​Capcom (9697.JP) is a well known gaming company, known particularly for games and franchises such as “Street Fighter”, “Mega Man”, and “Resident Evil”.  The company, based in Osaka, Japan has been the target of a number of ransomware attacks, particularly last November where personal information about customers, suppliers, and core business information was taken.  In order to reduce the chance of another security breech, the company has sent e-mails to employees that have been working at home indicating that they should come to the office to work and that the remote network could be temporarily dismantled.
The company indicated that ~70% of Japanese work from home, but what feeds the Japanese economy is the 30% that go to the office to work and that Capcom employees have a mission to be that 30% that supports the Japanese economy.  Insiders at the company have indicated that the e-mails informed employees that if they did not comply with ‘recommendations’, or make a complaint, it could result in hiring penalties.  While the company states publicly that “Capcom is striving for the health and safety of its employees and is carrying out distancing, measuring heat when entering and exiting, and distributing masks, although no mention was made about punitive measures against those that do not comply.
While it seems game developers are a major target for ransomware proponents, as Ubisoft (UBI.FP), and Crytek (pvt) have also been hit with ransomware, Capcom seems to be pushing quite a bit harder, despite the fact that four Japanese prefectures are still under emergency restrictions this month with foreign nationals barred from entering the country, despite the continued hope that the 2020 Tokyo Olympics would still be held.  While most businesses are open across the country because the Japanese constitution forbids a full lockdown, the government has been reinforcing “sanmitsu” which represents the phrase “Keep these Three Cs from overlapping in daily life”, with the three c’s being closed spaces with poor ventilation, crowded places with many people nearby, and close contact settings, including close contact conversations.
While we don’t know the layout of Capcom offices, we certainly understand the conflict between the company’s stance toward protecting important data and the employee stance concerning COVID-19 exposure.  It seems every country and every type of business has some circumstance where both parties are at odds over how to deal with COVID-19 issues and ransomware seems to have exacerbated that conflict in this particular industry…

Samsung Display (pvt), the display production arm of parent Samsung Electronics (005930.KS), has a few balls in the air.  Early last year, after a year-long brutal decline in LCD panel pricing and increasingly aggressive capacity expansion by Chinese LCD producers, the company decided to end large panel LCD production.  This entailed putting its Gen 8 LCD fab in Suzhou, China on the block and potentially shutting down all large panel production at its fabs in South Korea.  Timing for this plan, which surfaced toward the end of March ’20, could not have been much worse given that TV panel prices began a very steady rise in prices that continues today.  Toward the end of last year, the company changed its mind and has decided to continue large panel production, mainly for Samsung Electronics, at its remaining LCD fabs in Korea.
At the same time that SDC indicated that it would be shuttering local large panel production, it championed a new display process that combined OLED and quantum dot technology, which it planned to develop and offer by converting its L8-1 Gen 8 LCD fab to the new process.  While SDC was looking to replace its large panel LCD capacity with this new hybrid, parent Samsung Electronics was not as sanguine about the technology and its ability to fill the production gap, and until recently there seemed to be a bit of a rift between the two over the change.  Recent comments from the Korean trade press seem to indicate a more upbeat view from Samsung toward the project, but not only does SDC bear the technology risk of a new process, but might not have the full support of its largest potential customer.
However, the juggling continues to SDC small panel LCD and OLED display business, which, like a number of other suppliers, has lost a major customer, Huawei (pvt), who has seen its mobile business curtailed by US trade sanctions, leaving SDC with some idle small panel OLED capacity.  At the same time, Samsung Electronics has been seeing relatively poor results from its high-end smartphone line, which is based on OLED displays, and better results from its mid to low-end smartphones, which are based on LCD to keep the BOM low.  This is leading SDC to consider shifting production at its A2 fab from OLED smartphone display production to OLED notebook production, especially as notebook market demand has been exceptionally strong due to the COVID-19 pandemic.
The issue for SDC is whether they believe in the sustainability of notebook demand and a continuation of US sanctions against Huawei.  If they make the necessary conversions to the A2 fab and Huawei’s smartphone business recovers, they will have lost the ability to add back Huawei as a small panel customer to a degree, having made a larger bet on the success of OLED notebooks, which would be affected by both the status of the pandemic (overall notebook demand) and the consumer’s willingness to pay a higher price for an OLED notebook.  Samsung has already indicated that they expect to ship 2m OLED notebook units this year, up from 800k last year, but that doesn’t guarantee that customers will be as enthusiastic as the company.
SDC is still evaluating whether it will stick with QD/OLED technology or do more R&D on nano-rods, a substitute for the OLED portion of the new process, although a decision is expected next month, and questions remain as to whether parent Samsung will utilize the technology in either case, which leaves SDC to find a potential customer for the new process if Samsung does not adopt.  Sony (SNE) has been said to be a potential customer for QD/OLED, as they are the 2nd largest consumer of large panel OLED displays produced by LG Display (LPL) (parent LG Electronics (066570.KS) is #1) and could use that fact to negotiate favorable pricing for QD/OLED with SDC, but we expect that SDC will already be dealing with a new and expensive process and will have very little price negotiating room unless it is willing to produce substantial losses,
All in, SDC has put itself, intentionally or otherwise, in a precarious position, with a number of decisions that need to be made relatively soon that could materially affect the company’s forward prospects.  Making it more difficult is the COVID-19 issue that could swing demand in a number of possible directions as the year develops

As we have noted previously, MLCCs (Multi-layer Ceramic Capacitors) have become an increasingly essential component of both CE devices and automotive electronics.  While these small devices can cost less than a penny, the numbers used in devices has been increasing quickly, and while much time is spent concerning the increasing count of MLCCs in smartphones, particularly 5G smartphones, the largest market for MLCCs is not smartphones but automotive.  Automotive MLCC consumption is expected to grow about 15% y/y through 2025, with part of that consumption increase based on reducing the risk of failure in the ECU (Engine Control Unit), which also creates a higher MLCC ASP given that the reliability of each part also has to increase.  Increased wireless communication, ranging from entertainment to CTCC (Car-to-car communications) is also increasing, again with increased cost, and the higher operating temperature of current vehicles also adds to a more robust ASP.
Early in 2020 the COVID-19 pandemic caused vehicle sales to slow and consequently demand for many automotive components followed suit however demand returned as the year progressed and now capacity constraints in the semiconductor space are beginning to limit vehicle production.  That said, with both the smartphone and automotive markets vying for MLCC capacity, MLCC lead times moved up about 20 weeks ago, after remaining flat for the early part of the year.  While there are ~20 broad MLCC type categories, we noted that the lead time increase during that period increased by ~2 weeks to ~20 weeks.  From that point forward lead times remained flat, however between 3 and 6 weeks ago MLCC lead times took another step up by another 2 to 3 weeks to ~23 weeks, meaning that orders for MLCCs placed today would not be received for almost a half year.
We believe that some of the lead time increase is due to increasing demand, particularly for hybrids and electric vehicles, but as component shortages in the automotive space become significant enough to limit production, we expect that some stockpiling is also occurring, and an increasing number of new 5G smartphones could be pushing smartphone brands and assemblers to be doing the same.  While MLCCs are relatively simple devices their fabrication is not so the number of volume suppliers remains low, and while capacity is being added, mostly by incumbents, suppliers have been down this road before, only to see weak pricing after new capacity was added and are a bit more hesitant to expand, despite the bright demand prospects.  All in, it is an ideal time for MLCC producers, which we expect will remain so for the remainder of the year.

On 02/17/21 we noted that Samsung Electronics had was forced to shut down its existing production plant in Austin, Texas due to local power issues caused by the snow storm that was blanketing the country.  Negotiations between Austin Power, a community run service that is ostensibly owned by the State of Texas, and the Coalition for Clean, Affordable, Reliable Energy, a group that negotiates on behalf of the city’s largest power consumer, initially ended with a request to customers to conserve power but escalated to power being shut off at those facilities that had back-up generators.  The load however was greater than the disabled grid was able to handle, even at the reduced rates and they were asked to fully shut down production.
At the time Samsung stated that while they were eventually forced to shut down the plant at 1PM yesterday, “With prior notice, appropriate measures have safely been taken for the facilities and wafers in production.  We will resume production as soon as power is restored.  We are discussing timing with the proper authorities.”  While the fabs were shut down more gradually than during a full blackout, we expect the fab went into a ‘cold’ mode, where no equipment is kept running.  This means while the equipment will be able to turn on again when the power is restored, many tools will have to run a number of trial runs before they can be put back into full production, and the process can take as long as a month to complete, depending on how out of alignment the tools are.
Taiwan based Trendforce was able to detail production at the plant and estimates that the lost production will lower 2Q smartphone production by ~5%, even though the fab was notified in advance of the shutdown, as all WIP was likely scrapped.  In particular Qualcomm’s (QCOM) RFIC products and Samsung LSI’s OLED DDIC (Display Driver), which together represented ~50% of the line’s monthly output, were impacted the most, along with a lesser amount of Samsung’s CMOS Image Sensor Logic ICs.  The Qualcomm RFIC is a part of a 5G application processor or a 5G modem, and while the shutdown would reduce 5G smartphone production by 30%, existing stockpiles reduce the overall impact to the aforementioned 5%.  Samsung is expected to prioritize this product on restart, while some brands are expected to increase 4G smartphone model production in 2Q to compensate for the shortfall, which could reduce estimates for 5G 2021 smartphone production.
The Samsung OLED DDIC is primarily for the iPhone 12 family, which Apple (AAPL) has stockpiled.  That, coupled with weak iPhone Mini sales, will likely keep the impact of the shutdown at a relatively minor level for Apple, but it does point out how vulnerable the CE space is to semiconductor issues and how directly they can influence individual products or the entire industry.  Samsung’s shutdown could not have come at a more inopportune time, given existing tight semiconductor fab capacity going into the shutdown, compounding the shortage of display drivers and potentially limiting the most important area of growth for the smartphone business, 5G.  Given the unusual aspects of the Texas power grid (its A/C lines do not cross state lines and is therefore not under Federal regulation but cannot pull power from other grids), we wonder whether Samsung will take this issue into consideration when it decides on where its next US semiconductor plant will be located.  Austin looked like a shoe-in before the outage.

​Netflix (NFLX) has been testing a plan to crack down on password sharing.  The streamer is said to be sending out a request to some account users asking them to verify that they are in the household of the listed account holder.  The ‘suspected’ illegal user can verify or postpone the request, but if postponed, a 2nd request will be made at a random time, and if not verified, the stream will be terminated.  According to the Netflix ‘Terms of Service’, passwords cannot be shared with those not living with the account holder, although up to four people in that household can share a common password.
While Netflix certainly has the right to limit password sharing, we expect this is more of a warning than a real crackdown, as about a year ago, after a price increase and a bit of subscriber churn in 3Q, Netflix spoke about the issue of password sharing.  At the time they indicated that while they might do some ‘work’ around the edges of the problem, they had no plans to make a major push to limit password sharing, which could cause user alienation and increase churn.  We expect that Netflix is doing the same now, letting the public know that it is aware of the situation and might push real abusers to either verify or lose the content, but we expect little real push to bring the majority of their subscribers to absolute compliance with the TOS.  In this case the publicity associated would be the antithesis of the expression, “Any publicity is good publicity”, especially when new streaming services are being initiated on an almost daily basis.

​The Apple rumor mill is always in motion, but recent stories that Apple is reducing production volumes for the iPhone line by 20% from last year’s plans, has caused concern and weakness in companies that are part of the iPhone supply chain.  Disappointment with the iPhone Mini, which we have mentioned previously, seems to be the root of these stories, with estimates of iPhone Mini volume cuts as high as 70% still circulating.  We expect that while Apple might have pulled back 1H expectations for iPhone sales a bit, much of those cuts would be focused on Mini production reductions, as we believe the iPhone 12 and 12 Pro are seeing strong relative sales.
Smartphone suppliers we have spoken with have been seeing a mixed bag, with some having visibility through June, and others noting a slowdown from 4Q ‘20’s pace.  Since a number of these suppliers feed both Apple and other smartphone brands it is hard to isolate the effect of the weak iPhone Mini from Huawei issues or new models from Samsung and others.  That said, we do expect smartphone shipments to be up in 1Q on a q/q basis, but visibility through June is still hard to come by.  5G components should continue to see growth but a number of components and component materials have seen price increases over the last few months and while that would affect new models that are just building inventory more than existing models, we expect smartphone profitability will continue to be under pressure this year.

On March 5, the SEC filed a suit against AT&T (T) and three members of its IR department for an alleged violation of Fair Disclosure rules.  According to the filing, in March of 2016 (yes, 2016) AT&T learned that a steeper than expected decline in smartphone sales would cause the company’s 1st quarter results to fall short of analyst’s estimates by over $1b, at which point the CFO instructed the company’s IR department to ‘work the analysts that still have equipment revenue too high.’  The Director of IR then instructed three members of the IR department to speak to analysts privately to ‘walk the analysts down’ to the lower level that the company now expected, avoiding the company’s 3rd quarterly miss.
Over the next month and a half the IR team spoke to ~20 analysts to induce them to lower their estimates, disclosing material non-public information, including the company’s equipment upgrade rate, its projected wireless equipment revenue or both.  On some of the calls such information was presented as publicly available consensus information despite it being internally generated and far from actual consensus estimates at the time.  Analysts presented with the information lowered their estimates enough that AT&T beat the ‘new’ consensus numbers when it reported 1Q ’16 results.
At the time of the incident, AT&T had changed the way it sold smartphones to its subscriber base, no longer offering up-front discounts on purchases and converting to a full-price pay-over-time model, which caused subscribers to hold onto their phones for longer periods, while smartphone brands also began to offer their own installment programs to customers, bypassing AT&T.  Analysts had failed to ‘appreciate’ the effect this would have on the company’s wireless equipment revenue, which caused the consensus estimates to be ~$600m higher than what the company knew would be the case.  AT&T’s CFO had indicated that such trends did exist during the previous year’s 4th quarter call, although the consensus estimates were still higher than the ‘new’ data that the company had developed, leading to a public statement by the CFO that such trends could continue, but gave no new guidance or new metrics.
Section 13(a) and Reg. FD specifically indicates that when a company or its representatives privately discloses material non-public information, the company must simultaneously disclose that information to the public.  Both AT&T as a company and the three IR persons are defendants in the case with the SEC asking the court for injunctive relief and civil penalties, and ‘such other and further relief as this Court deems appropriate for the benefit of investors.”
Most of the time conversations with company executives or IR is a walk on a fine line, with analysts looking to discover a nuance that can help them gain an edge with their customer base, while not ‘wanting’ to hear anything that could be construed as non-public information.  Cases like this, although we wonder why the SEC waited 5 years, can make IR departments even more wary than usual, and analysts the same, but the sell-side is always looking for an edge and companies are always looking to have their performance viewed positively by shareholders, which makes that fine line very thin…. 

As we noted yesterday, President Biden signed an Executive Order (#14017) on February 24th entitled “America’s Supply Chains”.  We believe this was done in response to concerns that semiconductor shortages have been making headlines in the press and are said to be the cause of production limitations in the automotive industry.  The Executive Order asks Jake Sullivan, the Assistant to the President for National Security Affairs, and Keith Hennessey, the Assistant to the President for Economic Policy, to coordinate a 100 day study with the Department of Commerce, the Department of Energy, the Department of Defense, and the Secretary of Health and Human Services.  The Commerce Department is to focus on supply chain risks in the semiconductor manufacturing and advanced packaging space, the DOE on supply chain risks for high capacity batteries, the DOD on risks to the supply chain for critical minerals (rare earths), and the Secretary of Health is to focus on risks to the pharmaceutical supply chain.
Once the study is completed, which will have both risks and recommendations, the same team will coordinate a one year study with the same agencies and ones from the Department of Transportation and Department of Agriculture.  The one year reports are to identify the following:

• Critical Goods & Materials
• Manufacturing and other capabilities needed to produce said materials
• Potential intelligence and security risks that could affect such capabilities
• The ‘resilience and capacity of American manufacturing’, with emphasis on
  • Modernization to meet future needs
  • Gaps in domestic manufacturing
  • Supply chains with a single point of failure
  • Location of key manufacturing assets
  • Dominant supply by nations that are unfriendly or might become so
  • Current domestic workforce skill gaps

We hate to be critical of an effort to evaluate and modernize the US supply chain, but by the time the 465 days goes by until the reports are finished, the rest of the world, particularly China, will have continued to build out their semiconductor and similar infrastructure, and to expect significant change in the industries mentioned above on an immediate basis at that point is an exercise in futility.  There will need to be discussions for appropriations and political infighting that will postpone any real spending toward material improvements in the US supply chain, particularly in semiconductor production, for months after that, and we expect the necessary changes themselves will take years to implement. 
Rather than take the typical governmental path of studying what has already been studied, perhaps a more direct approach is needed.  Government sponsored R&D programs should be redirected toward process development that reduces the cost of semiconductor manufacturing, making actual production in the US more attractive, and of course, the use of tax incentives (with performance caveats) should be heartily encouraged and supported by both the Federal and state governments.  Critical material stockpiles should be developed using a buying program that makes fixed timing purchases against a realistic need schedule and local incentives for production of those materials should be encouraged[1].  Lastly, engineering and science education should be given a higher priority, so as to attract a larger pool of talent to drive the longer-term prospects for development of electronics in the US. 
But the problem is not really what to do, as studies have been done, reports written, and endless numbers of industry consultants have been paid, but with each new administration, the same things have to be done again, with the ‘new thought leaders’ of that administration, regardless of whether there is really any new spin on the topics.  We are spending all of this time and money on talking about the problems, when both need to be applied to fixing the problem.  As Linus Torvalds said,” Talk is Cheap. Show me the code.”  JOHO


[1] The US, Japan, India, and Australia have agreed to ‘cooperate to provide funds for new technologies and development plans.  Timing unknown.

The world loves their smartphones, but which smartphones does it love the best?  OMDIA (formerly IHS) says, based on shipments, Apple (AAPL) took 5 of the top 10 spots last year, followed by Samsung (005930.KS) with 4 and Xiaomi (1810.HK) capturing 1 spot, and while the values are different from those in 2019, the number of models for each brand was the same in 2019.  The total value of the top 10 was down 2.0% from 2019, but the shipment value share was almost exactly the same, giving Apple the lead in both units shipped and value in both years.
One interesting difference between the two leaders is their pricing strategy, with Apple still pursuing a premium price customer, while Samsung’s best performance is with mid and lower tier phones.  The weighted average (brand units – top 10 only) ASP for Apple in 2020 was $786.06, while that of Samsung was $191.53, a very obvious difference.  Last year the same calculations revealed an $864.14 weighted ASP for Apple and a $157.97 ASP for Samsung, however Apple saw top 10 shipments increase, while Samsung saw top 10 shipments decrease, which hints at the increasing contribution of the lower-priced iPhone SE for Apple.  While we don’t expect Apple to make significant changes to the base price of the top of the iPhone line this year, we expect they will continue to offer a mid-priced iPhone, be it a new iPhone SE or a similarly priced device.
Samsung’s disappointing Galaxy Flagship smartphone results last year will likely push the brand toward changing its high-end structure, with the elimination of the Note series and the addition of new foldables as Note replacements, which will likely increase the high-end ASPs.  This leaves Samsung more able to battle in the mid and lower price tiers, where it has had success, but much will depend on the success of the additional foldables, which are still a bit of a novelty with consumers.  If Samsung is able to begin to replace the Note line with foldables and not lose ground in the mid-tier, their overall ASP should increase again this year.

Rumors abound about Apple’s (AAPL) first venture into the world of foldables, with no end to the speculation about when and what the company will finally reveal.    As Apple has rarely been an early adopter, they have been researching flexible displays and foldables and the mechanics involved for years, with patent applications going back as far as 2012.  A recent grant however shed some light on just how specific Apple has been in developing foldable solutions in advance of their eventual release by the company.
The patent grant, simply titled “Electronic Devices with Flexible Displays”, addresses a problem that has plagued foldable devices, that of creasing at the fold line.  While the problem continues to be addressed by Samsung Display (pvt) and other OLED panel producers, Apple has noted that the problem increases as the temperature of the device decreases, as the flexibility of the foldable materials decreases in kind, and that decrease in flexibility can increase the chance of a permanent crease if the device is folded at such lower temperatures.
Apple’s solution offers two alternatives.  The first is installing a heating element, which would maintain a temperature that would keep the display and cover materials flexible, however given the space limitations in mobile devices, this is an awkward solution and one that would be a large power consumer.  As an alternative, Apple suggests that sensors in the unit first determine if the device has been picked up (proximity sensor), and if so, activates pixels (14B in Fig. 4) in the region of the fold, heating the materials to the proper temperature.  As part of this system, which was applied for in late 2017, Apple has included a latching system that keeps the device closed until the temperature sensor indicates that a crease will not occur, and then releases the latch, allowing the device to be opened.
There was considerable thought put into this concept by Apple engineers, and the pixel heating method is certainly the better and more practical alternative, however any system that limits the availability of the device to the user is going to be met with resistance.  The system is certainly there to prevent what could become an endemic problem for foldables if not used under ideal conditions, but a better alternative than a latching system might be a warning to the user on an external screen, an estimate of the time needed to bring the device to the proper temperature, and a countdown indicator, leaving whether the user waits for the time needed to insure proper usage in the hands of the users themselves.  Not only would this allow the user to open the device in an emergency, but would also absolve Apple of repair responsibility, as do other internal systems that indicate whether a device has been opened or modified.  What this does show, along with the myriad of other Apple patents that relate to foldables or flexible displays, is that Apple is actively working toward such a device, and while we keep our expectations for a foldable iPhone low, we do expect Apple to release a foldable device in 2022.  That said, whether it would be a smartphone or a laptop remains an open question.