​China’s ‘zero-tolerance’ COVID-19 policy has created a situation that has caused sporadic lockdowns across the country.  In many cases those lockdowns have shuttered or limited production at semiconductor and display factories that are key to the global CE supply chain and add to the risk of device or component shortages that already plague the sector.  While there has been considerable criticism of the policy and of China’s overall COVID-19 transparency, at least on the surface, China has limited the outbreaks of the virus in most cases.  That said, there is increasing pressure from the global supply chain to rationalize these lockdowns and as they continue to affect both non-Chinese and Chinese consumers, it seems the Chinese government is making some concessions albeit without admitting to a change in policy.
The government of Shanghai, a city of ~28m (more than the entire population of Australia and a bit less than the population of Texas) with a GDP greater than that of Sweden, and home to the country’s biggest port, issued “Guidelines for the Preservation and Control of the Epidemic of Shanghai Industrial Enterprises Resuming Work & Production”.  As part of that report, 666 key enterprises were specified, including 62 IC related companies, including ASML (ASML), Applied Materials (AMAT) and Amkor (AMKR), and a number of display companies, including Merck (MRK), Toppan (7911.JP), and others.  At the same time the report specified a number of ‘responsibilities’ that enterprises must adhere to, with specific reference to the ‘owner’ of the enterprise as the party held responsible for implementation.
Many of the rules are similar to more commonplace corporate level COVID-19 education and management planning for outbreaks, but the report also called for further delineation of ‘designated areas’, meaning separating the work zones and staff dormitories, but implementing strict rules as to entry and exit in the dormitories, similar to areas on the factory floor and limit entry for all non-employees unless they have had a negative COVID test within the last 48 hours.  While these seem logical in light of the restrictions many of us have faced over the last two years, China is trying to limit exposure to those infected further as the recent outbreaks have slowed China’s growth and are beginning to eat away at the 30-day supply of raw materials that most factories have on hand.  That said, these industries and companies will remain open during subsequent lockdowns in order to keep production from stalling.
Transportation to and from suppliers has been the real issue as many factories have been able to continue production, given the on-site dormitories for workers, but without regular restocking the Chinese government is beginning to understand that companies on the Mainland will slowly abandon the county if such strict lockdowns are continually implemented.  China is already dealing with the increasing cost of worker salaries, which has pushed a number of companies to shift production to Vietnam and other Southeast Asian countries, and in the short-term will be feeling the impact of the current lockdowns if they continue into May.  While China has a similar population density to Denmark or Thailand, with 64% of the population of China living in cities (up from ~36% 20 years ago), the risk of widespread outbreaks is a serious one, but also has to be measured against the economic result of such severe lockdowns.  As the end of April approaches and raw material supplies are wearing thin, it seems China is trying to balance the COVID risk against both the short-term and long-term impact to its economy in a more realistic way, with concessions to key businesses and few, if any to the population, but transportation is based on people moving goods and that is the real issue.  If there are no raw materials being moved there will be no reason to keep the factories open. 

Taiwan Semiconductor (TSM), the world’s semiconductor foundry (~54% share), reported 1Q results of $17.567b (US) in sales, which was above consensus of $16.9b and above company guidance of $16.6b - $17.2b.  ADR EPS was $1.40, also above consensus of $1.27, while GM was 55.6%, above 4Q’s 52.7% and above company guidance of 53% to 55%, while operating margin was 45.6%, considerably above 4Q ‘21’s 41.7% and above the 42% - 44% company guidance.  Much of the quarter’s strength came from High-Performance computing (Data Center), which saw q/q growth of 23.7% and a continued increase in revenue share to 41%, while automotive, grew 39.5% q/q, but still remains only 5% of sales.  Guidance for 2Q is $17.6b to $18.2b ($17.9b SP), which is above consensus of $17.3b, with gross margins expected to be between 56% and 58% on a better exchange rate and operating margins between 45% and 47%.  HPC, automotive and IoT are all expected to grow faster than the corporate average for the full year, while smartphone growth wil get close to the corporate average.
TSM expects supply chain inventory levels to remain higher than historic norms as uncertainty over economic and geo-political issues continues and they continue to see strong long-term demand keeping capacity tight for 2022 and giving them an optimistic view of meeting or beating their full year growth guidance of mid to high 20% levels (with HPC the biggest revenue contributor).  When questioned further about weakness in demand for some products (PCs and smartphones) and whether that will lead to semiconductor inventory levels being adjusted downward, they indicated that they have seen little change in customer demand and expect customers to maintain similar higher than normal inventory levels.  They see the demand remaining strong for HPC even if the consumer side weakens, which gives them the visibility to see utilization remaining high for the year.
 The company also noted that they do not expect any material shortages to affect their business this year TSM also stated that their N3 (3um node) schedule remains on track for 2H ’22 production and revenue contribution in 2023 with N3e one year later, but were unwilling to forecast whether the 3nm node revenue contribution in 2023 will be similar to other nodes in their first year of sales, which has been ~10% of wafer revenue.  They did indicate that progress on N3e was ahead of schedule but were unwilling to say that it might be pulled forward quite yet. 
While they were not specific, the complexity of the 3nm and smaller nodes seems to be the reason for the caution, with the company indicating that such comparisons ‘will be less relevant going forward’, which sounded like they expect 3nm to be a more difficult node than 5um in generating sales and profitability.  Typically new nodes have reached corporate GM within 7 to 8 quarters but the company cautioned that with higher corporate GM targets they were unwilling to predict for 3nm until production begins, although they assured all that they expect to reach those goals on a long-term basis. .  They did reaffirm their expectations toward N2 node production in 2025 and continued to hold to their capex expectations for full year capex of $40b to $44b. 
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When questioned about the industry’s capacity growth plans for more mature nodes (28nm+) management indicted that they see the semiconductor industry (ex-memory) moving to a growth rate of high single digits over the next 5 years (typically 3% to 5%) as silicon content/device increases along with the need for increasing computing power, but did not give any indication as to their plans for older nodes other than ‘working with customers to develop specialized products’ that assumedly would sustain those older nodes for an extended period.  This seemed to mirror a number of comments on TSM’s obvious focus on advanced nodes which are certainly in vogue when demand is strong.  That said, their higher industry growth view and associated advanced node capex is predicated on a continuation of the current demand cycle and the factors that have been driving it, so any change in those factors that leads to a change in demand would have to affect those plans, although the company does not expect same.
There was some concern among questioners about how the company would respond to a weaker semiconductor environment, particularly one where inventory levels were less aggressive, and while the company did acknowledge that they have seen some indications of demand weakness, as noted above, they did not see it affecting their business this year, especially in terms of utilization.  While even with the demand slowdown in some consumer products, TSM is counting on HPC as their growth driver, which does have more solid underpinnings than some of the consumer product demand that was driven by COVID-19, but even long-term macro HPC trends can be interrupted by a recessionary environment that pulls in overall spending and while HPC has momentum currently, we would be more focused on server and power computing demand growth than CE product demand when looking at TSM’s risk profile going forward.

Are waveguides applications for finding the ‘perfect wave’ at beaches across the globe, or are they those plastic things at the ends of sci-fi weaponry that help aliens shoot straight? No, they are neither of those but are a key component for XR products, especially AR devices.  While most folks are focused on the metrics of the display used in XR products, in AR the user must be able to clearly see what is in front of him, while in VR the display is the visual objective.  In order to get an image to AR glasses, the display image has to be combined with the actual visual image seen by the user, and that is done by optically combining the two sources.  The waveguide operates a bit light the optical fiber that brings entertainment to your home.  The display that carries the ‘overlay’ image into the waveguide which then reflects the image from side to side through the waveguide while moving it forward until it reaches the users eye.  While the waveguide is nearly 100% reflective on the interior, it is also transparent allowing the user to see both images at the same time.
In order to get the image to move through the waveguide it must be injected at an angle and the refractive index of the waveguide material must be high or the field of view will be relatively small, meaning you would be limited to a narrow left/right and up/down view.  That is where specialty glass producers such as Corning (GLW), who happens to be an investor in waveguide producer DigiLens (pvt) come in, creating such highly refractive glass that make waveguides viable.  There are a number of ways in which waveguides can be applied to AR products and other optical techniques can be used to create an AR system, such as mirrors and prisms, but waveguides are a hot topic in the AR world and  are considered one of the leading technologies for AR going forward, especially because they allow the display projection system to be small and less bulky that most optical combiners.
The problem with waveguides is they are more difficult to produce that typical display glass and must have uniformity and surface roughness metrics that are an order of magnitude better than those of display glass.  They are produced on wafers, which increases the cost of production but also allows for patterns to be etched in the glass that help to gather more light, and as such processes are more similar to semiconductor manufacturing, there is considerable room for advances to be made in production techniques.
DigiLens produces such waveguides and has just raised an additional $50m, bringing its capital from investors to $160m in 7 rounds.  Some of the investors in those rounds are Samsung Electronics (005930.KS), Universal Display (OLED), Dolby (DLB), and Corning, along with a number of US and foreign VCs, and will help push the company’s more specialized waveguide technology into volume production over the next year.  Given that their manufacturing process is scalable and cost effective while having better FOV and overall characteristics than competitive offerings, the company feels that they can dominate the waveguide space going forward.  We note that while there are other optical systems available to AR designers, waveguides are the most common in our AR database, especially among those AR devices that have been announced but not yet released.

​Last summer T-Mobil (TMUS) confirmed that its customer data had been hacked, with personal data from more than 54 million customers being revealed in the attack.  The hack exposed names, SSNs, driver license information and credit card application data for many customers and shortly after the attack the data was offered on the dark web for ~$270,000 in Bitcoin.  T-Mobile began an investigation right after the hack and according to court documents, went as far as to try to buy back the data from the hackers.  While T-Mobile is not specifically mentioned in the court documents (called “company 3”) the data was said to have belonged to a major telecommunications company and wireless network operator in the US, which timing-wise, matched the T-Mobile breach.
T-Mobile, through a 3rd party agent, transferred $50,000 of bitcoin to get a sample of the offered data and then another $150,000 in bitcoin to get the full dataset while posing as an interested buyer, with the objective of taking the breached data off the market.  Under the arrangement, the hacker would then destroy his copy, although it turns out that the hackers continued to try to sell the information after the T-Mobile purchase was made.  It is not unusual for a company to try to bargain in ransomware attacks, but unusual that T-Mobile and the 3rd party negotiator would expect the hackers to live up to their end of the bargain.  That said, it seems that the indictment here is for the person who acted as a ‘middleman’ between T-Mobile’s 3rd party and the actual hacker, who billed himself as an ‘Official Middleman Service’, having done the same for other hacks.  He was not actually involved in the hacks, but the US is petitioning the UK to allow the ‘middleman’ to be extradited to the US to face charges that he ran a website that supported the buying and selling of hacked data for a fee.
The FBI used the website and its ‘middleman’ services to purchase US tax information includingSSNs, tax ID numbers, bank account numbers and passwords for $4,000 in bitcoin from the site and after extensive research discovered that the middleman was running the dark web site where hacked information was being bought and sold..  The FBI also discovered that the site’s domain was registered by the middleman when he was 14 years old, which he continued to re-register each year, along with mirror sites that he noted to clients would be available if the site was ever raided.  Through the FBI purchase, the site and its owner were all linked to the many illegal transactions and eventually the indictment was granted.
While this sounds like fodder for a novel or movie (Bob Odenkirk to play the “middleman’?) it shows what goes on in what media calls the ‘dark web’.  Such ‘services’ have been around for almost as long as the internet itself, and through considerable complexity are able to operate almost anonymously, especially with the advent of cryptocurrency.  Most folks think it takes significant computer knowledge to ‘get on the dark web’ but it certainly does not, and hackers routinely share exploits and code about ways in which they have succeeded in hacking a site or company.
The T-Mobile hack was such a large one that it attracted considerable attention and governmental resources, but such goes on every day, and every time you fill out an account form, request information, or even put in a contact e-mail, you add to that vast sea of information that hackers find so intriguing, and services that offer to ‘immunize’ you from identity theft would have to go back in time to when you were born to erase any trail of information that could be used to build an identity profile.  Companies have a responsibility to protect your information, and some take that seriously, but asking for your first roommates name does not protect your information from someone who hacks into their servers.  There is no way to fully protect your information from hackers if it has been propagated to the cloud or remote servers, but expecting a hacker to ‘destroy the original’ after payment is a fool’s game.  There is no honor among thieves.
   

​As we have noted, Samsung Display (pvt), LG Display (LPL) and most recently China’s BOE (200725.CH) have been working toward developing the technology necessary to produce IT OLED panels on larger substrates, moving from Gen 6 sheets, which are 2.78 m2 to Gen 8.5 sheets, which are 5.5 m2 to increase the efficiency of the process.  Recently is seems that other OLED producers are also looking to make such a change, although we believe the motivation and potential for success are different from those producers mentioned above.  Visionox (002387.CH) has been the name most often mentioned as a potential developer of such technology, although we have our doubts as to whether such stories are anything more than self-promotion.
As OLED display technology migrates to larger devices, OLED deposition technology comes up against some roadblocks, the largest of which is the use of fine metal masks that force gaseous OLED materials to form the pattern on substrates that become pixels on a display.  These masks are made of a nickel/iron alloy that is able to remain stable under the heat and high and low pressures found in OLED deposition equipment, as it is absolutely necessary that the FMM ‘screens’ keep the OLED materials in perfect order and spacing during production.  While the FMM are designed to handle heat and pressure they must also react to gravity, which can cause them to sag and misplace pixels, causing a panel to fail.  While this is not a problem for small OLED displays, such as those used in watches and smartphones, as the displays and masks get larger, such as might be the case for notebook or monitor panels, the effects of gravity get worse and yield management becomes more difficult.
Currently the number of OLED displays produced for IT products is relatively small when compared to smartphone production, but that is expected to change over the next few years with OLED adoption increasing for such products, which makes solving the production issues with larger OLED panels all the more important.  It is especially important to SDC, LGD, and BOE, all of whom are OLED display suppliers to Apple (AAPL), who is expected to continue to migrate more display based products to OLED.  Each of the three has been working toward find solutions that will improve OLED IT panel yields, each with their own ‘slant’ to the problems, but with each knowing that they have the ‘ear’ of Apple as they progress.  Visionox however is not a supplier of flexible OLED panels to Apple, with Chinese brand Honor (pvt) their biggest OLED display customer, along with Xiaomi (1810.HK) for whom they produce OLED watch displays.
To give some perspective in 2021, Honor purchased ~24m OLED panels, and while that might sound like a large quantity, it represents ~3.9% of the OLED display market (unit volume), and while Xiaomi has a larger share (~13.9%) given the size of OLED watch displays relative to smartphones or OLED IT panels, it represents only a small amount of small panel OLED industry capacity.  Apple however purchased ~184m OLED displays last year, most of which went toward iPhone production, giving them a ~29.6% share of the overall small panel OLED market, which is why the three mentioned above are working so hard to solve OLED IT production issues, especially under the assumption that Apple will continue to expand OLED penetration among its IT products.  While all three OLED producers are taking R&D risk and potentially large capital risk, the goal of becoming a primary supplier of small panel IT OLED products to Apple is in their headlights.
That said, it is not the same for Visionox, who would have to get qualified as a primary small panel OLED supplier at Apple before they would even have a shot at competing with SDC, LGD, or BOE for Apple’s incremental OLED IT business, so why would they circulate such stories?  Industry folk, and we certainly can see their point, infer that it is to garner support from the Chinese government in the form of subsidies.  Much of the early construction costs and operating expenses for panel producers in China are paid for through provincial or city-based subsidies that can defray construction costs that might normally be prohibitive, allowing Chinese producers to grow more quickly than non-subsidized producers, and during the early years of operation, those subsidies can offset low yields and low utilization rates for Chinese fabs.  As China has already become the capacity leader in LCD panel production, government organizations are want to give subsidies for such capacity, but a challenge to incumbent OLED leaders like SDC and LGD can still garner local government financial support, giving Visionox the hope that by dangling the idea of building out capacity to challenge others for Apple’s OLED IT business, they might set the wheels in motion for potential government help.
Visionox is said to be testing the OLED IT waters at its V3 Gen 6 fab in Hefei to work through production issues, and then would build a new Gen 8.5 OLED line in another location.  The V3 fab is being built in two phases with “the 2nd phase promoted in a timely manner” according to the company late last year.  Perhaps additional financial support is being hinted at for the phase 2 construction and equipment, which we had expected to be completed later this year, although not oriented to IT panel production.  If Visionox is able to solve the necessary IT OLED production issues on the V3 phase 1 line, it would encourage funding sources to push forward with phase 2 and potentially add a new Gen 8.5 fab designed specifically for IT OLED panels.  By indicating that there was potential for a new Gen 8.5 OLED fab to be built, the company can begin selling the idea to city leaders in other locations to see if funding is available and hopefully create a bidding war, similar to what occurred when Samsung was looking for a new silicon fab location in the US.
There is a lot of speculation here, but certainly not any that has not been seen by us over the years in the display space, so while we don’t like to speculate, the Visionox story has many similarities to others we have heard over the years, and feels as if we have been to this rodeo before.  We could be wrong, with Visionox much further along with Apple or the technology needed for IT OLED production, but we are less sanguine about the idea knowing that Visionox only grew their share of the small panel OLED market from 4.7% in 2020 to 4.9% in 2021, while Samsung Display and LG Display’s real competitor BOE grew its share from 7.3% in 2020 to 10.0% last year, which amounted to a 66.9% increase in unit volume y/y.  Without a very dedicated customer base already established, we expect it will be necessary for Visionox to win a few more games before they build ‘it’, especially knowing who ‘they’ are.

​Now that Samsung Electronics (005930.KS) has begun offering its 2022 line of Mini-LED/QD and QD only TVs (or at least in part), we can look at how TV set pricing has progressed with last year’s models and how the new line’s pricing compares with 2021 pricing.  We note that while this is a microcosm of the TV space, it is at least a representation of how companies adjust TV set prices, particularly in the premium category and how seasonality and other factors affect that pricing.  The 2022 Mini-LED/QD and QD only line is essentially the same as the 2021 line other than the elimination of the 70A (2021) class, which consisted of four sizes of 4K Quantum Dot TVs.  Given that the series above (80A) and below (60A) duplicated all of those sizes and provided almost the same combination of features at similar prices, we expect Samsung saw no need to bring back that line.

When Samsung began to accumulate TV panels for the Mini-LED/QD line last year TV panel prices were on the rise (Figure 1), while this year TV panel prices had fallen considerably from the highs reached in July of last year.  Based on February Aggregate TV panel pricing, TV panels acquired in February 2022 were 38.8% lower in price than during the same period last year, while offsets would be rising component, silicon, and transportation costs, but Samsung has lowered the initial price of this year’s models by only 6.7%, with the bulk of the reductions in the lower price tier Mini-LED/QD line (85 Series) and the higher prices QD only line (80 Series).  Due to the potential for feature changes and potential cost offsets mentioned above in the 2022 line, it is difficult to understand exactly how much of the panel cost savings Samsung has passed on to consumers, at least as part of initial 2022 pricing, but we assume they continue to capture considerably more margin on this line than on the more generic standard LCD TV line.  We expect also that Mini-LED backlight costs are lower on a y/y basis as the number of suppliers has increased.
Based on the rate of change data (Figure 1) for the entire line, we expect to see price reductions as soon as the end of May, with the biggest price drops in June/July (summer sales), for Columbus Day in October and the Thanksgiving Holiday.  That said, the single largest overall price decline came in February of this year, usually due to a push to reduce previous year inventory as new models go into production.  The worst time to buy, at least from this sample, is right before Christmas, as desperate gift buyers tend to be more willing to pay a premium as time runs out, and similarly just before Chinese New Year, likely for the same reason.  Most significant however, is the fact that in the 328 days since the 2021 line became available the aggregated price of the entire line has decreased by 29.6% from initial prices, and 27 of the 35 models are currently at their lowest price point (one is at its highest), and across the top of the line (900 Series), which are 8K Mini-LED/QD sets, that group is down 46.7% from its initial pricing.

Way back on 6/11/19 and again on 12/17/21, we noted a start-up company, Mojo Vision (pvt) that was developing a particularly unusual AR device, and when we say unusual, we mean not the more common ‘sunglass’ type but something pretty much undetectable to the outside world.  Mojo Vision’s vision is to create the first commercial AR device in ‘contact lens’ form, essentially an AR device that sits on your eye.  Mojo Vision is well funded, having recently raised $45m for a total of over $200m through both VCs and a number of well-known companies like Motorola (MSL), Dolby (DLB), Amazon (AMZN), and LG (066570.KS), and while the product is still in development, the company has revealed a bit more detail about the prototype of the Mojo Lens that it announced recently.
The basis for the Mojo Lens is a Micro-LED display that is less than 0.5mm (<1/50th of an inch) and has a PPI (Pixels/inch) of 14,000.  To gain some perspective, an Apple (AAPL) iPhone 13 has a PPI of 460 and the highest PPI we can remember seeing was 807 on the Sony (SNE) Xperia XZ Premium that was released in 2017.  A 4K UHD 65” TV has a PPI of 68, and a similar sized 8K TV has a PPI of 136, and the Mojo Lens display has a space between each pixel of 1.8µm, which is ~1/4 of the size of a human red blood cell, so you get the idea that there are a lot of Micro-LEDs squeezed into a very small space.  As the display can do little on its own, there has to be a backplane of circuitry behind each pixel that controls them, along with micro-optics that shape the display image to the eye itself.  This gives the system the ability to project text, graphics, and high resolution images on the user’s retina, which would be visible in any lighting situation, including when the user’s eyes are closed.
As we have noted before, there are a number of issues that make VR uncomfortable or even impossible for a segment of potential users, one of which is latency, or an inability of the system to keep the focus point of the image where the user is looking.  If the image does not track to the eye movements of the user, the brain begins to get confused and fatigue or more serious problems begin to occur, which makes tracking a user’s movements a key to a practical device.  The Mojo Vision prototype not only tracks using the usual accelerometer, gyroscope and magnetometer sensors that are familiar to AR/VR users, but uses a proprietary motion sensing algorithm that the company says is orders of magnitude more precise than current leading AR/VR optical eye-tracking systems and also contains 5G I/O and a 32 bit ARM Cortex-M0 processor.
Of course, all of this micro-hardware needs power, which means there is also a medical grade micro-battery and power management circuitry built-in to the Mojo Vision lens and a necklace worn by the user, which is designed to run the system all day and be wirelessly charged when removed.  The final product will have to undergo FDA clinical trials for safety and reliability, but when it comes down to a device like this the biggest question becomes, “What will it be used for?”  The eye-tracking features let the user interact with AR data or images just by moving visual focus so we know there will be interest in such a product from the retailing sector, where a user could look at an item, see how it might fit in a room, get specific item data, and by some means, such as a blink or nod, purchase the item within a few seconds.  However there are a number of other uses that might have less financial significance but could provide considerable help to users.
One such would be in sports training, where athletes would not have to look at a band or display and lose performance focus during training.  The company has partnered with Adidas (ADS.GR), Trailforks (pvt) for cycling, Wearable X (pvt) for yoga, Slopes (pvt) for skiing, and 18Birdies (pvt) for golf all relating to sports venues, while doctors being able to see patient data during an operation or in an ER without having to look at a device, screen or ask for information.  However the visually impaired, a group of ~12m in the 40 years or older category in just the US, face little help from most modern wearable solutions, such as headsets that feed the user audio information as to what he or she is looking toward, would certainly benefit from a development like the Mojo Vision Lens, which could help to augment sight related information to those who have impairments.  To that end the company has partnered with Menicon (7780.JP), Japan’s largest contact lens manufacturer to expedite the eventual trip through the FDA, and is expected to be testing the device on visually impaired subjects later this year.
The Mojo Vision Lens is still in development but as noted has recently reached the prototype stage.  There are still many issues to be resolved and regulatory goals to be met, but we are always intrigued by a practical application of a display technology, in this case Micro-LED, and one that does not force the user to stand out because of an external device.   Most of the other ‘electronic’ contact lens systems we have seen are more oriented toward drug delivery than augmented reality or improved vision so it is encouraging to see continued funding and actual progress toward such a product, and while the company is quite careful about releasing details, and rightly so, they seem to be on track toward a commercial product within a few years.  Hopefully the display technology will also improve during that time and higher resolution and less costly Micro-LED displays will be available when the device goes into commercial production.

Small panel shipments, essentially those for smartphones, can be a difficult business for panel producers as it is not only a highly competitive market but one that has become bisected by two opposing technologies.  Traditionally, LCD displays have been used in smartphones, but over the last few years OLED smartphone displays have become quite important to smartphone brands, especially in flagship or premium priced phones.  The number of colors a display can reproduce is not determined by the type of technology used but the number of shades of each color (red, green, blue) that the display can reproduce (known as bit depth)., with the standard being 8 bits or 16.777m colors[1].  OLED displays however are self-emissive, meaning each red, green, and blue sub-pixel can be off completely, on completely, or a number of gradations between the two, which, in theory provides infinite contrast[2].  LCD sub-pixels contrast is controlled by the backlight that shines through or is blocked by the liquid crystal, however there are far fewer LED backlight ‘sources’ than there are LCD sub-pixels, so if an image calls for a black area right next to a white area (such as a star field) the black area will appear grayish rather than pure black as the LED behind both pixels will be on for the white ‘star’.
This gives OLED displays an advantage over LCDs in terms of contrast, and RGB OLED displays also have a faster response time, keeping fast moving objects from smearing or leaving trails as they move across the screen, which can be a problem for LCD displays, but OLED displays do have some issues, primarily they do not usually produce as much light (brightness) as LCD displays.  As the OLED material itself is generating the light, the OLED material itself determines the basic brightness of the display, while LCD display brightness is basically determined by the brightness of the LED backlight[3], so it is incumbent on OLED material suppliers to constantly improve such materials to compete with LCD small panel displays.  OLED RGB displays also have another issue in that the three OLED materials used to create colors do not age at the same rate.  This can cause an effect called ‘burn-in’ that creates ‘ghost’ images of banners or other images that remain on the screen for an extended time, such as a logo on a news show.
But even with these issues, OLED displays have become popular enough to dominate the premium smartphone category and take a significant share of the total smartphone market, a bit over 40% depending on the source.  We estimate that between 615m and 620m small panel OLED displays were shipped last year, up 20.8% over 2020 shipments and representing 45.7% of mobile device shipments based on our composite smartphone shipment totals, an increase from 39.6% in 2020.   However much has been said recently about how Chinese small panel OLED display producers have been gaining ground against the incumbent leader, Samsung Display (pvt), and as the dominant supplier of small panel OLED displays, it is inevitable that SDC’s share of that market will be reduced as other producers ramp production capacity and develop the expertise needed to maintain acceptable yields.
We believe that SDC’s share of the composite[4] small panel OLED market decreased last year from 77.6% to 70.5%, although SDC’s unit volume increased over the same period by 9.8% while all other producers gained share and expanded unit volumes.  As referenced below, there are both rigid and flexible OLED small panel displays in those numbers and a bit more granularity can be determined, especially as flexible small panel OLED displays carry higher ASPs, making them more lucrative for those that are generating high enough yields and utilization to remain profitable.  Looking specifically at flexible small panel OLED displays only, there was more intense competition from suppliers and SDC’s share in 2021 declined to 56.9% from 68.3% in 2020, although again, SDC’s actual flexible small panel OLED shipments grew in 2021, despite the share loss. 
The problem is scale, and while the flexible small panel OLED market saw a 28.2% increase in shipments in 2021, SDC’s growth was below overall industry growth because of its size.  The same goes for the composite small panel OLED market shown in Figure 6 and follows in the rigid small panel OLED category also, where SDC has an even bigger share (83.7% in 2021 down from 88.0% in 2020).  Samsung has the choice of further expanding small panel OLED capacity to continue to maintain share, or concentrate on higher value small panel OLED products.  A continued domination of small panel flexible OLED products would seem to be the proper goal, but SDC has taken it one step further and has become the dominant force in foldable OLED displays, which carry an even higher price premium than flexible small panel OLED displays, which tells us that SDC’s advanced planning for small panel OLED tends to be far ahead of most others.  Of course, it is easier to make such decisions when you are as large as SDC and have a parent who is among the top smartphone suppliers globally, but SDC has to make such decisions in a vacuum and cannot anticipate how fast they will progress down the learning and profitability curve and whether their assumptions about small panel flexible OLED pricing are correct as to price and timing. 
While others proclaim the loss of share as the end of the Samsung Display ‘era’ we point to the LCD large panel space where Chinese panel producers have built out significant capacity and now hold a dominant share of the large panel LCD market.  While this was a good strategy for much of 2020 and part of 2021, we look at a longer-term view and expect that the small panel ‘generic’ flexible OLED market will become crowded more quickly than expected, and competition, even between Chinese producers will become even more intense.  While SDC will lose more small panel flexible OLED in 2022, the real question is whether they will maintain profitability growth in a static pricing environment and whether that will hold true in a weak pricing environment.  The idea is to make money, not wave a flag, so we are still on the side of the SDC philosophy, even if it means losing share.


[1] Example: Adding 2 more bits of information to each of three colors changes the possible color combinations from 16.777m possible color combinations to a staggering 1.073b color combinations.

[2] Contrast: The difference from the deepest black and the whitest white,

[3] Brightness in LCD RGB displays is also reduced by the color filter used to generate each colored sub-pixel.

[4] Both rigid and flexible small panel OLED displays.

As we have noted in the past, while Taiwan represents ~27.4% (Fe. ‘22) of large panel display industry revenue, the three Taiwanese panel producers are required to report monthly sales figures while panel producers in other regions and countries typically report those figures quarterly.  This gives a bit of granularity to shorter-term trends in the display space and justifies tracking those results.  As February is an unusual month for the display space given that it is a short month and also contains the Chinese New Year holiday, March tends to even the quarter out, making it a bit more comparable to other years.  Such is the case this year, although the total quarterly result is a bit less positive than last year.
AU Optronics (2409.TT) reported March sales of NT$28043 ($829m US), up 9.3% m/m but down 8.7% y/y, while Innolux (3481.TT) posted sales of NT$23.92b ($825.74m US), up 9.0% m/m but down 22.8% y/y, while Hannstar (61116.TT) generated sales of  NT$1.74b ($59.57m US), up17.4% m/m but down 42.6% y/y.  While the m/m performance looks strong, as we noted, March tends to be a recovery month for panel producers after a slow January and February, however, in the table below, we also show the 5 year averages for March m/m and y/y, which indicate that the gains seen this March are below the averages, particularly when comparing y/y metrics.
Preliminary quarterly sales results, as shown in Table 2, paint a similar picture, although not quite as negative, with the 1Q results being a bit closer to 5 year q/q averages, while 1Q y/y results are a bit further from the averages.  The charts below show that 2022 is starting out more similar to 2018 – 2019, which makes sense given 2020 was certainly not a typical year, nor was 2021, but based on the sales data thus far for the three Taiwan based panel producers, it looks like 2022 will be a more typical year than the last two, but at a higher sales level than 2018 – 2019.  This would be a good indicator of full year panel producer results, however we expect TV panel pricing to remain relatively flat for 2Q and IT panel prices to decline further, which would pull down full year sales and make the 2022 full year chart look a bit less typical than it does thus far.
All in, the best case in our view would be a typically seasonal 2022 for panel sales, at a higher level than 2018 – 2019, but a lower one than the ‘COVID-19 years’ of 2020 and 2021.  The worst case would be a rapid decline in IT panel prices with no increase in TV (large) panel prices, which would set up potential q/q declines during what should be sequentially better quarters.  Y/y results will likely be down in 2Q and possibly 3Q as last year’s large panel price decline began late in the year.  While not a disastrous year for panel producers 2022 is shaping up to be far more difficult than last year and we expect valuations to continue to remain constrained for most generic panel producers.

Since we spent considerable time yesterday parsing data on SVOD and Social Media, we spend a bit more time on data that gives some insight into how COVID-19 has changed buying habits, in this case in Australia, a country where CE products (excluding appliances) represent ~3.3% of the total yearly value of all imports (more than passenger vehicles or crude oil imports) into the country. During the COVID-19 pandemic Australia saw relatively few COVID-19 cases (on a per/million basis) until 4Q 2021 when the Delta variant became dominant, however as early as March of 2020 the country’s borders were closed to all non-residents and Australians returning to the country were placed in quarantine for two weeks., along with states and territories limiting such borders at various times during small outbreaks.  Outbreaks in major cities like Victoria and Melbourne saw lockdowns that lasted 3 to 4 months and a vaccination program began in February of last year.   A Delta variant outbreak caused almost half of the country to return to lockdown in July 2021, although the government ended most public restrictions when a 90% vaccination rate was reached in December ’21, despite the Omicron variant causing new cases to spike.
 From an economics standpoint the Australian government was proactive and cut interest rates in early 2020, followed by a $17b stimulus plan that included both individual and small business payments and support, along with wage subsidies for trainees, and a second package that was paid out in September 2020, but by that time the Australian economy had fallen into recession.  Travel between Australia and New Zealand was restored and curtailed at various times in 2020 and 2021.  By April of last year restrictions were being lifted for some cities but in November the Omicron variant appeared and case rate began to increase spiking fears that another outbreak would occur, forcing purchase restrictions as a wave of panic food and supply buying was the result.  All in, while Australia saw a relatively mild run with COVID-19 due to swift government action, the economic effects were similar to those in other countries, especially those that depended on tourism and migrant workers for agriculture.
So whar does this all have to do with consumer electronics?  Despite the economic impact of COVID-19, Australian citizens bought consumer electronics during the lockdowns and restrictions, with 28% of Australians purchasing a new ‘device’ in 2020 and 38% in 2021.  Smart TV penetration rose from 58% in 2020 to 64% in 2021 and 33% of households upgraded their internet connection, with the need for additional speed as the primary reason, although 67% stayed with their existing carrier, and the data for Gen Z is parsed, 31% in that age category increased their internet speed for gaming, 38% for YouTube streaming, and 27% for SVOD services, although 9% said they changed to another plan (likely slower) in order to lower the cost.
As to specific items purchased as a result of COVID-19, the percentage of Australians buying each device type increased in 2021 over 2020, with a weighted average increase of 5.8%, and as has been the case through most of the pandemic, laptops saw the most turnover, likely due to remote learning needs and work-at-home requirements.  While video calling devices, such as PC cameras and accessories grew 100% y/y, we were surprised that so few Australian bought such devices, unless the market was already saturated, and equally surprised that smartphones were the 2nd most popular CE purchase given  the weakness in that category in other regions.
While the current COVID-19 new case data for Australia (see Figure 2) is certainly not conducive to stimulating CE sales in 2022, the high vaccination rate in Australia (over 86%) has led to a lower ‘serious’ infection rate and relaxed mandates, after a spike in January.  If Australia continues to push for full vaccination and boosters, barring any unforeseen circumstances, the economy should grow between 3.5% and 4.0% this year, with a return to a more normal country-wide supply chain.  Inflation, which was already an issue for Australia coming into 2022 has increased as the war in Ukraine has increased the price of gasoline by about 30% this year, which could impinge on that growth forecast, but it will be interesting to see if Australian consumers remain net buyers of CE products overall as the economy returns to some sort of normal, and which products will see growth or declines.  We would expect laptops to see little growth, while we would expect television sets to see higher growth than last year, with smartphones sales value less this year than last, despite the 5G penetration increase we expect this year (grew from 6% in 2020 to 14% in 2021) as 5G capabilities drift down to lower priced phones.
While Australia has a number of metrics that make it different from other high CE import countries, we expect that it is a good example of a country that was and has been aggressive toward COVID-19 and its impact on the economy, with CE purchase data reflecting that positive stance.  While the global economy will be an influence, we see Australia as a model for understanding consumer CE buying patterns in 2022 and pitted against countries that have taken a more ‘relaxed’ attitude toward COVID-19, it should help to give a balanced picture as to how consumers will react to a less COVID-19 burdened life.