As tensions remain high over ongoing US-China trade negotiations, we recognize all eyes will be on the next development in the tit-for-tat tariff saga. Given the globalized nature of the supply chain, technology products are at the center of this dispute, causing concern among some emerging market investors. Some commentators have suggested US President Donald Trump’s decision to delay an increase in tariffs on some Chinese goods until December was based on a reluctance to see prices increase for mobile phones, laptops and video game consoles in the run-up to the US holiday season. However, US-Chinese tensions are not the only issue facing the technology sector.
Moreover, the deterioration in Korean-Japanese relations over the past year due to historical issues has also led to uncertainty in the technology sector. Japan has tightened rules on exports of three key materials to South Korea’s semiconductor industry.
While the trade spat between Japan and South Korea has yet to have a material near-term impact, it has led to lower visibility for the industry’s medium- to longer-term outlook as the timeline for a resolution between South Korea and Japan is unclear. If the Korea-Japan trade issues were to persist or worsen, crucial smartphone component makers such as Samsung Electronics and Hynix could face both production bottlenecks and challenges moving towards next-generation technology, as it will take time to localize and/or shift the supply change.
Despite this uncertainty, we remain positive on the structural trends in the technology hardware industry and still see pockets of opportunity within the smartphone industry, particularly for companies with strong innovation capabilities and financial characteristics.
Smartphone Manufacturers’ Fight for Innovation Crown
The growth in smartphone sales over the last decade has been phenomenal. By 2016, global smartphone sales had reached nearly 1.5 billion, enough devices for every fifth person in the world.1
Many smartphone manufacturers are preparing to launch devices with fifth-generation (5G) capabilities to tap into new 5G mobile networks that are being rolled out in countries such as South Korea. However, there are signs that the global smartphone market may have reached saturation—smartphone shipments appear to have fallen in the second quarter of 2019.2
While the unit growth of smartphones has slowed down, we expect smartphone manufacturers to continue to spend more per phone on improving select handset features to attract consumers and gain share. That race to enhance consumer value should create investment opportunities among handset component manufacturers.
One area we might see smartphone manufacturing companies looking for differentiation is in the quality of their in-phone cameras. Leading companies have featured an increasing number of cameras, more complex camera designs, as well as higher resolution lens sets in their smartphones.
This demand for continued innovations in the optical space benefits the technological leaders within the smartphone lens space as it allows them to continue to increase not only the volume but also the average selling price. This is because the fast pace of upgrades in the space allows the leaders to continue to maintain and even increase average selling price as the laggards struggle to catch-up to increasingly higher technological and quality requirements.
Trade War Stress Opens Market Share Opportunities
As US-Chinese trade tensions drag on, we see an opportunity for non-Chinese smartphone component competitors to gain a larger market share.
The reason why companies are relocating certain aspects of smartphone production and assembly to countries outside China boils down to rising costs of land, labor and general production of goods in China. The US-China trade war has accelerated this trend.
We’ve seen evidence multinationals are investing in suppliers with the ability to diversify away from the Chinese smartphone market and into low-cost manufacturing centers in Asia. Vietnam and India have been attractive relocation options. Both countries are home to thriving manufacturing industries and we think both stand to benefit as companies invest heavily in factories, equipment and supply chains. An increasing number of firms have set up cutting-edge research and development labs in Vietnam and India, where operational costs are typically lower than in advanced economies.
In India, cumulative foreign direct investment (FDI) inflows came to US$64 billion for the last year.3 Noida, a city on the outskirts of New Delhi, is now home to one of the world’s largest smartphone manufacturing hubs. According to industry estimates, that hub is set to produce 120 million units a year for one company alone.
Vietnam has also captured global attention. FDI investment accumulation came to US$19 billion for 2018.4 The former garment manufacturing hub has moved up the value chain to produce technology-related goods, including smartphone components. And, given the country’s geographical proximity to China, it makes it easier for companies to integrate Vietnam into often complicated smartphone supply chains.
While Vietnam’s prospects look promising, it does currently face some constraints to achieve the production capacity and capability of China. However, we see Vietnam and other smaller economies gaining market share, particularly in certain niche industries.
Tying it All Together
On balance, we believe that select segments of the smartphone industry offer long-term growth potential that could see investment for years to come. In our view, current trade tensions present opportunities for select companies that can navigate and sustain earnings power in an already saturated market.
As long-term investors, we seek to identify companies that we believe are likely to benefit from the structural trends discussed. We look for companies with high-quality management, strong innovation capabilities and robust cash flow generation. In our view, these characteristics will help these companies navigate and potentially gain market share in the more complicated operating environment borne out of the US-China trade war.
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The comments, opinions and analyses presented herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice.
1. Source: International Monetary Fund, “A New Smartphone for Every Fifth Person on Earth: Quantifying the New Tech Cycle,” January 2018.
2. Source: IHS Markit, August 2019.
3. Source: Ministry of Commerce & Industry, July 2019.
4. Source: Vietnam’s Ministry of Planning & Investment, December 2018.
Hi-tech reinvents the massage
Virtual reality is invading the world of health and beauty – or is the other way round? ARTHUR GOLDSTUCK discovers a new role for VR through the ancient art of massage.
Imagine you are sitting at your office desk, stretched by deadlines and stressed by office politics. A minute later, you are sitting on a idyllic beach, watching the sunset, and someone is gently massaging your neck.
That’s probably a common fantasy, but now it is also a reality, thanks to the next big step in massage therapy. The ancient art is being transformed by virtual reality (VR), with massage clinics and therapists the world over discovering the transformative power of the technology.
In South Africa, the revolution is led by a company called Sheer Bliss, which works in the corporate space, mainly visiting company offices and call centres. The massage is quick – typically 6 minutes – but the combination of working the most stressed muscles and offering a brief escape to a beach paradise amplifies the experience.
Massage therapy goes back in history several thousand years, first as a sacred form of natural healing in India and later to pamper royals and the rich in ancient Egypt. These days, it is democratised, at least if you can afford it. But thanks to VR, it can now become a mass market experience. Sheer Bliss conducts an average of 27,000 massages a year, with teams in Johannesburg, Cape Town and KZN. Its mobile massage concept means it can also cater for conferences and large sporting events.
However, it’s not so much a case of VR saving the massage industry, as massage giving VR a boost, by providing a wonderful use case for its practical application.
“We needed to find something new to offer our customers,” says Nadine Hocter, founder of Sheer Bliss. “At the same time, we were looking at a way to future-proof the business. I was really lucky in that a group of MBA students at GIBS were given Sheer Bliss for their innovation project.
“We spoke about various ways of making our original massage more immersive. VR was mentioned, but it was in a meeting with a client who wasn’t biting that we sold the idea. Without realising it at the time, our business moved into a class encompassing the 4th Industrial Revolution.”
Visit the next page to more about how Sheer Bliss became the first virtual reality massage therapy business in South Africa.
Drones fight forest fires
The South African forest fire season began a month ago, and an estimated 20807 hectares of land were burnt in the Western Cape.
With such rampant and regular breakouts of forest fires, the quest to contain them before they cause widespread destruction, including property damage and loss of life, remains an issue of high importance for non-governmental organisations and the relevant government agencies. Equally important is the need to safeguard against the loss of the lives of firefighters during missions to contain these blazes.
As this continues being an issue, mainly because of the dense vegetation found in the Western Cape, coupled with the dry weather that is typical for this time of the year, the need to use unmanned aircraft to fight fires is ever increasing.
Drones are particularly crucial for forest fires that tend to get out of control quickly and that put both pilots and crew at risk. There’s only a small containment window between when the fire starts and when it gets out of control. Drones give firefighters a bird’s eye view of the terrain and helps them determine where the fire moves next so they can swiftly make decisions about where crews should go and who should be evacuated.
If you’re a firefighter responsible for forest fire response, mitigation and rescue, the benefits of drones are immense. We’ve detailed the main 4 benefits with supplemental stories below.
1. Drones Gather Situational Awareness in a Short Time
A drone helps you decide within minutes the type and amount of resources to send to the scene. Some drones are also equipped with thermal sensors, which uses infrared radiation to help first responders locate heat signatures of humans and fire hotspots that show where fires are most likely to spread. Even before your personnel arrive on the scene, commanders are able to make decisions just from these images live-streamed to their computers.
In early December whilst fighting a blaze, SanParks made use of a DJI drone with an infrared camera to capture images of the Rocklands fire in Simonstown.
In a similar incident in the German town of Hechingen, firefighters had to fight against winds that were spreading to nearby wooded and populated areas. The creeks had dried out while the first fire truck that arrived carried only 2,000 liters of water.
Hechingen’s Fire Brigade deployed DJI’s Matrice 210 ruggedised commercial grade drone, a Zenmuse XT thermal camera, and an X4S high definition visual imaging camera. These fed information to the incident commanders and helped them know where to direct their resources, how many units to send and where to increase water supply. At the end, the crew extinguished the blaze with only 5,000 liters of water mixed with compressed air foam. The drones not only helped them save water but more importantly hastened reaction time helping the Brigade send crews faster to the scene with the exact manpower, units and supplies.
“The biggest advantage came to light during the search for hotspots and extinguishing them,” Hechingen’s Fire Chief Commander Bulach later told DJI, “The simultaneous deployment of the XT and X4S provided me with exact information about where to delete the hotspots and how long until we reached a safe state.”
2. Drones Protect Your Personnel
Drones help you monitor your crew to make sure you’re sending them in the right direction, that they’re safe and to help you determine whether to send backup forces.
On 13 August 2017, Yosemite firefighters battled a 9-day blaze in Southfork, California, that was complicated by weakened timber trees in the nearby region. Flying planes in the tight canyons was dangerous due to a bellowing column of smoke. At the same time, an unexpected thunderstorm spread the fire, blurring the firefighters’ primary containment line and threatening to spread to nearby villages. The Yosemite fire-force used a DJI drone with the Zenmuse XT thermal payload in their pre-shift early morning hours to map fire lines and livestream information to controllers for operational decisions and situational awareness. Tony Eggiman, Menlo Park FPD Fire Captain recalled, “the operations major told me later it brought his blood pressure from about 200 down to about 100. He was really happy.”
With aerial intelligence captured by drones, incident commanders can make better-informed decisions that keep firefighters safe while they plunge into fire and other dangerous spots to save other peoples’ lives.
3. Drones Enable Fast Mapping for Incident Response as Well as for Post-Incident Recovery
Drone solutions for forest fire response typically carry two different cameras: a visual camera and a thermal camera. The visual camera gives you a real-time view of different situations, able to easily spot things such as your fire team or nearby equipment. The thermal camera scouts for heat signature of the human or fire hotspots.
Drones fly lower than helicopters, providing a more nuanced picture of the situation, and can navigate in tight or dangerous spaces where no helicopter pilot would dare to go. With thermal imaging capabilities, they can locate hotspots at a fire scene within seconds, and see people trapped even in areas of thick smoke.
Drones also play an important role after the fire has been put out. During the Carr Fire, crews piloted low-flying drones to capture 360-degree images of the destruction. For the residents forced out of their homes, this provided invaluable information on property damage to assess insurance claims in a faster time, letting victims more quickly take steps to rebuild their lives.
4. Drones Give you Accurate Intelligence for Informed Decision Making
Wildfires often involve large-scale operations where the incident commander must make decisions on personnel and resource deployment. Drones are effective intelligence generators that can capture detailed data and information from the field, and live stream back to the command centre. By having that real-time aerial view, you can see exactly what’s happening and don’t have to rely on second-hand information. You know what’s going on and where. You can also monitor your crew to see their location and that you’re sending them in the right direction.
Drones allowed firefighters of the Gaoming district, Foshan in South China to expertly evaluate 960 people when a fire broke out on Lingyun Mountain near the area, December 12, 2019.
The DJI Mavic 2 Enterprise Dual (M2ED) was flown out within minutes of the response team’s arrival at the incident for fast situational awareness. Two minutes later, the Matrice 210 V2 drone platform was launched, giving detailed information with its sensor’s 30 times zooming ability. The Mavic gave responders their quick incident overlook, while the Matrice provided detailed, high-resolution images for thorough situational awareness. The combination saved more lives, protected firefighters, and shaved firefighting costs.
As Los Angeles Fire Department (LAFD) Battalion Chief Richard Fields, program coordinator, told the Board of Fire Commissioners in a March 2019 report, “Timely and accurate communication is essential in getting the right resources in place to mitigate an incident.”
Drones have gained a foothold in the sphere of public safety and forward looking government agencies are expanding their use in areas including environmental services, public works, transportation and rescue services. Download DJI’s whitepaper to explore the Best Practices For Deploying Drones At State And Local Government Level.