- Globalization of internet access and market penetration opportunities, notably in developing economies
- Strong innovation, with AI having a growing impact on all sectors and ongoing installation of 5G technology
- Exponential growth of connected goods market
- Saturation of hardware markets (tablets, smartphones, PCs) in some economies
- Long-term challenges regarding rare mineral reserves
- Tougher regulatory environment ahead for ICT “giants”, notably in terms of taxation and data protection issues
Coface’s sector assessment methodology for the ICT sector incorporates several segments: telecommunications, electronics, the media and a ﬁnal segment comprised of computers, software and IT equipment. Empirically, the boundaries are becoming increasingly blurred between the product and service ranges offered by ICT companies and the ﬁrms’ traditional business activities.
The ICT sector is a concentrated sector featuring “giant” US and Chinese ﬁrms that dominate the market, including America’s FAANG (Facebook, Amazon, Apple, Netﬂix and Google – specifically Alphabet, its holding company) plus Microsoft, and China’s BATX (Baidu, Alibaba, Tencent and Xiaomi). These companies have some of the highest levels of capitalization in the world, and are reporting rising revenues (as per available Q3 2019 financial data).
The trade tensions are exacerbating the already competitive environment between the United States and China, as illustrated by the US sanctions imposed on some Chinese technology companies, including Huawei, a leading Chinese telecommunications company at the forefront of 5G technology implementation. Many countries, particularly the United States, are worried about the “Made in China 2025 Strategy”, which China hopes to use to become the global leader in strategic economic sectors, as well as a number high tech products of markets such as robotics. Meanwhile, 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 contrasted across regions worldwide in 2020 amid a global economic slowdown. This is expected to result in lower growth 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
The global economic slowdown and the protectionist environment are dimming the sector outlook
Coface anticipates a continued global economic slowdown – including in the biggest economies such as the United States, Europe and China – with a global GDP forecasted at 2.4% in 2020 after 2.5% in 2019 and 3.2% in 2018. This is expected to have significant repercussions on the smartphone segment, where demand has already been impacted for many years by the maturing market in some advanced economies, as well as in emerging economies with large populations such as India. Connected products, such as watches and wristbands, could continue to stimulate consumer interest, and according to the International Data Corporation (IDC), smart wearables are expected to see growth in both mature and emerging markets.
In Asia, the sector has been affected by the gradual deceleration of Chinese economic activity. After a 6.1% expansion in 2019, Coface estimates that economic growth will reach 5.8% in 2020 and will continue to be hit by trade tensions. Last year, Huawei was excluded from the project to deploy 5G technology in the US and the Trump administration placed it, alongside a number of other Chinese ICT companies, at the top of a list of businesses that US telecommunications companies were forbidden to deal with due to cybersecurity risks. This measure was extended to US government agencies in August 2019. Moreover, in September 2019, the United States raised tariffs from 10% to 15% on USD 125 billion worth of Chinese goods, including Bluetooth headphones and smart watches.
A concentrated and competitive sector featuring “giant” firms whose business models are evolving constantly
FAANG and BATX, all global leaders in their own core businesses, are now competing with each other across various markets, including cloud, streaming, media, payments and commerce, as the ICT giants expand into new sectors. Examples include Google’s launch of a driverless electric car in December 2018, and Facebook’s plans to launch its own cryptocurrency, Libra, in partnership with 27 other companies, although at the time of writing, this project is facing regulatory challenges, notably in the US. The race for innovation in the coming years is likely to be focused in the health sector, with developments in areas such as connected medical devices, for example, or augmented reality glasses, for which Apple reportedly filed a patent for a prototype at the end of last year.
Innovation linked to 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. All leading companies in the sector are committed to developing AI in their internal processes as well as their product and service offerings. This is particularly the case in the development of innovation services such as virtual assistants.
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 the trade war and technology-related challenges. One such technological challenge is that the range of a 5G signal is currently 10% that of a 4G signal, while the antennas are large (approximately the size of a refrigerator) and costly to make. Only 14% of all connections worldwide are likely to be 5G-powered by 2025. Accordingly, 5G is unlikely to become the new telecommunication standard in the medium term.
A more restrictive regulatory environment in data protection and taxation
The regulatory environment for ICT companies is expected to become increasingly restrictive in the coming years, particularly with regard to the protection of consumer data, following several scandals involving US companies, including the misuse of user data by Facebook, for which the company was fined a record USD 5 billion by the US Federal Trade Commission (FTC). The European Union implemented the GDPR data protection regulation in May 2018. The issue is currently under discussion in the United States, with, for example, California taking steps in 2018 to adopt its own data protection law, the California Consumer Privacy Act (CCPA), which will come into force this year. Microsoft has said that it will apply the CCPA in its operations in all US states. The rise of such regulations in the main markets worldwide could impact the business models of the giant ICT firms, and contribute to market fragmentation, since data protection rules could potentially differ significantly from one US state to another, as well as across different regions worldwide, while the major ICT companies operate globally.
Accusations of tax evasion have been laid against FAANG, particularly in Europe. In France, Google agreed to pay a fine of €1 billion last year to settle all tax lawsuits brought by the French government against the company. The tax environment could certainly become more restrictive, with many discussions underway at the international level. For example, at a G7 Finance meeting last year, governments of countries representing the main markets expressed their intention to work towards a common tax regime for the sector’s giants.
Last update : February 2020