Thematic ● Global
November 2020
Software is only 30% cloud
today. More upside to go…
Next disruptive cloud trend
…machine learning?
Even though cloud technologies access has become the new norm on PCs, laptops and
smartphones and 94% of enterprises use some form of cloud, we believe there is much upside
left for investors to capture from this multi-decade trend. For example, chart 1A illustrates how
as of last year (2019), cloud-based services had replaced about 30% of software. This means
there is 70% of software still yet to migrate to the cloud.
The venture capital firm BVP estimate that the public cloud hit USD1trn+ market cap this year,
which was probably accelerated by enterprises going virtual during the pandemic to function
remotely.11 Both Software-as-a-Service (SaaS) and Infrastructure-as-a-service (IaaS) crossed a
run rate of USD100bn last year – see chart 2A. Examples of SaaS include applications like
Office 360 from Microsoft or IaaS like Amazon’s AWS.
Chart 2A. SaaS and IaaS hit USD100bn run rate in 2019 (% market share)
40%
30%
20%
10%
0%
Oracle (23%)
Microsoft Azure (62%)
Adobe (29%)
Amazon Web Services (annual
Salesforce (21%)
SAP (39%)
Google Cloud (68%)
Alibaba Cloud (71%)
Cisco, Google, IBM* (26%)
Microsoft (annual growth 34%)
growth 33%)
SaaS IaaS
Source: HSBC, Bessemer Venture Partners
As more companies find practical uses of using AI and machine learning (ML) in their everyday
business operations, from analysis of raw data to generating recommendations for clients –
setting up bespoke solutions in-house may become unwieldy. Today 26% of companies are
using ML in the cloud, and a further 48% are experimenting or planning to use this type of cloud
infrastructure going forward – see chart 3A. Other popular cloud services include relational
databases (55% currently use), push notifications from the cloud (41%), and for data
warehousing (40%).
Today the main task of enterprise IT in cloud is to manage and optimise the costs of cloud
services and decide on apps appropriate for cloud. This makes sense as nearly 40% of
enterprises spend more than USD2.4m on cloud, with 13% of them spending more than
USD12m. See chart 4A.
______________________________________
11 Bessemer Venture Partners, 2020.
25
 Thematic ● Global
November 2020

50%
% of cyber-attacks are malicious7

Processing
 Microprocessors are at the very heart of all digital devices and have been driven by Moore’s
Law innovation since the 60s. So it’s a very mature but still important disruptive force. Today
chips are used in a variety of industries such as computer devices, automotive and more.

Currently, the next step in chips is the creation of processors to drive AI in the cloud and
low-powered datacentres. We are also seeing the emerging foundation for which chips will
be pivotal to drive the VR/AR revolution, particularly the mobile GPUs to power the headset.
We place processors for today’s applications in the “new normal” and position AI and VR
chips in the “real applications” but low powered chips like ARM for datacentres in the “hype
mania” part of our disruption framework. As AI become more important to disruption and its
business use cases increase, we believe these type of chips will move from “real
applications” to new normal.

Companies involved in manufacturing chips include:

 Asia: TSMC, Alchip, Global Unichip, Samsung, SK Hynix

 US: Nvidia/ARM, Qualcomm, Intel, AMD

35%
CAGR growth of VR headset chips to
2022, the highest growth sector8

Bandwidth
 5G: It can be argued that 5G wireless connectivity is set to become the next step in the
evolution of internet access, especially in densely populated areas. Although the GSMA
expects 5G to be 20% of mobile connections by 2025, today it’s still a small number. So we
place 5G in the “real applications” part of the disruption framework, and it should rapidly
move up this part of the curve towards “new normal” within the next few years.

Some companies involved in deploying 5G, Open RAN and LEOs include:

 Asia: Mediatek, Shennan Circuits, Sunway, Zhongji Innolight, ZTE, YOFC (5G and
bandwidth)

 EEMEA: STC, Zain, Etisalat, Turk Telecom, Turkcell (5G)

 LatAM: Telefonica Brasil, TIM, America Movil (5G)

______________________________________
7 IBM
8 Semiconductor Industry Association

22
 Thematic ● Global
November 2020

<5%
% of connections are 5G today9

 LEOs: Low-earth orbit satellites are a new generation of lower-cost space technology which
is grabbing a lot of attention and headlines. We believe that LEOs will help to close the
global coverage gap of 9%10, and help bridge the digital divide for EM and DM regions with
low population density, which have no connectivity. Last year SpaceX launched 13 batches
of satellites into space, each with 60 flat-packed LEOs, meaning SpaceX has now put just
under 800 in orbit.

Currently the testing phase of the service is being conducted and we expect the first
customers should be receiving space-based internet either later this year or next. So we
place LEOs floating between the “hype mania” to real “real applications” stage, until they
start to generate significant revenues from the business with this experimental but ground-
breaking and potentially very disruptive technology.

Companies working on LEOs include:

 SpaceX (Starlink constellation), Amazon (Project Kuiper), OneWeb, Telesat, Leosat

800+
SpaceX LEOs in space so far…

______________________________________
9 GSMA
10 Locations around the world where there is no infrastructure for fixed or wireless internet, mostly due to being in remote
or sparsely populated regions.

23
 Thematic ● Global
November 2020

Chart 3A. Machine learning is next growth Chart 4A. Challenges using enterprise
space in the cloud cloud
DBaaS (Relational) 53% 23% Cloud migration 73%
Container-as-a-service 37% 39%
Serverless 36% 39%
Managing multi-cloud 76%

Machine learning 26% 48% Lack of

79%
Data warehouse
resources/expertise
40% 31%
Push notifications 43% 27% Compliance 79%
DBaaS (NoSQL) 39% 29%
Security 81%
Queueing 40% 26%
Caching 36% 30% Governence 84%
Mobile Services 37% 28%
Managing cloud spend 84%
0% 20% 40% 60% 80%
% of Respondents 65% 70% 75% 80% 85%
Currently use Future expected % of Respondents
Source: HSBC, Bessemer Venture Partners Source: HSBC, Bessemer Venture Partners

Cybersecurity is critical for industry as software is eaten by the cloud…


Shall we play a game?
Joshua/WOPR in War Games (1983)

Cybersecurity spend set to
increase by USD100bn for 2026
The 80s motion picture War Games dramatized a worst-case scenario from hacking, leading to
potential global thermonuclear war. Since the early days of largely unconnected computer
systems in the 1980s, today almost everything is becoming increasingly connected to the
internet, from your work computer to your smart fridge. The importance of cybersecurity in a
digital world is clear, in that it protects all of these interconnected systems against substantial
and significant risk to the operation of the global economy. Chart 5A shows us that malicious
cyber-attacks are now more than 50% of all breaches, and that in turn has seen cybersecurity
spending increase from USD88bn in 2012 to an estimated 170bn today and set to grow by
another USD100bn by 2026e, according to IBM.

Chart 5A. Malicious cyber-attacks to drive cybersecurity spending (USBbn, % growth)

300 55%
51%
250 48%
48% 50%
47%
200 45%
45%
207
192

150
178
154
153

42%
141

40%
130
119

100
109
99
92
84
74

35%
50
62
59
55
52
49
46
42
39
36
32
31
29
27

0 30%
2012 2013 2014 2015 2016 2017 2018 2019 2020e 2021e 2022e 2023e 2024e
Internal External Malicious attacksg growth
Source: HSBC, IBM, Global outlook security Australian Outlook

26

Connectivity infrastructure is
fundamental to the digital age
and thus disruption
20
Thematic ● Global
November 2020
Connectivity infrastructure
 Connectivity infrastructure is crucial for all digital businesses and will
impact consumption and disruption in the next few years and beyond
 We look at key trends enabling growth in global connectivity through
data, data processing and bandwidth sub-themes
 We highlight over 60 companies exposed to the themes and outline
15 1st tier, 2nd tier, and ESG implications
Difference engines to datacentres, bandwidth and processing
One can draw a line of the lineage from the days of Charles Babbage’s first difference engine (a
mechanical computer, 1822) and the observation of Moore’s Law4 (1965) to the giant
datacentres powering the information age today, beaming data to our digital devices 24/7. All of
this data transmission and networked devices have their roots in the formation of the
ARPANET5 (1969), the pre-curser to the internet we know today.
HSBC Disruption Framework: Connectivity infrastructure
Gradient of estimated expectation vs. reality
Bandwidth
Low-earth orbit satellites, Data
5G, light fidelity wireless Data centres, cloud,
communication technology power/cooling, hyperscale
(Li-Fi), open radio access cyber-security
network (RAN)
Processing
System On a Chip (SoC), graphics / tensor
processing units (GPU & TPU), IoT, AI analytics
Early Hype Backlash Real New normal
disruption mania window application
Source: HSBC
While all of these domains have their origin in mathematics (pure equation solving like
Babbage’s Difference Engine), they grew so big that they morphed into their own subject -
computer science (via Alan Turing) and today lie at the very heart of nearly every commercial
digitally enhanced business. One could argue that the economy, at the most fundamental level,
______________________________________
4 Moore's Law: When processing power of chips double and price halves over a certain duration of time, typically about
every 2 years
5 ARPANET: Advanced Research Projects Agency Network was the first wide-area packet-switching network with
distributed control and one of the first to use TCP/IP protocol (basically a set of internet transmission rules)
 Thematic ● Global
November 2020

is today powered by data, bandwidth and processing technologies. Let’s call this collection of
disruptors the connectivity infrastructure.

From an investor point of view, it’s important to know where these different types of connectivity
infrastructure fit on our disruptive framework, in order to see how commercial these innovations are
today and who are involved in this space – that’s the focus of this part of this chapter. The next part
of the chapter will focus on discussing the key trends, stories and charts to illustrate the connectivity
infrastructure. The final part of the chapter will discuss the implications from these innovations (1st/2nd
tier and also any ESG implication overlays), which may help to feed into investment frameworks.
Data:

Datacentres and cloud technologies: Datacentres are firmly in the “new normal” part of our
disruption framework, meaning the technology is used widely for commercial purposes and
companies make significant revenues from this infrastructure. Datacentres essentially power the
cloud, and the future of cloud is to run a broad range of services on them.
Today companies run things like software-as-a-service (SaaS) and Infrastructure-as-a-Service
(IaaS) on the cloud (new normal) but looking towards the future, AI and ML (machine learning)
will also be run from the datacentres – which places this part of the tech stack in the “real
applications” stage but may not generate a significant amount of revenues today.
We list companies that are involved in datacentre and cloud space (we provide tickers for
companies that are listed; companies without tickers are not listed). These companies include:
 Asia: Wewynn, Quanta, Wistron, Alibaba, Sun Evision (datacenters and cloud)

 EEMEA: Yandex (cloud)

 LatAm: Ascenty, KIO Networks (datacentres), Globant, Sonda (cloud)

 US: Amazon (AWS), Microsoft (Azure), IBM, Adobe, Oracle, Equinix, CenturyLink,
Digital Reality, CyrusOne, Iron Mountain, DuPont Fabros Technology, Switch,
CoreSite, GTT Communications, Cogent Communications, QTS, Rackspace

USD1trn
Total public cloud market cap today6

 Cybersecurity: With the rise of data-centric businesses, all connected, the value of data
increases. However, this also means that there is the risk of bad actors trying to breach security
and obtain the data or take systems off-line too. This technology stack is in the “new normal”
part of our framework as cyber security is an essential part of businesses with connectivity.
The next evolution of cybersecurity will be to deploy AI to automate security further – we
suggest that this is in the “real applications” stage of the framework, so not necessarily the
main part of revenue generation for cyber yet.

Companies to follow in this space:

 Europe: Avast

 LatAm: Auth0

 US & NA: Palantir, CyberArk, CrowdStrike, FireEye, Varonis Systems, Absolute Software

______________________________________
6 Bessemer Venture Partners

21
 Thematic ● Global
November 2020

Story and key trends for connectivity infrastructure

1. The data story: driving disruption

Cloud is mature but plenty of upside disruption to come… leading to machine learning


The cloud is becoming as fundamental to how the world
runs as the electric grid, telecom network, or the railroad”
Aaron Levie, CEO of Box

A brief history of computing:
from hardware, software to
the cloud
Arguably the modern computing revolution started with the IBM compatible PCs of the early
1980s. Until then, software was mostly thought of as a bundled afterthought, whereas selling of
hardware was the main business in the computer world. This all changed with companies like
Microsoft showing how software was a market in itself. To paraphrase the founder of Netscape
and venture capitalist Marc Andreessen: software ate the world.

Chart 1A. 70% upside for cloud, replacing software by 2030s (cloud % of software)
100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
2007

2019
2000
2001
2002
2003
2004
2005
2006

2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018

2031e
2021e
2022e
2023e
2024e
2025e
2026e
2027e
2028e
2029e
2030e

2032e
2020e

Software Cloud
Source: Bessemer Venture

As the internet revolution took hold in the late 90s, this powered the dotcom boom of the early
2000s. This transformation led to fundamental shifts in how software was delivered to users in
the 21st century. The rise of smartphones like Apple’s iPhone, in the late 2000s, saw cloud
infrastructure (server side innovations) gain traction. Rather than buying a one-off piece of
software, cloud-based subscriptions began to grow, enabling companies to generate recurring
revenues, providing enterprises continual updates in exchange.

Many companies have gone through this transition like Adobe. A most recent example is SAP,
who have for the past 5 years transitioned their non-business critical solutions from upfront
licences to migrating them to the cloud for clients (e.g. businesses intelligence, customer
relationship management, human resources). However, they are now also shifting their critical
business solutions to the cloud for clients too (e.g. enterprise resource planning say for SAP or
core banking for Temenos). However, during this kind of transition, it can mean giving up front
loaded revenue recognition in exchange for cheaper but re-occurring and thus more predictable
revenue streams, although it might place pressure on margins in the short term.

24
 Thematic ● Global
November 2020

Drama series such as Mr. Robot have highlighted that often the user-engineered breaches are
a high risk point for computer systems. For example, according to Forrestor, 70% of breaches
are attributed to endpoints (devices). 71% of UK-based decision makers believe that the
pandemic accelerating remote work presents greater cybersecurity risks to their company.12
Moreover, cybersecurity outpaces cyber insurance13 (gross written premiums) spend in 2020:
USD170bn vs USD8bn.

Chart 6A. Country data security breaches Chart 7A. Sector data security breaches (x:
(x: cost of breach USDm, y: avg. # avg. total cost of data breach in industry
records/breach) USDm, y: avg. cost/record USD)

40,000 450
Middle East Health
India 400
35,000
US 350
South Pharmaceu
30,000 300
Korea tical
Brazil Technology Financial
France 250
Germany Consumer
Italy
25,000 ASEAN UK Hospitality Services
200
Canada Research Transportation Energy
Turkey
150
20,000 Japan Industrial
Australia South
Africa 100
Education
Scandinavia Retail Media Communication Entertainment
15,000 50
0 2 4 6 8 10 1 2 3 4 5 6 7

Source: HSBC, IBM Source: HSBC, IBM

United States and Middle
East lead in breaches, whilst
regulated sectors suffer most
in industry
Chart 6A shows us a scatter chart of cost of a data breach (USDm) against the average number
of records per breach, by country. The United States seem to lead the charts for the average
cost of a data breach at USD8m but the Middle East (as a combined region) leads the way with
the highest average number of records per breach annually trailed by India in second place.

The more regulated sectors like healthcare, financial services, energy and pharmaceuticals
generally suffered a greater dollar loss from data breaches than sectors which are under less
regulation worldwide. Healthcare average cost of breach was USD6.5m, with finance in second
place at USD5.9m. In terms of average cost per record by sector, healthcare leads the way,
more than double the finance sector, at USD429.14 This means it’s likely that the sectors with
high breaches and costs will need to spend more on cybersecurity infrastructure to prevent
breaches. See scatter chart 7A. The average cost of a data breach is USD3.9m with the lost
business accounting for 36% of that loss, followed by detection and escalation which was 31%,
see chart 8A.

The application of AI is encroaching in all areas of technological disruption to enabling more

Technology sector uses most
security automation,
industrials use the least
automation and efficiency, and cybersecurity is not an exception. According to Capgemini,
network, data and endpoint security are the leading use cases of AI in cybersecurity. It’s not
surprising that the technology sector uses the most security automation by industry, with 25% of
companies using it and a further 50% partially deploying security automation. Somewhat
surprisingly, industrial companies have the lowest level of automation in their security
technologies with only 15% of companies fully deploying automated security. See chart 9A.

______________________________________
12 Centrify
13 Microsoft
14 Study by IBM only look at healthcare companies in the US. Other countries classify healthcare as a public entity.

27
 Thematic ● Global
November 2020

Chart 8A. Data breach categories (average Chart 9A. Which sectors use automation
2014-19) for digital security?
Notification Technology 25% 50% 25%
5.4% Financial 29% 48% 23%
Post Lost Research 40% 42% 18%
business Retail 44% 41% 15%
breach Transportation 45% 36% 19%
cost cost
Communication 45% 34% 21%
27.3% 36.2% Hospitality 50% 38% 12%
Health 50% 35% 15%
Entertainment 51% 36% 13%
Education 51% 33% 16%
Total cost Services 53% 32% 15%
$3.92m Media 53% 36% 11%
Pharmaceuticals 54% 33% 13%
Consumer 54% 32% 14%
Energy 54% 29% 17%
Public 56% 29% 15%
Detection Industrial 57% 27% 16%
&
escalation 0% 20% 40% 60% 80% 100%
31.1% Not deployed Partially deployed Fully deployed
Source: HSBC, IBM Source: HSBC, IBM

2. The bandwidth story: the expanding digital pipes


It’s worrying to think more than half the world’s population
lacks internet access and therefore lacks an equal
opportunity to improve their lives
Richard Branson

Connectivity – half glass full, but more upside

The origin of the internet goes back to the heyday of the Cold War, when ARPANET was
Today 49% of the global
population have mobile
created by the United States, to allow functioning of the government in the event of a nuclear
internet war. Today, universal connectivity goes beyond national defence and is paramount for the
functioning of society and enabling people to get access to employment, healthcare,
entertainment, commerce and services both in the DM (~80% people online) and EM (~45%)
irrespective of where they are physically located.15 All the disruptive technologies we discuss in
this note rely on universal connectivity.

As we approach the first half of the global population being connected to the internet (49% of
population have mobile internet, or 3.8bn people), we observe the rate of internet user growth is
slowing down. For example, according to the ITU, growth of global internet users was about
20% in 2007, 10% in 2014 and according to the GSMA mobile internet growth will be 4.6%
CAGR from 2019-2025. The next half of the population is more difficult to get online due to a
combination of social, economic and technological reasons.

______________________________________
15 ITU 2018

28
 Thematic ● Global
November 2020

Chart 10A. Connectivity for 5G set to grow into the middle of the decade
70%

60% 56% 4G

50%

40%

30%

20% 5G
20%

18% 3G
10%
5% 2G

0%
2017 2018 2019 2020 2021 2022 2023 2024 2025

Source: GSMA

Despite the fact that the growth of internet users worldwide is slowing down, the GSMA expects
the world will have 600m more mobile internet users by 2025. Most of these new users are likely
to come from India, China, Pakistan and Nigeria. See chart 11A. By then GSMA expects that
61% of the global population will have access to mobile internet, which is about 5bn users. Later
on we’ll look at how a technology called low earth orbit (LEO) satellites might help bridge the
digital divide where traditional fixed and wireless connectivity might not be practical.

Chart 11A. Asia pacific and Africa to add Chart 12A. Connectivity investments will
to internet users in 2020s total USD1.1trn by 2025
North America Europe CIS 90%
2% 1% 350 87% 100%
3% 76%
300
Latin America 68% 62% 80%
9% 250
Asia Pacific 200 60%
40%
Greater China 150 27% 40%
10% Total new 100
subscribers 20%
50
by 2025
610m 0 0%
CIS
Europe

Latin America

Sub-Saharan Africa
North America

MENA

MENA
12%
Sub-Saharan
Africa
23%
5G capex (USDbn) Non-5G capex (USDbn)
5G as a % of total capex
Source: HSBC, GSMA Source: HSBC, GSMA

Connectivity progress doesn’t simply stop when one gets online, but existing connectivity often
5G will help growth
escalates and demands even better connectivity as the number of applications and data
volumes increase. The next generation of mobile connectivity is 5G, which allows faster speeds,
lower latency and better network slicing (better for segmented pricing power for the network
providers). Chart 10A shows us that today 56% of all mobile connections are 4G and 5G is
expected to begin taking off over the coming few years, and is set to become 20% of global

29
 Thematic ● Global
November 2020

mobile connections by 2025.16 5G uptake is likely to come from South Korea, China and the
combined region of the Middle East.

Mobile technologies and services created USD4.1trn (4.7% GDP) value in 2019 and are set to
increase to USD5trn (4.9% of GDP) by 2024, according to the GSMA, bolstered by countries
gaining from productivity and efficiencies from mobile internet. Furthermore the GSMA expects
5G to add USD2.2trn to the economy between 2024 and 2034 with sectors like
manufacturing/utilities (especially in China) and professional/financial services (MENA and
North America) gaining most. Chart 12A shows us, the breakdown of telecom investments by
country and the % of capex used by 5G.

Chart 13A. Legacy satellite usage today Chart 14A. Total SpaceX LEOs in Starlink
(top 10 traffic share %, 2019) constellation

Youtube 1000
Whatsapp 900
Netflix 800
700
Facebook
600
Instagram
500
Http media stream
400
Google
300
Facebook video 200
Http 100
Http D/L 0
Feb May Aug Nov Feb May Aug Nov Feb May Aug
0.00% 5.00% 10.00% 15.00% 20.00%
18 18 18 18 19 19 19 19 20 20 20
Source: Sandvine Source: HSBC, SpaceX

To enable EM to grow, it’s key for those regions to have access to the internet. Today, only
Can space-based internet
bridge the digital divide?
about 45% of EM is connected. In some of these regions, especially high-density cities, 5G is
likely to make more economic sense than LEOs.

However, in less dense areas where there is a coverage gap, technologically speaking, another
solution could help – this being space-based internet, or low earth orbit (LEOs) satellites. Chart
15A highlights that there is a global coverage gap (no access to fixed or wireless networks) of
9% of the population. In our view this is the initial target market of LEOs and that up to 350m
people might be connected by the technology. Chart 13A shows us the various apps and
activities for which people currently use legacy satellite internet. Despite it being slower than
traditional fixed and wireless internet, use for video streaming is high.

Starlink is the LEO constellation owned by SpaceX, which is currently leading the pack in terms
of the number LEO satellites in space. Currently it’s in the testing phase with over 700 LEOs in
orbit. Speed performance has been clocked at 100Mps+ (download) and 40Mps+ (uploads) with
latency of 18-19ms. In the US, where the coverage gap is 1% (3m+ people) of the population,
about 700,000 US residents have signed up for service updates. SpaceX has applied for an
FCC license to roll out 5m ‘UFO on a stick’ end-user terminals.17

______________________________________
16 GSMA
17 "Starlink starts to deliver on its satellite internet promise", ZDNet, September 2020.

30
 Thematic ● Global
November 2020

Chart 15A. Bridging the digital divide – we ask, can LEOs help fill this coverage gap?
Global

49% 42% 9% Connected Coverage gap

Usage gap

North America Europe CIS Asia Pacific

74% 76% 59% 42%

24% 24% 35% 54%

1% 1% 6% 5%

26% 62%
55%
49% 37%
41%
40%
26% 1%
51%
5%
Sub-Sahara Africa 9% Greater China
Latin America
MENA
Source: GSMA

The processing story: calculating bits and bytes for disruption


In order for the United States to do the right things for the
long term, it appears to be helpful for us to have the prospect
of humiliation. Sputnik helped us fund good science – really
good science: the semiconductor came out of it
Bill Gates

Chips – the next wave is VR and AI in the cloud?

As we all know, the hub of US innovation is called Silicon Valley. Microchips, from which Silicon
Chips power disruptive tech Valley took its name, are at the heart of the digital age. Everything from your smartphone, to
buildings, automobiles and the latest fitness tracker will be powered by semiconductors.

If data is the oil, then chips are not that far away from these data wells. From 2007 to 2015, the
chip imports in China were neck to neck with the oil imports, in billions of dollars, from
~USD100bn (2007) to USD225bn (2015). But since then, chip imports have climbed to over
USD250bn (2017) and oil dropped to below USD150bn (2017).18 The reasons maybe nuanced
______________________________________
18 Deloitte

31
 Thematic ● Global
November 2020

but the comparison highlights the importance of microchips and semis in the 21st century. Chart
16A shows the global semiconductor sales magnitudes.

Chart 16A. Chip market size (USDbn, Chart 17A. Areas chips are used (2019)
% growth)
600 40%
5.2 USDbn
30% 1%
500
48.9
20% USDbn
400 12% 136.0
10% 50.2 USDbn
USDbn

y-o-y%
300 0% USDbn 33%
12%
-10%
200 54.7
-20% USDbn
100 13%
-30% 117.3
USDbn
0 2021e -40% 29%
2000
2003
2006
2009
2012
2015
2018

Communication Computer Consumer

Automative Industrial Government
Source: HSBC, Deloitte, SIA, Statistica Source: HSBC, SIA

Today, semiconductor demand is driven by communications at 33%, followed by computers at

VR to drive chip demand
going forward…
28.5%. However, it’s interesting to note that the automotive sector uses about 12% of global
semi demand, followed by the industrial sector (see chart 17A). As autonomous vehicles begin
to roll out over the coming decade and the industrials sector automates further, through things
like IoT, their market share could grow in terms of demand.

Chart 18A. VR/AR (head mount display) is Chart 19A. AI chip market size set to grow
next wave of chips? (growth to 2022) (28% CAGR to 2027)
800 150
Energy management
Automation 600
Instrument cluster 100
USDbn

Storage 400
Sold-state lighting
Consumer 50
Industrial 200
Security
EV/HEV 0 0
2020e
2022e
2024e
2026e
2016
2018

Wearables
ADAS
Smart watches Global AI market size
Head mount display… Global AI chip market size
10%

20%

30%
0%

Source: HSBC, SIA Source: HSBC, SIA, Statistica

As we ponder the future drivers of semis revenue growth, observe chart 18A which shows us
demand going forward to 2022. We have written much about virtual reality (VR) over the years,
and another term for a VR headset is the HMD (head mounted display). The SIA expects that
HMDs will drive over 34% of semi CAGR growth to 2022e. Recently it was announced that
Facebook’s Oculus 2 VR headset would use the Qualcomm XR2 reference chip. This
underscores the direction of travel for the chip industry to drive high-powered graphical
processing demands for VR.

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November 2020

While VR will push mobile chip technology over the coming few years, the other area of growth for
Chips to power AI applications
- where are they made?
the chips will be towards technology that assist with AI applications. Chart 22A highlights the AI
application stack driving this demand, from robotics, AVs, smart factories – all using machine
learning, deep learning and image recognition – driven by CPU, GPU, FPGA and chips designed
for specific applications, called ASICs.19 Chart 20A shows the growth of the AI chip demand.

Chart 20A. AI chip market size set to grow Chart 21A. R&D for chips is only second to
28% CAGR pharmaceutical industry (2019)
800 150 Pharmaceuticals and
Biotechnology 20.8%

600 Semiconductors 16.4%

100
USDbn

Software and computer

400 sciences 14.3%

50 Media 8.9%
200
Technology, hardware and
equipment 6.9%
0 0
Mobile- Telecommunication 6.5%
2020e
2022e
2024e
2026e
2016
2018

Global AI market size Financial services 5.6%

Global AI chip market size

10%

15%

20%

25%
5%
0%
Source: HSBC, SIA, Statistica Source: HSBC, SIA

It could be argued that chip development is more capex-heavy than software development. This
is to some degree echoed by Bill Gates’ quote at the top of this section, where he implies,
semiconductor development needs good science. This is re-enforced by chart 22A which shows
that the semiconductor industry is the second-highest utilizer of R&D as a percentage of sales
in the US, after the pharmaceutical sector. In terms of global sales of semis, the US leads the
way with 47% (Korea 19%, Japan 10%, Europe 10%, Taiwan 6% and China 6% in 2019),
according to SIA.20 However, from a semiconductor manufacturing point of view, the US only
has 12.5% market share, whereas Asia has 79% market share. This US share is set to drop to
10.4% by 2025 and 10% in 2030, according to SIA – see chart 23A. The US leads in logic and
analog semis, Korea in memory and Europe in discrete chips.

As a quick aside, it’s worth mentioning that OECD economies have increased their R&D spends
as a share of GDP from 2% (2000) to 2.4% (2018), while China increased its R&D spend as a
share of GDP from 0.9% (2000) to 2.1% (2018). According to the National Science Foundation
(NSF), in 2000 the ranking of top R&D spend was: #1 US at USD270bn, #2 EU at USD180bn,
#5 China at USD30bn+. However, the NSF reported that by 2017 the rankings in R&D spend
was: #1 US at USD550bn and #2 China with USD500bn, with EU at USD430bn. The US
accounts for 25% of global R&D spend and China has 23%.

Earlier HSBC research found that regional electronics supply chains are highly pervasive in
Asia, with developing Asian economies having risen in prominence over the past 20 years as
key players in electronics value chains. This has been driven largely by leading regional
electronics producers (e.g. from Japan, Korea and Taiwan), as well as by China’s growing role
as an assembly hub. For example, the share of electronics (components and final goods)
exports from Asian economies destined for other countries in the region increased from 43% in
1998 to 66% in 2018.

______________________________________
19 Central processing unit (CPU) - the primary component of computers for processing. Graphical processing unit (GPU),
specialised processing unit for image creation, usually for display units. Field programmable gate array (FPGA), integrated
circuit to be configured by customers after manufacturing. Application-specific integrated circuit (ASIC), customised for
specific uses, rather than generalised applications.
20 Semiconductor Industry Association

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Chart 22A. AI next chip demand too?

Flexibility

 Robotics
 Autonomous Driving CPU
 Business Intelligence (Intel)
 Smart Factory
 Personal Assistance
Application
 Customer Service

GPU
 Machine Learning (NVIDA,AMD)
 Deep learning
 AI Platform
Technology  Speech Recognition
 Image Recognition
 Biometric FPGA
(Xilinx, Altera,
Microsoft…)

 AI chips
 Sensors ASICs
Infrastructure  Computing (Google, Horizon
 Data Robotics, Bitmain,
Cambrian…)

Efficiency

Source: SIA

IoT set to double by 2025 but
revenue will be from the
application/platform layer
Another angle which will grow the semis for processing is IoT devices, for both the enterprise
and consumer. Today there are about 12bn IoT connected devices in circulation, and this is set
to more than double to 24.6bn IoT connections by 2025, according to GSMA. The biggest chunk
of growth comes in enterprise for smart buildings (lighting, HVAC systems, security and
automation)) at 3.3bn more IoT devices, followed by smarter utilities (1.1bn) and smart
manufacturing (1bn). On the consumer end, IoT is likely to be driven by the smart home (2bn)
for example, home network infrastructure and home-security devices. See chart 24A.

Chart 23A. Asia set to capture nearly all manufacturing of semis growth
Singapore
Japan

S. Korea

83%
in Asia Taiwan
82%
in Asia
79%
in Asia China

Europe
12.5% 10.4% 10.0% U.S.

‘19 ‘25 ‘30

Source: SMA

Even though, according to the SIA, IoT is set to double from today to 2025, in terms of the
number of device connections, selling IoT hardware alone will not be sufficient to add to sales.
Like a lot of hardware, over time they naturally become commoditised, Moore’s Law playing a
role. So IoT makers will need to upsell controls and analytics for the IoT devices. For example,
GSMA expects that IoT revenue will go from USD343bn in 2019 to over USD1trn+ by 2025e.
But only 5% of this trillion dollars will be for IoT connectivity itself; the rest will be for professional
services (28%) and applications, platform and services (67%).21
______________________________________
21 GSMA

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 Thematic ● Global
November 2020

Chart 24A. Expected 13bn new IoT Chart 25A. Enterprise vs consumer IoT –
connections by 2025, smart buildings and 2020-2025
smart home set to grow
30 8.2
9

Billion connections
25
6 4.4
Billion connections

20 8.2
3
15 4.4
24.6 0
10 Consumer Enterprise
12.0 Wearables Smart vehicles
5 Consumer (others) Consumer Electronics
Smart Home Smart health
0 Smart retail Smart city
2019 Consumer Enterprise 2025e Smart manufacturing Smart utilities
Enterprise (others) Smart buildings
Source: HSBC, GSMA Source: HSBC, GSMA

According to a study Microsoft, the key industrial users of IoT are: 93% of manufacturing
companies use IoT, healthcare (89%), retail (94%) and energy (94%), with about on average
25% of IoT projects in use phase today. The key drivers for IoT within industry are to increase
cost efficiency, decrease human error, increase production efficiency, increase reliability and
security. Decreasing emissions is also another reason (if uncommon as of yet) to use IoT.

15 thematic 1st, 2nd tier and ESG implications for connectivity

Data

Cloud backlash  Data (ownership) wars: Over the last decade, data has gone from being stored locally at
enterprise premises (and on the consumer level local device) to migrating gradually to the
cloud, whether it’s corporate data through Microsoft Azure or personal family photographs
on Google drive. Many technological and social factors have played a role in this transition.
However, recently and increasingly, data privacy has come to the forefront. From GDPR,
CCPA or the latest bans on apps in the United States or India due to data ownership
issues. We highlight there could potentially be a backlash against going fully into cloud-
based services, even though cloud-based services may be cheaper and easier to use and
manage than data locally.

For example, a decentralised social network called Diaspora was created in 2010 in a
response to a talk the founders attended called “Freedom in the cloud” by a Columbia
University law professor. Companies like Storj provide solutions similar to Amazon AWS for
enterprises, in a decentralised, encrypted and node storage fashion. Even though Diaspora
did not gain traction and Storj isn’t a widely known decentralised cloud company, these
types of projects are an unknown risk to centralised cloud platforms going forward.
 ESG: Decarbonising the datacentres and power risk: We estimate that due to the data
Greener datacentres
revolution we are witnessing currently, from the growth of digital content and WFH demands
today and in the future, data demands like blockchain, VR, AVs and more, if data centre
efficiencies don’t pan out, due to the breaking of energy efficiency laws like Koomey’s Law,
datacentre and associated networks/devices will grow from consuming 9% of global power
to about 20% by 2030. This is generally a counter-consensus view to institutions like the
IEA, as most other scenarios assume data efficiency increasing in the future as it has done
in the past.

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However, on the flip side, you have tech giants like Google (owned by Alphabet, Inc.)
announcing that their business will use carbon-free energy (previously saying it had
become carbon neutral in 2017) by 2030. It has also shows that it can use its AI unit
DeepMind to make datacentre cooling technology use 30% less electricity, and so improve
the power usage efficiency (PUE) of the datacentre itself as a whole 15% better. This will
put pressure on other tech giants to do the same.22

We have written about the hydrogen economy over the last year to power-heavy goods
vehicles, and this potentially green fuel is being considered for potentially powering data
centres. Microsoft recently said that they powered datacentres using a hydrogen-based 250kW
fuel cell system for 48 hours. Microsoft also pledged to be carbon negative by 2030.23
 ESG: Re-localisation of datacentres and EM: If power demands increase from
EM datacentres and power
digitisation as we envision going forwards, then this is likely to place pressure within EM,
where power outages can and do happen. At the moment, most datacentres are located in
DM, where the tech giants are from. However, due to regulatory and privacy issues being at
the top of many countries’ priorities, there is a real risk tech giants could be pressured to re-
localise datacentres to where the users are physically located. This could place a further
strain on power demands in EM, if the necessary power systems are not constructed ahead
of time.

 ESG: Green tech funding: Data growth technologies like the increasing power
Green funding for green tech
requirements from the likes of datacentres has the potential to lean into green funding for
raising suitable funds from investors. For example, in 2019 Apple did its first euro-
denominated green bond, issuing EUR2bn (6Y and 12Y) debt, yielding 0.032% (no coupon)
and 0.5% (0.5% coupon). Apple at the time claimed to be the largest US issuer in green
bonds, previously raising USD1bn (2017) and USD1.5bn (2016).24
 ESG: Cybersecurity risks increase in connected age: We believe that as everything
Cybersecurity and cloud
becomes connected to the internet or connected networked systems for enterprise and
government, either directly or indirectly, there will be an increased importance of
cybersecurity. This is obviously used to prevent hacking and outages, to prevent
reputational, financial and regulatory damage.

Bandwidth
 ESG: Work from (rural) home using LEOs: We believe that LEOs will initially be very
LEO addressable market to
be larger than expected? complementary to telcos rolling out 5G. Whereas 5G technology is highly suited to dense
urban areas, LEOs make more sense in less densely populated regions – like the
countryside and rural spaces. Add to that, if COVID-19 changes the way the knowledge
economy organise themselves from being able to work from home by moving to more rural
or less densely populated regions, this might grow the total addressable market for LEOs
going forward. For example, if the trend of people moving out of the bigger denser cities
materialises over the coming few years and is sustained, towards less dense regions, where
5G may not be targeting, then LEOs could scoop up these markets.

Furthermore, even though today LEOs don’t make technological sense to address densely
populated areas, one mustn’t discount the march of progress in technology. Meaning, it is
possible that LEO technology could improve to the point where it could serve dense
populations and compete against traditional ground-based internet infrastructure. We have

______________________________________
22 "Google makes 24/7 carbon free commitment - as Microsoft's underwater data centre resurfaces", Cloud Computing
News, September 2020.
23 "Microsoft tests hydrogen fuel cells for backup power at datacenters", Microsoft, July 2020.
24 "Apple raises EUR2bn in green bonds", FT, November 2019.

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 Thematic ● Global
November 2020

seen other “technological Trojan horses”, so to speak; for example, online streaming
services were complementary to cinemas but today they have such a large market presence,
that they can fund their own motion pictures, and by-pass the cinema model all together.
 ESG: Negative environmental impact of LEOs: Re-usable rockets are enabling LEOs
Re-usable rockets might
harm the environment
help solve an ESG issue of bridging the digital divide, but new space-based satellites might
cause other unintended ESG issues. For example, people are now trying to understand the
impact of regular launches on our atmosphere due to the emissions of rockets, which are
typically powered by chemical-based propellants with sufficient energy density to launch
(e.g. RP-1, refined kerosene with liquid oxygen). In 2018, the Scientific Assessment of
Ozone Depletion report said that increasing the number of rocket launches impacts the
atmosphere, especially the sensitive region around the Ozone layer.

The study found accumulation of black carbon particles (soot from kerosene-based
systems) remaining in the altitude of 3-50km, which is then found carried into the global
circulation patterns. It also discovered larger and heavier aluminium particles (typical
propellant of solid rocket boosters), also caught in global circulation. Fascinatingly, the
atmosphere of the northern hemisphere had more concentration of this type of material, as
most of the launch facilities are located north of the Equator. However, as countries south of
the Equator, such as Australia, begin their own launches, particles in the atmosphere of the
southern hemisphere may be set to increase. Nevertheless, currently there is the
exploration of generating carbon neutral fuel, synthetic fuels generated from solar, water
and renewable carbon sources like biomass or air captured carbon dioxide. One method
could be: using high volumes of hydrogen and oxygen – to create hydrolex fuel sources for
rockets, basically solar to crack water.25
 ESG: 51% of the unconnected population moving online = new future workers: The
New EM population can work
online
GSMA estimate that today 49% of the world’s population is connected to the internet. This
leaves 51% of the global population still unconnected, and of this 9% live in locations where
there is a so-called connectivity gap, meaning no traditional internet infrastructure exists. As this
51% of the world get connected to the internet over the coming decade, either through traditional
connectivity or space-based internet, it will enable them take part in the digital economy. This
means, that EM citizens have access to almost an infinite amount of learning tools, many of
which are free, giving them the potential to join the global knowledge workforce. This could
indeed mean some jobs which traditionally went to DM workers, could go to workers elsewhere
in the world, which were previously not connected, for lower wages.
 ESG: WFH network issues: At the moment, most homes have asymmetric upload and
Upload congestion more
important in WFH era
download speeds. This means that typically one’s download speed is faster than the upload
speed. However, with more people working from home, and if this becomes a longer term
trend, then upload speeds could become important – especially for applications like Zoom.
There could also be network and router congestion issues in working from home en masse.
So this could spur network operators to increasingly address this issue going forward. This
also can impact the EM, which support DM companies and may experience similar issues
on a magnified scale.26
 Even faster data transmission rates needs for future applications and more devices:
How will homes be able to
cope with the growth
The number of devices in households is increasing, with smartphone, tablets, PCs, smart
of devices? TVs, smart speakers and more like VR/AR in the near future. In the US, when Wi-Fi 5 came
out, the average US household had 5 devices; now that number has grown to 9 devices on
average. Some estimate that it will be 50 devices on average in a few years’ time.27 Also,
______________________________________
25 "Renewable rocket fuels - going green into space", Space Australia, August 2020
26 Why the internet (probably) won't break during the coronavirus pandemic", Recode, March 2020.
27 "Average UK smart home will have 50 connected devices by 2023", Total Telecom, May 2018.

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November 2020

some applications will require faster transmission rates of data than can be supplied using
today’s technology. For example, AV and VR may have issues going forward with current
rates. We ask what technologies might support this growing demand going forward.

Li-fi28 is an emerging wireless technology, that transmits data at high-speed via light, using
line-of-sight. Variations of this technology could enable AVs and smart cities, with
transmission rates of 20Gbps+, which is 20 times faster than 5G data transfers. Latency is
also up to 3 times better than with Wi-fi. Currently there are two Li-fi standards, from Philips
and IEEE.29 Wi-Fi 6 is another technology which will take speeds up to 9.6Gbps from
previous Wi-Fi technology of 3.5Gps. In reality, devices don’t use more than 72Mbps, but
the greater capacity allows more devices to be connected.30
 Hot swapping efficiencies for networks: Open RAN (Radio Access Network) uses open
Next gen cellular networks
might be open and
interfaces and powerful software to virtualise highly complex network functions. These can
interoperable then be run on ‘off the shelf’ equipment from multiple vendors. This threatens to break open
a wireless equipment market that has been dominated by the ‘big four’ suppliers (Ericsson,
Nokia, Huawei, ZTE) for over a decade. Open RAN is now being deployed and tested by
more than 22 operators globally, with c2bn mobile subscribers.

As well as cost savings, Open RAN may help bring cloud innovation and flexibility to
telecoms. Even Open RAN proponents think it will struggle with the computational
complexity of 5G. Consequently, there is a lot at stake in the 5G Open RAN launch by
Rakuten (and DISH) in 4Q20. Telefonica and Vodafone are leading the charge in Europe,
with the results of Vodafone’s request for quotation for 100,000 Open RAN sites coming up.
Operators globally are accelerating contingency plans to swap out Huawei equipment.
Wireless capex totals cUSD145bn per year – more of this could go to Open RAN.

Processing
 ESG: Rise of the low-powered chips in datacentres: We have suggested in previous
Mobile processing to help ESG
power issues in data centres
reports that the data revolution is increasing the demands on power, especially at the
datacentre and networks levels, creating a potential ESG issue. One part of the solution is
to utilise lower power processors, which can optimise power efficiency, good thermals and
performance per dollar.

This could mean that low-powered chips like ARM processors (ARM 32-bit ARMv7 or 64-bit
ARMv8), which were previously used in mobile devices and portable devices, could be used
to power big datacentres to increase power usage efficiency (PUE) levels. These chips
favour UNIX based OSes (say vs. Intel/Windows). This in turn could raise the total
addressable market of mobile chipset designs, and away from x86 processors (Intel, AMD)
in the global datacentre market. For example, Santa Clara-based Ampere Computing
announced their ARM server chip start up built on an 80-core Altra ARM CPU. A
Cambridge, UK-based company called Bamboo Systems is also working on 1U ARM
server, the B1000N Series. Note carefully the much vaulted move of Apple from Intel x86 to
ARM for their computer line too.
 ESG: Environmental risks for IoT and connected infrastructure: The number of IoT
Hacking to damage the
environment and economy
connected devices worldwide is set to double from 12bn to 24bn in by 2025, growing by 8bn+ for
enterprise and 4bn+ for consumer., according to the GSMA This growth in industry not only
increases efficiency and productivity, but also allows an entry point for organised cyber-criminals,
hactivists or state-sponsored hacking to potentially compromise nationwide infrastructure and
economies. Today more than 50% of cyber-security breaches are malicious.
______________________________________
28 Light fidelity
29 "Will 2020 be the year Li-Fi hits the mainstream", Comtec, February 2020.
30 "Wi-Fi 6: is it really that much faster?", The Verge, February 2019.

38

 ESG: AI compressing live video: Video conferencing is going through a renaissance due
AI chips to ease data flow
within networks
 How to plan ahead of the possible chip wars? As the chip market consolidates, with the
RISC-V less risky future of
chips?
Thematic ● Global
November 2020
Examples of connected device hacks include when a dismissed waste management contractor
in Australia (Queensland) felt treated unfairly by management in the year 2000, and he hacked
the sewage system of the town. This led to the discharge of 260,000 litres of raw waste in the
town for months, before he was caught. With the growth of connectivity today, this is an example
of an ESG risk due to hacking connected devices embedded within state infrastructure.
to the pandemic with the rise of WFH and applications like Zoom and Microsoft Teams.
Moreover video streaming is about 60% of the internet bandwidth today. Add into that VR
streams of the near future, and we believe video has the potential to place enormous
strains for bandwidth upgrades. Is there another more intelligent way to tackle this problem
going forward, outside of building more connectivity infrastructure?
The GPU and chip maker Nvidia recently showed how to use AI compression on the chip
level, significantly minimizing the data required to be transmitted over the networks, without
destroying video quality. They are able to take a video that uses 98KB/frame and
compress it live, using AI, to 0.1165KB/frame. This is a compression factor of over 800x.
This type of server-side processing technology could be a boon for places in the EM, where
people are using wireless internet, often limiting themselves to audio only conferencing for
work. It could also reduce the burden on networks in the DM too, thus potentially offering up
an algorithmic way to get a handle on the data volumes and this power usage from
bandwidth. Less data generation is better in terms of power demand for datacentres, and
hence an ESG overlap for power demands, whether it’s green or fossil fuel powered.
likes of normally agnostic chip designers like ARM being bought by Nvidia and lines in the
sand being drawn from vendors between East and West, due to government influence,
there is a risk that proprietary technology might be used to keep some players out in
general. How might players in the world of chips position themselves from any future
potential fallout?
RISC-V is an open standard instruction set architecture (ISA – an interface between
software and hardware) developed around the RISC (reduced instruction set computer),
meaning companies can use and modify it for free. This has many implications including
allowing a company to be in control of the security on the chip level. This would also make
possible a move away from x86 (Intel/AMD) and ARM (both proprietary) for future markets.
RISC-V chips might be the future for some of those who want to be independent from any
particular vendor.
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