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'The impact of covid 19 on smart cards and embedded security' by P.A.ID Strategies

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This report has been released by John DEVLIN, Principal Analyst & Founder of P.A.ID Strategies and host of TRUSTECH’s innovation stage.
The Impact Report summarises the market situation and short-term outlook with guidance on how P.A.ID Strategies is adjusting its forecasts in 2020 as a result of the latest developments. It includes analysis and discussion of Mobile and SIM, eSIM, Payment and Banking, ID and Authentication, Ticketing and Access Control, and Embedded Security Solutions in areas such as IoT, IT, Automotive, Smart Home and Consumer, Logistics and Supply Chain.

About P.A.ID Strategies:
P.A.ID Strategies tracks and forecasts the market for 10 IC solutions used to secure credentials, embedded and IoT devices across 5 major verticals for smart cards and related devices, plus 7 leading IoT and M2M sectors. It provides a holistic view of the market, detailing how traditional smart cards and new embedded solutions are being employed to deliver and enable trusted services.

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'The impact of covid 19 on smart cards and embedded security' by P.A.ID Strategies

  1. 1. The Impact of Covid-19 on Smart Cards and Embedded Security (will be significant in 2020 and could last longer) This ImpactReportand itscontentare copyrightof P.A.IDStrategies,publishedinMay2020. Any redistributionorreproductionof partor all of the contentsinanyform isprohibitedwithoutprior writtenagreementfromP.A.IDStrategies. We have been indiscussionwithanumberof companiesastheyevaluatethe currentpositionof theirbusinessesandlooktotry andensure theyhave the rightstrategiestobestnavigate the widespreaddisruptionbeingcausedbythe Covid-19pandemic. These two-waydiscussions, answeringquestionsandofferingopinionwhilstlearningof the short-termchallengesfacingthem, allowusto formulate abetterpicture of the marketoutlookforthe varioussmart card and embeddedsecurityapplicationsthatwe provide market intelligenceon. Thisimpactreportprovides a summaryof our viewsonthe marketandwe will continuetomonitorandupdate ourguidance and forecastsinour upcomingpublicationof dataandreports. A recentblog, “Secure TechnologiesCanHelpPeople Work,Shop+Travel Safelyina Post- Covid-19 World”examinesthe longer-termeffectsof the pandemic.
  2. 2. Mobile + SIM We estimate thatglobal smartphone salesforthe yearwill be down15-20%. Thisisbasedon actual salesfiguresfromChinainQ1 2020 and initial resultsfromOEMs,mobile operatorsandothersales channels. There will likelybe adegree of recoveryascountriescome outof lockdownhowever,the disruptiontothe supplychainin1H 2020 hasbeensubstantial withproductionandsalesdownby over40% insome countries. April’ssalesfiguresforChina(the firstcountrytocome out of prolongedlockdown) showedaYoY increase of 14%, however,we believethatanypent-updemand will be temperedbypoorereconomicconditionsaffectingconsumerspending,withmanycountries alreadyenteringrecognisedrecessionstatusinQ22020. Thishas a knock-oneffect;withlesssmartphone salesthere isanatural reductioninchurnand new contracts – a primarydriverforSIMcard shipments. Relatedtothis,2019 saw the firstreductionin SIMshipmentsforyearsassmartphone lifecyclesincreasedandreplacementratesdeclined,atrend whichP.A.IDStrategieswasthe firsttopredictandhighlightayearago. The closure of manyretail outletsisalsoa factor,makingit more challengingandaddingabarrierto the SIMcard registration processregulatedinmanycountries. Fallingeconomicperformancemayactuallyprovide abitof a boostto SIMcard shipments –as consumersstartto shoparound formore cost effective contracts and offers – althoughwe donot expectittooffsetthe heavyinitialdecline andlowersmartphone saleswill dragonuntil at leastthe endof the year. As a result of thesefactorswe arelowering ourforecast(which wasalready flatafterdeclines in 2018 and 2019) forSIMcard shipmentsby 10-15% in 2020.
  3. 3. eSIM eSIM The eSIMmarketis differenttothatfor SIMcards as it isstill a relativelynascentmarket,lookingto buildandgrow itsinstalledbase. Previouslydominatedbythe automotive market,in2019 we recordedgreatershipmentof eSIMsinsmartphonesforthe firsttime. The automotivemarkethas beenhitheavilybythe Covid-19pandemicwithsalesreporteddownbyover90% insome countries at the peakof theirlockdown,clearlyrestrictingshipmentof eSIM-equippedvehicles. Asamuch higher-value transaction,automotive saleswillbe more heavilyhitbythe currenteconomic slowdown,acceleratingwhatwasalreadyamarketsetto decline in2020, followinga5% fall in2019. We believe thatautomotivesaleswill be down20-25% in2020. As statedabove,smartphone salesare forecasttobe 15-20% lowerin2020. However,foreSIMit is more complicatedthanthisas ithas beenthe case that eSIMshave beenpredominantlyafeature of more expensive models,specificallyiPhonesaswell asGoogle’sPixelmodelsalthoughSamsunghas nowaddedit to itsnewGalaxyS20 familyanditsZ-Flip,ashasMotorola inthe firsteSIM-onlydevice withthe RAZR unveiledlastyear. These are all flagshipmodelsatthe higher-endof the price spectrumandwhilstaverage retail priceshave beenpushedupandinitial figuresreportedare promising,theyare more susceptible inprice-sensitive environments. Itisnot all doomand gloom though,we believe thatthe game changerforeSIMsmartphonesisApple’snewlyannouncediPhone SE, pricedmore competitivelyinthe mid-tier. We expectthatthiswill be apopularmodel andwill account fora large proportionof neweSIMshipmentsthisyear,promptingotherOEMsto follow suitand in-turn,mobileoperatorstoincrease availabilityandsupportforeSIM. It shouldbe notedthatsome countries,includingChina,still limitorbaneSIMusage in smartphones whichrestrictssome potential high-volume markets. Takingall of these factorsintoaccountwe are
  4. 4. reducingourforecastfor eSIM-equippedsmartphonesalesby5-10% fromour previousestimate for 2020. The remaininguse of eSIMsisprincipallyinM2M andIoT applications. We believethatthese are largelymore resilientthanconsumerapplicationsandwhilstthere willbe inevitable disruptionto deployments,itcanbe arguedthat the abilityof eSIMsto enable more connectivityandremote monitoring,managementandmaintenance will drivegreateradoptioninthe long-term. Investment inthese typesof capabilitiesandthe resiliencethattheyofferwillbe attractive,especiallyforfield- baseddeploymentsandlogisticsandsupplychainapplications. There are increasedeffortsfrom some solutionprovidersaroundiSIMtoobut fornow we expectthe pandemictohave onlya limited impact(<5%) oneSIMadoptionthisyear. As a result, P.A.IDStrategiesis lowering its forecastforoverall eSIMshipmentsin 2020 (acrossall consumer,mobile,M2Mand IoT applications) by ~15%. Payment + Banking The current forecastforpaymentcards wasalreadyflat(with minimal shipmentgrowth) in2020 baseduponthe natural slowdowninmarkets,suchasthe US and China,whichhave beenboosting the marketoverthe pasttwo years. However,the disruptionbeingcausedbythe lockdowninmany countrieswill affectthe marketindifferentways. Adoptionof electronicpaymentsanddigital walletsisacceleratingunderlockdownwithpeople more waryof handlingcash. Thisisclearly visible inthe jumpinthe numberof card transactionsbeingreportedinmanycountries,particularly contactlesstransactions. Aidedbythe increasingof transactionlimitsin>30 countries,contactlessis nowaccountingfor as muchas 70% or more of POScard transactionsinthe Nordics,Canada, Australiaandothers,anincrease of >10% insome. NFC transactionsformobile walletsare also
  5. 5. receivingaboost,albeitata much lowerlevel(5-15% of potential users). STCoperatesthe most populardigital walletinthe Middle Eastandrecentlyannounced30% growth(alsoboostedbythe recharge limitbeingincreased). There are alsoeffortstodrive alternative mobilepayments solutions,withQRcodesfeaturinginPayPal’snew appbeingone clearexample tobuildonthis unexpectedmomentum. Whilst we estimatethat newusers/accountsmakeup <30% of cardsissued there could still be an effecton theoverall market. Usage of contactlesscards anddigital walletsisincreasingamongstexistingusersbutthere are differenceswhenlookingattheirgrowthprospects. Itisrelativelyeasyfordigitalwalletstogrow theiruser-base duringtimeslikethese;theyare digital solutionsafterall andare set-upforremote sign-upandauthenticationof newusers,oftenable toleverage existing3rdpartyaccounts to verify users’credentialsandfinancial credibility. Tosome degree,thisisreplicatedbythe neobanksand challengerswhoare principallydigital organisations. Theymaybe a little more limitedinsome respectsbuttheyhave the correct digital identityverificationandauthenticationmechanismsin place to on-boardcustomerssimplyandquickly. Whilstthisbooststhe numberof new usersand associatedcardsissued,theyremainasmall proportionof the overall market,bothintermsof geographiccoverage andsize of customerbase. Similarly, the numberof cardsbeingissuedbywhat previouslywere servicesonlyofferingvirtual cards,e.g.OEMPay services,remainquite small,even withGoogle,SamsungandHuawei all expectedtolaunchphysical cardsintegratedintotheirdigital wallets. We believe thatbankcard replacementcyclesshouldbe maintainedwithminimal disruptionduring lockdown,furtherhelpingtomaintainpaymentcardvolumesin2020. The biggerissue will be those lookingtoopena newaccount withincumbentbankstypicallycontinuingtorequire physical/personalverificationof auser’sidentitytofinaliseaccountopening. The lockdowns affectingmanycountrieswill preventordelaythisandcouldaidadoptionof alternative payment services. Whilstwe estimate thatnewusers/accountsmake up<30% of cards issuedthere couldstill be an effectonthe overall market. Taking all thesefactorsinto consideration,P.A.IDStrategiesislowering its forecastforpaymentcard shipmentsin 2020 by 2-3%. As a final commentonpaymentandbanking,we believethatitispossible thatbanksmayrespond to Covid-19by increasingissuanceof contactlesscards,lookingtoserve the new userbehaviours that we are trackingand expecttolastbeyondthe pandemic. Whilstitislikelythat thismayaffect onlyup to5% of cards issued,itcouldincrease the value of the overall marketslightly,offsettingany decrease inmarketvolume. Conversely,we donotexpectbankstolooktospeedupthe pilotsand trialsof biometriccards. Whilstan argumentcan be made that biometriccardswill enable secure higher-value contactlesstransactionstobe completed,itwouldbe veryunusualforbanksto increase expenditure onnewtechnologies/programsduringaneconomicdownturn. If anything,itis likelythatCovid-19will delaythe initial launchesof suchcards(unlessthere isacleardemandfrom the marketand financial benefitforthe cardissuers).
  6. 6. ID + Authentication The market forgovernmenteIDisa muchsimplerpropositionthanpaymentandbankingsince it featuresfewerinfluencingfactorsandoverlappingdrivers/barriers. Itistypicallyamuch more stable market,beinggovernmentfundedandoftenrelatestogovernmentspendingprogramsand the supportof newlocal andnational programsand services. Governmentshave beengenerally increasingtheirfocusoninclusiveanddigital programsfortaxesandpayments,vehicleregistration, immigration,healthcare,welfare,etc.andwe believethatthiswill continue becauseinadditionto the citizenbenefitsitoffersgreatercost-effectiveness(andsecurity) thantraditional paper-based solutions. Governmentissuedcredentialsanddocumentswillcontinuetoact as the foundationforsuch servicesandwe donot expectmany(if any) governmentstocut backin these areas. If the economic recessionisprolongeditcouldaffectthe introductionof new programsbutatthistime the general consensusisthateconomieswilllargelyexperience ashort,sharpshock withrecoveryexpectedin1- 2 years.
  7. 7. There couldbe a limiteddownturnthisyearineIDcardsissuedasa resultof the disruptionresulting fromlockdown,mainlydue tothe temporaryclosure of governmentofficesand operationsthat wouldbe usedtoregisternewandrenew existingnationalIDandhealthcare cardsand epassports. Some governmentshave announced6-12extensionstoexpirationdatestoaccommodate this. Itis likelythatthe lowerrate of travel andimmigrationcouldalsoresultinatemporaryfall indemand for workand residencypermitsandvisas. As a result, whilst weexpect only limited impacton eID credentials in 2020 butit is possible thatit could be up to 5% lowerthan previously forecast,however,webelievethatthis will largely be made up with increased demand and issuancein 2021. Ticketing + Access Control Thiscouldbe one of the mostaffectedsectors. Withthe (temporary) shutdownof manysectors, includinghospitalityandleisure, thereislikelytobe a notable reductionindemandforaccess control cards for gyms,hotels,etc. Educationwill continue toissue cardsbutthere couldbe a short- termimpact due to enrolmentprocessesbeingdelayedandaffected. Itislessclearwhenlookingat employeeIDandaccess control. Clearly,companieswillcontinuetorequire employee IDsfor physical andfor logical accesscontrol,particularlyrelevantwhenlookingtosupportworkerswith secure remote accessto email,filesandservices. The affectsonthiscouldbe more pronouncedin the longer-termascompanieslooktoevolvetheiroperationalset-upwithagreaterproportionof theirworkforcesbeingoff-site –we maysee more use of virtual/mobile credentialsandsolutions beingemployedbutitislikelytobe inconjunctionwithphysical cards(atleastinthe short-term). However,a reductiondue to fewernewand replacementcards being issuedisinevitable and P.A.ID Strategiesis reducingits forecast by 15% as a result. Whilstthere will be continuedneedforpublictransportationP.A.IDStrategiesexpectsanotable reductionindemandinH1 2020. With muchreducedmovementbothforworkandfor leisure there will be farfewersalesof one-time andlimiteduse tickets. We donot believe thatthiswill affect
  8. 8. reusable/top-upcards/accountsasmuchbutdemandfornew cards and replacementswillbe affected,evenif onlytemporarily. Longer-term,itisprobable thatincreasedpublicspendingon infrastructure projectswillbe introducedinanefforttocounterthe economiceffectsof Covid-19. Thiswill include new projectsandmodernisationof existingtransportationnetworks,lookingto introduce improvedcrossoverandticketingcapabilitiesaspartof wider “mobilityasa service” (MaaS) initiatives. Multi-applicationcardsandmobile appsforticketingwill increasinglyfeature as part of these programsandcouldprovide addedgrowthtothe marketfor smart transittickets. However,itisrecognisedthatlong-termandon-goingdemandwill be lowerasa resultof behavioural changesanduserpreferencesresultingfromthe Covid-19pandemic. P.A.IDStrategies is reducingits forecast for mass transit ticketingby 20-25% for 2020 and will also be adjustingits longer-termforecastsby as much as 5-10%. Please note thatthisonlyaddressesreusable/top-upcardswhichfeature microcontrollers. We believethatthere will be agreaterimpactonlimiteduse/one-time use memorytickets. Embedded Security Solutions Generally,we believethatthe demandforotherembeddedsecuritysolutions,suchasembedded secure elements,TPMs,on-chipHSMs,TEEs authenticationICsandsecure microprocessorswillbe primarilydrivenandaffectedbyeconomicfactors. There couldbe a boostforauthenticationICsas manufacturersandbrandslookto strengthenbrandprotectioninitiativesandsimilarlyforother solutionstosecure theirsupplychains. However,itislikelythatdemandforcars,smart home devices,industrial equipmentandinstallationswillbe reducedinthe face of uncertaineconomic performance. One (short-lived)bright-spotforTPMswas the boostinPC and laptopsalesascompanieslookedto equiptheiremployeestoworkfromhome towardsthe endof 1Q 2020. However,there islikelyto be a downturninthe remainderof the yearas replacementof on-site equipmentwillslow either due to feweremployeesbeinginthe office orbudgetsbeingheldbackinthe face of economic uncertainty. Itremainstobe seenif thisreturnsto “normal”nextyearbut the downturnin computersalesisnotexpectedtobe beyondwhatwaspreviouslyforecast.
  9. 9. A 20-25% downturninautomotive will impactdemandforTEEs,TPMs and some HSM-on-chip securitysolutions(aswell aseSIMas exploredearlierinthisreport). Itislessclearhow the Industrial andUtilitiessectorswillfare andwhatthe subsequenteffectwill be onthe demandfor embeddedsecuritysolutions. Generally,P.A.IDStrategiesbelievesthatthese will be largely unaffectedalthoughthere couldbe exceptionsif anyeconomicuncertaintyisprolongedorresultsin political instability. The primarysolutionsbeingpositionedtothese sectorsare TPM,authentication ICs andeSIMand anyimpact resultingfromCovid-19shouldbe limitedascompaniesandservice providerscontinue tofocusonimprovingtheirresilience andenhancingcybersecurityagainstany attacks. Governmentsandregulatorybodieswill alsohave arole toplayas theyincrease activityto ensure thatmanufacturingandcritical infrastructure isprotected. As we have saidpreviously,SmartHome + ConsumerIoTisveryfragmentedintermsof a wide breadthof devicesandapplicationswithlittleornoconsistencytodate intermsof the best (embedded) securityapproach. The mostconsistentnote isthatitisinconsistentwithmultiple platformsandstrategiesbeingemployedandthatitistypicallyverycost-sensitive,resultingin securitybeingviewedassomethingthatcanbe provided/fixedwhenitisnecessary. There is increasedregulatoryactivitystartingtobe putin place bya numberof countries/statesbutitisopen to a degree of interpretationhowthiswill be affected. Giventhe cost-sensitivityandmore consumer-orientatednature of thiscategoryitisexpectedthatanyeconomicdownturnwillhave a notable impactondevice salesanddelaythe OEMs’ possible intentionstoembedsecurehardware intotheirdevices(unlessmandatedtodoso). Logistics+ SupplyChainisone area where we see some upsideresultingfromCovid-19. Withmore emphasisoncontinuationanddemandformore efficientandsecure operations,includingtrackand trace and monitoringcapabilitiesgeneratingdataforanalytics,P.A.IDStrategiesexpectsnexttono – or evena positive –impactduringandafter the pandemic. Nodoubtthatthere will be some holes as companiesmovedquicklytoensure supplychainsweremaintainedwithfocusswitchingbetween industriesandsectorsbutthe greaterneedformore automationandvisibilitywithlessreliance on humanresourcesandmore remote access/supervisionisleadingustoup our forecastsfor authenticationICs,eSIM(andSIM/M2Mmodulesinthe short-term) andcouldresultinfaster adoptionof iSIMsolutionstoo. To summarisethecombined effectof all of these factors,in addition to the above,P.A.IDStrategiesis provisionally adjusting its2020 forecastforthe following hardwaresolutions: • Authentication ICs: -15%(an increase in supply chain and logistics and IoTedge device/node adoption isnot expected to offsettheexpected decline in consumerand objectID) • HSM: -15-20% (Note:themajority of these are HSM-on-chip asopposed to rack-mountHSMs which will fare betterdue to increased demand securing cloud platformsand services) • Secure Microprocessors:up to -5% (minimalimpact on the computing/processing applicationswhich they are primarily employed in)
  10. 10. • TEE: -10% (heavily impacted by falling smartphonesalesalong with automotiveand consumer) • TPM: -5-10% (combined effectof theeconomicdownturn affecting automotive,industrial and computing If greatereconomicbenefitfromthe adoptionof embeddedsecure solutionscanbe realisedby service providersandend-usersthenthiswill be apositivefactorthatmay offsetsome of the impact of Covid-19andthe subsequenteconomicdownturn. andthe increasedscrutinyandactivityaround cybersecurity,privacyanddatasecuritywill continue tomove some tointegrate new embedded securitybutit mayalsobe that theywill lookto(lower-cost) software inaninitial attempttoaddress these matters. Note P.A.IDStrategiesishere tohelpourclients make betterinformedbusinessdecisions. We will shortly be providingamore detailedupdate inits Marketintelligence Service:Digital Secure Solutionsfor Credentials,Embedded+IoT Devices,addressing10 chipsolutions,5majorsmart card marketswith relateddevices,plus7leadingIoTandM2M sectors. Our previousinfographicpresentingfindings and summarisingthe MarketIntelligence Service’scoverage canbe downloaded here. Please contact us if youwishto participate inreturnfora summaryof findingsorwouldlike tofindout more about ourservices. ThisImpactReportand itscontentare copyrightof P.A.IDStrategies, publishedinMay2020. Anyredistributionorreproductionof partor all of the contentsinany form isprohibitedwithoutpriorwrittenagreementfromP.A.IDStrategies. Whileeveryeffortismade by P.A.IDStrategiestoprovide anaccurate assessmentandresearchanalysis,innoeventwill the companyor its employeesbe liable forinformation,analysisorrecommendationsprovidedor actionsor decisionstakenbased uponthis.

This report has been released by John DEVLIN, Principal Analyst & Founder of P.A.ID Strategies and host of TRUSTECH’s innovation stage. The Impact Report summarises the market situation and short-term outlook with guidance on how P.A.ID Strategies is adjusting its forecasts in 2020 as a result of the latest developments. It includes analysis and discussion of Mobile and SIM, eSIM, Payment and Banking, ID and Authentication, Ticketing and Access Control, and Embedded Security Solutions in areas such as IoT, IT, Automotive, Smart Home and Consumer, Logistics and Supply Chain. About P.A.ID Strategies: P.A.ID Strategies tracks and forecasts the market for 10 IC solutions used to secure credentials, embedded and IoT devices across 5 major verticals for smart cards and related devices, plus 7 leading IoT and M2M sectors. It provides a holistic view of the market, detailing how traditional smart cards and new embedded solutions are being employed to deliver and enable trusted services.

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