​LG Electronics (066570.KS) which withdrew from the smartphone business last year, has completed the sale of the business, after converting smartphone production lines in Brazil, India, and Vietnam to home appliance production, and selling the lines in China to affiliates of Inspur Group (600756.CH), a large server company based in Jinan, China, who was said to have ties to the People’s Liberation Army, which precludes US companies or investors from owning its shares.  We believe LG owns 30% of the JV that was set up to encompass the sale with Inspur having been responsible for the production of a portion of LG’s low-end smartphones in the past. 
The lines in other countries were originally to be sold however it was found that there were few buyers that had the need or financial capacity for the lines, while the Inspur sales was easily accomplished due to the existing relationship.  LG had contemplated selling the entire mobile division last year to a number of possible global scale buyers but decided to hold onto the IP, a portion of which is related to 5G, which the company says can be applied to a number of affiliated businesses outside of smartphones.  Since then there have been a number of IP sales made by LG, one being through affiliate LG Innotek (011070.KS) to Scramoge Technology (pvt), a non-practicing IP holding company in Ireland that is known for it’s lawsuits against major CE companies, and a number of licensing agreements with Chinese smartphone brands.

​The iPhone SE is an appealing low-cost version of the iPhone 13 line that Apple has updated for the first time in 2 years.  Earlier this month (3/9/22 & 3/23/22) we compared the iPhone SE (2022) to the older model and to Samsung’s (005930.KS) A23 LTE for perspective on how the SE compares with other mid-range smartphone as the iPhone is typically known as a premium brand.    Since then there have been delays in pre-order shipments, which were pushed out to today or tomorrow quickly after March 19, when pre-orders began, and most recently there are indications that Apple has already cut orders at suppliers, although such cuts have yet to be officially confirmed nor has the reason why.
Speculation from some has cited slower than expected sales (or pre-orders) with high-end expectations coming down from 25m to 30m units for this year by ~10m units.  Other sources have indicated that Apple is cutting orders by 20%, but in both cases the reasons seem to differ.  In one case the source indicates that store checks point to weak sales while others are focused on the war in Ukraine and inflation, although technically slower sales and inflation are closely tied together.  After only 9 days, during which many potential buyers might be more concerned about pump or food prices than buying new phone, it seems a bit early for Apple to start cutting orders from wherever their initial orders were weeks ago.  Yes the Ukraine war has been raging for 36 days, but it took some time before the world realized that Russia was looking to take over the entire country and not just a few provinces.
All in, the world has moved into a new mode, one not seen, especially in Europe, for many years and that will set many similar estimates for CE products off balance.  While we believe Apple could have already contacted suppliers about possible order reductions, things remain very fluid and with 3 quarters to go for this year, any order reductions could easily me made up later in the year if the socio-economics environment changes, and we have no absolute understanding of Apple’s real order estimates to suppliers, only those of analysts, so without a crystal ball, we expect much of the speculation over potential iPhone SE order cuts is just that, speculation and is subject to change almost daily.

Samsung Display’s (pvt) new QD/OLED process for display production is already under fire as a German Magazine has indicated that there is a ‘defect’ that can be seen in the Alienware (DELL)  AW34 monitor display that is the first such monitor to use the new technology.  What is shown below is a thin stripe or fringe of discoloration that appears.  The magazine alleges that the problem is caused by the unusual pixel arrangement used by the QD/OLED display, which has a triangular arrangement of sub-pixels with a green pixel at the top of the triangle and a red and blue sub-pixel at the bottom.  This pattern is said to create more of a ‘fringe’ effect than a square arrangement where the sub-pixels are narrower and allow the eye to combine them more easily and there is less ‘black space’ between the sub-pixels.
Given that there has been no lack of comments about the problem from social media, the issue is certainly subjective, as some find it noticeable enough to be considered a flaw, while others barely notice the issue.  Samsung Display tacitly acknowledged the problem by responding to questions about the sub-pixel configuration as follows, and while some of the response is typical corporate jargon, we expect the speculation to continue until a more definitive review of the issue can be made by less subjective sources, such as Displaymate, who we consider to be the definitive source for display comparison and measurement.
"It is not a typical RGB stripe pixel – but our proprietary structure optimized to enhance the core user experience of color and HDR. We selected this new pixel structure in order to optimize optical characteristics of QD-Display like brightness, color gamut and durability. Each pixel of QD-Display has an individual Red, Green and Blue – 3 primary sub pixels.  Unlike Pentile sub-pixel structure that share the adjacent sub-pixel and compromise on detail and accuracy, QD-Display has 3 (R,G,B) x (3440*1440) sub-pixels. So, QD display does not compromise on the detail and accuracy.  The artifact pointed out also can be seen on conventional LCD and OLED displays using RGB stripe. Similar phenomenon is observed on the sides (Left and Right) side when displaying bright high contrast edge on conventional display products.  Displays with better contrast modulation performance and wider color gamut and greater contrast ratio will accentuate this artifact. Because QD-Display has the widest color gamut, superior contrast ratio and new sub pixel structure, this artifact could be visible."
 
All in, as with any new display technology, there will be issues and subsequent refinements that will help to give consumers the confidence needed to mainstream the product.  In recent CE history, problems with the first foldable smartphones were addressed and rectified by the 2nd generation and the issues mentioned above would more likely be addressed with software, usually an easier fix than hardware.  We have relatively low expectations for QD/OLED this year and expect that Samsung Display has been working to reduce this and other issues that might have seen during qualification trials, so we expect that a fix for this ‘fringe’ issue will be built into the production process for any QD/OLED displays that SDC will be producing later this year, and we note that this issue aside, the reviews concerning the QD/OLED display’s other characteristics have been extremely positive.

​Back on 10-01-21 we noted that China’s largest LED producer Sanan (600703.CH) was raising capital through a non-public offering to finance a Mini/Micro-LED project in Hubei Province, which was expected to also see subsidies from the local government.  While the project was said to be situated in Ezhou Gedian Development Zone, where a number of Chinese semiconductor and panel producers have existing facilities, few details were given about the project itself, other than an R&D center, a line(s) for Gallium Nitride (blue or green), Gallium Arsenide (red) chips, and a line for packing the LEDs into 4K displays, little else was known.
Now it seems that Sanan will invest ~$1.24b to build the facility, which will have production capacity for 1.61m GaN (blue/green) wafers and .75m GaAs (red) wafers, and 84,000 4K mini-LED units.  Sanan is a supplier to a number of CE brands that are building out Mini-LED display product lines, including Samsung Electronics (005930.KS), TCL (000100.CH), and Apple (AAPL), although they have had issues with mini-LED qualification from Cupertino as we noted on 3/10/22.  While we do not have a completion schedule for the new lines, we expect much will fall into 2023, a year in which Apple is expected to add more mini-LED backlighting to its product lines.

​In late 2020 a new UK based brand known as Nothing (pvt) was formed with seed round backing from a Who’s Who of CE industry names including Tony Fadell (Apple team leader for 18 generations of iPod and 3 generations of the iPhone), Steve Huffman (CEO of Reddit (pvt), Kevin Lin (COO of Twitch (AMZN)) and a later round with a collection of highly visible former athletes, DJs, and influencers, along with an investment from Google (GOOG) Ventures totaling ~$143m.  To date, the company has released one product, a $99 Bluetooth earbud, compatible with Android and iOS that is ‘carbon neutral’.
Yesterday the company announced plans to release its first (and highly anticipated, according to the company) smartphone product based on the ‘Nothing OS’, an Android based system that “…captures the best features of pure Android, distilling the operating system to just the essentials, where very byte has a purpose…”  The OS will be launched in April while the phone release date has not been given.  A 27 minute “Truth About Nothing” promo spends most of the time explaining how excited the company is to be the innovator for new technology, but in the last few minutes gives a few hints as to what they are eventually going to release.
A number of references toward Apple’s ‘closed’ ecosystem and how that limits innovation were made while promoting the benefits of using the vast number of Android applications that are already available, but again specifics were again thin.  A bit of color was given on apps that might reside on the phone itself, but it seems the real objective is to use the Nothing OS to connect to a wide variety of other CE products, both Android and iOS which would be a valuable product if it is truly compatible with both.  We are sure Apple will have some say about the value of its control over the quality of Apple products, while Google is usually happy to promote anything that is Android related.
We expect much of the upcoming focus will be on the Nothing phone (due out in the summer?) but the real key to the company’s survival will be the OS, where many much larger and more financially able companies have tried and failed.  That said, we reserve judgement until the OS is released and we can get a better picture as to how it might work with other devices.  The phone will likely be a slick and hip new entry into a market of bland new models, but we hope that the promo’s lack of detail and unfocused objectives do not portend another iPhone clone.

LCD panel pricing in March continued its downward slide but with IT panel pricing taking the biggest hit, down 4.7%, above the high end of our expectations.  TV panel prices also declined 1.3%, which was a bit above our range but has passed, at least for now, the period of upper single digit monthly declines seen in 2H last year.  As we have noted previously, panel producers shifted production away from LCD TV panels last year, given the rapid price declines and moved that capacity to IT panels (notebook, monitor, tablet), however as TV panel prices reached cash costs this year there was little incentive for panel producers to continue to offer TV panels at lower prices and TV panel pricing (Figure 4) and shipments Figure 5) began to level off.
IT panel shipments (Figure 6) began to decline at the beginning of this year as demand began to return to more normal levels and IT panel prices (Figure 1, Figure 2, Figure 3) also began to drop, and while few panel producers expected the same steep monthly price declines for LCD IT panels that had been seen for TV panels, the rate of monthly IT panel price declines has been increasing (Figure 7) and given the increased sensitivity to IT panel prices at panel producers (Figure 8), the effect on panel producer profitability is considerable.
Heading into 2Q, we expect April to see continued IT panel price declines and more moderate TV panel price declines.  While large panel shipments are seasonal, with 2H averaging ~52.6% of full year shipments, panel pricing is not, so we have little cause to expect large panel pricing to change direction unless real demand changes.  We believe that some of the demand seen for IT products last year was real demand that was a result of the global economy beginning to right itself as the COVID-19 pandemic began to abate, which leaves us to question what might stimulate demand for IT products this year, a more difficult question to answer.
While TV set demand on a long-term basis has not been growing rapidly, given the LCD panel price declines seen over the last eight months, TV set prices should reflect those declines, making LCD TV set prices more palatable to potential; buyers.  That said, inflation, both for raw materials and for components, has wiped out a portion of that gain, so we see some TV set demand improvement throughout the year.  IT products however are facing lower demand (other than seasonal), increased competition, and the same cost inflation that TV  set brands face, while IT panel prices continue to decline.  While as noted, the IT panel price declines have seen less negative momentum than was seen with TV panel prices, but given that most panel producers have concentrated their capacity toward IT panel production, that market will see increased competition as that capacity must be filled, even for less profitable prices.

​E-Ink (8069.TT), the de facto licensor of e-paper technology and materials has been expanding its production capacity to keep up with demand.  The company has plans to expand capacity by 30% to 50% by the end of this year and began building out the first of 4 new material production lines late last year.  That line is expected to begin production in April, after a few months of trial production and qualification, followed by a second line, which has been under construction and is expected to begin production in May/June.  The 3rd line is expected to be in production by the end of the year and a new building is being constructed for further expansion.
E-Ink last expanded capacity in 2020 and at that time received commitments from customers to fill that capacity however this expansion has been more the result of broader demand for ESL (Electronic Shelf Labels) and e-readers, which are among the least expensive available ‘entertainment’ products available other than TV.  While the company has buffer commitments from customers for this expansion they stated that they expected to fall short of demand, even after the capacity expansion, as overall demand has increased beyond their original expectations.
As E-ink is the primary supplier of electrophoretic materials, they tend to participate in the expansion of e-paper applications and the recent announcement that Walmart (WMT) has entered into a partnership with SES Imagotag (SESL.FP) an E-ink partner that produces ESL systems and tags to expand the use of ESLs across Walmart’s stores in the US has likely added to E-ink’s confidence that the market for electrophoretic materials will continue to grow.  ESL tags and systems allow retailers to connect all store shelf labels to the cloud where they can be updated at will, allowing for almost instant mark-ups and mark-downs to meet store inventory and profitability objectives. 
Typically such changes are made with paper labels that must be printed and physically placed at the appropriate location, a time-consuming and inefficient process.  Given that ESLs only consume power when the display information is changed, they require little or no maintenance and allow the store to change product configuration and location electronically. They can also be fitted with cameras to capture product count or inform the store of shelf-outs, can provide detailed product information for customers, and advertise specials and sales as customers approach, giving them a path toward recouping the initial hardware and software investment.
All in, E-ink seems to be expanding into growing demand, which has been developing as the materials improve and applications become more flexible and cost efficient.  Hopefully global macro conditions will continue to improve, pushing demand higher, but for now it would seem that the long wait for ESLs to catch on has finally reached an inflection point and with little or no competition in the space, E-ink should have little worry about filling the new lines as they begin production.
 

Neon lights have been around since the 1920’s and while neon glows red/orange and other gases are used for other colors, “neon lights” are more a generic term than one specific to a particular color, and by the 1940’s neon lights were so popular that even small US towns had at least one neon sign hawking something on Main Street.  That said, ~70% of the neon gas currently produced globally is used in the semiconductor industry, specifically for excimer lasers used in DUV (Deep Ultraviolet) stepper photolithography down to the 7nm node, and Lasik eye surgery. So why do we mention neon? Because the Ukraine is the world’s leading producer of neon gas (~50% share) and the war with Russia has increased the concern that the gas will be in short supply.
Neon gas is found naturally in the air but at only 18.2 parts per million and is a byproduct of a process that removes oxygen from the air.  As the oxygen is removed through liquification, a neon and helium (NHM) mixture must also be removed, but in order to move the NHM from 30% - 40% purity to the 99.999% needed for commercial use, the energy cost is so high that only the largest facilities can do so profitably, with smaller plants just releasing the NHM into the atmosphere.
As the lasers[1] are used the neon degrades, introducing impurities which affect the performance of the laser and the neon has to be partially or fully replaced after a few weeks. During the 2015/2016 unrest in Ukraine laser designers at companies like Cymer (ASML) and Gigaphoton (631.JP) found ways to reduce gas consumption, stretching the replacement intervals by modifying the injection software, but the only long-term solution has been to recapture the ‘used’ gas in tanks under the floor of the fab and eventually filtered and returned to the laser, and this process has an efficiency of between 85% and 92% and is more energy efficient than producing ‘fresh’ neon.
The problem with the recovery/recycle process is that the lasers must be designed to take advantage of such a system and that production must stop in order for the cleanroom to be fitted with the recovery tanks, so in many cases, even with the price of neon increasing, it is more cost effective to buy new gas rather than convert to recycle/recover for smaller companies, especially when utilization is high.   The wholesale price of neon has jumped from 1,850 yuan (~$290/ft3) on February 24 to 16,000 yuan (~$2,511 US) on March 17, when both major neon producers in Ukraine shut down[2], after a previous increase between October 2021 and February from the equivalent of $62.77.  This makes the economics for recovery a bit different, especially if semiconductor manufacturers did not have strong ties to Chinese neon producers as a secondary source of the material, but with semiconductor demand at such a high point, it is still questionable as to whether fabs can take down production to make such changes at this point


[1] Typically Argon Fluoride lasers, which are made up of 95% neon despite the name.

[2] Ingas is in Mariupol and Cryoin is in Odessa.

Overall mobile phone shipments in China fell to 14.86m units in February, down 55.0% m/m and down 31.8% y/y.  Given that the 5 year average m/m shipment decline is -52.6% the sequential decline is right in line with the averages, however the y/y decline far exceeds the 5 year average of +32.3%, as it includes last year’s 241.5% y/y increase in February, which followed January 2021’s y/y increase of 92.7% and the March 2021 increase of 65.9% y/y, all of which represents the rebound in the Chinese smartphone market seen last year after four years of declining shipments.  That said, while we have yet to change our overall estimate for Chinese smartphone shipments in 2022, we remain a bit more cautious as to the strength of the recovery.  We do expect that the recent outbreaks of COVID-19 in China might have slowed shipments a bit more than expected, given the lockdowns in a number of large cities on the Mainland, but we had expected slightly better results for February.
5G smartphone shipments in China were 11.37m units, down 56.8% m/m and down 24.5% y/y, again against a strong February report last year.  As 5G data is still relatively short-term, it is hard to read much into the decline  but while 5G models remain about 50% of total new models in China, 5G shipments as a percentage of total Chinese smartphone shipments have fallen below the trend line for the last three months.  We doubt that pricing has much to do with the decline, as there is little premium attached to 5G models however given the weaker economic growth seen in China, we would expect a shift toward lower priced phones generally, which would be less likely to be 5G ready.
As is the norm, February is an odd month for CE products, especially in China given the February 1 New Year holiday, so we give it less weight than other months, while March tends to be more pivotal.  Typically March shipments in China are up 102.1% m/m, including last year’s 65.6% jump and the 2020 m/m increase of 240.8%, so we are expecting shipment to be a bit over 29m units in March, which will determine how we adjust our 2022 full year shipment estimate. 

​Peter Wennink, the CEO of ASML (ASML) has indicated that the company is continuing to struggle to meet customer demand and that delivery delays should be expected to continue.  ASML experience a fire in its Berlin facility that disrupted production of components for its DUV and EUV lithography tools and while the DUV component production has resumed, EUV component (wafer clamps) production was more severely affected, however that has been only a part of ASML’s troubles as the company’s supply chain of over 200 critical components is facing shortages of their own.  As each EUV tool is custom built to customer specifications, any supply disruptions can cause the whole build and test process to be delayed.
Given the number of new fabs announced over the last few months, the next two years should be the perfect environment for ASML to expand its business, and the company expects it will see more orders this year than last, but component constraints and a lack of qualified staffing are keeping the company from taking full advantage of its monopoly position in the lithography space.  An example was given as to Carl Zeiss (pvt), the supplier of lenses to ASML, who is unable to increase the number of lenses it supplies with existing tools.  ASML is pushing the company to build a new clean room line, but such a project will take many months to build and roughly 12 months to manufacture the lenses, leaving ASML short during what should be the company’s ‘finest hour’.  No matter what the demand is, the supply chain rules all….