The Disruptive Strategist - Private 5G Networks: Unlocking the Industrial Internet of Things

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GAM Investments’ Kevin Kruczynski considers the power of 5G networks and the increasingly important role they will play in the Industry 4.0 ecosystem, as well as the potential beneficiaries from these developments.

28 November 2022

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5G networks provide up to 50 times more speed, 10 times less latency and 1000 times more capacity than 4G, but as network service providers search for a ‘killer app’ to accelerate and monetise 5G adoption from their traditional consumer base of smartphone users, new commercial (or B2B) use cases are emerging at a rapid rate and will be a source of significant incremental growth. This is most apparent when we look at industrial applications where 5G is playing an increasingly important role in the Industry 4.0 ecosystem.

For example, the latest smart factories incorporate innovations in artificial intelligence, augmented reality, and automation. These have a multitude of machines, vehicles, robots, sensors, cameras, software systems, and people that need to communicate effectively with one another in real time. Given the number of devices, the amount of data and mission critical nature of many of the functions, this is only possible with fast, reliable, and secure wireless communication. Private 5G networks with ultra-low latency are emerging as the preferred choice as they unlock a wide array of use cases that were not possible under 4G or Wi-Fi based networking solutions. Crucially, these private networks can be designed to meet the most stringent of security requirements, sensitive data can be stored locally and need never leave the network.

As we have seen with many innovations over the years, initial barriers to adoption are high as management teams struggle to visualise the concept and are reluctant to commit large amounts of capital to unproven technologies, but this changes as use cases emerge and early adopters develop a competitive edge, forcing the broader industry to catch up. We think that the S-curve of adoption of 5G enabled industrial internet of things (IIoT) is pivoting from the slow growth to the rapid growth phase. This shift coincides with supply chain rationalisation and near-shoring, as companies reconsider their production footprints against a backdrop of Covid disruption and geopolitical tensions.

Ericsson estimates the incremental opportunity to network service providers from new industrial use cases enabled by 5G will be USD 700 billion by 2030, which should provide ample incentive to continue investment.

Chart 1: 5G-enabled revenue potential for service providers

 
Source: Ericsson and Arthur D. Little. The figures refer to future performance and such forecast is therefore not a reliable indicator of future performance. There is no guarantee that forecasts will be realised.

This will be spread across a broad range of industries and help fuel elevated growth rates.

Chart 2: Estimated addressable market for 5G

 
Source: Ericsson and Arthur D. Little. For illustrative purposes only.

Many companies along the value chain will benefit from the incremental growth, which will provide a significant tailwind for many years. The need for denser networks will be a boon for the networking equipment providers such as Nokia and Ericsson. Keysight Technologies, the leading testing and measurement solution provider is another obvious beneficiary, given the increasing importance of network reliability and uptime, testing and measurement is vital, not just for the networks but for the devices that connect to them. These developments also unlock new use cases for robotics and automation across a broad range of industries that have been slow to embrace these solutions in the past. This is positive for robot makers such as Fanuc and ABB, as well as machine vision pioneers Keyence and Cognex. It also plays well for companies that provide industrial software solutions, such as PTC, Dassault Systemes, Trimble, and Bentley Systems. Companies will need advice and know-how in developing and implementing digitisation strategies, which leads to robust demand for digital transformation consulting, and is a clear positive for the likes of Accenture and specialists such as EPAM Systems, in our view.

Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not a reliable indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a security is not a recommendation to buy or sell that security. The securities listed and examples provided were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities mentioned in this material are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. There is no guarantee that forecasts will be realised.

Kevin Kruczynski

Investment Manager
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