‘Smart’ products are all the rage in the appliance business.  Washers that tell you when it completes its cycles, refrigerators that tell you when you are low on milk, security cameras that alert you when anything gets near your front door, are all examples of ‘smart’ devices that are here to make our busy world a bit easier.  But there is a problem with all of these devices, and that is they don’t all speak the same language.  Consumer electronics brands all want their protocol to be the one that will rule the house and in that regard your ‘smart home’ is a bit like the UN without translators; Lots of people (devices) speaking but little communication.
Back in June of last year we wrote about something called 'Matter',  an internet protocol that in simple terms was developed to certtify that CE devices will work seamlessly and will allow for more connections between products, along with making it easier for manufacturers to develop new products, in other words the ability for any “Matter” certified product to communicate (with the permission of the user) with any other certified device.  A detailed understanding of the protocol is not necessary for anyone other than product developers, as one of the objectives is to make consumer oriented “Matter” certified products able to communicate with other “Matter”  products without any unusual consumer intervention (other than giving permission).
The concept will be applied to smart lighting, TVs, motion sensors, thermostats and a wide variety of other devices, and will allow a ‘Google (GOOG) Home’ device, such as a speaker, to work with Amazon (AMZN) Alexa, or Apple’s (AAPL) Homepod.  Rather than the consumer having to make the brand decision, and then being forced to remain with that brand, the consumer can look to see if products are “Matter” certified, indicating they can interoperate and then choose the device by its function rather than its brand.  The original founders of what is now “Matter” are Amazon, Apple, Comcast (CMCSA), and Google, but key CE brands like Samsung and Huawei (pvt) are key players in the project, along with retailers like IKEA (pvt) and Kroger (KR), and semi suppliers such as Texas Instruments (TXN) and ST Micro (STM) and 150+ others.  The standards themselves are free so there should be little reason for CE companies not to join the alliance, especially if the “Matter” certification gives consumers the confidence to buy such a certified product over the hundreds of smart home IoT products.
Samsung Electronics is expected to be the first global home appliance company to support the new standard in its TVs, monitors, and refrigerators starting in 4Q, and with “Matter” as the basis for managing IoT devices, those products will be able to be smart home ‘hubs’ that can be used to control other IoT devices outside of the Samsung brand.  With 300 other companies committed to the project consumers eventually will not be bound to a brand hub, such as Apple’s HomePod or Amazon’s Alexa, but will be able to choose any certified product as a hub that will be able to control all certified products.
There are certainly implications for the CE space here, as proprietary products will have a difficult time competing with “Matter” products, but whenever the ‘proprietary’ nature of products is lessened, competition intensifies.  In this case, using a consumer oriented perspective, competition will likely bring down prices for smart products generally, and from a brand perspective proprietary R&D costs will now go toward the development of better hardware and applications, rather than relying on the ‘lock-in’ of a proprietary system to keep consumers ‘sticky’.  Not to say there will only be ‘cheaper’ products, as brands will still have the impetus to create tiered product pricing, but such products will have to compete more directly with other brands and will no longer have the captive consumers that they once held.
All in, “Matter” is a positive for the ‘smart’ market, which has had so many false starts that it is difficult to build a real timeline for the space.  That said, there has to be momentum behind “Matter” and that means other brands have to take the protocol seriously.  We expect once Samsung is able to garner the spotlight as the first “Matter mover, others will quickly follow.  It would be difficult for LG Electronics not to be presenting something similar, given the similar product linecard, and even Apple, known for its proprietary systems, is a top-line member and a likely candidate for at least building in the protocol in some products.  China is certainly a major part of the “Matter” project, with Huawei and Oppo (pvt) also in the top tier, and BOE (200725.CH), Haier (6690.HK), Hisense (921.HK), Vivo (pvt), Xiaomi (1810.HK) and TCL (000100.CH) all members of the alliance, so there will be no shortage of companies vying for a post position in the smart home market, which means the availability of new products with fewer bells and whistles and lower prices..

March is typically a recovery month for large panel sales as February is a short production month and reduced production during the Chinese New Year holiday lowers factory utilization rates.  With potential restocking and resumed production, March large panel sales are typically up 18.8% m/m (5 year average), however this year large panel sales grew only 1.6% m/m in March (see Figure 1), even with large panel shipments (see Figure 2) increasing by 8.1% for the month, indicating continued large panel pricing weakness, which was down 3.4% in March.  April large panel pricing is expected to have declined by 4.1% (see table below) and we expect May will see roughly the same decline. 
As we noted in our 04/06/22 note, TV brands had set very aggressive goals for the 2022 year under the assumption that lower TV panel prices would stimulate TV set sales, however a number of TV set brands cut back orders in 1Q and are likely to do the same in 2Q, although not all brands are have reacted the same way.  TV set shipments declined by ~20% in 1Q, despite TV panel shipments being up 2.9% y/y, which has prompted expectations for TV set shipments for the 2022 year to be reduced to flat to up 1%.  Reasons cited have been the Russian/Ukraine war, China’s zero-tolerance COVID-19 lockdowns, FIFA World Cup postponement, and component shortages, much of which had already been part of higher estimates. 
Samsung Electronics (005930.KS) reduced TV panel purchase plans in 1Q by ~7.5% and is expected to do the same in 2Q, while LG Electronics (066570.KS), has lowered its TV panel purchase plans for 2022 by ~20%.  Some Chinese TV brands have also made TV panel purchase order adjustments, but others are waiting to see how the 618 shopping holiday plays out before making adjustments to their TV panel purchase plans, which has allowed some Chinese panel producers to continue to see high utilization rates.  Other than that there has been little for panel producers to be excited about as we head into 2Q, and few of the negatives seem to be changing quickly to the positive.  Large panel pricing is expected to decline again in May (~4.0%), broken out as shown in the table below.

A Chinese court in Hangzhou ruled that the responsibility for guaranteeing the ownership of assets sold on NFT marketplaces resides with the marketplace itself. The ruling was the result of a suit by Shenzhen Qice Diechu Cultural & Creative Co. (pvt) against Yuanyuzhou Company’s (pvt) subsidiary “Bigverse” over artwork created by Chinese artist Bu2ma, as Qice owns the artwork and not the seller on the Bigverse site.  The suit alleged that the site did not take necessary steps to ‘disallow and remove’ fake NFT’s that were placed on the site and caused the ‘uniqueness’ of the items to be lost.  While the monitory damages sought were $1.6m, the court ruling only awarded $612 to the plaintiffs, however the ruling cemented the idea that anything that affected the consumer’s trust that NFTs were unique would undermine the industry’s business model and would therefore violate copyright law.  The defendants argued (unsuccessfully) that since it is a 3rd party platform and the works are uploaded directly by the platform user, it should not be held responsible and performs a ‘post review’ at which point it can delete transaction notifications.  Since NFTs operate through blockchains, they cannot be completely deleted from all nodes and enter a ‘black hole’ when there is suspicion of an illegal transfer.
With Alibab’s (BABA) NFT marketplace (Topnode) having more than 700,000 active users and over 4.5m NFT sold last year in China, there has been considerable controversy both by the Chinese government, who has warned consumers to be wary of fakes, fees and other dishonest practices, while NFT marketplaces that sell everything from digital art to virtual land have been popping up everywhere.  In the above case, the platform charges what it calls a ‘fuel cost’ for purchasers to use the platform (non-refundable) and also receives a 5% fee on the sale of items (10% to list), along with another $33 “gas fee” and a 2.5% ‘writer’s royalty’, and there is no limit on the value of NFT’s sold, with some artwork sold at over $15m US.

​Taiwan based AU Optronics (2409.TT) has announced the purchase of Rise Vision (pvt) based in Wichita, Kansas for $29.25m US.  The company provides software that helps users design cloud based content for digital signage for schools and commercial applications.  The software is based on the number of displays used (10 displays cost $1155/year, while schools get unlimited displays for $1,000/year).  The software is hardware and OS agnostic so it will run on almost any OS and media player, and is used by a number of large organizations including Marriot (MAR), The Philadelphia Eagles (pvt), and the Chicago Public School System.
AU Optronics has a public display division that provides a broad lineup of displays that include small touch based displays to large video walls.  This software will help to provide a simple and popular solution for content creation as part of a PID sale and goes toward AUO’s push toward providing non-generic displays that carry higher margins and are less subject to competition from Chinese panel producers.   For those not familiar with the public display market here are a few examples:

Most surveys are a bit biased in our view as many of those willing to spend the time on surveys are doing so because they have already formed opinions on the subject andthere foire do not represent the public in general. However when we see such surveys we feel a bit obligated to present the data to investors, who then can formulate their own level of credibility, especially for some of the more narrow consumer device polls.  One such survey we have come across is focused on AR or Augmented Reality, a type of system that allows the user to overlay digital oimages of objects on a live visual image.  This isususally accomplished while wearing AR glases that allow the external visual image to pass through while tiny projectors and focusing optics project the digital image on the user’s eye where they combine with the actual visual image.
Rather than go through the history of AR products, we p[resent a few slices of the survey data, which profiles US consumer AR users.  We note that AR applications are typically commecial ranther than consumer, at least so far, as the usefulness of AR in the commercial space is high, particularly in the design and maintenance segments, where seeing an image of a device in front of you while you are looking at one that needs to be repaired can be a godsend.  Consumer applications however are a bit more limited, with directional information and product details some of the more common applications.  As retailers become more familiar with AR/VR, there are more instances where consumers can look at an object, say a piece of furniture, in a store or on-line, and place it into an image of their living room or bedroom to see how it would appear.  Similarly AR systems do the same foir clothing, giving the user a way to try on clothes visually.
AR systems are still evolving and are getting lighter and more natural looking, almost the same as regular glasses, so as the quality and style of AR glasses improves, we expect the consumer usage will also increase. That said, there is a big difference between what AR glasses ‘should’ look like for consumers vs. those used commercially, with the consumer challemges more difficult to achieve, so we expect slower AR growth on the consumer side until packaging challenges are solved, although they have progressed substantially over the last two years..
The survey data samsles shown below point to a number of peculiarities among US consumer AR users, most surprising are the mobile usage patterns (daily, weekly, monthly, a few times/yr, and once), all of which have declined on a linear trend line basis, which we attribute to the release of various Ar devices by Microsoft (MSFT), Google (GOOG) and Facebook (FB) over the last few years, which have not been as consumer oriented as hoped.  More obvious however is the US user age profile data that shows 82% of US consumer AR users are under the age of 45, but less obvious is that50% of consumer AR users are in families having income of $50,000 or less, and only 17% of those in the $100,000+ income bracket have used consumer AR.  The breakdown by gender was also a bit surprising as 46% of consumer AR users were women, higher than we might have expected.
All in, while we still see the survey data as leaning toward those that already formed opinions about the technology, we do note that we do expect that to lessen over time as more consumers become aare of the progress being made in consumer AR.  The willingness of younger consumers to try AR leads us to believe that overall usage will begin to increase over the next few years, especially as the Metaverse hype continues, even though that tends to be a fully immersive experience that requires VR rather than AR.  Consumer applications for logistics, such as prescription AR glasses that you could wear while driving that acted as a HUD (head’s up display) would have the ability to become viable consumer products for drivers that do not have such functions built into the vehicle as long as they are light and do not restrict peripheral vision, while those oriented toward sports applications, particularly running, could become almost as ubiquitous as common sport’s bands in the future.  So while consumer user usage frequency is still light, there is still hope for consumer AR, especially given that while the commercial AR segment is willing to pay higher premiums for more specific devices and applications, the potential consumer market for AR is large and open to new entrants that can solve those issues that commercial developers are less focused on.

​China’s Tainma (000050.CH) has set a timeline for its new Gen 8.6 LCD fab project that it is building in  Xiamen.  This follows the recent early production runs at its T18 OLED fab also in Xiamen.  The new project is expected to cost $5.16b, of which Tianma has contributed $464m for a 15% direct stake, and will have a capacity to produce 120,000 Gen 8.6 (2250mm x 2600mm) panels/month.  The project is expected to reach the piling (basic construction) stage during the 2nd half of this year and the main building is expected to be capped a year later.  Phase 1 production is expected to start in 2H 2024, although no timeline has been set for phase 2 development, which we assume will mean that 60,000 sheets/month will be built out for phase 1.  We expect the project will develop both LTPS and IGZO backplane technology and will be oriented toward the production of IT and automotive panels, at least that is the current intention,
While Tianma is best known for its small panel production, both LCD and OLED, the company lacks the Gen 8 capaity that is needed to efficiently produce large panel displays.  That said, given the vast resources of other Chinese competitors, and the potential for over capacity across the large panel display industry, it would seem somewhat ill advised to be building out new Gen 8 LCD capacity at this point in the cycle.  That said, we expect that Tianma’s management is more concerned with their ability to provide what their customer base is asking for or what they believe they will be asking for in the future, without regard for the impact on the overall LCD display industry or China’s exposure to a potentially extended weak profitability cycle for China’s display segment.  There is little chance, in our view, that management has put such a perspective ahead of a desire to gain share against competitors and generate what it believes will be new revenue sources, but we expect the outcome of the project will be to generate incremental sales but at relatively low profitability.  It’s a long way t 2H 20224.

Chromebooks have been around for longer than most would expect, with the earliest Chromebook coming from Samsung (005930.KS) (Series 5) back in June 2011, followed by the Acer (ACER) AC700 Chromebook only two months later after both were announced at the Google (GOOG) I/O conference in May and Google itself released the Google Chromebook Pixel almost two years later.  Early reviews were uncertain that such devices had a place in the CE space when compared to laptops, but the lower pricing of such devices slowly gave credibility to their value.  However there was relatively little excitement over Chromebooks until Google announced in 2016 that it would make Android apps available on Chromebooks via Google Play, but relatively weak Chromebook processors did not always produce expected performance results.
While Google assisted Chromebook marketing on a general basis, consumers had little understanding of the reason why one would buy a Chromebook, other than price, as the concept of working without Microsoft (MSFT) Windows™ was a bit hard to get used to, and some were wary about everything being stored ‘in the cloud’, particularly business information.  As early as 2013 however the educational market began to recognize the value of Chromebooks, particularly the idea that a large IT department was not needed to maintain such devices, as all O/S updates were done automatically by Google and only a few applications were needed for classroom work.  In 2013 1.8m Chromebooks were sold in the US, up from .4m in the previous year, with Google seeding classroom in the US and Europe, and in 2016 58% of the mobile devices purchased by schools across the US were Chromebooks, although concerns over the storage and use of student history information was a concern.
Chromebook sales in subsequent years followed seasonal patterns as niche devices, although the generational familiarity with the cloud and on-line computing generally seemed to establish Chromebooks as legitimate devices in the CE space.  However the outbreak of COVID-19 in 2020 changed everything for Chromebooks as it pushed legislators across the globe to institute ‘school-at-home’ programs, with laptops and less expensive Chromebooks as the logical choices for remote learning.  Of course, at the same time a better understanding of how much of the world’s population had/has access to broadband internet (currently 62.5%, up from 59.0% in 2020) was also made apparent as many locations were unable to support such projects as connections were slow or non-existant.
That said, Figure 1 shows the jump in Chromebook shipments during the onset and continuation of COVID-19 and the decline in those shipments as vaccine programs allowed students to return to classrooms more recently., We would expect Chromebook shipments to decline substantially on a y/y basis this year, returning to more seasonal patterns, although we expect the overall unit volume to be a bit higher than in the pre-COVID period as the global population becomes more used to cloud computing. 
While Chromebook shipments are expected to decline this year, we were curious to see how Chromebook pricing has been affected by the weaker demand, and surveyed pricing history on Amazon (AMZN) for a variety of popular Chromebooks.  We were surprised to find that current prices were on average near the midpoint between their historic highs and lows, currently 12.9% above the average low and 11.0% below the average high, as we expected more price pressure.  When speaking with distributors about the pricing we noted that in almost all cases the reference point was higher component and transportation costs and in some cases higher inventory levels, but the view was that over the next few months some of those costs might be mitigated unless Chinese lockdown policy remains at current levels.
While we do expect Chromebook pricing to decline, particularly as IT display panel prices show similar weakness, the question remains as to the usefulness of Chromebooks to the general global population in a non-pandemic world.  There are certainly a number of positives that make Chromebooks viable in many situations, although there are also a number of reasons why they fail to qualify as laptop replacements, which we look at below.

• Most work done on Chromebooks is done through the browser, which has become the de facto standard for smartphones, making it a very familiar environment for many users and there are almost innumerable applications that have been written to operate under Android, but each needs to be loaded locally on an Android device.  Chrome, the OS under which most Chromebooks operate, runs applications remotely and will not run Android or Windows applications unless they have been ported to Chrome.  This means that while many users are used to Android applications, they might not be as familiar with Chrome applications, which means there is a learning curve for those that are doing more than watching movies or playing relatively simple games.
• As Chrome is web-based, there is little need for storage on Chromebooks, as opposed to Windows, which runs many applications locally.  This helps to keep costs down and for organizations, reduces the IT staffing needed to perform updates and solve application issues on Windows-based laptops and desktops. 
• Thinking back to the era of ‘client-server’ or ‘dumb terminal’ computing, Chromebooks can be thought of as ‘smart terminals’ allowing users to interact with remote applications rather than doing much of the heavy lifting on the local device, but for those that need local computational power both the lack of storage and relatively weak processing capabilities usually rule out Chromebooks for those in media creation, financial modeling, and product design.
• Progress is being made by application developers to design software that allows power users to perform such functions on server-based hardware through Chrome-based devices, but many of those applications also need high-speed data transfer or the data movement will cause bottlenecks or require local buffering, so the introduction of 5G will help to alleviate that problem over time, but an internet connection is a necessity for Chromebooks, while laptops can be used in any location as long as the battery lasts.

All in Chromebooks are a viable alternative for a portion of the computing public but thought must be given to what such a device will be used for.  If its browsing the web, checking stock prices, and reading e-mails and IMs, saving the higher cost of a Windows laptop is a no-brainer, although we might wait a bit for prices to come down.  For those who need more power in a general sense, a laptop would be a better choice, even at the higher price.
 

​LG Display (LPL) has picked up a second customer for its foldable OLED displays, said to be supplying same to Hewlett Packard’s (HPE) 17” 4K foldable device expected late this year or early next, and will begin production in 3Q.  Unit volumes are expected to be small, but represent a 2nd foldable OLED display customer for LGD.  The company previously supplied foldable panels to Lenovo (992.HK) in 2020.  LGD displayed its 17” foldable 4K panel at CES earlier this year.  Polyimide cover film is expected to be used on the display, which will be supplied by SK IE Technology (361610.KS), a local material supply firm that is part of SK Holdings (034730.KS), a major energy conglomerate in South Korea.  It is said that SK IE bid 50% lower than competitors to win the project as the last project for which it supplied such material was for China’s Royole (pvt), whose volumes never improved and is now facing financial difficulties.

There are no shortages of comments on Samsung Display’s (pvt) newest display technology QD/OLED.  We have mentioned it innumerable times and most recently there has been talk of a 2nd generational QD/OLED product that is being worked on that will reduce the thickness of the original QD/OLED display. (The 55” TV produced by Samsung (005930.KS) using the original QD/OLED display technology is 1.6” thick).  There has been some controversy as to some of the characteristics of the QD/Display, which is used in a Sony (SNE) TV and an Alienware (DELL) monitor, but the general feeling is that the display technology, especially in its first iteration, is a step up for OLED and display technology generally and is a viable contender against LG Display’s (LPL) WOLED TV technology.
Potential technical issues aside, which will likely be addressed by SDC in the second or third generation product, parent Samsung Electronics has been supportive concerning the new product offering but has been a bit hesitant on the prospects for the technology during its development and early production.  It was surprising to see that Sony was first to announce the availability of the technology in its TV line (shipping expected next month) but Samsung is now offering almost immediate delivery (1 day) through Best Buy (BBY) and is said to be scheduled to receive .5m QD/OLED panels from SDC this year.  While that is a small number of units compared to Samsung ~50m units shipped last year, it would reflect more the early production stage of the technology and Samsung’s lack of information as to how the new technology will be accepted by consumers.
That said, Samsung Display, who will be the sole source of QD/OLED displays to Samsung, Sony, and Dell, must also be realistic as to how many panels they are able to produce this year, and we look at the most important characteristic of panel production, yield, to give an estimate of the number of panels SDC will be able to produce.  As the SDC QD/OLED fab is configured as a Gen 8.5 15,000 sheet/month line, we have to make a few assumptions before walking through the actual estimates.  First, we assume that the fab was built to accommodate MMG (Multi-mode glass), which allows the lines to mix different size panels on the same Gen 8.5 substrate, however most Gen 8.5 OLED lines process a half sheet at a time.  Using MMG would make it impossible to process a half sheet because of the configuration (3 65” & 2 55” panels/sheet or 3 65” panels & 3 34” panels/sheet), so we did calculations for both MMG and non-MMG configurations.  
We also have to make some assumptions as to how many of each panel size Samsung Display is producing[1], which would be based on consumer demand, which is still an unknown, however we build in a roughly two to one ratio for 65”/55” as the price differential between the two is ~35% and the screen size of the 65” model is ~40% larger, with roughly 15% of production going toward the 34” (monitor) size. 
The most important metric in the calculations is yield, as QD/OLED is a new technology and has a number of process steps that are different than typical OLED display production.  Typically yields are quite low when production begins as tools need to be tuned to mass production levels, however it has been rumored that SDC was having trouble with yield and had been moving into mass production with yields in the 50% range.  We expect this was a reason for parent Samsung Electronics’ reticence about promoting the technology late last year, however a recent internal memo from SDC management to employees indicated that yields are now 75% with a target (timeframe?) of 90%+.  It is rare for any company to publish actual production yield, especially for a new product, but it seems that SDC wanted to encourage the fab staff to have an optimistic view of the potential for the product and the prospects for their continued employment on the project.  This gives us some clarity as to where the production yields are currently, which we build into our model below.  As noted, while we are less sanguine about the use of MMG at this fab, we present both MMG based and non-MMG based estimates.


[1] Available to SCMR LLC clients.

​Based on our estimates Samsung Electronics will take ~85% of SDC’s QD/OLED TV panel production this year, with the remainder going to Sony.  As part of SDC’s 2022 QD/OLED production we expect ~110,000 monitor panels to be produced, but we expect there is some flexibility in that figure.  If SDC were to lower the percentage of capacity dedicated to monitor panels, it would lower the total number of panels produced, but increase the number of 55" and”65”, which would boost the number of TV panels it could offer to Sony.  That said, for SDC to be ultimately successful with its QD/OLED project, the company will have to build new capacity to increase production, which would likely take a year if they were to build in an existing location.  In order to meet the 2023 holiday season they would have to make such a decision by mid-year 2022, which would leave little time for Samsung and Sony to evaluate consumer reaction to the product, which puts SDC in the unenviable position of having to make that decision with relatively little customer data. 
If they decide to expand, equipment suppliers will be pressed to also meet such deadlines, which can complicate such timelines.  All in, QD/OLED, or at least Samsung Display’s version of the technology is just beginning to emerge but there is little time to make educated decisions as to expansion plans or SDC will be limited to current production levels until 2024.  While this would certainly give the technology a chance to mature a bit, other display technologies will also improve and QD/OLED will face a stronger challenge from competitive TV display technologies.  Decisions, decisions… 

​Reports from Korea indicate that Samsung Display is on schedule to bring up production at its A4-2 Gen 6 OLED line in 3Q of this year, in line with our timeline, as equipment deliveries began in 1Q of this year.  This line replaces SDC’s L7-2 LCD production line that it closed in 3Q last year.  We note that the fab has additional production space and could expand further if needed.  We expect the line will be producing LTPS displays, rather than the LTPO displays that are used by Apple (AAPL) and other smartphone brands, as the conversion of other lines to LTPO has limited SDC’s production capabilities for the more standard LTPS OLED panel production.  SDC’s objective is to bring small panel OLED production to 180,000 sheets/month, which would imply at least another line at A4-2, and give them the capability for ~650m smartphone units at 100% yield and full utilization.  SDC is also considering building a new fab for OLED IT displays, which could be either a Gen 6 or Gen 8.5 fab, but that decision has yet to be made.