​Samsung (005930.KS) is having a Galaxy ‘Unpacked’ event of February 9 during which they are expected to release their new line of Galaxy tablets, which have been leaked ‘accidentally’ or otherwise to a number of locations.  What makes this tablet series different than previous models is the addition of an ‘expected’ 14.6” model that would further blur the lines between tablets and laptops.  While full specs have not been released officially price was posted for a short while on the Amazon (AMZN) site in France, which translated into $1,307 US for the Wi-Fi only model and $1,475 for the 5G model.  For reference the smaller (11”) Galaxy Tab S7 tab originally sold for $650 while the Galaxy S7+ (12.4”) originally sold for $849, so there is a fairly large price gap between the smaller versions, should they remain at the same price as last year’s models and the larger version this year, putting the new tablet model in the same price range as Samsung’s Galaxy Book Pro line, which has a 13.3” model and a 15.6” model selling for similar prices.  More to come next week…

While we don’t often mention coal in our CE notes, it is the globe’s primary source of material for energy production and recent issues facing China and a number of other countries that have begun to limit the exportation of coal to prevent shortfalls at local power-generating facilities, have brought the material to the forefront in recent months.  In particular, Indonesia, the largest producer of thermal coal, issued a ban on coal exports, which began on January 1, when the country’s mines failed to meet a government requirement that 25% of their annual production must go to the state-owned electric company PT PLN at a maximum price of $70/ton.  While the Indonesian government indicated that it is also reviewing export restrictions on other mineral resources, with indications that copper and bauxite (85% of bauxite is converted to aluminum) are among the one being considered, no determination on these materials has been noted thus far, with Indonesia being the world’s 6th largest copper exporter in 2020 with a 4.2% share and the 5th largest bauxite exporter last year.
But the good news is that the country has started easing the coal restrictions for those local companies that have met their domestic market obligations, allowing 75 ships to load coal from complying companies while 12 more ships have been allowed to load under written assurances of compliance and penalties from others being closely monitored.  The coal stockpiles at Indonesian power generation plants has now reached 20 days, which the government finds is enough to maintain consistent operation.  The original ban pulled the mining licenses of over 2,000 producers, many of whom had been lax about meeting government imposed requirements, but the release of the ban, at least in part, is a welcome relief for a number of countries that are large coal importers and rely on Indonesia to supply same, such as the ones shown below.

We expect most investors are unfamiliar with the characteristics with which VR headsets are judged.  Some are similar to those used to specify smartphone displays or TV displays, but some are a bit more esoteric, albeit important to the VR space and our VR/AR headset database gives some insights into not only those specifications and what they mean, but also into the development of VR headsets over time. Our database contains almost 100 VR headsets that have been released between 1994 and 2021, along with another 15 that have been announced but have not yet been released.  In Figure 3 we show the number of models released yearly that use a particular type of display, with LCD and OLED being the primary contenders, LCoS, a long past technology, and Micro-LED the new contender.
The initial consideration shown in the data, which includes only released headsets, is the number of VR headsets released each year.  There was little activity after the 1994 release of the Forte (defunct) VFX1 headset, the first commercial headset we can find, that used a Kopin (KOPN) LCD display and a Sharp (6753.JP) video processor, until September of 2002 when Sony (SNE) released the PUD-15A (catchy name?) as a 3D headset for the Playstation, and NVIS (pvt) released a $24,000 headset (the nViser), which was considered a quasi-commercial device.  Little commercial VR equipment was produced until 2013 when Oculus (FB), a Kickstarter funded company at the time, released the Oculus Rift DK1, an inexpensive LCD based VR headset, and followed it in 2014 with the Oculus Rift DK2, which was based on an OLED display.  Facebook (FB) bought Oculus for $2.3b in 2014 and has partnered with a number of large CE companies using the Oculus platform as a basis for such branded VR products.
In 2015 Razer (1337.HK), currently a producer of PCs and smartphones and accessories, released the OSVR HDK (Hardware Development Kit), which allowed for enthusiasts to develop their own modifications to the headset, which was based on an OLED display.  That same year 3Glasses (pvt) (aka Shenzhen Virtual Reality Technology Co.) released its first VR headset the D2, based on an LCD display.  2016 was a better year for VR as 8 headsets were released from a variety of small companies, and a number of large ones, such as LG Electronics (066570.KS), HTC (2498.TT), Sony, and Oculus, with the type of displays evenly split between OLED and LCD, however the resolution of these displays was still relatively low until 2018 when the first dual QHD (Wide Quad HD) display was released by VRgineers (pvt), a Czech based company that specializes in VR for pilot training.  Since then the development of micro-LCD and micro-OLED displays for VR has increased and continued improvements have followed with a number of high resolution LCD models released in late 2020 and last year’s first micro-OLED headset from Arpara (pvt), that pushed VR display resolution and technology forward.
While we expect at least a dozen new VR headset releases this year, we also expect to see VR displays based on quantum dot enhanced LCD and both updated micro- LCD and Micro-OLED displays, however also expected is the first Mini-LED LCD display and an ultra-high resolution LCD display that would be more than double the resolution of the best released thus far.  That said, we do note that there can be a big difference between when a VR headset is announced and when it is actually released, sometimes more than a year (and in some cases never, so we wait until such promises become actual products before including them in our ‘current’ VR database.
The objective in developing such high resolution displays is to reduce what is called the screen door effect, which occurs because of the space between pixels and can be both distracting to the user and confusing to the user’s brain causing fatigue.  The spaces are hidden with a black ‘mask’ that separates the light from each pixel, but also creates the effect if the PPI (pixels/inch) is relatively low, especially when the displays are so close to the user’s eye.  Companies have found ways around the problem by blurring pixels slightly but these are solutions that do not address the real problem, display resolution. 
As display technology improves, resolution improves, which is absolutely necessary for VR and the Metaverse to become anything other than a toy for the dilettante, but such improvements in micro-displays are both difficult and costly, while headset volumes are relatively low when compared to other CE display products.  With the focus on the Metaverse creating renewed interest in VR, we should see additional capital being spent on micro-display development, but such developments take time and the question remains as to whether the current enthusiasm over the Metaverse will last long enough for the next level of micro-display development or will we have to wait for Metaverse 2.0 a few years forward?

Its Chinese New Year as it is February 1 in China, and that begins a 7 day public holiday celebrating the year of the tiger.  Also known as the Spring Festival, there are a number of do’s and don’ts that have developed over the 3,500 years the holiday has been celebrated.  As the New Year holiday can set the tone for the entire year, negative words are a no-no and breaking glass or similar items can break your connection to prosperity for the year as will sweeping, which should have been done before the holiday, but the gist of the holiday is for families to get together after being separated during the year for a feast to celebrate the new year, which usually means in excess of 1b people will be moving from one locations to another.  Chinese New Year in 2020 came right before the COVID-19 outbreak, with ~1.5b people traveling but this year traveling for factory workers would require approval  from a senior supervisory person or face a smaller year-end bonus, which will likely limit travel considerably, with the Chinese government being unusually careful about COVID-19 leading up to the Winter Olympics in Beijing. .

​Huawei (pvt) has begun arbitration proceedings against the Kingdom of Sweden after the country targeted Huawei specifically by excluding them as a supplier of 5G network products and services and further requiring the company to remove all of the company’s installed equipment by January 1, 2025.  The arbitration will take place in the World Bank Group’s International Center for Settlement of Investment Decisions after an appeal in the Swedish court confirmed the decision made in June of 2021 by Sweden’s Post & telecom Authority.  With Sweden the 2nd country in Europe (the UK was 1st) to officially ban the company, relations between China and Sweden have been strained with Ericsson (ERIC) expecting some retaliation from the Chinese government, especially as the suit begins.  While no damages were specified in the suit, public media says the initial compensation sought was over $500m but could go considerably higher if Huawei can make the case that Sweden has violated its international responsibilities toward Huawei’s international business.

As has been the case in the past, we look at Corning (GLW) differently than most as our focus is on two rather than all of the company’s product segments, display and specialty materials, which represented 39.3% of core sales in the 4th quarter and 40.4% of core sales for the full 2021 year.  However on a net income basis these two divisions represented 70.6% of 4Q net income and 73.5% of same for the full year, and while they might not be the drivers for growth in every quarter, they are essential for Corning’s sustained profitability.
The display segment, which supplies substrate glass for LCD and rigid OLED display production, saw a 1.5% decline in sales on a q/q basis but was up 12.0% y/y.  Typically 4Q display sales are up 1.8% q/q, but given the new world we live in currently, we chalk up the difference to the variety of factors that are now part of the CE supply chain.  Display net income in 4Q was up 2.0% q/q and up 16.1% y/y with 4Q display margins at 26.8%, the highest they have been this year and since 1Q 2017, as very favorable glass pricing continues.  We note that the display glass business is one with few suppliers and high entry cost, but one that typically has seen gradual glass price declines built into panel producer supply contracts, although that has not been the case since late 2020 when it became more important for producers, especially those in China, to secure steady supply than to haggle over small price reductions.  This has allowed Corning and other glass suppliers to maintain glass prices and even see some increases, helping display segment margins increase from a low of 22.6% in late 2017 to where they are today. 
There is some nuance to Corning’s glass substrate business however that does give them an edge over other suppliers and that is their expertise in large substrate production, which has made Corning the leader in that market segment for the last few years, particularly as Gen 10.5 fabs became popular, and while Corning’s large panel glass supply relationship with Samsung Display (pvt) has slowed as SDC moves away from large panel LCD production, it has increased with Chinese panel producers who have become primary suppliers of large panel LCD displays.  Given that average TV sizes have been increasing for the last few years, the necessity to produce such large panels in Gen 10.5 fabs has helped Corning to maintain its leadership position in such large panel sizes, cementing their relationships with such fabs by co-locating glass production facilities at the fab itself.
There are mitigating factors however that also fall into the glass business and that is new capacity and utilization rates, with new LCD capacity being the long-term growth driver and utilization being the shorter-term driver.  Until the middle of 2021 large panel LCD display industry had been seeing strong demand and increasing TV panel prices as a result of COVID-19, contributing to the performance of Corning’s display segment.  That, coupled with LCD capacity growth incentivized by Chinese government subsidies has created the optimal environment for glass suppliers.  However things changed a bit in 2H 2021 when the increased cost of TV panels and other components began to impinge TV set sales while overall TV demand slowed as governments began to remove some of the COVID-19 mandates that had fueled demand in early 2021.  TV panel prices fell and panel producers moved production to IT products that still saw stable pricing.
The effect of such a change, while seemingly a watershed event, was relatively minor for the glass industry as demand for IT products remained strong and therefore overall utilization rates remained high, but as the industry entered 4Q, it became necessary for panel producers to lower TV panel production utilization or face even greater TV panel price declines, which was the first of two events that will set the tone for display in 2022.  The second was the beginning of price declines for IT products, again we believe prompted by the mindset that the COVID-19 pandemic was at least under some level of control and the shelter-at-home necessity was lessened, as we noted yesterday.  This is important in the sense that the shift by panel producers toward IT production increases their sensitivity to IT panel price declines, and leaves them little recourse but to lower IT panel utilization if demand for IT products returns to pre-COVID levels, with lower utilization meaning less glass demand.
It will be difficult to discern how much ‘normality’ will be seen in 1Q display results, for Corning and for other component suppliers as 1Q is typically the weakest in terms of CE demand, but while Corning was optimistic about the prospects for the display space and the glass market this year, and guided to flat glass pricing and a continuing tight market in 1Q ’22, we expect much of that optimism is based on contract negotiations that occurred in late 2021, with panel producers a bit more optimistic than they might be now.  That said, glass prices don’t change quickly and with high fixed costs the competition has little room to undercut Corning’s dominant position with price, unless they are willing to create a deficit, so we see the second quarter being the key for the display space, as a sustained demand downturn would begin to affect overall material demand, or a more stabilized demand environment would lead to a continuation of Corning’s strong display segment margins.  We hate to say 1Q is a throw-away quarter, but its seasonality make it one that can hide a multitude of sins.
The specialty materials segment, which is primarily a supplier of cover glass to the display industry, along with some specialty optical products, saw a 6.8% q/q decline in sales, also a bit more than the 5 year average of -4.2% q/q, but was down 5.0% on a y/y basis.  As Corning sells cover glass to processor, rather than directly as it does with substrate glass, they have a less direct ‘demand connection’ which can move segment results away from expectations, in both directions, but 4Q is a volatile quarter for specialty materials with q/q spread between +5.4% and -13.1%.  That said, net income from the specialty materials division was down 14.0% q/q and 32.4% y/y, with the only y/y growth seen in 1Q against a very weak 1Q in 2020. 
No direct 1Q guidance was given for Specialty Materials with a broader ‘expect sales to grow faster than our underlying markets’, but Corning added that the lower net income was the result of investments in new innovations that will be commercialized this year with a nod toward optical products for EUV lithography in the semiconductor space.  With the smartphone market seeing relatively slow growth and despite Corning’s relentless push to find more points in the mobile market in which glass can be used, it will be a challenge to grow the cover glass business this year with at least one new product announcement.  Perhaps a new version of ‘Ceramic Shield’ or a UTG cover glass with superior characteristics, but smartphone size growth is relatively limited, with foldables picking up that mantra, which leads us in that direction relative to new products for specialty materials.
Perhaps we are reading more into Corning’s loose guidance for display and Specialty Materials for 1Q, but based on the display space itself and panel pricing, we are expecting the inverse of last year, when a strong 1H in the display space was followed by a weakening 2H, but we are struggling a bit to understand what the drivers for a better 2H ’22 in the display space might be, aside from typical seasonality.  We expect that even with some of the potential changes to panel pricing and demand mentioned above that the effect on Corning’s display glass businesses will lag the industry a bit, but while last year was a year in which the display industry had considerable leverage over panel buyers, this year is more likely to have real negotiations, less affected by exogenous circumstances, resulting in a more ‘normal’ balance between supply and demand, leading us to expect a bit less overall growth in the display space.

As we have noted the Indian government has been and continues to try to attract both display and semiconductor companies to build production facilities on the sub-continent, offering a number of financial incentives that are meant to lessen the burden of such build-outs.  To date the country has been essentially unsuccessful in their attempt to entice front end producers, although they have been able to attract CE device assembly companies who put together phones for Apple (AAPL) and Samsung (005930.KS), which are sold both locally and to customers in SE Asia.  However India faces some real problems attracting more basic CE production in that much of the surrounding CE infrastructure would have to also be built out, and the skill level of employees is not high enough to support those production facilities without importing significant talent from home countries.
If those obstacles were not enough the Indian government is planning to develop an indigenous mobile operating system to compete with Android and iOS in order to further its ‘Digital India’ plans, although we find it hard to understand exactly how an in-country OS would encourage front-end spending, particularly as Apple is the sole supporter of iOS.  Perhaps the country’s investigations into Google (GOOG) and Apple relating to application payment systems makes them believe that they could provide a less expensive or more robust system on their OS, but first they would have to convince developers to adopt the new OS and either port existing applications or write new ones exclusively for the new OS. 
While we are usually skeptics when it comes to plans for rebuilding what has already been built, it could work, but the odds seem small when looking at the number of mobile operating systems developed by such as Microsoft (MSFT), Samsung, Blackberry (BB) all of which have been abandon, along with dozens of others that most would not recognize.  Of course, a self-developed OS could be tailored to Indian social proclivities, making it more attractive to 1.4b Indian residents, but the country already has a few ‘local’ variants that operate under Android, none of which have achieved traction, and undertaking a full OS development is a much larger task.
As seen in Figure 2, the dominant mobile OS is Android, along with iOS represent 99% of the Indian mobile OS market, so it might take some time to unseat such an entrenched user base if potential users could be convinced to switch, with much resting on whether other applications can be ported or new ones developed, all of which will depend on the new OS and how easily developers can make such changes, but in the long run it seems very counterintuitive to set out to spend R&D dollars building what has already been built.  A company like Huawei (pvt), with vast resources and IP had little choice when it was forced out of the Android world, and the company, even if successful with its Harmony OS, would likely be limited to use in China, which means in the long-run it will probably wind up on the list of mobile operating systems that are no longer in use, like Symbian, Blackberry, Firefox, WebOS, Windows Mobile, and Windows Phone, all of which were developed by companies with considerable mobile experience and resources, some of whom had or have a very large installed base.  Rupees well spent?
 

Now that 2021 is behind us the data for what was an unusual year in the display space becomes available and allows us to paint a picture of how the year looked, how it compared to other years, and how individual panel producers fared.  In Figure 1, we show large panel display revenue for the 2020 and 2021 years broken out by region.  China is the region with the most growth, which comes as no surprise, with revenue growing 29.4% in 2020 and 45.5% in 2021 while Korea’s display revenue declined 8.1% in 2020 and 25.0% in 2021 as both Samsung Display (pvt) and LG Display (LPL) reduced their exposure to the large panel LCD display space.  During 2020 the large panel display industry grew revenue by 5.4% and by 19.3% in 2021 and Figure 2 shows revenue share for both years.

​Year over year revenue growth was a big seller for panel producers in 2021, especially when compared to weak early 2020 large panel revenue, but those comparisons declined from the high point in February as shown in Figure 3.  That said all regions save Korea saw y/y revenue growth over 25% in 2021 although declining toward year-end.  In December large panel y/y revenue growth in Taiwan was 6.2%, 4.9% in Japan, and 22.1% in China (Korea remained negative), and while the 2022 January y/y comparison might be a relatively easy one, the comparisons, especially in 1H will likely be problematic. 

Looking at individual large panel providers China’s BOE (200725.CH) was the largest revenue generator in 2021, as it was for much of 2020, with LG Display the 2nd largest revenue contributor.  While LG Display was intending to reduce its exposure to the large panel LCD space in 2021, large panel price increases slowed those plans until mid-year, and while LG Display and other producers with TV panel exposure shifted production away from TV panels when TV panel pries broke in July, the overall effect of those TV panel price declines can be seen in Figure 4 as the year progressed.  In 3Q the offset to TV panel price declines was the stability (and increasing price) of IT panels, which continued to incentivize panel producers to shift more production away from TV panels and toward IT panels.  While this helped to keep the effects of TV panel price declines somewhat in check, by the 4th quarter IT panel pricing began its decline, albeit at a slower pace, but it seems the die was set as IT panel price declines continued to gain momentum, which has also been the case in January (see below).
The issue remains as to whether the IT panel price declines can be slowed by limiting utilization rates, but that takes a coordinated effort that not all panel producers will agree is the right method, and coupled with slower IT device demand, we expect it will take a few months of further price declines to make some panel producers realize that the cost of lower utilization in the short-term is less than the cost of a protracted downturn in the panel industry, especially during the seasonally slow 1st quarter.  Unless component and silicon cost increases begin to abate as overall CE demand slows, panel producers will have a difficult time passing on cost increases and will likely have to absorb much of those increases while prices decline, making for a relatively weak 1Q and possibly 1H.  If some balance can be reached before the holiday build period, there is a chance that the display space could see some growth, but display producers will likely be back to a more ‘negotiable’ mindset by the end of 1Q, which could help to lower CE device pricing and stimulate at least some demand in the 2nd half.  Still lots of unanswered questions about the CE space, but then it is still January…

As we have noted previously the rapid decline in TV panel prices in 2H 2021 pushed panel producers to shift production to IT panels (Monitors, Notebooks, Tablets) where panel demand and pricing was more stable.  That shift, while reducing exposure to falling TV panel prices, tacitly increased IT panel capacity across the display industry exclusion of actual new capacity and increased the industry’s exposure to IT panel pricing.  While IT panel prices continued to rise through much of 2021 they did begin to decline, albeit far more slowly than TV panel pricing, starting in October.  While the smaller IT panel price declines were easier for panel producers to manage, their exposure was higher, giving more weight to IT price decreases, but most producers remained optimistic in 4Q, especially those who focused their IT panel production on the premium segment.
In January IT panel prices continued to decline as COVID-19 vaccination rates increased globally and a portion of the workforce returned to work, pulling demand away from stay-at-home products like notebooks and tablets.  Even with the impact of the Omicron COVID-19 variant, overall IT demand faced both waning consumer demand and expanded capacity which has led to a continuation of the IT panel price declines seen late last year. Panel price declines for all panel categories exceeded our expectations in January as shown below.  Our expectations for February panel prices continue the negative trend for all categories, and while many have expressed optimism that TV panel prices are not decline as rapidly as they have in the last few months of 2021, they are still declining and more importantly, given the expanded exposure to IT panel production, IT panel prices are falling at a faster pace than in 4Q.  1Q 2022 is typically a slow quarter for the display industry and some of that can be read into such panel price declines, but even if the global zeitgeist remains cautious about returning to a pre-COVID lifestyle, much of that stay-at-home demand seems to have been filled.
One thing we have learned about the ‘new’ CE world we live in is to expect the unexpected so we hesitate to make broad predictions about where panel pricing will be at mid-year or year-end at this early stage, but we expect this will be a more difficult year for the CE space overall as demand slows and some of the more easily resolved supply chain bottlenecks are cleared.  Hopefully this will reduce some of the price volatility that has been caused by the pandemic’s rapid shift in demand and the CE industry’s inability to manage that shift, but the global environment continues to grow more complex, or at least seems so, so we expect at least one unknown to find its way into the CE space this year.  As to whether it will be a positive or negative, we don’t know, but as Roseanne Rosaeannadanna said, “It just goes to show ya! It’s always something!”

Samsung Display is Apple’s (AAPL) primary flexible OLED supplier for the iPhone, with LG Display having rebuilt it relationship with the company after problems with OLED displays in 2019 forced LG Display to prove to Apple it had resolved OLED display production issues through an extended requalification process.  More recently China’s BOE, has also gone through such an extended qualification process with Apple that after a number of failures has now allowed them to become a 3rd OLED supplier for the iPhone line.  While the qualification process that Apple requires is based on both the quality of the display and the ability to meet production goals (yield), the reward, given the iPhone’s popularity and its premium price, is considerable and a goal for almost all OLED panel suppliers and while Apple tends to keep the number of display suppliers for the iPhone to a minimum, we expect almost all OLED suppliers have or will try to gain that access.
Apple certainly has an incentive to go through the qualification process with potential iPhone OLED panel suppliers as the company is always looking for ways to bargain down panel prices with Samsung and LGD, so the inclusion, or even the possibility of inclusion of another supplier gives them increased leverage.  The offset is that SDC has been producing flexible OLED panels longer and in higher volumes than other producers, which gives them an advantage as to both technical capability and production stability, both key factors in Apple’s iPhone display producer choices, and SDC’s ability to produce LTPO (Low-temperature Polyoxide) backplanes, a necessity for Apple’s variable refresh rate feature, still keeps them ahead of the pack.
That said, there are contenders, with China’s Visionox (002387.CH) sampling to Apple last year and more recently Chinastar (pvt), a subsidiary of TCL (000100.CH) forming a group to work toward conforming its small panel OLED production to Apple’s standards.  China star operates a Gen 6 OLED fab in Wuhan with a capacity of 30,000 sheets/month and plans to add an additional 15,000 sheet line to the fab, so in its present state Chianstar would be in the early stages of a qualification process, which could eventually lead to the development of a pilot line specifically designed to meet Apple’s specifications.  Whether this means an LTPS line, which would put them in contention with BOE, or an LTPO line, which would challenge SDC and LGD remains to be seen, although Chinastar does have considerable expertise in developing oxide backplanes for LCD, but we expect any real volume production for Apple would be 2 to 3 years out, if they are able to get through qualification.
With a folding iPhone somewhere in Apple’s future, a new display category could help smaller OLED producers like Visionox, Tianma (000050.CH), or Chinastar step forward with Apple, but again Samsung Display has considerable expert and experience in the foldable space already so new entrants would have to find a feature that would attract Apple’s attention as more than a point of leverage, which is not an easy task given SDC’s size and resources.  The capacity issue is also a factor as much of small panel OLED production for Apple is done on dedicated production lines, some of which have been partially financed by Apple itself, but building such high volume lines is capital intensive, time-consuming (18+ months) and has no guarantee that yields will be high enough to produce profits, and also carry the risk that Apple will decide to reduce its OLED exposure at some point down the road, so these are no decisions taken lightly.  That said, with the vision of selling millions of OLED displays to Apple in their heads, it is easy to see why almost all OLED panel producers will vie for that brass ring, even if it burdens financial goals for years.  It will take some very understanding capital sources for most smaller producers to enter such a competition in a realistic way, so we are a bit less excited about the prospects for new OLED panel producers being added to Apple’s iPhone supply chain, but it is certainly in Apple’s best interests to encourage same.