- Globalisation of internet access and market penetration opportunities, notably in developing economies
- Strong innovation, with AI having a growing impact on all sectors and upcoming 5G technology
- Exponential growth of connected goods
- Saturation of some hardware markets (tablets, smartphones, PCs) in advanced economies
- Long-term challenges in relation to rare mineral reserves
- Tougher regulatory environment ahead for ICT giants, notably in terms of taxes and data protection issues
Net Margin of globally US ICT companies (JUNE 2019)
The ICT sector is highly concentrated sector with ﬁerce competition, particularly between the giant US and Chinese ﬁrms that dominate the market, including America’s FAANG (Facebook, Amazon, Apple, Netﬂix and Google; speciﬁcally Alphabet, its holding company) and Microsoft, as well as China’s BATX (Baidu, Alibaba, Tencent and Xiaomi). These companies have some of the highest levels of capitalization in the world, with US companies reaching nearly USD 4.5 trillion in market capitalization in July 2019. In addition, those companies are highly profitable, with generally sustained growth in their net margins (see Chart). Nevertheless, some companies performed disappointingly in the second quarter (Q2) of 2019, due notably to lower demand. This was the case for Netflix, which lost 126,000 US customers in Q2 2019, and is facing increased competition, such as from the scheduled autumn 2019 launch of Disney’s cheaper streaming platform.
The trade war is exacerbating the already highly competitive environment between the United States and China. The American sanctions imposed on some Chinese technology companies, including Huawei, the leader in 5G technology, is an example. . Many governments in advanced economies, particularly the United States, are worried about the “Made in China 2025 Strategy”, which China is planning to use to become the global leader in ten critical economic sectors that include ICT products, such as robotics and semiconductor production. These new technologies, and notably the swift development of artiﬁcial intelligence (AI), are likely to bring signiﬁcant changes to production methods.
Prospects for the ICT sector will remain varied from one region to another in 2019, while overall business performance will depend on economic conditions. The main risks that affect the sector outlook are the global economic slowdown and the protectionist environment. Coface expects global economic growth to slow in 2019 and to remain at a similar level in 2020. This is expected to result in a contraction in demand for ICT goods and services overall. Looking forward, one of the key challenges, particularly for FAANG, will be the increasingly strict regulatory environment in terms of data protection.
Sector Economic Insights
Global Telecommunication operators leaders' sales (June 2019)
Global economic slowdown and a protectionist environment are weighing on the sector outlook
Coface expects global economic growth at 2.7% in 2019 and to remain at a similar level in 2020 (down from 3.2% in 2018). Global demand for ICT products and services is likely to be impacted by weakening global activity. The first half of 2019 was marked by a decline in world trade. Coface expects world trade to decline in volume by 0.7%. According to the International Data Corporation (IDC), smartphone vendors shipped 312.9 million units globally during Q1 2019 – a 5.9% decline compared to the 332.7 million units shipped in Q1 2018. This is the sixth consecutive quarter of year-on-year declines for the global smartphone market, predominantly due to saturation in mature markets. Nevertheless, the IDC also stated that global sales of mobile phones and cloud computing continue to be the mainstays of ICT demand, despite the growing importance of innovative technologies. In 2019 and beyond, connected products – such as watches and wristbands – could stimulate consumer interest, and according to IDC, the rise of smart wearables be in both mature and emerging markets.
A concentrated and competitive sector in which giants’ business models are evolving constantly.
The sector is consolidating around US FAANG challenged by Chinese BATX. While these companies were once each leader in their own core business, they are now competing with each other across various markets, including cloud, streaming, media, payments, and commerce. Examples of these shifts include Google launching an autonomous electric car in December 2018, and Facebook’s June 2019 announcement of its own cryptocurrency, Libra, in association with 27 other companies – although at the time of writing, its scheduled 2020 launch faces challenges regarding US regulation front.
Innovation linked to “data hungry” AI is expected to lead to major developments in all segments of the sector
AI has a significant “disruptive power” on all sectors as it pushes the limits to which machines, notably via robots, can carry out tasks and jobs that humans have performed until now. Fierce competition between Google and Amazon to introduce innovations on their respective virtual assistants (or AI Assistants) during the January 2019 Las Vegas Consumer Electronics Show (CES) is a good illustration of this. The upcoming AI “invasion” was one of the striking trends seen at CES, together with the new generation of wireless networks and upcoming 5G technology.
Telecommunications will keep growing with the arrival of 5G
Coface expects the telecommunications industry to continue to grow. The implementation of 5G technology is developing steadily despite challenges, such as the trade war and the limits of technological capacity*. According to Fitch Solutions, 14% of all connections worldwide will be powered by 5G by 2025, and approximately 4 billion 5G connections are expected by 2028.
Asia’s ICT sector is suffering from deceleration in China
In Asia, the sector has been notably affected by the gradual deceleration of China’s economic activity – after a growth of 6.6% in 2018, Coface estimates that China’s 2019 economic growth will be 6.3% – the lowest level in 27 years – and forecasts a 6.1% growth rate in 2020. Many governments in advanced economies, particularly the United States, are worried about China’s “Made in China 2025” strategic plan. As a result, as part of the escalation in the global trade war in Q2 2019 between China and the United States, Huawei has been excluded from the project to deploy the 5G Technology in the US. The Trump administration placed Huawei at the top of a blacklist, along with other Chinese ICT companies – a blacklist of businesses that US telecommunications companies should not deal with due to cybersecurity risks; a prohibition measure that was extended to US governmental agencies in August 2019. This escalation was followed by the application of renewed tariffs of increases of 10-25% increase in customs duties on USD 200 billion’s worth of Chinese products. The US government has announced the introduction of additional tariffs of 10% on Chinese electronic products (about USD 300 billion) by mid-December 2019. China has announced retaliatory measures if this measure is implemented, including stopping the import of US agri-food products. Another illustration of the strategic importance for the world's major economies, including China, is that China imports more semiconductors than oil: in 2018, according to Chinese customs services, Chinese semiconductor imports, largely from the United States, amounted to USD 300 billion, compared to USD 239.2 billion for crude oil.
Data protection standards becoming more and more strict
Data protection is likely to be subject to a tougher regulatory environment – following several scandals involving US companies, such as the misuse of user data by Facebook – and higher taxation plans. The European Union implemented the GDPR data protection regulation in May 2018. This is currently under discussion in the United States, with 36 states now having legislative initiatives designed to improve data protection and privacy for users. These risks could impact ICT giants’ business models and contribute to market fragmentation, since data protection rules could potentially differ significantly across different regions, while leading ICT companies operate globally. At the same time, there have been some steps toward a long-term multilateral approach, as seen at the last G7 finance summit, where nations representing the main markets expressed intent to work on a more global taxation system for tech giants, since some – notably FAANG – have been accused of tax evasion.
Notes for the reader :
Coface’s sector assessment methodology for the ICT sector incorporates several segments: telecommunications, electronics, white goods and a ﬁnal segment comprising computers, software, and IT equipment. Empirically, the boundaries are become increasingly blurred between the product and service ranges offered by ICT companies and the ﬁrms’ traditional business activities.
* Casanova C. & Weil, P. May 21, 2019. From copycat to early bird: Taking stock of China’s 5G ambitions. Coface. Available at: https://www.coface.com/News-Publications/News/From-copycat-to-early-bird-Taking-stock-of-China-s-5G-ambitions
Last update : September 2019