​Sharp (6753.JP) has announced that it will sell its shares in Sakai Display Products, an entity that owns Sharp’s Gen 10 LCD fab in Osaka, Japan.  Sharp owns 1.03m shares (23.4%) of SDP, all of which will be sold as of March 15.  The assets include the main plant, which has a capacity of 78,000 sheets/month  using a 3130mm x 2880mm substrate, two color filter plants and considerable logistical infrastructure, and are co-located with a number of major LCD material suppliers, including Corning’s (GLW) Osaka Glass fabrication facility.
Sharp has not indicated who the party is that will be buying the shares, but has indicate that they have established an agreement with SDP to receive ‘a stable supply of high-quality LCD panels’ after the shares are sold.  Sakai Display products is owned by Terry Gou, the founder and chairman of Foxconn (2354.TT), the company that owns a controlling stake in Sharp., which would give us the idea that Sharp might be selling its stake to an entity associated with Foxconn or Gou personally, although no such mention has been made.  That said Sharp stated that the ‘Assignee’, while not disclosed due to confidentiality, ‘is not a related party to the company” leaving speculation open as to the actual buyer.  More to come…

​As we have noted a number of times, the tech press is ripe with commentary on shortages in the CE space.  Components from MLCCs to open panel displays have been singled out as seeing price increases based on shortages or higher prices of raw materials, intermediates, or end-products, and recently shortages have been blamed for production slowdowns or temporary factory closures in the automotive space, due to a lack of silicon components.  As we have also noted, the fear that a company will not be able to meet expected demand can cause buyers to over order, with the thought that supplier allocations will bring delivered amounts close to ‘real’ expectations.  Not only does this tighten these markets, but it gives suppliers the opportunity to continue to raise prices, not just because raw material prices are increasing, but because they know that buyers will pay up to guarantee supply.
At a more basic level, silicon foundries are in an ideal position, as long as they are not constrained by wafer and other semiconductor process materials.  Semiconductor capacity works on a sliding scale in that common silicon components are usually produced on the same node, with each node having a calculable industry capacity and cost.  Not all products need to be fabricated on 7nm of 5nm nodes, which get lots of press, so there is considerable demand for 28nm and larger nodes, where capacity is less constrained.
But this all falls apart when foundries are running at full capacity, which many are, and they are no longer looking to fill capacity at each node.  At this point foundries are looking to see which customers are the most ‘in need’, which translates to who will pay the most for capacity at each node.  A number of well-known automobile manufacturers have either indicated that they were facing possible temporary line shutdowns or have already closed lines on an interim basis.  Most blame a shortage of silicon-based components and governments in countries where the automotive industry represents a sizeable piece of GNP are beginning to get involved.  That said, the world’s largest foundry, Taiwan Semiconductor (TSM) has taken it upon itself to alleviate the shortage.
TSM has responded to requests from various governments and agencies, and has agreed to put orders for its automotive chip customers first and move them up to SHR (Super Hot Run) status in order to help to alleviate these shortages.  While this seemingly altruistic step will possibly help a few of TSM’s larger automotive customers, it will also make it more difficult for 2nd tier customers to get orders run, which will put those customers into an evaluation process that would try to identify the lost revenue and operational cost of shutting down production, against paying a higher price for foundry time.  In addition, it seems that along with moving automotive customers to the front of the line comes a 20% increase in price, so if the big boys are already paying an additional 20% to get product made, we have to assume that 2nd and 3rd tier customers would be paying a bit more, regardless of what their analysis tells them. 
For those that would be in jeopardy if they shutter a line until component supplies can catch up, they have little choice but to accept the 20% boost and then another add-on to get TSM’s attention, which only serves to both embolden foundries as to what they can charge and escalate the rapidity and severity of price increases.  None of this is surprising, however the basis for this (we hate to use the word) ‘inflationary’ cycle, is a virus, which hopefully will begin to have a lessening effect on the global population over the next six to nine months.  This leaves plans on both sides of the supply/demand seesaw in limbo.  As a CE supplier, do we continue to expect that accelerated demand will continue and build inventory toward those goals?  As a component supplier do we add capacity to meet what might be a more permanent demand increase? 
Luckily we don’t have to make those decisions, but what we do have to deal with is the end-user price increase that are already affecting CE products, and at what point, even without a change in virus status, they would affect demand.  We do not expect companies that are in such advantageous positions to hold back increasing prices for noble reasons, but as price increases filter through inventory and production costs, they just make the ‘other side’ of the cycle more exaggerated and potentially more devastating  The equation then becomes one of whether management goes for higher profits in the near-term, knowing that things could get messy if and when things return to ‘normal’, or whether they look at the last year as an anomaly and maintain a less aggressive pricing policy.  We can’t answer the question, but having been in the business through a number of CE cycles, while we would like to think that the latter would be the case, its hard to imagine the CEO of a company sitting down with the board and trying to explain why they are not taking advantage of potential price increases above their material costs.  We guess that answers the question…

Shipment data is always a moving target and this year was the definitive example of that mantra.  When estimates  for 2020 smartphone shipments began to surface late in 2019, few (no one) had any idea that the world would be turned upside down by a virulent virus that changed the way people interact on a global scale.  The other factors that can influence shipments continued throughout the year, but nothing had more of an influence of smartphone shipments than COVID-19.  Given the reduction in travel and office time and the increase in home time, the constant focus on smartphones shifted to tablets and laptops and reducing the need for the latest and greatest smartphone.  That coupled with smartphone prices rising substantially above $1,000 in the previous year, was something even excitement over 5G could not conquer, and smartphone shipments declined in 2020.
To what level is a more subjective question, and as we accumulate estimates from multiple sources, we see both the variations in full year smartphone shipment numbers and the corresponding differences in y/y shipment performance estimates.  As we have always done, we average our sources to try to mitigate the effect of outliers and what amounts to inclusionary or exclusionary biases.  The data below ranges from less than 30 days old to less than two days old, so it is as fresh as possible, but we note that one unnamed source published data ~ one month ago and updated it yesterday, with a 27.1% reduction in overall smartphone shipments, which points to the necessity for fresh data and averaging.
The data below shows the 202 smartphone shipment estimates for six of our sources, essentially those that have reported same, and while there are others that have not yet published their data, we expect this will give a good sample of the final data.  We compare each to the average and compare the 2020 average to last year’s composite number, which was derived by averaging all sources on a quarterly basis and then totaling for the year.  According to our calculations, the smartphone market declined 7.98% y/y, which we believe is an accurate representation of the actual market contraction.

There is a problem with using average data which becomes obvious when calculating individual company share.  As each vendors quarterly shipments are an average of all data sources and the totals are averaged, the total share (all vendors) will exceed 100%.  To compensate, we bring the share total to 100% using a yearly constant modifier, with the result below:

​We note that while Samsung continued to hold the top share in 2020, the actual number of smartphones shipped decreased by 12.3%, with a similar circumstance for Chinese brand Oppo.  Huawei saw both a share drop and a substantial reduction in total units shipped due to US trade restrictions, while Chinese brands Xiaomi and RealMe, which is a sub-brand of Oppo, saw actual shipment unit share gains, despite the overall smartphone market contraction.  Apple saw a similar shipment and share boost to a lesser degree.  As we have noted previously, LG is facing a decision as to what it will do with its money-losing mobile division, which saw a substantial decrease in shipments in 2020. 

On February 24 the management of Frys Electronics (pvt), the 13th largest Consumer Electronics retailer in the US, notified its employees, suppliers, and customers that it would immediately cease operation in all of its 31 stores and website, ‘as a result of changes in the retail industry and the challenges posed by the COVID-19 pandemic.”  The company, which generated slightly more CE sales than Staples (SPLS) in 2019, was known for its unusual themed stores, which began in Sunnyvale, California in 1985 and grew to a peak of 34 stores in 2019.
The CE big box retailer began when the Fry brothers were each given $1m after their father sold his supermarket business, and joined together to open the first store, which was loosely based on the same principals as the grocery business, with a wide variety of products from microprocessors to technical books.  In fact, the early store also sold groceries in the early days (“chips & chips”) but essentially competed with Radio Shack (pvt) and Circuit City (defunct) and more currently Newegg (002280.CH).
​

Fry's Interior & Exteriors - Source: ​Jddg5wa via imgur.com, Fry's

The fear of, or actual component shortages were the root of continued panel price increase in February, which exceeded our expectations in two of the three major large panel categories.  There were some real events that contributed toward that fear for TV panels, particularly the explosion at the Asahi Glass (5201.JP) plant in Gumi, South Korea, which we expect will not reopen to production until the end of April, and the mid-December power outage at the Nippon Electric Glass (5214.JP) plant, which is still under repair.  Together with driver and other shortage, these issues continued to pressure panel buyers to pay higher prices again in February.

Looking at TV panel prices specifically, February aggregate TV prices are now 75.6% above the low point (Jan ’20) last year and 9.1% above the December 2020 closing aggregate TV panel price, and are 41.1% above the highest TV panel price in 2019.  To put this into greater perspective, if we look at TV panel prices over the last 33 months (fully comparative data), as shown in Fig. 6, every TV panel size has increased in price, with only 65” panels below the June 2018 price by 1.2%.  In a cyclical industry that is known for LCD panel price declines, this is a very unusual circumstance.  Possible scenarios for where panel prices go this year will be noted next week. Stay tuned.

​Yesterday President Biden issued an Executive Order commencing a 100 day review of the US supply chain by the Commerce Department with regard to risks associated with semiconductor manufacturing and advanced semiconductor packaging.  Further, the Department of Energy is to conduct a similar review relating to high-capacity batteries, the Secretary of Defense is to do the same for ‘critical materials’, which in this case means rare earths, and the Secretary of Health & Human Services is to review the supply chain for pharmaceuticals and ingredients.  In more typical government style, these agencies have one year to submit full reports on how to strengthen the US manufacturing base to be less dependent on supplies from foreign adversaries (No specific names, but …China) on a broader basis, expanding into a broad swath of technologies ranging from cybersecurity to agricultural commodities.
Its not like dozens of such reports have been written over the last few years (we have read a few) so this is a ‘new administration’ look at the same problem, which is a horrendous waste of time and capital.  The objectives are to reduce reliance on China and other adversaries and to generate those resources from US companies or allies.  Of course every administration has to have their own take on these issues, but by the time any actual plan is implemented and starts showing results, years will have gone by.  Mineral resources tend to be regional and therefore are hard to ‘re-source’ so stockpiling would be the alternative when it comes to rare earths or similar materials that are necessary for national security or advanced semiconductor development, but that is just the tip of the iceberg.  While the US has a big stick when it comes to overall trade, the more specific issues relating to using trade to punish supplier countries for what we believe to be nefarious or ethical issues, comes with lots of repercussions.  We are not saying using trade to further ethical ideals is a bad thing, just make up your mind as to what is good and what is bad an implement policies against those judgements.  Don’t spend years agonizing over the same issues that resurface every few years.  As Nike (NKE) used to say, “Just Do It!”

​Mobile phone carriers are big on promises.  There are lots of plans that offer ‘unlimited’ data plans, but there always seems to be a catch, especially with plans that include 5G.  Take, for example, AT&T’s (T) Unlimited plans, which start at $35/line and run to $50/line.  The first catch is you have to sign-up for 4 lines (all unlimited plans) and with the $35 plan they add “AT&T may temporarily slow data speeds when network is busy”, while the $40 and $50 plans give the same caveat when you hit 50GB and 100GB respectively, and should you travel to Mexico or Canada you could see speeds down to 2G levels.  As some folks figured out that they could use their smartphones as ‘hot spots’ for their tablets or laptops, these plans also limit the ‘hot spot’ data maximums so you can’t use your smartphone as your in-house 4G/5G network.
AT&T is no different than other plans, most of which bury the data limits in plan details far from the promotional advertisements, but now T-Mobile (TMUS) says they have unveiled a new plan that has absolutely no limits.  The new Magenta Max plan costs $50/line, for those taking 4 lines, $57 for three lines, $70 for two and $85 for one, but ‘smartphone speeds can’t slow based on usage’ is the mantra for the new plan.  There is a 40GB limit on ‘hot spot’ data, which would then switch from 4G speed to 3G, and 5G access (at no extra cost) is certainly a part of the plan, but the specifics as to whether you can be on a 5G network 24/7 without restrictions is a bit fuzzy, although 4G unlimited access is guaranteed.  The Canada and Mexico restrictions hold even for this plan, but you get Netflix () for free on each line, or you can stream in 4K UHD for an additional $5/month, but T-Mobile is going to charge an additional $20/line if you run your tablet under the plan and an additional $10/month for any wearable that connect directly to the network.
We only point out the new T-Mobile plan because it moves consumers closer to what would be a true ‘unlimited’ data plan.  As 5G coverage expands and consumers find value in the higher speeds, 4G becomes more of a throw away to carriers who figure high volume mobile data users will migrate to 5G and open bandwidth to 4G customers, reducing the ‘network congestion’ that gives most carriers the out to reduce mobile data speeds. Without that necessity carriers will be less subject to criticism for throttling data speeds and less prone to issues surrounding net neutrality that the new administration is expected to restore.  Just make sure you read the fine print on any plan, even the really small print…

LG Electronics (066570.KS) is trying to decide what to do with its money losing mobile phone division, and as part of that decision, the fate of LG’s rollable smartphone device also hangs in the balance.  Korean trade press has been suggesting that the project has been put on hold after LG ‘reportedly’ told suppliers, particularly BOE, who was developing the display, that the project has been put on hold, and that they could request compensation from LG in the future to cover their development costs.  Earlier this week an LG official indicated that nothing could be confirmed at this pint regarding the company’s plans for a rollable smartphone, yet another LG official stated that “I can firmly deny that any such decision on future mobile products has been finalized.”  This follows a similar denial that the company was planning to exit the smartphone business last month, only to later note that the company was open to all possibilities for the mobile division, even if the final decision has not been made. 
LG is under considerable pressure to make a substantial change to the mobile division, which has lost~$4.5b over the last 5 years, and while LG has come up with some unusual mobile devices over the years, consumers do not seem to have attached themselves to any of them in a big way.   LG has had its share of actual problems with some of its phones and in our experience, the software has never been quite up to par, but we expect after so many disappointing releases, LG’s mobile marketing must be in disarray.   While LG could continue to move toward OEM phone development, the LG brand, which is highly regarded in other CE products, is not so in the mobile space, and unless LG management has a particular fondness for losing money, we would expect they would sell or JV out the mobile business this year, hopefully by the end of 1H.  Given the circumstances, we expect the few remaining high-quality engineers and developers will get picked off by other smartphone brands this year, if the roster has not already been completely picked over, and little will be left by the time the company makes a final decision if they continue to deliberate.
Here’s the short promo for the LG rollable from CES this year: (ctl+click)

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​In our 6/24/20 note, we mentioned that strained relations between Japan and South Korea has pushed the South Korean Ministry of Trade to sponsor a Fine Metal Mask ‘bakeoff’ pitting a number of South Korean companies against each other to find the best production methodology to develop an in-country supply chain, allowing South Korea to become less dependent on Japan for this critical part of OLED production technology.  These masks are precision components as a typical 6” smartphone display can have over 12m sub-pixels that must be of a very specific size, pattern, and location and must be exceedingly thin to avoid shadows that can deposit materials incorrectly.  That said, if the mask is too thin, it will sag and misplace pixels.  Further, as the masks become coated with OLED material that does not pass through the minute holes, they need to be cleaned and replaced on a regular basis.
South Korea imports nearly 100% of its FMMs and that dependence has been a cause for concern, not only for the South Korean government, but also for dominant OLED producers Samsung Display and LG Display (LPL).  Strained relations with Japan, the source of both the masks and the material from which they are made (Invar), over a dispute going back to WWII caused the concern, with the South Korean government developing a competition between APS (054620.KS), Philoptics (161580.KS), Poongwon Precision (pvt), and Olum Materials (pvt).  The latter two use etching to create the FMM, while APS uses laser patterning, and Philoptics uses electro-forming, essentially a process that deposits metal on a mandrel, which is later separated from the mask material.  Laser patterning is just what you would expect, using high-powered, micro-precision lasers to form the mask ‘holes’.  Poonwong and Olum use more typical etching methods used by Dai Nippon Printing (7912.JP) and Toppan Printing (7911.JP), which roll the mask to the desired thickness and etch the ‘holes’ in the same way semiconductor material is etched.
The South Korean Ministry of Trade has now chosen APS (laser patterning) and Poongwon (etch) as the winners in the project, which will now focus on the development of a 600ppi mask for Gen 6 OLED fabs.  That said, the target for such development is 2023, which means that Korean OLED producers will remain dependent on Japan for FMMs for another three years.  Considering that Hitachi Metals (5486.JP) is the leading supplier of Invar, it will likely take even more time to build out a FMM infrastructure.  Credit for the effort, but “Lost Time is never found again” (B. Franklin – “Poor Richard’s Almanack)

January is usually a weak month for the display industry, as December of the previous year is usually the last month for production for Chinese New Year, along with the New Year holiday in the West.  Based on a 5 year average, the typical December to January m/m decline in display industry sales has been -8.6%, with a low of -15.2% (Jan ’20) and a high of +0.3% (Jan ’18).  Before minor corrections, January 2021 saw a sales decline of 2.0% across the large panel display industry, slightly less than what we were expecting (-4%).  Typical February large panel display sales declines are -8.1%, but as January was considerably better than the 5 year average, we expect the same for February, which we expect to be down ~3%.  March however is typically a big recovery month on a m/m basis, both due to pent-up demand following weakness in January and February, and the return of workers to plants after the Chinese New Year holiday.  

Breaking down the decline by panel type, on a unit shipment basis, monitor panels saw the biggest m/m decline at -10.3%, followed by TVs at -8.4%, notebooks at -0.9% and tablets, which grew 1.2%.  While units in total were down 4.5%, continuing panel price increases offset almost half of the unit volume decline.  On a regional basis large panel sales break down as the table below indicates, however Fig. 2 gives a better understanding of how the share of revenue across the large panel display space has changed over the last 2+ years, with Korean large panel LCD producers reducing production capacity and Chinese large panel producers increasing production capacity.

Nanjing and 51% of their Gen 8.6 fab in Chengdu and Samsung Displa (pvt) has sold its Gen 8.5 plant in Suzhou to TCL (000100.CH)/Chinastar (pvt).  These two transfers, while they will not have a major effect on industry capacity overall, will make a big difference to the share and capacity of both sellers, as can be seen in Fig. 3, with BOE and Chinastar seeing offsetting increases as the transfers are made this quarter.  Given that Samsung Display is developing a QD/OLED fab, which we expect will not be in a high-yield mode until 2022, we expect little improvement in Samsung Display’s large panel LCD sales this year, and could see further curtailment of LCD production if panel price increases flatten out, while the fate of Panda’s remaining Nanjing LCD fabs depends on performance and the China Electronics Corporation (State), who is a controlling entity.
All in, it was a better than expected January for the large panel display space, and a continuation of the ‘new normal’ we have seen since the outbreak of COVID-19, which we expect will continue into this month and potentially March.  That said, there are two factors that we are watching closely, the first being the effect of component shortages, and the second being a lessening of the effects from COVID-19 on a global and local basis.  Thus far component shortages have been more of a talking point than one that has made an appreciable difference to the overall LCD display space, and we expect some of that talk is a result of companies double ordering to ensure they will have adequate supply.  The increased demand for monitors, notebooks, and tablets, a result of remote learning and work-at-home focus, has thrown the CE supply chain into disarray, making years of industry long-term planning irrelevant, but while we ponder when things will return to normal, we also have to gain perspective on what that normal will look like.  Next week (hopefully) we will match up our demand scenarios with our capacity estimates for the year and present a few of the possible outcomes and how they will affect the CE space, particularly display companies.  Stay tuned.