policy support is also essential to promote the development of China's 5G industry. For example, it can reduce the pressure on operators and guide the communication industry to shift from "speeding up and reducing fees" to "speeding up and improving quality". At the same time, policies should be introduced to encourage operators and tower companies to share and build together.

Challenge 3: Multiple paths for technology selection

Operators have always had different technical options for 5G network construction: NSA (Non-Stand Alone) and SA (Stand Alone). The so-called NSA is to add 5G base stations on the basis of the 4G core network, so that users can enjoy 5G broadband services using 5G terminals.

NSA has the advantages of simple deployment, fast start-up, and low investment. The terminal only needs to support broadband services, which is relatively easier to produce and manufacture. However, because NSA does not change the core network, it cannot support the two major characteristics of 5G wide connection and high reliability and low latency. SA, on the other hand, uses a real 5G core network, base stations, and backhaul links to truly meet the large number of related demands of industry customers.

For example, remote driving in the application of the Internet of Vehicles, although there are already a lot of business demonstrations now, it is just for show. To truly achieve the commercial level of open roads, relying solely on the current NSA 5G network cannot effectively guarantee security.

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The three operators had relatively clear ideas for 5G network construction in the early stage. Telecom and Mobile preferred SA independent networking, while Unicom preferred NSA. However, Telecom and Mobile have adjusted their strategies and will first deploy NSA networks on a large scale, while the core network transformation and network slicing technology use progress have been delayed. However, Yang Jie of China Mobile also said that starting from January 1, 2020, the government will not allow NSA mobile phones to access the network and will make every effort to transition to SA networking.

In general, operators currently have different NSA and SA presentation route plans. What is certain is that NSA and SA networking will coexist for a long time in the future, and operators are faced with the complex network challenges of multi-frequency and multi-standard coexistence.

Challenge 4: Dependence on global supply chain

The globalization trend of the 5G supply chain is clear, mainly involving chip supply chain, smartphone supply chain and base station supply chain.

The chip supply chain mainly involves "design (Fabless) - equipment - materials - manufacturing (Foundry) - packaging and testing (OSAT)" and other links. Chinese companies mainly focus on the two ends, namely design and packaging and testing.

Some of my country's specialized chips are catching up quickly and are moving towards the world's top camp. These include cost-driven consumer electronics, such as set-top box chips, monitor chips, etc.; and communication equipment chips, such as core router chips. However, China still has a large gap in the high-end smartphone, automotive, industrial and other embedded chip markets. The gap between high-end general-purpose chips and foreign advanced levels is even greater, including processors and memory.

In terms of the smartphone supply chain, the industry's commanding heights such as chips, memory, operating systems, as well as RF front-ends and filters, still cannot get rid of their dependence on European, American, Japanese and Korean manufacturers.

In terms of the base station supply chain, there are many devices involved, and the dependence on imported devices is high, especially FPGA, ADC&DAC, which are difficult to find better substitutes.

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Overall, China's progress in the millimeter wave field lags behind that in the Sub-6GHz field.

It can be expected that China's 5G will overcome various challenges and achieve rapid development.