Electrophoretic displays get no respect.  They don’t have the ability to display full motion video in millions of colors like LCD or OLED display can, in fact they can only display a few colors at a time, so they tend to be looked down upon by their more sophisticated brothers and sisters in the display space.  Yet when it comes to retail settings, they have an advantage that puts them far above the smartphone, monitor, notebook, and TV displays that get all the respect.  Bistable displays, aka electrophoretic or e-ink displays use very little power, in fact they use almost no power most of the time, which makes them ideal for the retail signage space where hundreds or thousands of small signs help consumers with item descriptions or pricing.

For example, a grocery store, where thousands of items must have what are normally paper tags that show product and pricing information.  Each paper tag must be printed and manually placed alongside the proper item in order for the store to recognize what is usually a narrow profit margin.  When an item’s price changes, a new tag must be printed and placed after removing the previous tag.  Think about doing this for thousands of items in a store, and the monumental task of keeping paper tags up to date, while gaining the advantage of price changes, sales, special discounts, etc. all depend on getting someone to print and place such tags.

What would happen if the tags could update themselves?  No longer would you need a number of employees running around the store with updated item tags, and product managers could change prices or generate sales at a moment’s notice.  Of course this is a great idea and a big cost savings, but the savings have to be balanced against the cost of the tags and the maintenance involved in keeping thousands of such displays running.  LCD displays would be colorful, eye-catching, and full of information, but they need power, and trying to string power lines across moveable shelving and connecting thousands of small LCD displays is not practical, which brings us to e-ink displays and the mainstay in the industry, E ink holdings (8069.TT).

In such a case, full motion video is unimportant, as are millions of colors on such displays, but the use of a few colors, with the ability to show small bits of alternative information make e-ink an ideal display for retail applications.  What about power?  Here’s where e-ink displays shine. Such displays do not consume power when they are visible except when the information is changing, so an item tag, that would only change when a manager signals a price change or a sale, would use almost no power (microwatts) and could be run on a self-contained battery.

Formerly e-ink displays were monochromatic and many still are (see Fig.1), but three and four pigment systems are now becoming common and can provide a more attractive an eye-catching tag, with the same display characteristics.  Yes, at some point the battery in a tag must be replaced, but remember that for most of the tags life, it will not be changing and therefore will not be using any power.  A wireless signal from the product manager will change the tag, draw a small bit of power, and then go back to sleep until the next change is made.  No printing, no finding product locations, no changing tags, no incorrect pricing, and the ability to change prices at a moment’s notice.  Is it raining? Let’s put the umbrellas on sale.  Snowing? Shovels and salt on sale? 4th of July? Hot dogs, beer, paper plates, charcoal, and red, white, and blue napkins special pricing updated in seconds.  One could even conceive of an airline like pricing system, which would increase prices as the number of units of a popular item declines.  Well, maybe that’s a bad idea, but you get the idea.

So, all in, e-ink is the Rodney Dangerfield of the display space, it don’t get no respect[1], but the application of the technology, and there are many other applications where it shines as well as it does in retail, makes it ideal for situations where the data does not need to change rapidly, and the poor stepchild of the display space gets to show those other displays what it can do.  Far less expensive than LCD displays, with almost no power requirements, and a colorful, albeit limited palette, make this display ideal for many applications that could not be done with LCD technology.  We are not promoting E ink Holdings or placing electrophoretic technology at the same level as LCD or OLED, but E ink technology has a place in the display world that few other display modalities can satisfy, and more sophisticated and reactive products are being developed that can enhance the user experience at costs far lower than more sophisticated display technology.  It deserves a little respect.



[1] “I get no respect.  The way my luck is running, if I were a politician I would be honest” – Rodney Dangerfield

Newly appointed (to a just-created position) Director of the White House Trade Council, Professor Peter Navarro recited the administration’s ‘unfair trade practices’ rhetoric against Samsung Electronics and LG Electronics (066570.KS) in reference to their competition with Michigan based Whirlpool (WHR).   "I am amazed by how hard it is for our companies to compete on a level playing field. This heartland of America icon is grappling with a practice called country hopping. Two of the South Korean competitors, LG and Samsung, simply move the production to another country each time Whirlpool wins anti-dumping cases against them.  Such country hopping has happened twice to Whirlpool already. LG and Samsung have moved from China to Vietnam and Thailand. This is the kind of trade cheating that must be stopped. It undermines the whole international order, even as it puts thousands of Americans on the unemployment line. It imposes millions of dollars of losses on companies like Whirlpool."

Of course, his comments did not mention the US anti-dumping duties of 52.5% on Samsung and 32.1% on LG that were imposed in December as a result of a petition from Whirlpool, based on the concept that the two competitors were selling washing machines at lower than ‘normal’ prices in the US, or the fact that when the US Tax Policy Center commented that the new administration’s economic plan would both reduce Federal revenue by $6 trillion and lower long-term growth, Navarro stated that the analysis demonstrated “a high degree of analytical and political malfeasance”.  He followed the Peterson Institute’s comments that the plan would cost millions of Americans their jobs with “(the Peterson Institute) weave a false narrative and they come up with some phony numbers” and when 370 economists signed a letter warning against Trump’s economic policies last November, Navarro stated that the letter was “an embarrassment to the corporate offshoring wing of the economist profession who continues to insist bad trade deals are good for America.”

While we are as non-political as is possible, we see such rhetoric as a waste of time.  Rather than cry about what other companies and countries are doing to US companies, wouldn’t it be a bit more logical to retrain workers, develop new products, and generally work toward improving the ability of the US to compete, rather than making statements that are obviously placed to destabilize relationships with trade partners in preparation for a renegotiation of trade deals.  If you think that the deals are not good for America, then sit down and start to renegotiate.  Putting a low-grade economist with an obvious political agenda in the spotlight does little to work toward a better agreement.  If you are going to try to bully your opponent into a new agreement, make sure you and the public know what the upside and downside could be before you start mouthing off in the press.  JOHO

While here in the US, we have our own set of international relationship problems, South Korea is facing sanctions from China for establishing the US Army’s THAAD[1] anti-ballistic missile program to protect itself from North Korea’s aggressive ballistic missile and nuclear warhead programs.  The system, which began to be deployed yesterday, has already spurred the ire of the Chinese government, who sees the system as a way to contain China’s military, although the system is not configured to intercept Chinese missiles theoretically headed toward the US.

South Korea however has already seen Chinese authorities shut down four South Korean Lotte (023530.KS) Mart’s on the mainland and has banned (unofficially) South Korean game companies from releasing new games in China.  While these are merely tokens, the real impact will likely be felt among South Korea’s largest corporations, of which Samsung Electronics would be on the top of the list.

From a broad perspective, China is South Korea’s largest trading partner, with South Korean exports to China representing ~25% of total country exports, and China holds 18% of all South Korean government bonds but ~20% of the sales of the 4 largest South Korean conglomerates comes from their Chinese subsidiaries, with Samsung Electronics (005930.KS) at 23.1% for the 1st three quarters of 2016 and SK Hynix (000660.KS) (not in the top 4) having 34.7% of its sales in China during the same period.  On the other side of the ledger, South Korea was the 4th largest market for Chinese exporters, only behind the US, Hong Kong, and Japan and 78% of South Korea’s exports to China were for intermediary goods, essential to Chinese manufacturers.

As the defense system continues to be deployed, we would expect to see further sanctions from China, and while it will be a bit difficult to see a direct correlation to any shortfalls seen by South Korean manufacturers, we note that while the Chinese CE market has made significant strides toward self-sufficiency, we estimate that Chinese panel producers will represent only 24.7% of the worldwide market this year, while South Korea will represent 35.4%.  China’s dependence on South Korea’s display production capabilities is still a reality, and direct sanctions against companies like Samsung Electronics by the Chinese government would be walking a slippery slope, but trade sanctions and tariffs seem to be the current tool for establishing who wears the biggest pants in the neighborhood.  Perhaps looking at the THAAD system as a way to protect a nation from a psychopathic lunatic that lives on the other side of a 2.5 mile wide DMZ might serve China better in the long run.



[1] Terminal High Altitude Area Defense

AU Optronics (AUO) reported February sales of NT$29.14b, up 2.7% m/m and up 41.7% y/y.  As we noted last month, given the very weak panel pricing environment in 1H 2016, y/y comparisons will be easy until July of this year.  That said, typical February m/m results are down 2.4% (5 year) although eliminating the anomaly year (2012) would show a more realistic decline of 10.2% (4 year), so we characterize the February results as strong.

Large panel shipments were 8.91m units, ~6.6% better than the 5 year average, up 5.1% m/m and up 26% y/y, while small panel shipments were 11.76m units, down 1.5% m/m but up 1% y/y.  The consensus estimate for AUO’s 1st quarter 2017 is NT$85.454b, which implies March results of NT$27.945.  Given that the average March results (5 year) have been NT$32.89b, we would expect AUO to come in ahead of consensus for the quarter, particularly, as we mentioned above, the 2016 1H results were very weak, skewing the average downward.  As a reference point, Hannstar Display (6116.TT) also reported February sales, down 10.9% m/m but up92.3% y/y, again indicating how severe the 1H 2016 pricing downturn was.

AU Optronics has been able to take advantage of both the shortages seen in certain TV panel sizes and in the trend toward ultra large TV panels, where it has been one of the few panel suppliers to hold a position in the 85”/86” 4K market, (against LG Display (LPL), Samsung Display (pvt), and Innolux (3481.TT)), where premiums are still high.  In the near-term, other than the risk of falling TV panel prices, AUO’s position in the large format TV panel market is sound, however as a number of new large format TV panel fab open in 2018 and 2019, AUO will face increased competition from suppliers with more efficient production.  The company has mentioned that it is considering a Gen 11 fab to offset such competition, but no decisions have been forthcoming.

Once again the iconic Radio Shack (pvt), the home away from home for amateur radio nerds in the 1950’s and 1960’s, looks like it has gasped its last breath, really.  The company, which was started in 1921 was close to bankruptcy in the 60’s when Charles Tandy bought the company for $300,000 to add to his leather goods and hobbyist businesses.  Radio Shack went through a number of rebranding efforts (Incredible Universe, McDuff, Video Concepts, etc) but didn’t catch on to the e-commerce parts business until 2006, when well established high volume parts suppliers already had a lock on the market.

There were some good times, particularly oriented toward fads in the CE business, such as CB radios and the TRS-80 personal computer, but hard times hit again in the 1990’s, and Tandy sold what was once the largest PC manufacturing organization, along with the Memorex brand name and its leather assets, and began selling the same 3rd party brands that were available everywhere.  This, a number of missteps in the mobile phone space, a class action lawsuit by 3,300 current or former Radio Shack managers, and ratings as the ‘retailer with the worst overall customer experience (6 years running) took their toll, despite a $250m cash infusion from Cerberus (pvt) and Salus Capital (HRG).  By 2013 losses were over $400m and a proposed restructuring was prevented by creditors, with a formal Chapter 11` filing in February 2015.  A month later the court approved a $160m offer from Standard General (pvt) along with a partnership with Sprint (S) who would be a co-tenant in the remaining 1,700+ Radio Shack stores.

Now General Wireless, the entity that runs Radio Shack for Standard General is expected to file for bankruptcy, leading to a liquidation after Sprint backed out of the deal in January, drying up the RS cash flow.  According to ‘sources’ General Wireless terminated buying, inventory management, marketing and franchise operations early in February, while shutting its fulfillment center and stopped paying vendors. CEO Dene Rogers said, “We had a decent 4th quarter”, at a roundtable in January, right before the Sprint pullout.  Maybe it’s time to give Dr. Frankenstein a rest and let the body stay dead.

We are not quite fans of VR, despite the ongoing hype over how we all will be wearing VR headsets during what little free time we have, likely more because we are part of that 20% of the population that does not do well when watching 3D videos with glasses, but also because from a practical standpoint, the applications are limited.  AR (augmented reality) however, would seem to have many applications, both from a consumer standpoint and from a business standpoint that are a bit more practical, and while they don’t have the appeal of being completely immersive, unless you are sitting on a couch or chair, an immersive experience can be hazardous to your health.

That said, we have seen a simple AR product that seems to actually be helpful to the consumer, at a ‘reasonable’ price, and doesn’t make the user look like someone wearing a pair of x-ray specs from the 1950’s.  A small company in San Mateo is developing an AR product line that overlays video content from an iOS or Android smartphone to the glasses, which look like regular glasses that would be typically worn by ordinary folk.

The glasses work by projecting an image on the side frame of the glasses, which is bounced through an embedded prism onto the user’s retina.  This image floats in front of the wearer and stays in focus regardless of the direction of view.  While details are still meager, the first and second versions will produce a 200 x 400 (possibly 480) pixel image to the right eye, while the third version will have dual eye images.  The glasses connect to other devices via Blue tooth and can last up to 18 hours before charging, using three axis sensors, an accelerometer and a magnetometer along with a temperature sensor and ambient light sensor.  Five button on the frames allow the user to work through menus and notifications, although when the glasses detect a speed over 17 mph, all notifications are turned off., and at no time are videos able to be played on the glasses, as they are considered a dangerous distraction.

The supplier, LaForge Optical (pvt) will give users the option of having their prescription built into the lenses at no cost and a few early versions have been shipped with current orders being scheduled for 2Q delivery.  The cost for the initial units is $590 and the 2nd generation, which is expected to ship later this year will be supplied for free for those who place orders now.  In light of full disclosure, we have no affiliation whatsoever with this company or the product, we just thought it was an interesting application of a technology that has a tendency to be overhyped and over-engineered.

User video here: https://www.laforgeoptical.com/video/original-beta_6.mp4

With LG (066570.KS) getting a time advantage over the Samsung Galaxy S8 flagship smartphone release, the company says it is seeing strong pre-orders for its new G6 smartphone.   According to the company, pre-orders have reached over 40k units in the 1st 4 days of pre-release availability.  The phone will be released to the public at the end of this week and will carry a $778 price tag for the 64 Gb version.  LG has been giving consumers the ability to test the device at over 3,000 retail locations in South Korea since 2/27.

Of course, if you pre-order, as seems to be the case for almost all high-end pre-ordered phones, you get some additional benefits.  In this case, a one year screen replacement warranty and a phone case worth $389, and a chance to purchase the LG TonePlus Bluetooth Headset, a Raleigh keyboard, or a Nescafe Coffee machine for 5,000 won ($4.33).  Given that the last two flagship LG smartphones, the G4 and G5 have been less than successful and caused LG’s smartphone segment to show a $404m operating loss in 4Q 2016, the G6 is a bit of a “Hail Mary” for LG.  The delay from the usual release of a Samsung Galaxy smartphone at Mobile World Congress to March 29 will give LG at least a running start, but the phone will have to do well on its own merits in order to resurrect LG’s smartphone prospects this year.  The phone received good press in South Korea, but has yet to prove itself on both a local and worldwide scale, and at 1st glance it seems quite similar to other phones in the same category, but the true test will be how it stacks up against the Samsung Galaxy S8 with its next-generation OLED conformed screen, vs. the G6 LCD display.

As we have noted over the last two years, Chinese LED chip producers have continued to expand capacity during a time when others, particularly Taiwanese competitors have not, despite the over-capacity situation that has faced the industry.  With the goal of increasing Chinese independence from worldwide suppliers, as it is also doing in the display industry, the capacity increases have accomplished their goal, with domestic LED chip manufacturing at ~76%.  The Chinese upstream LED chip market, which grew ~9% y/y in 2016 to ~$2.02b US, with the top 10 taking a 77% share, but the Chinese LED packaging market has yet to capture such a top ten share, at a meager 43% last year.

Growth in the Chinese LED packaging market is expected to outpace the overall LED packaging market this year (~4%), as the Chinese LED industry refocuses on packaging for more specific applications such as IR and small pitch LEDs as iris recognition becomes more popular and VR applications gain some traction.  Micro-LED applications are also getting focus, as some producers and packagers see this technology as a substitute for OLED, but despite the optimistic view, actual high volume commercial CE products with the technology are still far away as we mentioned in our note on HKC (248.HK) last week.  Rather than seeing micro-LED applications in mobile consumer devices this year, we would expect to see them in very large screen signage displays where placement is less of an issue, and in some very small (watch size) devices, where the number of micro-LEDs is small.

As is noted in the above comment on smartphone component pricing, the prices of LEDs have been rising, less on demand, although small pitch LEDs have seen demand increases, than on component and material cost increases.  As producers have not benefited from these increases, the need to find packaging applications that have some premium over generic LED applications will drive the industry this year, particularly in China, and while the Chinese government can tout the lessening dependence on the importation of LEDs to the mainland, we note that a significant portion of the Chinese LED production industry is made up of JVs with non-Chinese companies.  Should the battle between Taiwan and China over LED chip pricing take a turn toward profitability rather than share, there is a chance the expansion by Chinese packaging companies might help the industry rather than hurt it, with the alternative being lower demand as prices continue to rise.

Chinese smartphone vendors Xiaomi (pvt) and LeEco (pvt) have been reducing component orders for smartphones from a number of suppliers in Taiwan, according to Digitimes.    Recent smartphone price increases across the Xiaomi Redmi 4 line of CNY 100 ($14.50 US) against CNY 699 & 899 ($101 & $130) selling prices, have caused  sales to decline by 10% after a 42.4% decline in Xiaomi shipments in 4Q 2016 and LeEco has seen unspecified sales declines after increasing smartphone prices by ~5%.  LeEco saw a 39.5% decline in smartphone shipments in 4Q 2016.

Last month we noted that component prices for smartphones and other display devices continued to see increases, and panel prices for smartphones have been rising for the last year in most cases.  The combination of these factors has pressured smartphone producers to increase prices or see further deterioration in margins, as has been the case in the TV set business.  The low-end Chinese smartphone market is extremely sensitive to such changes and we would expect similar declines from other vendors as price increases proliferate.  According to Digitimes Research, the Chinese smartphone market is expected to decline in units shipped from 181.4m units in 4Q 2016, which was up 4.4% q/q and 12.8% y/y to 146m units in 1Q 2017, down 19.3% q/q and down 2% y/y.  Seasonality, particularly in China, given its January 28 New Year holiday, says 1Q is a weaker quarter than 4Q, but smartphone price increases will continue to have a negative effect on unit sales if component prices continue to rise.

We expect a bit of weakness in smartphone panel prices during March and April, as builds for recent smartphone releases (Mobile World Congress) have ended and reorder rates will be based on actual sales rather than anticipated sales, but other component pricing tends to be a bit slower to respond, and will continue to pressure margins for smartphone vendors, especially in the low-end Chinese market, where price elasticity is high.  Hopefully, lower smartphone panel prices will eventually help to stabilize smartphone prices at the low-end, while high-end prices will be determined by the success of both Samsung’s (005930.KS) Galaxy S8 line to be released next month, and Apple’s (AAPL) iPhone 8/X later this year.