​Taiwan Semiconductor (TSM) received governmental OK to build a 2nm fab back in July of last year and has been in negotiations with landowners in Hsinchu, the site of the new fab.  According to local press, ~90% of landowners have agreed to the purchase, with final agreements expected to be made this month.  Construction will start in July or August and is expected to take ~1 year to build the physical fab, with equipment move-in and testing to take an additional year, leading to trial production in 3Q 2024 and mass production in early 2025.  Original plans were mass production in late 2024 or early 2025
The fab is said to have potential for four 12” lines, although it is expected to be built out in 4 phases, and while total fab capacity has not been specified, it is expected that the total fab capacity when fully built out will be ~100,000 wpm.  The fab is expected to use GAA (Gate All-Around) architecture, similar to Samsung’s (005930.KS) GAA 3nm process, which has proven difficult for Samsung to implement thus far.

We will skip our usual oratory about the unreliability of surveys, with just a nod toward those with samples large enough to be called ‘random’, as was the Thrive survey we note below given its 98,000 participants, but most interesting was the 23% of respondents who said they own or have used a VR headset, which remained the same since the last survey a year ago.  Non-VR users however seems quite disinterested in VR overall, with the query about why no interest yielding an ambivalent “Just Not Interested” (63%).  While the peak of consumer interest in VR was likely back in 2017, and those already involved seem satisfied, the challenge to bring VR back into the realm of consumer interest might not be an easy task.
65% of survey respondents indicated that cost was a factor in determining interest, and even the seeding of the VR headset market by Facebook’s (FB) Oculus 2 ($300 base price) does not seem to have changed general consumer perception about VR.  Application cost was also mentioned as a factor given the relatively high cost of VR application production, which gets passed on to consumers.  Latency has been a problem for VR, and while difficulties with VR generally do affect a portion of the population, latency is one area that is improving regularly, both at the hardware level and the networking level, and while VR will not generate enough momentum currently to encourage network improvement on its own, there is the possibility that more sophisticated hardware can tap into that potential.
One area in the VR space that we see as ripe for consumer concern is privacy and security, which we expect will become an even greater concern as the Metaverse becomes a bit more practical.  While only a bit more than half of cell phone users are concerned about stolen passwords, identity theft, and illegal tracking, the opportunities for such nefarious activities will expand as the Metaverse’s “Wild West” will open new pathways for cybercriminals to gather information.  Will application developers make their VR apps secure?  Probably not, until they have to, and if NFTs and cryptocurrencies are any example, criminals will use their own expertise to bypass rudimentary security practices, and with each publicized ransacking, wary consumers will move further from the VR world.
All in, VR has no killer application to draw in a doubtful public, and the survey results seem to indicate considerable resistance.  Even the questions about what VR applications might increase interest in a VR headset seemed mundane and a stretch in terms of applications that would excite consumers, and for virtual shopping to come in below pornography, does little to justify the expenses retailers seem to be willing to put behind the Metaverse, where they believe they can sell both real and virtual items.  Given in many cases retailers see the Metaverse as a salvation to the problem of a generational disinterest in brick and mortar shopping or just feel the need to have a presence, even if it is a passing fab, but even Apple’s potential entry into the space (see above), while it might push some to try VR, would need a killer application that has sustainability, and in that regard VR remains a product looking for an application.  Until one is found, unless they give them away, its going to continue to be a hard sell.

​There has been an endless outpouring of speculation, rumors, and flashy mock-ups of what is expected to be Apple’s (AAPL) first official announcement concerning the potential unveiling of its first AR headset and its ‘realityOS’ operating system at the Worldwide Developers Conference that begins today at 1:00PM ET.  The virtual event is expected to give information on iOS 16, iPadOS 16, macOS 13, watch)S 9, tvOS 16, and possible hints toward some hardware for the MacBook Air, the MacPro, and the long-awaited AR/VR headset that has been rumored for the last few months.
It seems however, that word has gotten out that Apple has told its suppliers to hold production until October, which would push out the release of any such product until 2023, rather than later this year.  Apple could still announce the reality OS at today’s event or in the near term, as developers need time to modify existing apps for the new headset, with Apple supposedly working on a migration tool to help developers adapt applications more easily.
While much excitement surround the potential for Apple’s entry into the AR/VR world, we believe if Apple is serious about the category as a major product line, it will take a considerable amount of time and product iterations to come up with what would be a practical AR/VR product.  With the category still in its infancy, and a trail of relatively unsuccessful products from other companies in its wake, we expect Apple to tread slowly and carefully, leaving as much time as necessary to its product development team before releasing even an early model, as this first iteration would be. 
To us, the real question is will the first release be an actual consumer oriented product or one designed to give app developers a platform on which to develop AR/VR content that would take advantage of the feature set that Apple will include in the reality OS, that will set it apart from others and allow Apple to create another proprietary ‘world’ of Apple AR/VR products to maintain a loyal customers base.  Apple’s delay (should that be the case) should not be looked at as a negative but more of an attempt to get their first product reveal as close to a practical product as possible.
While Apple has never been a technology leader in the sense of rushing to market with technological advances, their customer base seems to rely on them to make sure a technology is stable and benefits the user before they begin to capitalize on the trend.  This was quite apparent with Apple’s adoption of small panel OLED display technology which first appeared on the iPhone X in late 2017, over 10 years after the technology was used in early smartphones. 
We expect Apple is in no rush to jump start it AR/VR effort until it meets at least three goals.  First it needs to be technologically sound and reliable, second, it needs to serve a valid and practical purpose, and third it needs to be ‘cool’ looking, so postponing a potential release until issues are resolved would satisfy the first goal, allowing developers a physical and software development platform on which to work, could satisfy the second goal, while the 3rd will likely take a release that Apple might not consider ‘the actual product’ until it is able to apply its unique design qualities to make AR/VR its own.  We are not making excuses for a potential delay, but applying many of Apple’s historic principles to a new product line.  Maybe Apple will reveal all today and will prove us to have overthought the situation, but the company thinks differently than most.

​The China Securities Regulatory Commission has received an IPO and listing guidance report from China International Capital Corp. (601995.CH) concerning the potential IPO and listing of Huike Company (248.HK) (aka HKC), a producer of large panel LCD displays in China.  According to the report HKC has a ‘relatively complete accounting management system’ and is ‘relatively independent in terms of business, assets, personnel, finance, and organization.”  As we noted on 02/10/2022 HKC was added to the ‘unverified’ list managed by the US Department of Commerce’s Bureau of Industry & Security, which does not preclude US exporters from ‘engaging’ with listed parties or that there are specific foreign policy or national security concerns with those on this particular list, only that the BIS is unable to establish the legitimacy and reliability relating to the end use or end user of the items that fall under the US Export Administration Regulations (EAR) by such parties. 
The reasons for this inability could be an failure to contact or locate the parties involved, failure by those parties to demonstrate the disposition of items subject to EAR, or lack of cooperation by a host government with the BIS when making end-use checks.  The corporate structure of HKC overall is a bit complex but the company that owns HKC’s Chongqing Gen 8.6 LCD fab (Chuzhou HKC Optoelectronics), which is owned by HKC and two Chongqing government entities, had submitted proposals for the purchase of equipment used in the display process and the US government was unable to verify that the end user for HKC products that were being produced (using US equipment) was not in violation of the BIS rules (no sales to Chinese military).
HKC itself, owns four Gen 8.5 LCD fabs and currently has a ~5.5% share of the total LCD market (by capacity) and an 11.6% share of the Gen 8+ LCD market and this year has been generating between $380m and $430m in sales on a monthly basis.  Peak sales were in June of last year when the company generated $540m in LCD panel sales.  We expect the actual IPO filing will reveal a bit more detail about HKC, in particular its recent performance as it has not yet released results in 2022.

NFTs are an enigma to most everyday folks and even in the most elite technology circles definition vary considerably and we will not attempt to add our voice to such definitions, but we can at least give investors a bit of understanding as to what the NFT world looks like and potentially what purpose it serves, although the latter is the more difficult question to answer.  Non-Fungible Tokens are a big business, and the platforms on which they are bought and sold have hundreds of thousands of registered and active participants, but it is difficult to gain insight into who these customers are and their motivation for involving themselves in this somewhat arcane world.

While one might assume that NFT traders are a sophisticated and erudite lot, living in full-floor penthouses high above major cities or sitting on the veranda of a beachside mansion in Bermuda, but that is not always the case.  In fact the country that has the largest number of NFT users has a GNI/capita of only $7,040 but an NFT user penetration rate of 8.08%, far above the US penetration rate of 1.14%.  That country is Thailand, where NFT virtual land sales can give Thailanders a chance to become owners of a piece of ‘virtual Bangkok’ (40m x 40m) for a mere $3 or where you can buy collectible cards from the Miss Universe Thailand pageant, the winner of which was given prizes in both cryptocurrencies and NFTs, all of this despite the Thai government’s ban on NFT trading.
Much of the interest in NFTs in Southeast Asia has come from Axie Infinity, a game developed in Vietnam that allows players to earn Smooth Love Potions (SLPs) the more they play the game, which can be converted into Etherium and sold, which became a way for serious gamers to put food on the table during COVID lockdowns, and the concept of digital tokens appreciating in value was a quick step toward NFTs, particularly when the value of early art-based NFTs soared, with collectibles and art generating almost 80% of NFT market value at the end of last year.  We are not saying NFTs look like a get-rich-quick proposition to those in less wealthy countries as the inclusion of the US, Canada, and Germany in the top 10 debunks that concept, but one wonders why some would be willing to risk government wrath and potential financial loss unless there was the promise of a pot of gold at the end of the rainbow, although when you look at Figure 3, which shows the average ‘gas’ price (the fee paid to the platform for any transaction) on Ethereum, there are those who profit with relatively little risk in the NFT/crypto space..

​Starting a war has consequences and Russia has been feeling the impact of severe economic sanctions from the US and those from US allies since they invaded Ukraine, particularly when it comes to Russia’s energy and oil businesses.  While the absolute impact of these restrictions on the Russian citizenry is shielded from view by state media, it is hard to assume that the impact is not being felt across the country.  Russia has protested such sanctions and threatened to take its own actions in order to protect its interests, but has had little recourse other than the secondary impact on gas and energy prices.  While sanctions against Russia in the electronics space continue, the Russian semiconductor industry is only a small (0.1% of industry total) buyer of semiconductor products and has a relatively unsophisticated semiconductor production base.  Current Russian government plans are to upgrade to 90nm fab production this year and is targeting 28nm production by 2030, while Taiwan and South Korea are targeting sub-5nm levels. 
As we have mentioned in our 3/24/22 note 70% of the neon gas currently produced globally is used in the semiconductor industry, specifically for excimer lasers used in DUV (Deep Ultraviolet) stepper photolithography down to the 7nm node, and the Ukraine has been the supplier of ~50% of the world’s supply of the inert gas.  Both major neon producers in Ukraine shut down[1], in March and a Russia gains territory in the country, they are exerting greater control over the production of that gas and have just instituted restrictions on the exportation of noble gases (Helium, Neon, Argon, Krypton, Xenon, and Radon).  In a typically un-subtle way, the Russian Deputy Tarde Minister indicated that the move would provide an opportunity to “realign the now broken supply chains and create new ones”, while the read on the statement has been that Russia intends to trade the gases for semiconductor imports.
While Russia is a relatively small exporter of Helium, which is used extensively as a cooling material in the semiconductor fabrication process, the US Federal Helium Reserve System, created back in the 1960’s is scheduled to be closed later this year, making the US more dependent on countries like Qatar (2nd largest producer/2020) and Algeria (3rd largest), with Russia’s Gazprom (GAZP.RM) ramping production over the last two years.  Earlier this year global semiconductor associations indicated that they had ample supply of inert gases, although that was based on a short timeframe war in the Ukraine, which has now extended to over three months. 
While we expect the US to continue to maintain strict sanctions on Russia, Taiwan[2] and South Korea together produce ~83% of the world’s semiconductors (foundry) and are highly dependent on maintaining that production as inert gas sourcing become more difficult.  While we expect these countries to maintain the restrictions placed on Russia, the impact on the global semiconductor industry will likely increase, especially as China’s unrestricted trade policies toward Russia give it an advantage in securing supplies.  Further tightening of the semiconductor market could extend the time it takes for a global economic recovery and extend the downturn in the CE space into next year if sufficient supply deals with alternative sources are not able to be made.


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

[2] Taiwan has just banned the sale of high capacity/high speed processor and ICs to Russia and Belarus.

In our note of 5/19/22, we indicted that while March smartphone shipments in China were strong m/m (up 44.4%), they were down significantly y/y (down 40.6%) and underperformed typical March seasonality by a large amount.  With April typically showing another m/m gain (5 yr. avg. up 21.8% m/m), our expectations for Chinese smartphone shipments in 2Q remain under pressure, with our concern that 5G smartphone shipments, which have seen better than industry growth on the Mainland, would fall prey to the general smartphone ennui.  Our first data point for 5G smartphone shipments in China indicated a strong April (up 42.3%) on a m/m basis, but down 41.4% y/y against a very strong post-New Year holiday bounce back last year, which gave us little on which to gauge the impact on 5G smartphone shipments. 
Recent data for Chinese domestic smartphone SoC (System on Chip) brands seems to indicate that the overall weakness is continuing into April.  The top 3 SoC brands in China represent ~94.2% of the total, so the extreme y/y weakness at HiSilicon (pvt), an affiliate of Huawei (pvt) that remains under US trade sanctions, and the large y/y increase at UNISOC (000938.CH) have relatively little impact on the metrics.  While SoCs are used in many applications, the data here is specific to smartphones, which would point directly to production levels and indicate another weak month for Chinese smartphone production in April.  While we expect this could produce another weak month for Chinese 5G smartphone shipments, we expect the 5G market in China to be the only real growth driver this year, even if growth is more moderate. 
With a number of global smartphone brands reducing earlier optimistic shipment targets, it is no surprise that the weakness in the global smartphone market continues, with the hope that Chinese brands follow through on target reductions and start working down inventory levels.  Hopefully Chinese small panel display producers will lower utilization rates in keeping with the reduced demand and also lower inventory levels, but that has not been the case with Chinese large panel LCD display producers, who maintain high inventory levels and have made only token production reductions.  It is hard to imagine what more Chinese panel producers must see to ‘encourage’ them to take more realistic steps toward reducing inventory, but we expect the fear of not being able to maintain share if the market rebounds in 2H is a major factor in their reticence. 

Samsung Electronics (005930.KS) is the volume leader in the smartphone space in most quarters, and as such is constantly being pressured by rivals to innovate their smartphone offerings, especially as smartphone display size reached a size where the device barely fit into a pocket.  Samsung Display (pvt), a Samsung affiliate, took the expertise it had developed in flexible OLED display production and applied it toward developing a commercial display that was flexible enough to fold without breaking.  While Samsung was not the first to develop such technology (others had demoed concept displays and prototypes in previous years), and was outdone by China’s Royole (pvt), who released the first foldable smartphone (developer version) in December 2018, after being announced earlier in the year.  Samsung released its first foldable smartphone in September 2019, the Galaxy Fold, after announcing the device at CES earlier that year.
The initial reviews of the Galaxy Fold were favorable from a technology point of view but not from a practical one, as problems with visible crease lines in the display caused many to set aside the technology in order to give Samsung time to fix the display issues.  As the company had already committed to the foldable concept they delayed the actual release date (April 2019) until they were able to make changes to the display and the fold hinge to reduce the crease.  While this gave hesitancy to consumers that might have been early adopters, especially the lengthy ‘care’ instructions given to consumers upon the final release, Samsung Display and its parent continued to push forward with the concept.
Since then Samsung has released at least two foldable smartphones each year and is expected to announce the 2022 versions in August, with delivery in September, and while there have been numerous ‘leaks’ and unsourced mock-ups about these next-generation foldables, the category continue to evolve.  Samsung’s biggest foldable competitor is Huawei (pvt), a Chinese company that is under severe US trade restrictions and is tacitly limited to selling its products in China, but in 2021, despite the poor performance of smartphone brands generally, two additional Chinese brands entered the foldable market with the Xiaomi (1810.HK) Mi Mix Fold, and the Oppo (pvt) Find N devices., and thus far in 2022 both Honor (pvt) and Vivo (pvt) (both Chinese brands) have already released their first foldable smartphones.
Much of this activity was generated when Samsung made a concerted effort to promote its foldable phones in 2H last year.  We believe that Samsung felt that enough time had passed from the initial, somewhat sketchy release in 2019, that they could safely assure the public that the durability of these devices had improved significantly, and sales jumped 273% q/q in 3Q ’21 and reached almost 8m units for the 2nd half, relative to a bit over 1m units in 1H.  While the unit volumes for Samsung’s foldable smartphones grew substantially in 2H last year, we note that they are miniscule relative to the roughly 690m mobile units that shipped during that period, but if nothing else, it generated considerable interest from consumers and competitors, and likely lit a fire under those brands that were already developing foldable offerings.
Despite Huawei, and the initial models from Xiaomi and Oppo, Samsung remained the dominant vendor in 2021, as seen in Figure 2, with an 88% share of the market based on unit volume, although a slightly lower share based on value, given Samsung’s Flip foldable line, which brought the price of foldables below $1,000.  Still, Samsung held an 85% share based on sales value, with the 2021 Galaxy Z Flip 3 capturing over 50% of total foldable smartphone unit volume for the year (Figure 4).  Not only did the big jump in volumes spark interest in foldable smartphones from competitors, but it also began a spate of foldable smartphone forecasts that we have compiled to garner some understanding of expectations for the foldable smartphone category going forward.
We note that while we aggregate estimates and forecasts, there are always outliers and some of the years further out might have only one or two forecasts, which would account for the unusual volume jump in 2025 and what would look like a decrease in the following year.  More likely those years would follow a more linear pattern as forecasts become more plentiful for those years.  While unit volumes are certainly a key to understanding the foldable smartphone segment, Samsung’s introduction of the ‘Flip’ model in 2020, and its price reduction in the following year had a significant effect on unit volumes but lowered the ASP across the category.  This is important in that it gives us some indication as to price points that will attract consumers to foldable smartphones in high enough volumes to make them a distinctive smartphone category, which was Samsung’s ultimate objective.
Based on available pricing data, we believe the weighted ASP for foldable smartphones in 2021 was $1,688, which would equate to foldable smartphone revenue of $15.3b.  If we go further and adjust for the ASP for each brand, that figure drops to $14.6b, as the lower priced offering from Samsung carries more weight than others.  That said, we would expect both the unweighted and weighted ASP to decline each year as Samsung increases manufacturing volumes and competitors move to large scale mass production.  That said, given that there is limited seasonal data for the category and that we are rather unsure of the reliability of forecasts in the out years, we hesitate to predict sales figures for the category at this time.  We do note that the first glimpse of foldable smartphone shipments for 1Q ’22 are massively ahead of 2021, although it is an easy compare, but we feel that by the end of 1H, we should have enough of an understanding of the ‘new’ seasonality for foldable smartphones that we might make more reliable estimates for the 2023 and 2024 years.  While we note that hesitation, we do give credit to Samsung for taking a nascent category and making it a viable product differentiator, a task that no other smartphone brand was able to do.  Kudos…

​Insider trading is not new, although until Strong v. Repide pushed the Supreme Court to rule that company directors must either disclose ‘inside’ information or not trade on such information, but it lacked specifics on who would be considered an insider.  The Securities Exchange Act of 1934 went a bit further in assigning fraud to the illegal purchase or sale of securities, which added to prosecutorial leverage in insider cases, but again it was still fuzzy as to whom it applied., and while the Texas Gulf Sulphur case clarified the rules further, it wasn’t until the early 2000’s that the government became aggressive in pushing the rules to include a wide range of insider trading scenarios.  In most cases it was relatively easy to see that inside information was either traded on or disseminated to an individual or small group who were able to profit from the non-public data, and in 1997 the Supreme Court extended the insider trading rules to people that had confidential information even if they did not have any connection to the company involved.
Some cases were hard for the SEC to make, especially those less directly involved with corporate hierarchy, but the list of mid and low level employees and contractors who traded on information that they were either not allowed to see or had an obligation not to reveal or trade on is almost endless, and the idea that “…It was just a good guess…” in such a data driven world seems a bit ludicrous.   So why would Nathaniel Chastain, a product manager at OpenSea (pvt), the world’s largest marketplace for the purchase and sale of NFTs, think that nobody would notice that he was buying certain NFTs before they were featured on the OpenSea website and selling them soon after the digital items were featured, with many knowing he was part of the featured decision making process. 
Examples given in the indictment cited that o August 2, 2021, “…minutes before the NFT named “The Brawl 2” was featured on the OpenSea homepage, Chastain purchased 4 of the NFT, selling them hours after the features became public…” doubling his investment, and on August 9 he purchased 10 of the NFT collection “Flipping and Spinning” before the items were featured, then selling them for prices 250% to 300% higher.  While he made the purchases and sales using anonymous accounts and wallets, he did so on the OpenSea Etherium blockchain and tried to conceal the transfers by opening new accounts when transferring capital in an out.  Chastain purchased approximately 45 NFTs on 11 occasions, all based on inside information, that generated between two and five times his purchase price.
The charges in the indictment are for wire fraud and money laundering, each of which carries a maximum sentence of 20 years, and the defendant was arrested after the indictment was filed.   Bond was set at $100,000.   The FBI and the National Cryptocurrency Enforcement Team assisted in the investigation, which was the first involving digital assets being traded on inside information.  While the blockchain has many positives relating to security an anonymity, it seems to be far more traceable than many believe, although this case seems particularly obvious and ultimately provable (although currently ‘alleged’), so the lesson here might be both don’t trade on information that you are obviously privy to, and don’t think that just because the transaction information is broken up into many pieces across many computers that it cannot be put back together if absolutely necessary.
 

While we spend a great deal of time on the design, production and sale of CE products, moving CE products from point A to point B has become an important factor in the cost of such products.  In most situations CE products and components are shipped by maritime transport, which accounts for more than 90% of transnational trade, with land and air making up the difference, although by weight, air transport accounts for only 0.21%.  While air transport is usually used for CE products when delivery schedules become critical because of the high cost, air transport accounts for ~26% of global trade value. 
As can be seen in Figure 1, container rates have risen 55.9% y/y in April, despite a 16.5% drop since the end of 2021, and viewed against April 2020 those rates have increased by 437.2% y/y, and with 7 of the top 10 ports worldwide (End of 1H ’21) being in China and 9 of 10 in Asia, where much CE traffic is originated.  After the onset of COVID-19 in 2020 set back shipping volumes, container shipping volumes rebounded last year despite the higher container rates, but the war in Ukraine and inflation have maintained unnatural shipping rates which continue to affect CE device pricing, at best offsetting any manufacturing efficiencies, and at worst contributing to continued overall CE product price increases. 
We expect that shipping costs, along with rising silicon and overall component costs, will push CE device prices up by between 5% and 7% this year, even with the 16% reduction in average shipping rates, as many suppliers have been absorbing increased costs to keep product flow from stalling.  With 2022 representing a year with more difficult y/y comparisons we expect suppliers will be under more pressure to recover lost margin, and will have little choice but to build in those costs.  If the global economy slows enough in 2H, there is a chance that CE prices will stabilize in 2023, at least from a cost perspective, while demand is still a bit of a wildcard given the ‘global government’s’ push toward returning to a more normal lifestyle, despite COVID-19.  From a CE perspective deflation never looked so good…