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5G is coming. A New Era in Mobile Technology.
Have you ever left home without your smartphone? We will hazard a guess and say the answer is, “Not likely.” We’d feel instantly cut off from, well, everything. Exposed. We pose this question to highlight how ingrained mobile technology has become in our lives.
As thematic investors, it helps to step back and look at developments through the lens of our personal experience. This approach helps us to grasp the incredible growth of mobile technology, particularly in Asia and China. We have all played our part in this evolution or, indeed, revolution, and this is what we are going to explore in more detail.
Mobile penetration and the development of 5G services continue to astonish us. The investment landscape is continually changing, and we never cease to be amazed at the willingness of people to embrace new ways of communicating, spending, and being entertained. Why then do China and Asia stand out as the global torchbearers for the mobile future?
China’s Secular Consumption Shift and the Rise of Mobile
China’s long-term structural growth story is an excellent place to begin. The shift away from global trade and investment means that consumption of some form represented over 76% of GDP growth in 2018, with year-on-year online retail sales increasing by 23.9% in the same year, according to the National Bureau of Statistics. The growing middle class and millennials are especially far less wedded to shopping in physical stores.
This consumption shift demonstrates that the populace is willing to spend. But why are they embracing technology so readily?
It’s worth going back a few years and looking at how the online experience has differed in China compared with other territories. In the West, consumers made a more sedate progression from high-street stores to PC-based shopping, to mobile. Even now, all three elements play a part in the e-commerce mix, with many viewing an item on their phone before purchasing it from a PC.
China, on the other hand, leapfrogged the PC stage and went straight to mobile. This was mainly because of economic reasons – for a long time, PCs were out of reach for most Chinese citizens. Even as recently as 2010, barely a third of the population had access to the Internet. The introduction of affordable smartphones changed all that. By the first half of 2019, 847 million people in the country had mobile internet access – almost 99% of all internet users in the country1.
The government also strongly encouraged Chinese telecom providers to invest in network infrastructure, first 3G, then 4G, and now 5G services. This outlay is still reflected in the balance sheets of many telecom providers. China Mobile, for example, has one of the highest capital expenditures to sales ratio in the world.
But while rational economics was the catalyst for this trend, the versatility of smartphones combined with the importance of social and family networks in China have amplified it. A smartphone is a perfect way to communicate with family, friends and peers (messaging) and interact (social media). Shopping is a natural extension of this experience.
China’s mobile ecosystem has thus grown to an unprecedented size, unmatched by any country in the world. With 1.4 billion people, this represents enormous investment opportunities in areas such as e-commerce firms, gaming, and social network services, as well as in the rollout of 5G, which we will discuss in detail in a follow-up article.
“The unprecedented growth of China’s mobile ecosystem is creating massive investment opportunities. This will only be augmented by the rollout of 5G.”
A Trend Reflected in the Broader Asia-Pacific Region
The above numbers become more striking once we encompass the wider Asia-Pacific region. Recent studies have shown robust growth in the three categories of digital activity: connectivity, internet penetration, and social media. Data from 2019 revealed that internet penetration was up by 65%, social media exposure rose 63%, and mobile connectivity soared by 132%2. The factors underpinning this expansion are in many ways similar to China’s: a burgeoning middle class with new money and the express route to mobile that bypassed the PC phase.
The number of smartphones in the system in used is equally impressive. We can gauge this by looking at the number of subscriptions in the six largest ASEAN economies, which totaled over 760 million.
Bear in mind that these numbers also include inactive accounts and people with multiple subscriptions. Further, some of these users may be on 3G services and only use their handset for calls or texts.
In saying that, a 3G customer will inevitably become a 4G or 5G convert in the next few years, as bandwidth is liberated – a conversion rate that presents e-commerce and other platforms with a substantial and previously untapped section of the market. As such, it’s no surprise that Asia-Pacific countries, as well as China and India, are at the forefront of subscriber growth.
Lastly, the same study by Ericsson that produced the mobile subscriber data also notes that, crucially, mobile broadband uptake expanded by 10% year-on-year at the end of quarter three 2019 – a rise of 120 million globally3.
In summary, mobile internet penetration is growing throughout the continent, with China leading the way. We see a rapidly expanding mobile ecosystem and billions of dollars’ worth of investment opportunities.
Long-term Opportunities in E-commerce
When it comes to e-commerce, China is firmly in the lead, and not just in Asia, but in the world. In 2019, its total retail e-commerce sales fell just shy of the US$2 trillion mark – triple that of the USA at number two.
Despite such volume, China’s growth remained strong, with sales increasing year-on-year growth by 27.3% in 2019, second only to India. Contrary to popular opinion, the Chinese e-commerce market is far from mature. As a percentage of total retail, its penetration rate, while the second-highest in the world, was still only a hair above 20% as recently as 2018.
This low penetration rate indicates that China’s e-commerce boom, while impressive, is only just getting started.
The market currently follows an oligarchic structure, with the household name Alibaba Group – which also operates the B2C Tmall and Taobao platforms – leading the pack. Other leading players, such as Pinduoduo and Tencent-backed JD.com, have gained prominence. However, Alibaba appears likely to retain its market-leading position and thus capture a significant amount of this predicted growth.
But e-commerce is just one aspect of the overall opportunities created by the expansion of the mobile economy.
Mobile Payments Fuel
Buying goods online requires that we have a means of paying for them – the mobile economy cannot survive without the fuel of mobile payments. In turn, this has created a wealth of opportunities in this area. In China alone, an estimated 577 million people used proximity mobile payments (using your mobile to pay at the point of sale) in 20194, a healthy 10% year-on-year increase.
But although the absolute numbers seem very large, this still only represented less than 50% of the population. Just like e-commerce, significant headroom remains. It is believed that the dominant mobile payment companies, i.e. Tencent and Alibaba continue to drive the growth of the e-commerce sector. By 2023, this percentage is forecast to increase to over 60%. Based on China’s population size, this is a rise of almost 150 million people.
Although China continues to be the head of the pack, the mobile payments ecosystem in the rest of Asia-Pacific is also poised for steady expansion, driven by tapping into the unbanked demographic. Thanks to mobile-dependent finance apps, even those without access to traditional banking facilities can participate. It’s no wonder then that data on financial apps downloads puts the region miles ahead of the rest of the world5.
As the mobile payment ecosystem continues to scale, other ancillary components of the broader mobile economy will be able to capitalize. One example is mobile games. China is already the largest mobile gaming market in the world, with about US$20 billion in revenues for 20206. Another is the sharing economy, much of which is heavily dependent on mobile platforms.
“While China remains the unquestioned leader in terms of the development of its mobile ecosystem, other Asian nations are poised for strong expansion – particularly as they continue to tap into the unbanked population.”
Changing Consumer Behaviour: the Long-term Catalyst
The rapid growth of the mobile economy could not have happened and cannot be sustained without the long-term catalyst of shifting consumer behaviors. In China, those born in the 1990s and 2000s are estimated to comprise 36% of the population by 20277, and they have demonstrated markedly different spending habits from their predecessors.
Most of them are far removed from the economic struggles of the past, resulting in much freer spending habits. Many also receive significant financial support from their parents, meaning even those who have yet to enter the workforce are able to contribute to economic spending. They also have an optimistic outlook – one APAC-focused study of Gen-Z8 reported that 74% of them expect to be better off in the future.
More importantly, they are digital natives (a telephone with a manual dial is a museum piece). To them, there is no distinction between the mobile and the ‘offline’ economy. This, in tandem, with their more liberal spending attitudes, is a positive sign for Asia’s expanding mobile economy.
“Consumer behavior will continue to change. The new generation of digital natives does not distinguish between the mobile and ‘offline’ economies. They are a long-term catalyst for the expansion of e-commerce”.
Covid-19: A Long-term Silver Lining?
The Covid-19 pandemic is an undoubted near, and perhaps even medium-term blow to the global economy and Asia is not spared. However, not all sectors will be equally affected. Over the longer-term, the pandemic could even turn out to be positive, especially for companies within the e-commerce space. While people are forced to retreat behind their front doors to flatten the curve, once this is all over, we might see work-from-home arrangements being more accepted, which will be a boon for the mobile economy.
Even over the shorter term, the pandemic has lowered asset prices, resulting in attractive entry points for investors who have the courage to ride it out for the long term. However, for this to work, careful asset selection is imperative.
Mirae Asset’s Investment Selection Methodology
At Mirae Asset, we believe that asset selection is the key to outperformance. That’s why we have a rigorous bottom-up screening methodology (including an ESG scorecard) in place, bolstered by local on-the-ground teams. Our objective is to filter the larger investment universe down to the select few. For instance, our China Growth Equity Strategy focuses on fewer than 30 stocks, while our Asia Sector Leader Strategy invests in only about 50 out of the thousands of options available.
For investors looking to stake a long-term position in the future of Asia, both these strategies could be the optimal choices.
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