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Can Telecom Stocks Defy Tariff Ergonomics With Solid Q2?

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When the United States implemented its long-publicized $34 billion worth of trade tariffs against China in the first week of July, it prompted a swift retaliation of the same magnitude by the latter. As the battle lines were drawn and shots fired from both sides, the U.S. equity markets remained more or less unfazed by the events and seemingly waited for one of the warring nations to blink first to avert any catastrophic damage. However, after Trump issued threats to impose an additional tariff on $200 billion of goods from China, equity markets became shaky and lost resilience.

With the commencement of the earnings season, equity markets have more or less stabilized with healthy performance across most sectors. Bulk of the earnings for the telecom sector is yet to be released and expectations are rife that the sector will report strong quarterly results for a solid head start in the 5G race against China.

5G: A Key Reason for Trade War?

5G is billed as the technology of the future with faster download speed and seamless transfer of data. Leveraging state-of-the-art communication network architectures, 5G is touted to be the primary catalyst for next-generation IoT services. These include connected cars coupled with augmented reality and virtual reality platform, smart cities and connected devices that revolutionize key industry verticals.

According to data from research firm IHS Markit, 5G is expected to enable $12.3 trillion of global economic output by 2035. It is no wonder then that both United States and China would like to gain a greater pie in this market to have a political, economical and technological advantage. Declan Ganley, CEO of communications company Rivada Networks, observed, "It’s about who is going to define and control the model, the architecture, and the agenda of 5G, and why that matters is because 5G is the deep blue ocean of the cyber domain."

What’s Blue Ocean Strategy?

‘Blue ocean strategy’ is one of the most acclaimed tactical moves adopted by companies to gain a competitive advantage over peers. The term is derived from the book "Blue Ocean Strategy" penned by W. Chan Kim and Renee Mauborgne.

The concept exemplifies a typical scenario in the real world, where intense competition leads to bloodbath and thereby renders an ocean red. Instead of viciously fighting against each other to gain market share, companies therefore should create an ‘uncontested market space’ or rather a blue ocean, which is pristine and pure and devoid of any interference or competition.

The strategy is likely to be successful as it would simultaneously attract a large chunk of customers as well as raise the cost of competition with a first-mover advantage. Whether it’s a new product altogether or an existing product refurbished with some added features or services, the uncontested market space is likely to have a better emotional connect and create a new value curve for customers. Various companies have successfully found this elusive blue ocean and have been able to fend off competition.

China Leading United States in 5G Race

It seems as if China has been able to replicate this strategy to outsmart its Western rival in the 5G domain. According to a study commissioned by U.S. cellular industry trade group CTIA, China is leading the race to deploy 5G-enabled technology, followed by South Korea and United States. Perhaps this is one of the reasons why the U.S. government blocked the hostile bid of Broadcom Inc. AVGO to acquire Qualcomm Inc. QCOM. The Trump administration also took several steps to prevent China-based telecom firms to gain an advantage over its U.S. counterparts by imposing trade restrictions on firms like ZTE and Huawei and blocking the entry of China Mobile Limited CHL, citing security concerns.

On the other hand, U.S. telecom firms like Verizon Communications Inc. VZ and AT&T Inc. T are quietly moving ahead with plans to launch 5G services by the end of this year, while T-Mobile US, Inc. (TMUS - Free Report) and Sprint Corporation S are aiming for a 2019 launch. However, the purported claims are yet to be supported by the mass availability of 5G-ready devices as handset makers and chip manufacturers are still busy working on them. Unless the initial issues are sorted out rapidly for a broad-based launch across the country, 5G would remain more of hype than a reality.

Relevance of Q2 Earnings

Under the given circumstances, the current earnings season is likely to play a key role in establishing the dominance of the U.S. telecom firms amid key trade challenges.

As the battle for survival gets murkier with intense price wars and diminishing technological barriers, companies are increasingly devising newer avenues to outsmart rivals in a highly competitive market. These include out-of-the-box ideas for innovative product concepts to redefining the corporate strategy within a framework in accordance with the changing dynamics of the customers. Solid earnings results of the telecom sector could pave the path in this regard and sow the seeds for future investments in network and 5G-enabled devices for superior 5G readiness.

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