​In May we noted that Corning (GLW) had officially announced the opening its 2nd Gen 10.5 glass substrate facility in China, and its 6th class facility in the country, co-located with BOE’s (200725.CH) Gen 10.5 fab in Wuhan. Last night Corning announced that it will add production capacity to its facilities in Chongqing, producing substrates at Gen 8.5 and above.  There are two LCD fabs nearby, a Gen 8.5 LCD fab (B8) run by BOE, and a Gen 8.6 LCD fab (H1) run by HKC (248.HK) and one Gen 6 OLED (BOE) line.  The new glass processing lines are expected to be in production in 2023.

Huawei has been under pressure as the US has continued trade sanctions against the company, extending them from what were direct sales exclusions to considering any component produced using US equipment a violation last year.  The impact on Huawei’s smartphone business has been quite pronounced and caused the company to sell its Honor (pvt) brand, which was developed by Huawei to appeal to a young and less affluent segment of the global population, and in November of last year Huawei sold the brand to a consortium of over 30 agents and dealers, including a division of China Telecom (728.HK) and the Shenzhen government.
As part of the trade sanctions imposed by the US, Huawei lost the ability to access the Google (GOOG) Play store and the ability to access and update the Android operating system in all of its existing phones, and would therefore be unable to release new phones that would allow users to access Android services.  While China is less dependent on Android than the global community, it severely limited Huawei’s global smartphone business, and pushed Huawei to step up development of its own Hongmeng (Harmony) OS to replace Android.
As we have noted recently, Huawei has officially released the Harmony OS and is actively promoting the OS to smartphone and CE brands in order to lessen product dependencies on Android and bypass some of the US restrictions, however the CEO of Honor recently announced that it new flagship phone the Honor 50 5G will continue to use Android across the Honor 50 line and not adopt its former parent’s OS, although he stated that they will keep an eye on future Harmony OS ecosystem developments.  In this case, it seems obvious that Honor, which is totally independent of Huawei and is therefore outside of the US restrictions, is looking to appeal to a more global customer base that requires the ability to access Google services and likely has little or no allegiance to Huawei, as some on the Mainland do.  While it is a tangible blow to Huawei, it goes to show how difficult it will be for Huawei to establish a new OS in the global smartphone market.  If you have every had your kids ask to be dropped off a block from school, you know what that feels like…

Foldable OLED displays are relatively new in terms of the display business, with the first foldable display being announced by Royole (pvt) in January of 2018 and Samsung (005930.KS) following with the announcement of its Galaxy Fold in February 2019.  Since then a number of other models from Samsung, Huawei (pvt) and Motorola (MSI) have appeared, and a number of brands are expected to release foldables during the 2nd half of this year.  As the pricing for foldable displays, whether they are used in smartphones, tablets, or notebooks, must absorb both the cost of development and lower yields, the devices that have been developed are expensive and in our view are still not mainstream products.  There are also a limited number of foldable display producers, with Samsung Display dominating the market and just recently opening its foldable display production to outside customers, which will showcase their expertise and volume availability in the foldable space.
That said, predictions as to the growth of the foldable market are quite difficult at this early stage in the in the foldable development cycle, so we take any such estimates as transitory at best.  While we admire those willing to make the attempt, we temper those expectations and expect that the rapidly moving parts of the foldable space will changes those estimates regularly.  In fact that has been the case recently as DSCC has updated their OLED Foldable unit volume forecast through 2025, decreasing estimates to reflect issues with trade restrictions that limit Huawei’s ability to maintain its leadership position in the smartphone space.  With Huawei’s contribution to the foldable space lower and the adoption of foldables by Apple (AAPL) not expected to appear until 2023 at the earliest, we see the reductions as logical, and expect some further modifications as the trade situation with Huawei remains fluid and consumer acceptance of foldable devices becomes more widespread.  The chart below shows the original estimates through 2025 made in December of 2020 and the updated estimates.  The numbers in red indicate the difference between old and new estimates and the dotted line indicates the new estimate rate of change on a y/y basis.

The Semiconductor Industry Association is the voice of the US semiconductor industry and has spent the last 40 years promoting the US semiconductor market and establishing policy, much of which has been adopted by the US government.  A recent report developed in conjunction with Oxford Economics spells out the impact of the semiconductor industry on the US economy, particularly on the US workforce, where the report states that the semiconductor industry directly impacts 277,000 jobs, generating $47.1b in labor income and $55.8b in economic output.  Those jobs also support an additional 1.6m jobs that generate $113.7b in labor income and $190.6b in economic activity, with the manufacturing sector seeing the most impact. 
The SIA also notes that a$50b investment in the US semiconductor industry would create 10 additional fabs, generating 42,000 new jobs by 2027, and using the same metrics as they did to generate the metrics above, by 2027 the semiconductor industry would support 2.13m jobs across the US economy.   They take the metrics a bit further when looking at the use of semiconductors rather than the production of.  The SIA says that over 300 industry sectors purchase semiconductors (2019) and so if you count all of the workers in those industries, they surmise that the impact of semiconductor products would influence 26.5m US jobs.
While we expect using a 5.7x multiplier for the economic impact of every new worker in the semiconductor industry might be a bit of an overstatement, the report does apply the impact model to the CHIPS Act, showing how each economic sector would contribute to the generation of 1.1m jobs.  The Senate p[assed the US Innovation & Competition Act on June 8, which would provide $52b to fund R&D and manufacturing initiatives, with the bill currently awaiting review and a vote in the House of Representatives.
 

On 2/25/21 we noted that President Biden had issued Executive Order #14017 which commenced a 100 day review of the US Supply Chain in relation to Semiconductor manufacturing and advanced packaging, high capacity batteries, critical materials (rare earths), along with pharmaceuticals and their ingredients.  The agencies involved have one year to submit full reports on how to strengthen the US manufacturing base and make it less dependent on supplies from ‘foreign adversaries’ and how the US could expand its reach in a number of areas ranging from cybersecurity to agricultural commodities, but were to summarize their thinking in this ‘preliminary’ report..
The White House has released that 100 day review, with detail provided by the Department of Commerce, the DOD, the DOE, and Health & Human Services, and the 250 page report, “Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth”, includes reviews of the defense, public health and biological preparedness industrial base, the information and communications, energy, transportation industrial base, and supply chains for production of agricultural commodities and food products, with a more detailed look next February.
Since we the US taxpayers are paying for the report, we thought it necessary to see what our dollars were buying, so we took on the task of wading through the governmental gobbledygook and overburdened detail to summarize the report, starting with a broad description of the report’s focus (the “What”), which are quotes from the report as to critical points in the four key focus areas, followed by the reasons why the government is all up-in-arms over these topics (the “Why”), and the report’s ‘solutions (the “How”), and our short rant on the report. 
We have tried to cut much of the fat out of the 6 page Executive Summary below and have not burdened investors with the next 200+ pages of detail on pretty much anything relating to the four main topics in order for folks to get a picture as to the What, How, and Why the government is spending money and time once again to evaluate situations that have been evaluated so many time before.  Ours is not to reason why, or is it?
 
The “What”
Semiconductor & Advanced Packaging – “The US share of global semiconductor production has dropped from 37% in 1990 to 12% today and is expected to decline further without a comprehensive US strategy to support the industry.”[1]
Large Capacity Batteries – “Global demand for EV batteries is projected to grow from approximately 747 gigawatt hours (GWh) in 2020 to 2,492 gigawatt hours by 2025[2]. Absent policy intervention, U.S. production capacity is expected to increase to only 224 GWh during that period, but U.S. annual demand for passenger EVs will exceed that capacity”.[3]
Critical Minerals & Materials – “China was estimated to control 55 percent of global rare earths mining capacity in 2020 and 85 percent of rare earths refining”.[4]
Pharmaceuticals & Active Pharmaceutical Ingredients – “Thanks to the work by both government and the private sector, in less than a year the United States dramatically increased its capacity for vaccine production. But shortages of critical generic drugs and APIs have plagued the United States for years. 87 percent of generic API facilities are located overseas which has helped reduce costs by trillions of dollars in the past decade, but has left the U.S. health care system vulnerable to shortages of essential medicines.”[5]
The “Why” (Self-Explanatory)

• Insufficient US Manufacturing Capacity 
• Misaligned Incentives & Short-termism in Private Markets
• Industrial Policies Adopted by Allied, Partner, and Competitor Nations
• Geographic Concentration in Global Sourcing
• Limited International Coordination

The “How”

• Provide Direct Funding for Semiconductor Manufacturing & R&D – The report recommends at least $50b in investments to advance domestic manufacturing of leading edge semiconductors; expand capacity in mature node and memory production to 13 support critical manufacturing, industrial, and defense applications; and promote R&D.
• Provide Consumer Rebates & Tax Incentives to Spur Adoption of EVs – The report recommends $5b be spent to electrify the federal fleet with US made EVs and $13b in infrastructure investment to build a national charging infrastructure.
• Provide Financing Across the Full Battery Supply Chain – The report recommends new incentives to support battery cell and pack manufacturing in the United States, including grant programs that can help entrepreneurs who do not have the ability to access tax credits in the short run and the use of the $17b loan authority attached to the DOE, to review applications from critical material and mineral refining and processing facilities and to re-equip, expand, or establish facilities for manufacturing advanced technology vehicle battery cells and packs
• Establish a New Supply Chain Resilience Program – The report recommends the enactment of the proposed Supply Chain Resilience Program (DOC) and back it with $50b in funding.
• Deploy Defense Production Act – Establish a new interagency DPA Action Group to recommend ways to leverage the authorities of the DPA to strengthen supply chain resilience to the extent permitted by law (their words).
• Invest in the Development of Next Generation Batteries – The report recommends that the United States should focus on: (1) reducing or eliminating critical or scarce materials needed for EV or stationary storage, including cobalt and nickel; (2) accelerating battery technology advances including next generation lithium ion and lithium metal batteries and solid state design, and (3) developing innovative methods and processes to profitably recover “spent” lithium batteries, reclaim key materials, and re-introduce those materials to the battery supply chain.
• Invest in the Development of New Pharmaceutical Manufacturing & Processes – The report recommends that US agencies s increase their funding of advanced manufacturing technologies to advance continuous manufacturing and the biomanufacturing of APIs by using American Rescue funds to increase production of key pharmaceuticals and ingredients, including using both traditional manufacturing techniques and accelerating on-demand manufacturing capabilities
• Work with Industry & Labor to Create Pathways to Quality Jobs – The report recommends using Employment & Training Administration funds to support sector-based pathways to jobs through industry, labor, community colleges, and non-profit partnerships.
• Support Small, Medium, and Disadvantaged Businesses in Critical Supply Chains – The report recommends that the SBA should support the above who are in or seeking to enter the four targeted industries through long-term equity investment and SBIR programs.
• Create 21st Century Standards for the Extraction & Processing of Critical Minerals – The report recommends the development and adoption of comprehensive sustainability standards for essential minerals, such as lithium, cobalt, nickel, copper, and to establish an interagency team with expertise in mine permitting and environmental law to identify gaps in statutes and regulations that may need to be updated
• Identify Potential US Production & Processing Locations for Critical Minerals – The report recommends the establishment of working group comprised of agencies such as the Department of Agriculture, the Environmental Protection Agency, and others to identify potential sites where critical minerals could be sustainably and responsibly produced and processed in the United States while adhering to the highest environmental, labor, community engagement, and sustainability standards.
• Improve Transparency Throughout the Pharmaceutical Supply Chain – The report recommends that HHS should encourage Congress to give it new powers to track production and provide same on labeling for all pharmaceuticals sold in the US, particularly with generic drugs, which represent 90% of all pharmaceuticals consumed in the US.
• Create a Data Hub – The report recommends that the Commerce Department create a data hub to coordinate data from across the federal government to track supply and demand disruptions and improve information sharing

These are the broad topics, and while they start off somewhat specifically in terms of spending and implementation, they tend to get more general as the report continues.  Some refer to existing programs where funding has already been allocated but many would require new funding that could show up in a variety of bills to be presented to congress.  The report does go into much more detail as to each sub-set of the four main focus segments, with massive sets of data to support each process description, risks and recommendations, and the status of each entity that is involved with the industry.  As we are data-centric folks at heart, this is a treasure trove of information, but in terms of solutions that are more than boiler-plate recommendations, the report is lacking.
Of course, those involved will say to wait for the full report after one year, and that in governmental terms this 250 page report was put together overnight, but we wonder why such recommendations are not made to the President and Congress on a regular basis?  Does everything relating to the highly identifiable issues in the report have to be restudied every time a new administration is elected?  Yes, we understand that every administration has their biases and goals, which taint and slant the practicality of actually implementing programs that would continually upgrade these areas of contention in the US supply chain, but since we pay for all of this crap, shouldn’t we be able to expect that the agencies involved are providing such details and recommendations on a regular basis, regardless of what administration or bias is in vogue? 
Maybe after reading the report our naiveté as to how the government ‘works’ is showing through, but if this was a report sent to the Board of Director of a company, aside from keeping the staff busy, it is far too general to mean anything, and by the time the full report comes out, bills are introduced, and negotiations between parties begins, it will be election time, with the next administration likely to assign its new agency heads to compile a report detailing solutions for the same or similar topics and the cycle begins again.  “Where’s the Beef?”


[1] Antonio Varas, Raj Varadarajan, Jimmy Goodrich, and Falan Yinug, “Government Incentives and U.S. Competitiveness in Semiconductor Manufacturing,” September, 2020, Boston Consulting Group and Semiconductor Industry Association, (https://www.semiconductors.org/wp-content/uploads/2020/09/Government-Incentives-andUS-Competitiveness-in-Semiconductor-Manufacturing-Sep-2020.pdf).

[2] 5 “Lithium-Ion Battery Megafactory Assessment,” Benchmark Mineral Intelligence, March 2021, (https://www.benchmarkminerals.com/megafactories/)

[3] Alice Yu and Mitzi Sumangil, “Top Electric Vehicle Markets Dominate Lithium-Ion Battery Capacity Growth,” February 16, 2021, (https://www.spglobal.com/marketintelligence/en/news-insights/blog/top-electric-vehiclemarkets-dominate-lithium-ion-battery-capacity-growth).

[4] Carl A. Williams, “China Continues Dominance of Rare Earths Markets to 2030, says Roskill,” February 26, 2021, Mining.Com, (https://www.mining.com/china-continues-dominance-of-rare-earths-markets-to-2030-says-roskill).

[5] Food and Drug Administration, Testimony before the House Committee on Energy and Commerce, Subcommittee on Health regarding “Safeguarding Pharmaceutical Supply Chains in a Global Economy,” October 30, 2019, (https://www.fda.gov/news-events/congressional-testimony/safeguarding-pharmaceutical-supply-chains-globaleconomy-10302019).

​According to local press, the water shortage that has been plaguing a number of regions in Taiwan, has been alleviated by the Caiyun Typhoon (Hurricane to us) that passed over Taiwan on June 4 and the Meiyu front that added to the 807 mm of rainfall seen on the island in the last 12 months, which is about half of the annual average.  A number of key Taiwan based companies, particularly Taiwan Semiconductor (TSM) were faced with both water rationing and the cost of bringing in water, in order to maintain semiconductor production, which is highly water dependent, with a typical fab using between 2m and 4m gallons of ultra-purified water per day.  Crisis averted.

​Last May Lee Jae-yong, the Vice-Chairman and heir to Samsung Electronics, made a public apology concerning the ‘irregularities’ surrounding his inheritance of managerial rights at Samsung Group (pvt) and its policy of suppressing labor unions.  In that speech he promised to abide by the law and stated that “there’s no more controversy about the issue of management succession.” On the topic of Samsung’s intolerance of labor unions, Lee said, “The culture of labor-management relations at Samsung has failed to keep up with the changing times. I will ensure that the phrase ‘no union management’ is no longer used at Samsung,” but in January of this year he was sentenced to finish a 2.5 year term in prison for bribery, and currently resides at the Seoul Detention Center.
While the promises he made before his sentencing were likely carefully screened by Samsung’s legal department and worded as vaguely as possible, Samsung Display (pvt), the company’s display production affiliate, allowed the formation of a union in February 2020, which now has ~2,400 members, or ~13% of the affiliates workforce.  Unfortunately, things have not been going smoothly concerning talks between the union and company management, and a disagreement on the 6.8% wage increase the union has asked for and the company’s 4.5% increase proposal has not been resolved, along with an increase in hazardous duty pay, which has been frozen for 10 years.  Workers received a 2.5% increase last year and a 3.5% increase in 2019.
As these negotiations are the subject of close scrutiny, the outcome could set the tone for union formation and negotiations at other Samsung affiliates, particularly while Lee remains in prison.   The compliance committee that was set up as part of a court order forcing the company to abide by labor laws, is facing considerable pressure to resolve the situation, however union members rejected the company’s proposal and a subsequent vote by union members decided by a 91% positive vote, to take collective action against Samsung Display management.  The union is planning a strike for June 21. 
While strikes are usually ugly affairs with shouting mobs and nasty placards, this strike will be a bit different, starting with six union members and increasing gradually, as this would be the first union strike at a Samsung affiliate, but the union did suspend mediation after deciding that the differences between the two parties were too difficult to resolve, opening the way for the walkout.  SDC managers have kindly given the union a list of the minimum number of workers needed to keep the fab in operation, although it seems that it might take some time for the union to build to anywhere near that point, a rather polite but somewhat superior gesture . 
Given the relatively low level of initial union involvement, at least as of June 21, we expect little impact on SDC’s production, however should the walkout expand and be sustained, it could put more stress on what is a relatively tight display market currently.  As large SDC customers such as Apple and Samsung itself would not have time to requalify new producers or evaluate sample products, an expanded or extended strike could present an issue for release dates, but thus far, while the situation is far more volatile than it might have been in the past when Samsung management was able to squelch any worker disagreements, it still seems quite staid and civilized compared to strike at other companies in Asia and certainly more polite than those seen in the US.

​Apple (AAPL) is certainly the leader in the smartwatch segment, with a share over 50% in the last few quarters, and while Samsung’s (005930.KS) share is around 15% the do hold the number two slot after Apple, and their next iteration of their smartwatch has just been certified by the FCC, hinting that its release is relatively soon.  While no official date for the release of the Galaxy Watch 4 or the Galaxy Watch 4 Active has not been set, expectations are that at least one or both will be announced in August, given that the original Galaxy watch was released in August (2018), as was the Galaxy Watch 3 (there was no Galaxy Watch 2), and the Galaxy Watch Active 2.
That said, there are expectations that this Galaxy Watch will be different than previous versions in that Samsung will offer a combination of its own Tizen OS, along with Google’s (GOOG) Wear OS for the first time.  While Samsung has been promoting its Tizen OS for years, it does not have the following in the application developer community that Google does, and when it comes to wearables, the applications available to the user are second only to the look of the device.  If Samsung does offer this OS combination, it would represent an acknowledgement that Google’s application development universe is 2nd to none and it plays a key role in selling wearables.  From the user’s standpoint, an updated Samsung One UI interface will make the OS look almost identical to what users have seen before, but now including Wear OS apps.
There is some indication that these expectations are not just idle speculation, as Google has mentioned that it has modified Wear OS ‘with Samsung’s help’, which is unusual in that any modifications to the OS are usually made by the company releasing the wearable, but in this case, in order to gain the Samsung watch user base, it seems Google has made modifications for Samsung, giving it a better chance of competing against Apple’s Watch OS.  Apple does not let Android smartphone users pair with an Apple Watch, but iPhone users are able to use a Wear OS smartwatch, so you can keep your iPhone but migrate to a non-Apple smartwatch.  In the past, Wear OS and Tizen OS applications that worked with the iPhone were very limited, and we expect the improvements made to the Wear OS will open up many of its applications to iPhone users, giving Samsung a more attractive entry point to Apple’s smartphone user base.
There are some points that go beyond the potential for Samsung’s adoption of Wear OS on the Galaxy Watch 4, such as a glucometer that would measure blood sugar levels or a faster chipset, potentially produced using a 5nm process (previous version was 10nm), and the return of battery supplier CATL (300750.CH), who was the supplier of the battery in the ill-fated Samsung Galaxy Note 7 that caused the phones to catch fire and caused a global recall, and while a glucometer and a faster chipset might be selling points, we expect adding Wear OS, should that be the case, would have a greater impact on sales over time.

Shipments of Handsets in China fell again in May to 23m units.  This was down 16.4% m/m and down 32.0% y/y, against a 5 year average increase of 0.9% for May, putting shipments only 5.5% above the low for the year, which was February, typically the low point for shipments historically.  We expect this trend to continue through June/July/August, which are typically relatively weak months for handset shipments in China, and pick up again in September, although our expectations for the year are for 303.48m units shipped, which would be down 1.5% y/y, even against the weak year in 2020.  While the 1st quarter’s y/y comparison (up 100.2% y/y) was easy due to the onset of COVID-19 in China, the 2nd quarter comparison will be the opposite, given the snapback seen in 2Q last year, and we expect 2Q total handset shipment in China to be down 30.7% y/y at 72.2m units this year.
5G smartphone shipments declined to 16.7m units, down 22.0% m/m but up 6.8% y/y, although the share of 5G smartphones as a percentage of total handsets also declined to 72.6% from its peak of 77.8% last month, and th number of new 5G models released in May declined to its lowest level this year.  We expect that the release cycle for 5G smartphones in China would account for the low number of 5G new models and weaker shipments, although component shortages might begin to slow the rate of 5G smartphone growth in the near-term.  That said, we expect 5G share of total shipments in China this year to remain above 70% for the remainder of the year and new 5G model releases to pick up in September.
On an overall basis, China’s smartphone market remains lackluster, and Huawei’s (pvt) trade issues with the US, while they are less impactful on the Mainland, do have a sobering effect on smartphone demand in China.  As Huawei is unable to avail itself of 5nm or 7nm process nodes, their ability to compete with other smartphone brands is muted, despite the lessened impact of limited Android services in China.  Other Chinese brands continue to try to fill the gap, but to remove what was the number one brand in China from its position in its home country would be like removing the iPhone in the US.  Many will migrate to other brands, but the transition is not an easy one and will opt to hold on to existing Huawei phones for a while to see if the trade logjam breaks.  In the interim, the Chinese smartphone market continues to weaken.

While Taiwan based Digitimes tends to be a highly promotional news source concerning CE related companies in Taiwan, on occasion they do basic research that is informative and unbiased.  Over the last six months they undertook a project entailing looking at the financial reports of 4,725 publicly listed companies across 11 countries in Asia.   Their Asia Supply Chain 100 ranks Asia’s top 100 hardware suppliers by sales and other financial  metrics and is focused on hardware suppliers in eight industries including ICT (Information & Computer Technology) end devices and equipment, consumer electronics, motor vehicle manufacturing, medical electronic devices, semiconductor, electronics components, motor vehicle parts and equipment and electromechanical technology. However, no medical electronic device supplier made it into this year's top 100 list.
The top 100 names were primarily based in Japan, China, Korea, and Taiwan, which is of little surprise, with the two largest groups being auto/motorcycle manufacturing and ICT end device equipment suppliers.  Of the top 100, most are from East Asia, with only five suppliers based in Southeast Asia, including one Indonesian company and four Indian companies.  When broken down to the top 10 companies on the list, 5 are auto/motorcycle manufacturers (Toyota (TM), Honda (HMC), SAIC (600104.CH), Nissan (7201.JP), Hyundai (005380.KS)), 3 are ICT suppliers (Samsung Electronics (005930.KS), Foxconn (2354.TT), Hitachi (6501.JP)) and two are CE companies (Sony (SNE), Panasonic (6752.JP)), and while Taiwan Semiconductor (TSM) is #18 on the list, it has a profit margin of 38.7%, the highest on the list.