​Earlier this month we indicated that Samsung Display (pvt) would likely be making a decision next month as to whether it would stick with QD/OLED technology or do more R&D on nano-rods, a substitute for the OLED portion of the new process.  It seems that SDC will be producing prototype QD/OLED panels for both TV and monitors in June, for testing by parent Samsung Electronics (005930.KS), Sony (SNE) and other potential set brands in China.  Based on a response after 90 to 120 days of testing, SDC will decide whether to put its Q1 fab into mass production.  SDC has already sent prototypes to Samsung Electronics, but those were open cell panels rather than the modules needed to produce a TV set.
Samsung Electronics had previously indicated that they did not intend to produce an OLED based TV product, which was a devastating blow to SDC, who was, at the time, planning to shutter or sell all large panel LCD production capacity at the end of last year.  Since then, SDC has reconsidered its plans as LCD large panel pricing increased markedly, and parent Samsung Electronics has warmed to the idea of using the new QD/OLED technology for a potential TV set product.  That increasing acceptance of the QD/OLED technology does come with some considerations, particularly increasing production capacity by improving yield, which is typically quite low during the early months (or even years) of producing a new display technology.
If Samsung commits to the technology SDC will have to not only increase its yield at its existing fab, but will likely have to commit to and build out another line, as the current fab, even at 100% utilization, would likely be capable of producing just over 1m units/year (65”), and realistically far less.  Such a commitment would entail considerable financial risk for SDC if the technology does not prove competitive with large panel OLED or mini-LED TVs in the future.  Further in order to make the 2022 TV season, such capacity would have to be in service in under 15 months, a daunting task, especially coupled with other improvements required by Samsung, such as an increase in luminance over earlier prototypes in order to compete with Samsung’s mini-LED quantum dot TV line.

​UK based ARM Holdings (9984.JP) has indicated that its new ARM V9 Chip architecture does not fall under US export regulations, allowing it to license the technology to Huawei, who has been severely affected by the US regulations, particularly in reference to semiconductor process.  ARM says it completed an extensive review of the US restrictions and the architecture, which is said to contain the most innovations that the company has made to its design in 10 years, and will now be able to license the technology without restrictions.
This will allow Huawei’s HiSilicon (pvt) fabless unit to use the new architecture in its Kirin chipsets that are used in its high-end smartphones.  Depending on the design however, as HiSilicon must depend on foundries to produce the chips, those foundries must also be convinced that they are not violating US trade rules, unless they are based in China.  As Chinese semiconductor fabs have yet to produce at 5nm, it might still be difficult for Huawei to get non-Mainland fabs to allocate 5nm resources, but it at least sets the stage for the possibility that Huawei might be able to regain some of its former stature in the smartphone business.

Mentions of semiconductor price increases are almost a daily occurrence in the trade press, but at least there is a bit of stability, albeit relatively short-term in one part of the semiconductor space.  DDR4, the higher speed and lower power consuming version of DDR3 that has been around since 2007, looks to have stabilized in price for what is now three months.  This keeps it in line with the linear trend line and a bit above the poly trend line at least for now and has been bucking the trend of increased demand from notebooks pushing up prices as it did last year. 
That said, expectations are that prices will rise in 2Q when peak-season quarterly server DRAM contracts are negotiated.  Since last year’s 1H was a bit on an anomaly there is little consensus on expected DRAM pricing in 2Q other than it will be above $3.  NAND Flash pricing continues to remain flat, although near-term expectations are for a price boost in April as seasonal demand increases, with current prices already a bit above both trend lines.

​Chip shortages are certainly an important topic, as they are the basic building blocks of many CE products, but perspectives on the situation are many and varied, making it a bit hard to discern what is at the root of the problem, especially when certain biases come into play.  Recent comments on the shortage by an industry professional leave us in a quandary as to what to believe and what not too, so we pass it on to see if others are equally perplexed.
According to the source there are three main factors for the chip shortage:

• The limitations put on chip production manufacturing by the COVID-19 pandemic, keeping some manufacturers from meeting schedules.
• Repeat (double) orders.  The US/China trade war has caused buyers to increase inventory levels at a number of points in the supply chain to make sure they have sufficient inventory to work through potential supply limitations.  Those brands looking to build share that was formerly owned by Huawei (pvt) have also increased inventory levels in anticipation of success.
• The COVID-19 pandemic and its limitations have accelerated the global trend toward digitalization.  That acceleration is ahead of industry plans for capacity expansion.

These all seem logical and innately correct but the follow-up solution to the issues above are a bit more telling.  The source (to be revealed below) indicated further that the solution to the problem will ‘depend on how China and the US negotiate and reach consensus in the future,’ also a logical conclusion, since both countries are vying for supremacy in the semiconductor space.  But the commentary gets a bit more specific going forward with the source stating, ‘It is understandable that countries want to put chips used for infrastructure or defense purposes in the country, but it is inefficient to bring the complete supply chain back to the country and try to adopt a self-reliant approach, and it may also bring difficult profits (non- profitable).’
So the source is now saying that a focus on self-reliance in the semiconductor space could lead to a lack of profitability, as semiconductor resources are built on a regional or country basis, rather than on global need, a very logical thesis, which unfortunately has been supported by those who fear that globalization leads to a lack of control by incumbents.   He added, ‘the chip shortage has nothing to do with the location of the fab.  These factors will be present no matter which country it is produced in’, again consistent with a global view of the semiconductor industry.
Given that China’s most recent 5 year plan has a focus to expand the country’s semiconductor industry to reduce dependence on foreign chip manufacturing, and the US government and US companies have begun to focus on building out US semiconductor manufacturing capacity, these comments represent an opinion that is shared by many across the semiconductor industry.  The source added that ‘We believe that the current total production capacity is still greater than the actual market demand,” furthering his apprehension toward a nationalistic expansion of the semiconductor industry as opposed to a globalized approach.
All noble thoughts and representing a less political and more industry oriented approach to current shortages, but we are just a bit concerned that there might be some bias here, as the source of the comments was Mark Liu, the just elected Chairman of the Taiwan Semiconductor Industry Association and the Chairman of Taiwan Semiconductor (TSM), the largest semiconductor foundry globally, with capabilities of ~13m 300mm wafers/year, production node capabilities down to the 5nm level, and the largest purchaser of semiconductor capacity and related equipment.  This taints his view that semiconductor expansion in China, the US, and Europe, would be ‘unrealistic’ a bit considering such would represent additional competition to TSM and could reduce TSM’s utilization and ‘ability to use their expertise to discern which customers are actually buying for need rather than buying for inventory stocking’, as he also noted in the speech.  Its hard to take advice from someone whose motives are a bit self-serving, even if they are correct, albeit likely for the wrong reasons…. JOHO

Corning (GLW) has indicated that it has raised prices ‘moderately’ for display glass substrates in the 2nd quarter.  According to the statement, “This price adjustment is a result of increased costs in logistics, energy, raw materials, and other operational expenses during the current glass shortage.  Additionally the cost of precious metals required for maintaining reliable glass substrate manufacturing have risen significantly since 2020. While Corning has sought to offset these added costs with productivity enhancements, it can no longer fully absorb them.”
We took a quick look at raw material prices used to make glass substrates, and while borosilicate glass is primarily silica which is highly refined or grown, other ingredients, most of which are closely guarded secrets, include Boron Oxide (made from Borax) and oxides of Sodium, Potassium, and Aluminum.  The price of Boron Oxide has risen by 9.5% over the last 12 months, enough to make a difference given it constitutes between 7% and 13% of borosilicate glass composition, so there is justification for a price adjustment, even at this basic level, and as we have noted, the price of rare earth materials has risen precipitously over the last year, also having an impact on the overall cost of display glass production, despite the small quantities used.
But when considering that glass production is one of the most energy intensive production processes, a quick look at the spot price of natural gas during the same period is an even bigger indicator that the cost of production is rising.  As seen in Fig. 2, the spot price of natural gas has risen 32.6% in what is the last 13 months, and if we go back just one month (Feb.), that increase would have been 67.4%.  With energy accounting for between 14% and 15% of the glass industry’s production costs, just the increased cost of energy would justify higher prices.
So if a glass substrate price increase is justified from a raw material and energy standpoint, are there any other issues that come into play here that makes this time different from others?  Before we answer that question, it is important to understand a bit of history concerning glass price declines.  If we go back to the ‘old days’, especially when panel prices were falling quickly, we note glass ASP declines at Corning of over 6% on a quarterly basis between 4Q and 1Q (2015), however in subsequent years that same 4Q/1Q decline began to moderate with company comments like “sequential price declines in 1Q were the best in 5 years” (2016), “sequential price declines were moderate – the best in 6 years” (2017), “…best in a decade…” (2018), “more moderate than expected” (2019), and continued in that vein, with estimates falling to low single digits and hints of ‘flat’ pricing late last year. 
As demand increased last year we expect q/q glass contract price adjustments got close to zero, and while the company does not reveal the actual contractual price reductions, we expect that large customers (top 4 represented ~74% of sales in 2020) were willing to hold glass prices steady to insure continued supply.  Then the ‘other issues’ came into play, a power outage at Corning competitor NEG’s (5214.JP) plant in Shizuoka, Japan, which shut down the plant for over 5 hours and an explosion at Ashai’s (5201.JP) Gumi glass plant (Gen 10.5.).  Given that glass production is a continuous process and that the rapid cooling of a plant’s furnaces can damage the refractory brick that lines the furnace, just the NEG shutdown is expected to reduce industry glass production by 2% to 3%.  While this seems to be a relatively small amount, when the industry is as tight as it is currently such a reduction in capacity can make a significant difference.  In order for panel producers to make sure they have enough glass substrate capacity to meet current demand, they will be willing to pay a higher price for production, especially those who are directly affected (We believe LG Display (LPL) is a key NEG customer),, which pushes up the overall price of glass.  This coupled with the increased cost of production makes Corning’s price increase, which we expect could be as much as 3% to 4%, a no-brainer, and panel producers will likely be happy to pay it despite its ‘unprecedentedness’, hence the flying pig and blue moon.

​A Samsung spokesperson has said that the Samsung Austin Semiconductor fab that was shut down during the winter storm power outage that took place in Texas six weeks ago is ‘returning to levels prior to the halt.’  The Austin fab is able to produce 100,000 wafers/month when at full capacity, although from the language of the comment, we expect the fab is still ramping up production.  When the fab was shut down the company was said to have sent 300 technicians from Korea to assist in the repair and restart of the fab, which is a key producers of CMOS image sensors, display drivers, SSD controllers, and application processors, a number of which were already in short supply before the shutdown.  The cost of the shutdown has been estimated to be between $250m and $275m.

​As commentary on shortages in the CE space is getting to be a daily occurrence, we try to pass on those comments that we believe are based in fact and are not intentionally inflammatory, of which there are quite few.  It does serve the interests of many CE companies whose cyclicality only give them short periods when they can remain profitable, to ‘promote’ the concept of shortages and its resulting increase in prices.  As we have noted above, such component shortages take time to work through the CE supply chain and are lessened in the near-term by components that have been stockpiled by experienced buyers, but eventually those costs take their toll and intermediate or end-user prices rise.
Hon Hai Group (pvt) (aka Foxconn (2317.TT) is not a reliable source in our view, and we could cite many reasons why we have come to this conclusion, but as the largest assembler of Apple (AAPL) products and one of the top global OEMs, what they say does carry weight.  Yesterday, during a telephone interview, the chairman of the Hon Hai group stated that he thought the impact of the shortages many not slow down until the 2nd quarter of 2022.  While this is certainly a radical view, he also mentioned that the impact of such shortages, particularly semiconductors, was not obvious during the first two months of the year, however changes are gradually appearing.  Of course, that was followed with the comment that the impact on Hon Hai group will not be too great.
He went on to indicate that the shortages affect about 10% of normal orders, but the impact on rush or urgent orders is greater, which we assume is due to rapidly increasing component lead times and stockpile reserves allocated to large customers.  Again he added that “if there is no impact from the epidemic and a lack of materials this year, the group’s profit margin is expected to have an opportunity to reach 7%,” which is like saying “If we hadn’t hit that iceberg and there were more lifeboats, we would made it to shore...”  Sooner or later “Something’s Gotta Give” (Johnny Mercer – 1955).

​While Magnachip (MX) is listed on the NYSE and is technically a Delaware corporation, the company has a business address in Luxembourg and operates primarily in South Korea as a supplier of display drivers particularly for OLED displays, with display products representing ~59% of sales, and the remainder being power semiconductors.  Last year Magnachip sold its mixed signal foundry business and fab to a Korean firm for $350m which allowed them to pay off their outstanding $225m senior notes which would have been due this year, deleveraging the company.
It seems that this has made Magnachip more attractive to potential buyers as they have announced a merger agreement with Wise Road Capital (pvt), whose entities will be buying the company for $29 per share, a 75% premium to the company’s 90 day average price, with a total deal price of $1.4b.  The buyer is a Beijing-based Private Equity firm that has a number of smaller investments in technology companies mostly in the semiconductor space, including Huaqin Communication (pvt) one of the largest global OEM for a variety of CE devices.
Magnachip is the leader in the OLED driver IC market and was affected by the closing of Samsung’s (005930.KS) Austin plant during a recent winter storm, however Samsung is bringing the fab back up currently and as a customer of Magnachip, will reinstate production relatively quickly to insure that other Samsung affiliates, such as Samsung Display (pvt), will be less ‘silicon constrained’.  While the premium Wise Road is paying for the company is high, as the OLED display market continues to expand, they likely see the continued expansion of Magnachip’s OLED DDIC business, its reduced debt burden, and its exit from the analog foundry business as justification.  That said, the deal will still have to pass US government scrutiny by the end of this year according to the agreement, which would trigger a $105m termination fee to the company, less certain reductions if not completed.  Given the strained relations between the US and China, particularly over semiconductors, getting all the necessary approvals could prove to be a daunting task.  

​The Ministry of Finance of the People’s Republic of China issued a notice concerning the country’s policies toward Customs and Taxation for the Integrated Circuit and Software Industries.  The notice stated that ”Logic circuits and memory manufacturers with integrated circuit line widths less than 65 nanometers (including, the same below), and specialty processes with line widths less than 0.25 microns (ie, analog, digital-analog hybrid, high voltage, radio frequency, power, optoelectronic integration, Image sensor, micro-electromechanical system, silicon-on-insulator technology) integrated circuit manufacturing enterprises, importing domestically produced raw materials and consumables for private use (including R&D, the same below) that cannot be produced or whose performance cannot meet the demand, special construction materials for clean rooms, Supporting system and integrated circuit production equipment (including imported equipment and domestic equipment) spare parts.” 
This allows the import tax exemption for any standard IC with a less than 65nm line width that cannot be produced in China, including those that can be produced but do not meet performance metrics (unspecified).  The exemption notice also includes a wide variety of materials (photoresist, masks, etc), including 8” and larger wafers, and a host of software used to test various points in the semiconductor production cycle.  The notice actually gives a rebate on taxes that would now be un-taxed under the new rules going back to July 27 of last year, and will continue through 2030.
While this might seem to be counterintuitive to China’s desire to rapidly build out its semiconductor infrastructure, it seems to us to be more of a near-term incentive for semiconductor companies outside of China to step up the supply, as they will now see some of the price increases that have been instituted offset by the elimination of the import tax for more items.  Whether this really has any effect on supply to China or just gives ammunition to US semiconductor component and equipment suppliers to lobby the federal government for less trade regulation with China remains to be seen, but it does indicate that China remains in the same precarious position as others in relation to near-term semiconductor shortages.