Still among the most popular VR headsets the Sony (SNE) Playstation VR headset is now 6.27 years old, having been released in October of 2016, but with the official release of the Playstation VR2 scheduled for February 22 Sony is offering the headset to Chinese customers starting yesterday, but there are some conditions.  Aside from the fact that the price in China will be the equivalent of $67 higher than in the US, you have to ‘register your interest’, which puts you in the queue to be ‘invited’ to pre-order the device, and not everyone will be invited.  While the ‘invitation’ is also a prerequisite in the other countries where the pre-order is being offered (US, UK, Germany, France, Netherlands, Belgium, and Luxembourg), in China you will be limited to one device and you will have to come back to the store to pick it up, as there will be no shipping of the new device to pre-order customers.  Hopefully you will enjoy your VR2 as the pre-orders are not applicable to the typical 7 day return policy, so if you don’t like it, you still own it.
The new device, for which stocks are estimated to be ~2m units, is certainly an upgrade to the older device, with two 2,000 x 2,040 resolution OLED displays vs. the previous model’s single 960 x 1080 display, and an improved field of view (110° vs. 96°), and an overall lighter headset that looks slightly less nerdy, along with three additional tracking cameras.  At $600 plus charger and other necessary accessories, the new model is ~$200 more expensive than the older version, but we expect gamers will welcome the upgrades despite the higher cost, and with the Oculus 2 now over two years old and the profitability pressure on Meta (FB), we expect the next ‘Oculus’ to also see a bit of a price hike.  While the global economy is weak and CE products are seeing mediocre demand, we expect the PD VR2 to sell out relatively quickly despite the higher price. .  

Early 4Q smartphone shipment readings have just started coming in, with even some of the more previous forecasts seeing additional reductions.  One source that had estimated total smartphone shipments for 2022 of 1.176b units only a bit over a month ago, cut its full year 2022 forecast by an additional 1%, doing the same for this year’s estimate, and reduced its 5G smartphone shipment estimate for 2022 by 2.6%, along with a similar reduction in this year’s target.  While none of this is surprising, those estimates were among the most aggressive toward the downside, and only 5 weeks later are being reduced, which gives some measure of by how much the global CE space saw demand decline. 
If the trend is any indication, we would expect further reductions for 1Q, although Samsung’s typical flagship (non-foldable) release schedule will help a bit.  While we might have seen the effects of inflation on CE product demand at its worst in 4Q, we expect demand to show only modest signs of recovery on a y/y basis given the demand strength seen in 1Q ’22, and while we still expect those comparisons to be negative in 2Q, 3Q should begin to see such comparisons remain flat or turn positive.  Unfortunately much of that scenario is based on how poorly the CE space did in 2H ’22, so there are still questions as to what might help push demand in the back half of this year and those are far from being answered.  As Chinese New Year comes relatively early this year (1/22), results from the holiday will give some help in understanding whether or by how much of a recovery will be seen in China, which will go a long way toward building a more realistic model for the 2023 year.

Trackers have always been a part of history, with the tracking of animal food sources playing a pivotal part of human existence, but as technology has developed, particularly after the Russian satellite Sputnik was launched in October 1957, scientists and engineers realized that they could calculate location based on satellite location, and eventually launching atomic clocks into space that laid the groundwork for GPS satellite systems that are used today.  The global GPS system relies on satellites that are placed precisely 11,000 miles above the earth and therefore orbit once every 12 hours, but there are a number of global  satellite systems beside GPS (run by the US Department of Defense), such as GLONASS (run by the Russian Federal Space Agency), Galileo (run by a number of EU countries), Beidou (run by the Chinese government), IRNSS (run by the Indian government), and QZSS (run by the Japanese government).  Many of these systems have both military and civilian users and have become essential to the military as they are the basis for many targeting systems, while in civilian use, they tend to be used for geo-location and asset tracking.
As technology continued to develop, particularly with the popularity of smartphones, other tracking systems have been developed, although there are many GPS tracking devices and systems available to both individuals and commercial users for a variety of uses and prices, ranging from ~$30 for a 2.3” tracking disc and software, to larger and more powerful devices that can be used to track assets such as cars and shipping containers.  As these devices are powered internally, they have a finite lifespan, which runs from 1-2 weeks for a device that is always on and sending notifications, to 6 months for those that operate in low-power mode, with more limited communication ability.
A small company, Tile (LIFX) had been producing consumer tracking devices using Blue-tooth low-energy tracking since 2013, which had a range of ~100’ but included a system where any Tile user who was within 100’ of a lost Tile device would trigger an anonymous message to the owner, giving the location without the non-owner knowing (known as “crowd GPS”).  The idea was to attach a Tile tracker to common devices, such as keys or a TV remote, to make sure they were always able to be found, however, in 2019 it became apparent to developers that Apple (AAPL) had included in its iOS 13 release, a number of references to a product then known as B389, which fit with rumors that Apple had been developing a personal tracking device that would operate under iOS and use Apple’s in-house U1 chip that appeared in the iPhone 11. 
The Apple system used a different technology called UWB or Ultra-Wideband, which differs from standard radio transmission and Bluetooth, both of which use narrow frequency bands and transmit data continuously.  UWB broadcasts a signal that is pulsed but occupies a large frequency band, allowing it to be more powerful and carry more information without interfering with other devices.  This increased power is spread across a wide frequency band and appears as noise to other receiving devices but allows the system greater range as shown in the table below.

While other major CE brands have come out with their own UWB trackers, and a number of smaller companies continue to supply devices,  Apple is so ubiquitous that we expect they dominate the space, although we are hard pressed to find accurate shipment numbers for the entire UWB tracker space or for Apple’s AirTags.  Most estimates center around 20m units in 2021 and an expected 35m units last year, but there is little hard data that can be verified.  That said, there seems to be a resurgence in the idea that Google (GOOG) will be joining the UWB tracker race with its own tracker. 
The project, supposedly titled “Grogu” or G10, after the character in “The Mandalorian” TV series, is part of the company’s “Find My Device” initiative.   As Google purchased Nest (pvt) in 2014, the idea of a more connected home is essential to Nest’s success and in a 2022 Android update, Google included code that made obvious the company’s intention to popularize UWB by giving Android developers UWB hooks into the OS.  That said, we suspect the initial UWB focus was to enable connectivity between Nest and Google devices, such as to allowing a Google smartphone used as a music source, to move from one room to another, with speakers in each room able to instantly recognize the source and seamlessly continuing to play the music. 
We note also that the Google Pixel 7Pro (10/22) and the Pixel 6 Pro (10/21) smartphones are both UWB enabled, and while we have no real timetable for Google’s entry into the UWB tag market, the logic seems apparent.  With Android supporting ~70% of the of the smartphone world, Google has a more reasonable chance of encroaching on Apple’s personal tracker dominance than most others, and while the iPhone network gives life to Apple’s AirTag abilities, if Google releases its own tracking device, it will eventually have access to all Android phones that have UWB capabilities.  It is a bit of a chicken and egg scenario, but Google’s Android share gives them a good shot going forward.

Tough times in the display business typically lead to utilization cuts and the eventual reduction in personnel if those lower utilization rates are sustained.  Such was the case for most LCD display suppliers last year, and while little was said about lower utilization or employee reductions at Chinese producers, other panel producers were a bit more forthcoming about belt tightening.  As public companies in Taiwan have a bit more public transparency than most, it has been a bit easier to see what has transpired to panel producers there than in other locations.
Last year, Innolux (3481.TT) promoted a program that encouraged employees to take consecutive vacations, reduced the number of foreign workers, and in some cases instituted a 3-day weekend schedule to reduce operating costs as utilization decreased in the later half of the year.  AU Optronics (2409.TT) faced similar utilization reductions last year with programs similar to those at Innolux, but AUO has gone further, indefinitely postponed the construction of the company’s planned Gen 8.6 LCD fab in Taichung, the first capacity expansion project the company has undertaken in the last 5 years.
As we have exited 2022, with the display industry facing a continuing drop-off in CE product demand, both companies have instituted new projects, with AUO promoting its ‘Talent Activation/Revitalization Program’ and Innolux its “65 Project”.  The AUO program is said to ‘help long-term senior colleagues with more flexible planning for the next stage of career development’, while the Innolux program is a bit more direct, providing incentives for those who voluntarily apply for retirement.  While the programs tend to be laden with phrases like ‘…taking care of the physical and mental balance of colleagues…’, these reduction plans are part of the usual boom/bust display cycle that regenerates every few years  Perhaps it makes management feel a bit better to couch the staff reductions in more ‘…we care…’ terminology, but we expect there have been few employees that saw the programs as anything other than what they were.
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* Refers to the 1992 quote from then governor of Texas Ann Richards in reference to the President George Bush plan to use US warships to protect oil tankers in the Mideast.  The quote was “Well, you can put lipstick on a hog and call it Monique, but it’s still a pig”.

Producing displays is a complex task and as the display industry finds new technologies that can push the industry forward, it also must find ways to make those technologies economically feasible or they will never find their way into commercial mass production.  Micro-LEDs are one such technology that shows particular promise as a longer-term display technology, as a self-emitting, high-brightness display modality that can compete on a technical basis with existing LCD and OLED displays that predominate the consumer electronics world.   The problem is however that Micro-LED displays are difficult to produce and in the display space, difficult usually means expensive, and without the ability for display companies to see a pathway toward reducing Micro-LED production costs to a competitive level, they will never develop past the point of being a niche product.
One of the biggest production issues facing Micro-LEDs is numbers.  As in other self-emitting displays, there is a pixel for each ‘point’ on the screen, and at what is now becoming a baseline for displays, 4K resolution requires 8,294,400 pixels per display.  In a large display, such as a TV, the pixels can be placed relatively far apart, but as screen size decreases pixels need to be closer together and while OLED materials can be placed directly on a substrate using metal masks and OVP deposition tools or solution-based processing, LEDs are grown on silicon or sapphire and must be moved from the native wafer to a display substrate.  To make matters worse, each pixel mentioned above, is comprised of three sub-pixels (red, green, and blue), which multiplies the number of pixels showed in the table below by 3.
OLED deposition tools require RGB emitter materials to be deposited separately, which adds to the processing time, while blue and green LEDs can be grown on the same wafer, with red on another wafer.  However, while OLED substrate can be moved through the deposition process, each Micro-LED must be moved from its production wafer to the display substrate.  OLED sub-pixels have size restrictions based on the properties of mask materials but Micro-LEDs can be as small as 2um to 3um, about the size of a red blood cell, which makes them a bit difficult to pickup or move from the wafer to the substrate, so as the display gets smaller, even with the lower resolutions shown toward the bottom of the table, the Micro-LEDs also must get smaller to squeeze them into the smaller space.
We have spent much time over the last few years examining Mini-LED (>100um) and Micro-LED transfer techniques, but we note that while transfer time and cost is certainly a bottleneck in the development of Micro-LED displays, we note that under each sub-pixel there is a TFT (thin-film transistor) circuit that tells the sub-pixel when to go on and off and how bright to be in order to create the millions of color mixes promised by display manufacturers.  This circuitry is produced using typical semiconductor photolithography techniques and in OLED displays the TFT takes up a portion of each subpixel, creating what is called an aperture for the OLED light to escape.  Hence, the larger the sub-pixel, the TFT takes up less space, creating a bigger aperture, and the sub-pixel can be brighter.  However as the display gets smaller, such as in smartphones or AR/VR displays, the TFT remains the same size and the aperture gets smaller and the brightness is reduced.
Micro-LED displays have the same characteristics in that they are self-emitting, but as noted, the complexities of moving over 24m single digit micron sized LEDs with damage can be daunting, but in order for them to work, they have to be moved to a substrate where the TFT circuitry will align with each Micro-LED sub-pixel.  Logic holds that ideally one would want to create the TFT circuitry on the same wafer that the Micro-LEDs are grown on, eliminating the complex and expensive transfer step, but the temperatures needed for TFT creation are near 300°C,which would damage the Micro-LEDs, so the expensive process of transfer and attaching these incredibly small LEDs to a substrate with TFT already present.
According to a Manchester, UK company, SmartKem (SMTK), they have developed inks used to produce TFT circuits that can be processed at ~80°C, low enough that no damage to the Micro-LEDs would occur and allowing the TFTs to be built directly on the Micro-LEDs, without having to transfer them to a separate substrate.  If this process is as successful as the company indicates, it would sidestep the transfer issue and many of the problems associated with their movement, particularly transfer speed and damage, and the company says it can also benefit OLED displays, assumedly allowing for faster total OLED stack creation.  The company claims that the process can be scaled from 10ppi to 2,500ppi, although we believe while the technology has passed the ‘proof of concept’ phase, it will take some time before the commercial scalability can be proven.  That said, if such a technology can be applied toward Micro-LED production it would represent a big step forward to meaningful commercialization of Micro-LED display technology, and while there are still many other bridges to cross before Micro-LEDs can compete against more established display technologies, any process that can eliminate a major commercialization bottleneck is a positive one.

​Huawei (pvt) has been the target of anti-China sentiment in the US government going back to 2012 when government agencies were banned from using Huawei’s telecom equipment.  Things escalated further in 2019 when then President Trump added the company to the US Entities list, extending the ban to US commercial telecom networks, and eventually tightening the rules to force both US and foreign companies from supplying advanced semiconductor technology and components to the company.  As is well documented this caused Huawei, once the 2nd largest smartphone vendor behind Samsung (005930.KS)[1], to fall to a share 85% below its peak, while its global telecom business also declined significantly.
Huawei’s founder vowed that the company would survive the loss of US components and technology by building local sourcing with the help of the Chinese government.  Over the past few years Huawei itself, and many Chinese government sponsored programs and subsidy enticements have helped to build the infrastructure that Huawei, and other banned Chinese companies need to survive, but it is hard to gauge how much dependency Huawei still has on foreign components given the Chinese government’s positively biased propaganda extoling the virtues of locally produced components. A recent teardown of Huawei’s Mate 50 Pro, the company’s most popular smartphone (released in September of 2022) gives some indication as to the progress Huawei has made toward local sourcing.
According to the most recent teardown, ~90% of the components in the Huawei Mate 50 Pro smartphone are sourced from Chinese companies.  The display, which tends to be the most costly single component, is sourced from BOE (200725.CH) and Visionox (002387.CH), which is not surprising,, with the lens cover supplied by Lens Technology (300433.CH), with a long list of Chinese companies supplying everything from structural parts, analog chips, batteries, PCBs, and touch and fingerprint ID components, but there were still a variety of components produced outside of China, some of which are key components.
In particular Qualcomm (QCOM) provides the 4G processor, a number of power management chips, an audio codec, RF transceiver, Wi-Fi, and power amplifier, many of which operate under it’s Snapdragon 8+ Gen 1 processor that runs the phone.  SK Hynix (000660.KS), Samsung (00930.KS) , and Micron (MU) provide memory, along with HiSilicon (pvt), which is owned by Huawei.  Qorvo (QRVO) provides RF front-end silicon, ST Micro (STM) supplies encryption protection, NXP (NXPI) NFC, audio power amp, and battery charging management, while Maxim (ADI), IDT (IDT), Skyworks (SWKS) and Broadcom (AVGO) all supply various sensors and other silicon.
While Huawei has developed its own OS (Harmony 3.0) the company must still rely on outside companies for its main processor, the Qualcomm Snap 8+ which is produced using a 4nm process as China’s silicon fabs have been unable to develop the necessary technology to duplicate much silicon at these node levels.  Even more stringent limitations on EUV and potentially DUV tools from ASML (ASML) have made things even harder, forcing the Chinese semiconductor industry to try to develop such tools internally, a process that will take years.  The big issue that still remains however is the inability to access current versions of Android or access to the Google (GOOG) store applications, which continues to keep Huawei’s markets primarily in China.
That said, Huawei has certainly gone a long way from the over 70% non-local component content seen a few years back, and while there have been fits and starts as to negotiations between Huawei and the US government, we expect little will change unless the global (and US) semiconductor industry goes into a sustained downturn, at which point we would expect some of those restrictions to be eased, although that would likely not be this year.  In the interim, Huawei will have to try to eke out another percent or two of local sourcing to keep from inciting the US government to tighten sanctions further.


[1] Huawei – 19.4% Samsung 19.5% in 2Q ’20 according to our composite smartphone shipment database.

Passive components are the Rodney Dangerfield’s of the electronics world, they get no respect, however they have become increasingly important since 2020 for two reasons.  First, the use of MLCCs (Multi-layer Ceramic Capacitors) has increased rapidly as their use in consumer devices (smartphones, etc.) and automotive applications (EVs) has increased demand, and second, the prices of the raw materials needed for producing passive components have increased considerably over the last two years, creating a volatility that is rarely seen in passive component prices.
The increased demand for consumer products during the COVID-19 pandemic was responsible for much of that volatility, however while passive raw material prices remained at unusually high levels in 2021, the Russian invasion of Ukraine last year caused a secondary spike to even higher levels but relatively quickly returned to that new baseline as supply chain routes were restored.  That said, as shown in the chart below, prices for passive raw materials have been on the rise again which is concerning for passive component pricing as we move through 1Q. 
While the overall effect of increasing passive component cost will be offset a bit by lower silicon based product prices, the inflationary environment we face is pushing consumers to be more frugal with their CE purchases, leading to the expectation that brands will offer significant discounts to entice buyers.   There has also been an increased focus on renewable energy over the last few months as a large number of weather incidents bring forward the demand for less carbon emissions from global industries, also contributing to demand for the same raw materials that are present in passive components, and that renewed demand competition seems to be, in part, responsible for the most recent spike in passive raw material prices.
However, if this rise in passive raw material component prices continues in early 2023, which it is expected to do, CE brands will have little room or incentive to lower prices and CE sales will continue to suffer at least through 1Q, so we see this as a negative datapoint in our expectations for the CE space in 1Q and possibly 2Q.  That said, given the volatility seen in some passive component raw material pricing, we expect things could change substantially during the year.  CE product brands will likely pass on cost increases more quickly this year in order to preserve margins that are already under pressure, so we expect CE product sales to be even more closely tied to manufacturing costs and raw material prices, for both passive and active components for the 2023 year.

​Yesterday we noted that an ITC judge had issued a preliminary final decision concerning a patent infringement case brought against Apple (AAPL) by Masimo (MASI), a major producer of pulse oximetry sensors.  In the ruling, Apple was said to have violated one of four Masimo patents with the ITC ordering a ban on the importation of the Apple Watch 6.  The ruling now goes to President Biden for his review, and should he sign the ruling after the 60 day review period ends, Apple will be forced to agree to a royalty arrangement with Masimo, or stop selling the Apple Watch 6 in the US.  It seems that on December 22 of last year the ITC also ruled in favor of a patent infringement suit against Apple by AliveCor (pvt), the producer of the KardiaMobile™ heart monitoring device that is advertised on TV, determining that Apple had violated two AliveCor patents and issuing both a cease & desist order and a $2 bond on any devices that are imported during Apple’s PTAB (Patent Trial & Appeal Board) hearings.
The Masimo suit seems like it is coming to a conclusion however we expect considerable lobbying to avoid an outright ban on the Apple Watch 6 before the President’s decision, and Apple will have the right of appeal with PTAB again if the president does sign off on the ban, so things could take some time before they are resolved.  The ITC bond is suggestive of what Apple might wind up paying per unit if the infringement is upheld, and Masimo has another suit against Apple in Federal Court concerning an additional 10 patents it believes Apple has infringed upon, so there is considerable pressure on Apple to resolve the Masimo ITC issue with an agreement that would include any other potential infringement legalities.
While license fees for both suits will do little to reduce Apple’s massive cash position, it seems that Apple’s licensing practices are a bit unusual in that before they wind up licensing a patent, they incur years of legal fees in addition to the eventual per unit license fee that would be backdated to the original violation date.  Its hard to know how the legal fees compare to the license payout, but it seems that reaching an agreement before the product is released seems a better plan.  Of course, every small company with IP will try to squeeze money out of a company with such vast resources, but we expect most would rather negotiate down a bit than spend years and considerable cash litigating against Apple’s legal team that will be happy to appeal any unfavorable decision ad infinitum. 

For the last two months we have expressed some concern over the slowing rate of growth seen in some of the indicators we use to gather insight into 5G infrastructure development, having seen 5G smartphone model growth of only 1.3% and 0.6% in October and November.  While that concern was based on the overall global macro environment, which would lead one to expect at least some slowdown, we note that smartphone model growth increased in December by 2.8%, and while that is still below December’s m/m growth in previous years, it is a step in the right direction, with slower growth expected as the 5G space matures.   
For the 2022 year 5G smartphone model releases grew 47.9%, still a bit below trend line, while total 5G devices grew 43.0%, with vendor count increasing by 24.4%, as overall device growth moving back above trend line in 4Q.  CPE growth was particularly strong in December, up 11.8%, with the full year seeing 30.5% y/y growth for that category, which we use as a proxy for 5G’s expansion from a primarily mobile technology to one that compares to other fixed customer technologies such as cable or fiber.  All in, given the macro environment we believe 5G performed well in almost all categories, especially relative to mobile phone growth or lack thereof.  In 2023, we expect 5Ggrowth to continue but expect y/y comparisons to be reduced as the industry matures, especially form factor growth.  Our focus will be on device count, 5G share of the smartphone market, and CPE growth, which we believe will best reflect the state of the 5G ecosystem.

The President of El Salvador is, to say the least, a big fan of cryptocurrency, and has staked out the country as being the first to declare Bitcoin as the country’s legal currency.  As we noted last July, Naib Bukele, the country’s president, began a program of purchasing Bitcoin for the country’s treasury back in September of 2021 and to date has invested $109.058m of the country’s capital in his program.  Unfortunately the price of Bitcoin has not gone his way and the current value of the country’s Bitcoin holdings has declined by 56.7% to $47.724m, including a purchase he made last November, which, to his credit, is up 13.65%, although even with that purchase, the total portfolio is only up 1.02% from where it was last July. 
It seems that both the president and the parliament remain unfazed by the drop in the value of their Bitcoin holdings and just passed an amendment to the country’s Digital Securities Act (62 for 22 against) that will allow the country to issue $1bil in  “Volcano Bonds”, the fulfillment of the President’s plan announced last November.  The plan entails using half of the bond sale proceeds to by more Bitcoin and the rest to go toward developing the country’s geothermal power infrastructure, which would be intended for low-cost Bitcoin mining.  The development project, known as “Bitcoin City”, will be created at the base of Conchagua, a volcano near the Honduran border, that will provide geothermal power for the city’s infrastructure and crypto mining, along with being a tax haven.
 While no date has been set for the bond issuance, the parliament has set in motion the legal framework for such a financing, which will take place on Victoria, BC’s Blockstream’s (pvt) Liquid Network in the future, while most immediate would be creating and passing government securities laws and licenses to maintain some level of legal control over the process.  Rumors that verbal commitments for over half of the potential issue have not been verified, but the bonds are said to carry a 6.5% coupon and a call on 50% of the profits that the government makes on its Bitcoin investment after it recovers $500m, and while the government expects institutional investors will take most of the offering, they will set aside a portion to be sold to the general public for $100/bond.