​Nokia (NOK) has been around the telecommunications business since the mid 1800’s and as such the company is among the world’s largest telecom patent holders, with such well-known subsidiaries as Bell Labs (pvt), Alcatel (), and Lucent (pvt).  Nokia’s patent portfolio includes SEPs (Standard-essential patents) concerning 5G, some of which are under the scrutiny of the Chinese government, who is pushing to enforce its antitrust laws.  Whether in response to potential litigation in China, Nokia has instituted a large number of lawsuits against Chinese smartphone brands for patent infringement, asking for injunctions to force the companies to stop selling those products which Nokia claims are infringing their patents.
Simply put, Nokia is asking for a license fee of 3€ ($3.16 currenty) per device, a not unreasonable amount, but we see that some in China are calling this fee excessive based on the fact that China is ranked first globally in patent applications in the digital communications technology field, and Nokia’s share of 5G patents is only 7.6%.  By using 5G IP share to calculate the supposed ‘real’ cost of the fee based on an average smartphone price of ~$261, the cost of paying the 3€ fee for each Chinese phone produced would amount to 17% of the price of a typical Chinese Android phone, and that does not include 4G and 3G license fees.  The theoetical calculations go further in that they note that Huawei’s (pvt) profit (formerly China’s largest brand) on a smartphone is between $6 and $19 (US), which the propose would mean that all profits and more would be taken up by the proposed Nokia 5G license fee.
We are a bit confused by this math, which puts the number of patents issued over the intrinsic value of each patent and goes further in that it suggests that China’s ‘domination’ of the telecom IP world and Nokia’s lack of filings should influence the rate that Nokia charges for its 5G IP license and faults Nokia for filing infringement suits in multiple countries using different judicial systems that could view SEP liotigation differently and allow what China calls ‘patent hijacking’.  Our question is if China is the leader in 5G development why have they not been able to find a way to avoid the necessity for licensing what they call weaker 5G IP?  In reality it is an odd position for China, known to be rather lax on acknowledging foreign IP in locally made products, and one where it will be hard to make such math work.  Nokia has every right to sue if they are not being compensated for IP being used in Chinese phones and Chinese smartphone engineers have every right to find alternative ways to bypass Nokia’s IP if they find the fes onerous, but basing a defense on such math is going to be a difficult one to justify in courts around the world.

Microprocessors get all the press, with their billions of transistors squeezed into a tiny piece of silicon, but who does all the real work these days?  Its us, the passive components that serve and protect the microprocessor and its fancy TSVs, 3D stacking, and metal highways.  We do all the work and they get all the glory, but it hasn’t felt so good when you microprocessors have to sit on the shelf because manufacturers have to wait months to get us lowly passive components.  Yeah, we only cost a few pennies but there is usually only one microprocessor and hundreds or thousands of us passives in a system, so without us there is no system.  Okay, we are anthropomorphizing passive components, but these simple components are the traffic cops, bus drivers, and garbage collectors for many CE devices and while they seem immaterial when compared to transistors and the complex systems they can be molded into, they are as necessary to those systems as water is to humans.
The ECIA (Electrical Component Industry Association) surveys its members via an independent 3rd party (Technology Partners Consulting) on a regular basis to get a sense of both sentiment across the components industry and a read on inventory and pricing levels.  As this data is for North America, it is not conclusive for the global market but does give some major data points as to where the industry has been and is headed.  As can be seen in Figure 2, while m/m sales increases peaked in March of last year, they have remained consistently above the 100 mark, which indicates stable sales gains, however the inset shows that expectations for June, while still above 100 for individual component categories, indicates that the end markets will fall below 100 for the first time since the COVID-19 pandemic began. 
More specifically, as shown in Figure 3 and Figure 4, members were pessimistic about the prospects for sales in 1Q, relative to 2020 and got more pessimistic as the quarter developed, and while that pessimism about 2nd quarter was at a low in January, it continued to rise as 1Q developed.  With expectations for the industry expected to fall below 100 in June, it would seem that a positive view of the industry from its members has been replaced with a negative one, although individual component segments, while down in June, have remained above the 100 mark, sort of a “…well the industry is crappy, but we’re still doing o.k….”, with ~90% of respondents indicating they see a book-to-bill of 1 or greater at their company.
We see the worry coming from the fact that while general component inventories are all relatively close to normal for most categories, concern that inventory levels will continue to grow in 2Q is the case for ~45% of respondents, while only 8% expect those levels to decline.  These metrics are actually down from those heading into 1Q, but component inventory levels were artificially low early this year as supply chain issues and high raw material prices limited the supply of a number of components, both active and passive.  Since then supply pressure has eased a bit and component suppliers have tried to normalized shipments, but are concerned that seasonal factors will make it necessary to build inventory further without underlying demand.  
All in, component suppliers remain pessimistic about the state of the industry but seem to be more optimistic about their individual segments.  In most cases raw material and energy prices continue to rise and with component inventories at normal levels, it becomes more difficult to pass on price increases, so the carrying cost of potentially higher inventories becomes more of a burden in 2Q and potentially 3Q, while demand returns to more modest pre-COVID 19 levels.  We believe this is the basis for the industry pessimism seen above but with sales remaining above the 100 line for most component segments each seems to have a more positive view of their own segment than the industry overall.

​In order to stem the tide of falling panel prices panel producers typically reduce utilization and reduce inventory levels against the weaker demand.  While painful for producers, especially after a period of high margins, it is a solution that typically begins to stabilize panel prices relatively quickly, at least that’s how things have progressed in the past.  However, as the LCD industry leadership has moved from Japan to South Korea and Taiwan, and now to China, things have not worked quite the same as in the past.
While there have always been government support programs for the display industry that provided infrastructure or tax abatement, the Chinese government has been far more aggressive toward developing its display industry and provides those same perks, along with construction and operating subsidies, which can be a substantial benefit to Chinese panel producers.  While Chinese LCD panel fabs are expected to produce positive financial results, the understanding that such subsidies will continue as the fab matures, leads to a different mindset that is less profit oriented and more focused on objectives that can satisfy the political goals of the funding sources.  This is not to say that Chinese fab managers are lax in their ambitions toward sustained profitability, but they have the luxury of being able to make decisions that might be more difficult for those that face shareholder scrutiny that is oriented toward quarterly results.
We believe this has led to a less traditional reaction time to events in the display industry from Chinese panel producers and while it seems a moot point when panel prices are rising, as they did in much of 2020 and early 2021, when panel prices began to drop last year the rhetoric was that ‘things were different this time’ and production shifts to less volatile display products (IT) was considered the perfect solution.  Unfortunately, when most of the major players in the industry make the same move at the same time, the intended safety net of the shift becomes its own worst enemy and competitive pricing is used to keep fabs running at high utilization rates.  At the first sign of segment demand weakness, the competition becomes more desperate and panel prices fall faster.
During the pricing slide there is always the mantras of ‘it can’t go much lower as it is near cash cost’, but in this down cycle the hunger to keep fab utilization levels high seems to have kept panel producers, particularly Chinese panel producers form making any real utilization rate changes, other than token reductions.  Now that a number of generic panel segments and sizes have fallen below cash costs, it is suddenly important to lower utilization rates to ‘preserve pricing.’  Of course, the real question is whether substantial utilization rate reductions are being made to ‘help stabilize the industry’ or to avoid running much of the fab at a loss (the answer is obvious), but the time for waiting seems to have passed, with rumors that some Chinese LCD panel producers are now making the utilization reductions that should have been made months ago.
Based on data from China, we believe that the major Chinese LCD panel producers have adjusted their yearly production targets down by ~8%, a modest reduction, but have recently implemented utilization rate reductions in excess of those numbers.  In terms of Gen 8 and above fabs, those that would normally be used to produce TV displays and large monitors, we believe utilization reductions of 23% have been implemented, although not every producer has done so to the same degree and these metrics do not include smaller substrate fabs such as Gen 6 lines that are used for much IT and mobile device display production, so we see the impact primarily on TV panels and focused on only large producers.
While these reductions might move the needle a bit, with inventory levels above normal it could take some time to slow panel price declines along with other macroeconomic influences.  While it is easy for use to arm-chair quarterback the industry, if history teaches us anything it is that the display industry is cyclical and will eventually respond as such, so keeping your foot on the accelerator as you begin to descend from the top of the mountain might make things look good for a quarter or so, but it won’t make stooping the decline easier, so we hope that the utilization reductions that we think are being implemented are more than just lip service to a short-term problem, but it is a bit too early to tell.
 

In our 05-11-22 note we reviewed the results for the three Taiwanese LCD panel producers which were quite weak and while May sales results were up on a m/m basis for two of the three, y/y comparisons were quite poor.  Of the three AU Optronics (2409.TT) fared the best, with sales of NT$21.97b ($744.0m US), up 8.7% m/m but down 31.6% y/y, while Innolux (3481.TT) saw sales of NT$18.01b ($610.02m US), down 12.6% m/m and down 42.6% y/y, and Hannstar (6116.TT) generated NT$1.60b ($54.32m US), up 15.6% m/m/ but down 43.1% y/y. 

AU Optronics typically sees a m/m sales increase of 8.1% (5 yr. avg.), so this month’s performance seems in-line on that basis, although sales for the month are now only slightly above 2020 pandemic levels, which were the lowest since 2005,  While AUO does not report large and small panel shipments, they do show shipment area (m2) for each month, which we convert into sales/m2, as seen in Figure 4, which peaked in July of last year, and has continued that m/m decline this year as panel prices declined.
Innolux fared the most poorly of the three, despite a continuing rebound in small panel shipments, although we expect the continued weakness seen in large panel pricing offsets the shipment gains in the small panel segment.  Hannstar, which specializes in small panel production, saw a large jump in large panel units, but we note that these are small volumes relative to other producers and vary considerably based on orders, especially after the weakness seen earlier this year.  After a poor April Hannstar is now seeing relatively steady small panel shipments, although pricing remains under pressure, and with the return of large panel shipments (IT panels most likely) was able to generate positive m/m performance in May.
Looking at the two large panel Taiwanese producers combined, sales saw a 2.07% decline, and while we cannot directly compare large panel shipment data for bot (AUO does not provide), we assume that the combined large panel shipments were roughly flat, leaving price as the basis for the sales decline.  As we expect June will see additional panel price declines, we expect flat to weaker results for Taiwan panel producers this month.  We do expect to see Chinese panel producers lower utilization rates again, although the increments have been small thus far, which could help to slow panel price declines, but we would not expect to see panel price stability until August when panel production for the holidays begins again.  Much will depend on how much inventory Chinese panel producers were able to bring down by lowering utilization and how aggressive brands will be on maintaining inventory levels into the holidays, but we are still quite concerned that the lingering effects of COVID-19 lockdowns and the war in Ukraine, along with the rapidly increasing price of energy will temper production demand in 3Q.

In our note of 9/23/21, we spoke about the proposal made by the European Commission to address the problems for consumers related to the presence of three different connectors (charging and data transfer) on the market.  The problem, a lack of charging interoperability and the environmental impact associated with the problem pushed the EU Commission to propose measures that would reduce ‘charger fragmentation’ and ‘performance interoperability’, and allow consumers to decide whether or not to acquire a charger when buying a new device.  Simply, the EU wants one charger standard so consumers do not have to buy a new charger with each new device.
As part of the review process the EU put forth a matrix of six options for consideration, with the “F” option the preferred choice by the commission.  We have added which options are supported by various organizations, although they seem rather obvious, at least in the working document proposal.  The final agreement could be a single option or a blend.  

​[1] Including tablets, digital cameras, headphones, portable speakers, and handheld video game consoles.

This week EU countries agreed to implement the proposed rules that would limit mobile phones, tablets, and cameras to a single charging port type, which would in theory, allow users to use one charger for all of their mobile devices.  The port specified is what is known as a USB-C, which is commonly used for charging, transferring data, and mimicking your phone on a larger display, and most Android phones have USB-C charging ports currently (77.9% of all phone models available in 2021 and 2022 by our count), but the remainder, mostly iPhones and other Apple (AAPL) products, have a proprietary connector which Apple licenses to cable manufacturers.  With 420m portable electronic devices sold in Europe last year the EU says it would be able to avoid disposing of the 12,000 tons of chargers that are thrown away each year, saving 861,000 tons of copper, zinc, and tin in the process, and reducing the cost to consumers of standalone chargers, which is estimated to be about $2.8b each year.

​The agreement, which would be implemented two years after its final approval is a problem for Apple who has opposed the idea on the grounds that it would stifle innovation, although the company uses USB-C connectors on much of the MacBook line due to its higher power handling capabilities.  Apple will have time to make the changes as the rule implementation does not begin for two years after final approval for smartphones and tablets and two years later for laptops, and Apple’s MagSafe, which is a wireless charger could offer a solution that is less costly than reworking all Apple mobile products to USB-C if the company feels that consumers would accept it, although we believe the new rules as they stand would need to be modified for that option. 
Citing environmental concerns has been the company speak concerning Apple and Samsung’s (005930.KS) elimination of chargers and power cords in new device packaging last year, but it is hard to imagine that the environmental concerns were more than an add-on to justify cost cutting measures for both companies.  As the cost of producing separate Apple products tailored to EU rules would likely be cost prohibitive, we expect Apple will comply globally, especially given the momentum behind such rules in other countries, but will likely petition to have the process modified over the next two years.  We believe Apple has been prepared for such an event and will make the required transition in the iPhone 15 (2023) or the iPhone 16 (2024), but will not see license revenue for the Lightening connector from cable manufacturers trail off until 2024/2025.

According to local South Korean press, Samsung Electronics has notified major suppliers that workers at its Vietnam smartphone assembly plant will be reducing the number of days they work each week, with some lines as low as 3 days/week.  While unusual in anticipation of the August release of the Galaxy Fold/Flip lines, it is in keeping with the target reductions we have seen from Samsung itself and a number of its customers.  Samsung’s Vietnam assembly plant would be responsible for ~55% of Samsung’s smartphone volume this year, which would amount to ~154m units (280m total target) or 12.8m/month.  We know that a substantial portion of the Samsung Galaxy foldable line was assembled in Vietnam last year, with smaller amounts assembled in Brazil and South Korea, so with 6 months to produce, assemble, and ship ~10m foldable (series 4) units expected to be shipped this year we would expect that the Vietnam plant is scheduled to assemble ~8m units, with the remainder assembled in Brazil and South Korea. 
With maximum production in July for August shipment, the 2m Galaxy Folds we would expect for the month could be theoretically produced in 4.67 days utilizing the entire Vietnam plant, so utilizing 25% of the plant’s resources, a more realistic view, would take a bit over 18 days, which could be accomplished even if those lines were running 4 days/ week for half of the month, and likely the Galaxy Fold assembly lines would be the ones still running 5 days/week.  More likely would be reductions to 3 or 4 day/week on lines for outside customers, where the release of new product was not imminent, so we see the reductions as in line with the overall weakness in the smartphone market.

​Huawei’s (pvt) smartphone business has been severely disrupted by the US trade restriction placed on the company that do not allow US companies or foreign companies that use US products to sell to Huawei.  This has limited Huawei’s smartphone business to China and stifled its ability to produce 5G smartphones for its customers.  While Huawei has developed its own flavor of Android, its smartphone customers are also unable to access the Google (GOOG) Play Store, which means they are unable to access many Android applications and updates and without the advanced node 5G chips produced by Samsung and Taiwan Semi (TSM), their phones are limited to 4G..
As a result Huawei’s share of the smartphone market has declined from 19.36% in 2Q 2020 to 1.8% in 1Q this year, with little hope that such sanctions will be lifted in the near-term, and while local semiconductor fabs are able to produce more mature node chips, they are also prohibited from purchasing much of the advanced lithography tools needed for nodes below 28nm.  Huawei went as far as to sell its Honor (pvt) smartphone brand division to investors in order to separate it from the US restrictions although the company has no interest in Honor at this time.  Given the tight rein the US restrictions place on Huawei, the company has transitioned into businesses that are not based on advanced node semiconductors, but has not given up on the smartphone business despite the lack of consumer traction.
It seems that Huawei is able to provide 5G service for its customers if they purchase a mobile phone case that is made by a 3rd party that is not affiliated with Huawei and therefore is able to purchase 5G modem components.  While the case offers some protection for the phone, the real purpose is to give 5G service to Huawei smartphones.  But things go further as a company known as TD Technology (pvt), an affiliate of TD Tech Holdings (pvt) which is jointly owned by Huawei and Nokia (NOK), sells a smartphone known as the TD Tech M40, strangely similar to the Huawei Mate 40 series of 4G smartphones, but capable of 5G service, and we say strangely similar as TD Tech is a licensing partner of Huawei and has acknowledged that it purchases parts from the company.  The Huawei P50 series, released last year has the same lack of 5G service but it seems a company known as Soyea Technology (000909.CH) has developed a “5G Communication Case” that is suitable for the Huawei P50 Pro, and can be purchased for ~$120.
Huawei has recently removed the Mate 40 smartphone line from availability, which many believe is in anticipation of the release of the Mate 50 expected this summer, which is already said to possibly include a ‘mobile phone case’ similar to the one mentioned above, allowing the phone to provide 5G service and stimulating Huawei’s smartphone sales, and while much of the Mate 50 story is speculation, expectations are that there will be a number of ‘cases’ available for the new Huawei smartphones as accessories.  As TD Tech is a real company with over 1,800 employees they can obviously develop their own 5G smartphone line based on Huawei (licensed) technology, as they did with the Huawei clone mentioned above, but as it turns out, much of the TD Tech board is composed of Huawei executives and an undisclosed holding company beneficiary, which creates further suspicions that Huawei is even more closely tied to these ‘clone’ phones. 
We wonder if the US DOD is up on these connections, as a possible workaround for Huawei’s smartphone business and whether TD Tech and Soyea will be added to the US entities list or will be allowed to provide help to Huawei’s smartphone business?  We assume the answer depends on how stringent the DOD wants to be with Huawei and whether it is politically beneficial to tighten the screws on Chinese companies heading into the mid-term elections.  If we know, we have to assume someone at the DOD knows that the Huawei clones are already here…
 

​Apple’s (AAPL) yearly World Wide Developers Conference began yesterday, and while reviewers were sufficiently upbeat enough to likely satisfy company management, there was little to get very excited about.  As a software developers conference, there was considerable focus in the release of iOS16, which is now available to developers and is expected to be released alongside the iPhone 14 series in September, at least in consumer beta.  While we will not go into the details of the new iOS and its variants in detail, there were two aspects that we thought noteworthy.
The first was Apple’s move into the BNPL (Buy now, pay later) genre for the iPhone, which allows iPhone users to split payments into 4 installments spread over 6 weeks, with no interest or fees (if you pay on time), and strangely for Apple, the option is not restricted to only Apple products and you don’t need an Apple Card.  Goldman Sachs (GS) is the attached bank, but details as to who might be absorbing the interest costs were not revealed.  The concept is similar to PayPal’s (PYPL) BNPL, which limits the service to transactions between $300 and $1,500, while Apple has yet to specify limitations.
We have noted some of the security issues facing those using Apple’s Air Pod tracking devices, with boy/girlfriends or spouses using them to track or stalk former partners, going as far as to hide them in cars or personal items.  Apple has taken this seriously, going as far as to include the features, known as “Rapid Security Response” in the developer version and making the update automatic, rather than forcing the iOS 16 user to reboot to have the changes take effect and institute further protection against cyberattacks and potential software vulnerabilities, but also adds “Safety Check” which implements a number of features that would help to protect those being tracked or harassed.

1. The system can disable sharing of location data.
2. All application permissions are reset, which means no outsider (many couples share permissions to make sure the other person has not been in an accident or hurt in some way) can access the camera, microphone, or any other application that might have access to same.
3. Removes outside access to messages.
4. Facetime is limited only to the user’s device.
5. All recently deleted or hidden photos are locked and cannot be accessed by others.
6. All device iCloud accounts on all devices can be signed out at once.

As these precautions will be automatically available with iOS16 users will have access to these functions as soon as the major iOS update is made and will also be included in iPadOS16, WatchOS 9, and MacOS Ventura in September.   We commend Apple for being proactive in making these security improvements quickly and easily implemented.
We note that while this was a software developer’s conference, there were some hardware changes announced, although we would consider them relatively minor.  To use of most significance was the lack of any AR/VR reference or teasers, as we suggested might be the possibility in our note yesterday, and while this is disappointing from a product perspective, we expect it will be a positive for Apple in the long-run, as they continue to further refine their AR/VR headset prototypes further.  There were some other upgrades, with the Mac Book Air and the Mac Book Pro 13 shifting to Apple’s M2 chip from the previous M1, which should noticeably improve performance, but the price of the Mac Book Air also increased from $999 to $1,199, which could push it near or to the budget limit of those looking for MacBook performance but at the lowest possible price.  The MacBook Pro 13 with the M2 chip sells for $1,299, with both expected to ship in July.  All in, a relatively uneventful event.

Social media influencers, despite the jokes and SNL skits, are gods to the retail world, and the phenomena is not just in the US but global, and even the slightest perturbation in the daily activities of influencers can cause ripples across products and light up social media sites across the globe.  Perhaps it does indicate an unwillingness of the younger generation to think on their own, but whatever the reason, influencers have influence and retailers pay them well for just a few positive words or a nod toward a new product.  Even more focused are live streaming events where influencers can generate millions in revenue by explaining what is hip and what is not, as is the case with Austin Li Jiaqi, aka the “Lipstick King”, and influencer in China who has over 64 million followers and was in the middle of a broadcast on Taobao Live, when he brought out a plate of Viennetta ice cream with Oreos and chocolate, which some say looked like a military tank.
Suddenly the broadcast went blank and his fans were left wondering what had happened, especially since the broadcast was during the big 6/18 shopping holiday.  While Austin noted in a post that there had been some technical issues as the reason for the broadcast shutdown, he did not appear for hjis next show two days later and has not been seen or heard from since the broadcast shutdown.  The speculation is that whether intentional or not, the cake looked like a tank to government censors, which could be assumed to be a reference to the 1989 Tiedemann Square massacre where government troops killed a number of students and civilians, with a famous picture of a protester standing in front of a tank, the symbol of the carnage.
So far there has been no indication as to Mr. Li Jiaqi’s whereabouts and holiday retailers that were part of his broadcast venue are scrambling to fill the gap and salvage sales, but the incident has also had another effect, and that is of educating a generation of young Chinese citizens who had never seen or heard of the Tiananmen Square incident.  As no mention or reference to the Tiananmen Square massacre is allowed there is a generation that had no reference point to understand what the tank cake might have been alluding to, but many seemed to have decided to look it up, likely using VPNs that can bypass Chinese internet restrictions, and now have an understanding of what Tiananmen Square represented.  While we have no idea if Austin Li Jiaqi’s intention was to subtly remind a country of how repressive the government has been in the past or just to hype an ice cream product, it is an odd confluence of events that seems to have had an effect different from what the government intended.  Given the lucrative financial compensation given to influencers we expect the actions of Mr. Li Jiaqi were likely unintentional, and he will eventually return after considerable interrogation, but the power of influencers has been reinforced, albeit not as intended by the censors.

2021 was a good year for most technology companies, especially large ones, with margins reaching record highs, many technology companies, large and small, were on a tear to hire new employees.  Of course there were many who struggled with staffing shortages, but with 5.7% of the US workforce employed by a (loosely defined) technology company, and ~80,000 new tech hires last year, technology companies seemed empowered with the desire and capital to broaden staffing, with the only industries having a greater hiring rate being finance, insurance, accounting, and healthcare.
This year has been different and the aggressive hiring of last year and the weaker economy this year have turned that hiring into layoffs at many technology companies, with more than 17,000 US technology workers be laid off so far this year.  Generally corporate speak blames COVID-19 while o few acknowledge that over-hiring last year might be a contributing factor, but hiring freezes or layoffs seem  to be accelerating as technology profits decline.  The good news is that the decline is far from the actual COVID-19 related layoffs seen in 2020 and on an overall basis (all industries) new jobs are being added, but technology companies have seen valuations decline precipitously and VC funding has also slowed (Figure 1). 
While likely not a complete list Crunchbase has provided a list of the most notable tech layoffs this year which includes a number of public companies amongst the vast array of private organizations.  The list, which includes company or sourced announcements since January 21 is considerably longer than what we show here (50 most recent).  The number of layoffs across the top 50 in the list is 7,227 with that representing 17.8% of the workforce on average, only including those where the number of layoffs is verified by source.