Samsung Electronics does not like ToF (Time of Flight) sensors.  While promoting the idea of using ToF sensors in smartphones as adjunctive depth maps to optical cameras, they have slowly abandon the concept, particularly on their flagship models, while other brands, particularly Apple (AAPL) and a number of Chinese brands continue to use the functions to augment security and imaging.  Samsung is now contemplating the removal of ToF sensors on the upcoming versions of the Galaxy A24, A34, and A54, which are among the company’s best-selling (volume) smartphones.
While we have gone into considerable detail as to why Samsung made the decision to abandon ToF, we expect the most recent change is one based on cost, with the elimination of the ToF module a cost saving measure on these mid-priced smartphones in a very competitive segment of the market.  Of course there is the marketing jargon that says the company feels it is better to focus on developing better quality cameras than on maintaining a high number of different camera types on its phones, which is the antithesis of the thought process a year or two ago when the battleground was who could put more cameras on their phones, but with silicon and component prices still at high levels, Samsung’s marketing motivation has shifted from quantity to quality for next year’s mid-range models.
Underneath all of the pro/anti ToF rhetoric, is the fact that Samsung Electro-Mechanics (009150.KS), the Samsung affiliate that produces many of Samsung’s camera modules, had made a decision about the ‘type’ of ToF sensor it was to develop a number of years ago, choosing what is known as ‘indirect sensing’ over the ‘direct sensing’ choice made by ToF camera competitor Sony (SNE).  When Apple settled on Sony’s solution battle lines were drawn between the two types of ToF sensors and competition heated up, tightening margins and putting pressure on SEM to reduce costs in order to counter what Sony was promoting as superior ToF technology (see table below).  We believe SEM was not able to bring cost down low enough for parent Samsung Electronics to justify the cost given the weaker characteristics and the decision was made to eliminate ToF from flagship models and now from mid-range priced models.
All in, Samsung’s continued insistence that consumers do not use the functions associated with ToF sensors as a justification for removing them still rings hollow with us, and seems more like a justification for the need to cut costs, as was the ‘environmental’ justification of removing chargers from the box when consumers purchased a new phone last year (Apple did the same), but ToF lives on outside of the Samsung world, and as we noted in our 6/10/22 seems to be finding its way into other applications in the CE space, while remaining an integral component of the various forms of driver assistance systems and fully automated vehicle systems.  While we might be a bit bruised by Samsung’s continuing battle against ToF in the smartphone space, we see its value increasing across a wider swath of applications…

Back on 05/07/2020 we noted that what was then a relatively new category of mobile device, Chromebooks, were seeing rapid increases in shipment expectations as the COVID-19 pandemic forced the public into isolation and the need for inexpensive mobile devices to remain connected became a necessary item for almost all and we noted the impact of various global government programs that tried to guarantee same to students who were unable to attend classes, particularly in Japan, where the trend had already begun due to smaller viral infections.  By 3Q last year Chromebook sales had seen reductions, although the brand mantra was that any slowdown in Chromebook sales to consumers would be offset by corporate sales, as employees returned to offices, although the chart we showed in our 10/25/21 note (chart reprint below) indicated that Chromebook shipments had already peaked (1Q ’21) and had begun to decline, and a number of follow-up notes this year followed that trend.

​Expectations have now reached new lows for Chromebooks this year with the latest estimates from Gartner (IT) being for the sub-segment to see a decline of 30% y/y, helping to brag down the broader PC category (PC, MAC, Chromebook) by 9.5% after last year’s 11% y/y gain.  With MACs flat and PC’s down 3%, the effect of the Chromebook decline is easily seen, especially against 2020’s ~300% y/y increase in Chromebook sales.  The obvious factors are the reduction or end of the student mobile device programs in a number of countries and the macro factors that are affecting consumers across the globe, but Chromebook brands are also dealing with the effects of the massive order pull-ins that fed the Chrome book cycle in 2020 and early 2021. 
While there are still those who might buy a Chromebook as an inexpensive substitute for a laptop, much of that demand has already been filled, which leaves only the demand of what would have been ‘new’ Chromebook customers before the pandemic, and just looking at last year’s shipment chart gives some understanding of what actual Chromebook demand might have been before COVID-19.  We do believe that Chromebooks are now a viable alternative for those that do not need the computing power and storage of a laptop, but we expect Chromebooks will have to create more differentiation between themselves and both tablets and laptops/notebooks in order to regain some market stature. 
We expect this will take the form of more cloud based Windows or iOS based applications that can run well in the Chrome environment, a process that needs developers to continue to support the idea of Chromebooks, with much of that in the hands of Google (GOOG) as the driving force behind the OS and offering less onerous fees and payment options goes a long way toward that end.  We have looked at Chromebooks a number of times as alternatives to more expensive Windows-based devices but, at least in our work, we need more of an ability to manage applications and storage locally, although a generation that has already lived and died by their smartphones will likely have less compulsion for that kind of control, giving Chromebooks a chance to grow again when the macro environment stabilizes.

Way back in 2007 SMPTE (Society of Motion Picture & Television Engineers) began to set standards for what is known as 8K resolution, a format that the Japanese Public Broadcasting system began to research in the mid 1990’s to help Japanese CE companies maintain a leading share as LCD TVs began to become popularized.  Sharp (6753.JP) released an 85” 8K LCD TV at the 2012 CES show, soon to be followed by Panasonic’s (6752.JP) 145” 8K Plasma demo at IFA in the same year, and the 2014 Winter Olympics and the World Cup were broadcast in 8K.  By 2018, while forecasters were relatively conservative, predictions that 8K would be ‘mainstream’ by 2023 and would sell over 11m units were appearing along with 8K sets from almost all major TV brands and in 2020 Samsung Electronics (005930.KS) noted that the Samsung Galaxy S20 smartphone would be able to record in 8K, although it required 600MB/minute of storage capacity.
But things have not been going well for 8K recently, despite the support from TV set manufacturers, who generate premium prices for a resolution that is 4 times the resolution of the 4K TVs that are becoming the standard globally, as US TV brand Vizio (VZIO) has decided to drop the format from its TV lineup and rumors that early 8K cheerleader Samsung might be cutting back on offerings going forward, although we expect they will maintain some 8K representation in the Mini-LED/QD lines.  But it gets worse in that OMDIA has just cut its 8K forecast again, after cutting it late last year, as it seems that less 8K TVs were shipped in 2021 than in the previous year, with Samsung, the share leader at ~65% seeing 18% less units y/y.  The latest cut puts the number of global 8K households at 2.7m by 2026, down from 9m by 2025 in last year’s forecast (here are 596.97m households in just the top 10 largest countries), only 0.15% of all TV sets shipped last year.
Of course there is the fact that there is very little native 8K content, which would be the real reason for owning an 8K set, and a distrust of upscaling techniques that have always been sold to the public as ‘enhanced’ versions of 4K content (see sidebar), but it has always been our view that buying an 8K set to ‘anticipate’ content would cause one to own an outmoded set when that content finally comes around.  Those issues, along with the significant expense broadcasters would have to incur to air 8K content (Streaming services can but it takes considerable bandwidth even with compression), seem to have put a real dent in 8K, at least for the time being, and adding the difficult macro environment seems to have tapped off any residual COVID-19 related consumer interest.  Now it is up to TV brands, who will be looking to rein in costs, whether they can support an 8K format with such small unit volumes in such an environment, but we expect 8K will be back again when consumers are less burdened by inflation and TV set brands can try to squeeze out that extra bit of margin on 8K product once again.

Most 8k upscalers fill in the missing pixels by interpolating image content around the target pixels.  If there is consistency, such as a red background, the system will assume that it can fill in the extra pixels with that color, but when it comes to fine detail, each upscaler has to use its algorithm to make a determination of what would look best and place that image on the additional pixels.  AI techniques can be used to better understand an image based on what the system has seen in the past, but all upscalers make assumptions as to what ‘might have been there if it was taken by an 8K camera’.  TV set brands and retailers will show you a 4K and an 8K set next to each other to point out the skill of the upscaler, but most of the difference is actually the number of pixels on an 8K set displaying a higher resolution image, as no upscaler can create ‘better’ images than were captured natively, they can only attempt to fill in the blanks with something close.
​

​The US Senate will begin voting on legislation that is expected to boost the country’s semiconductor efforts in light of the global silicon shortages that have been causing supply disruptions and price increases over the last year or so.  The original bill, the “CHIPS for America Act (S.3933) contains a number of incentives to expand the country’s standing in the world semiconductor market, particularly in semiconductor production and metrology.  While the final form of the bill might differ after last minute negotiations and partisan politics, we summarize the bill below:

• Credits of 40% of the value of equipment placed in service before 2025 with the credit decreasing by 10% each year until the end of 2025 after which it disappears.  This includes any equipment, new construction, acquisition of equipment or upgrades that would incur depreciation or amortization including leases and lease extensions or renewals.
• Any property approved will receive a reduction in basis although new construction must be completed within 5 years.
• No credits or basis change will be issued for any equipment or items used outside of the US or in any way connected with the governments of China, Russia, Iran or North Korea.
• $10m/year will be allocated to advanced metrology for 3nm or above
• $10m/year will be allocated to metrology for security and supply chain verification (assumedly verifying imports and fakes)
• $30m/year will be allocated to developing a ‘manufacturing institute’ that will focus on research in virtualization and automation, advanced test, assembly, and packaging, and educational skills
• Various other ‘institutes’ will be developed and funded to foster ‘leadership’ in semiconductor R&D and packaging
• $50m/year will be allocated out of the DOD budget for R&D and development specifically for the semiconductor sector
• Innumerable studies, reports, and addresses to Congress, and the usual political ballyhoo will become part of the program’s oversight

Hopefully the $52b bill does not get watered down much further and if passed, does not get mired down in red tape when it comes to actual cash allocations, but at least it is a step in the right direction and one of the few that seems to have bi-partisan support, although with only 21 days left before the Senate summer holiday, much still needs to be done to make this a reality and considerable lobbying from special interests is still in play.  While the bill is certainly not perfect and we can already see dollars being spent for reports that only serve to justify the politics behind the bill, passing it before September would certainly be a plus and would give the US semiconductor space a longer-term boost toward regaining both manufacturing prowess and keeping semiconductor development ahead of the global competition.  Our focus is less on China and the like and more on Taiwan, South Korea and Japan where well established players can exert considerable semiconductor supply chain pressure and can maintain sometimes singular control over materials and equipment.  Perhaps by spending highly directed capital on the industry we can develop processes and technology that the US can utilize and/or lease to others under more favorable arrangements, but before any of that can happen, Congress has to actually pass the bill and allocate the funds.  They do work for us, right?
 

The smartphone market is highly competitive to say the least, and both small and large marketing departments are constantly challenged to find ways in which to differentiate their products and make them more appealing to the buying public.  In some cases this can be a sleek or fancy new design, in others leading technology, and finally in some, the wedding cake approach, tier after tier of extra features that are meant to overwhelm the user with the phone’s ability to run almost every aspect of life.  As in all things CE this works in cycles, with categories like multiple cameras, higher pixel displays, or faster charging all taking p[precedent for a period of time only to fall prey to consumer ennui after they become commonplace, so every once and a while a brand, in this case a new brand, decided to try to simplify and return to basics, or so the copy says.
Nothing (pvt) Technology was formed in 2021 (we noted same in our 03/25/22 note) by Carl Pei, the founder of Chinese smartphone brand OnePlus (pvt) and added a number of well-known investors from other successful CE companies (all of whom are prominently shown on the company website) and released an earbud product in July.  A few days before our earlier note the company announced its intent to release a smartphone with a simplified OS on top of Android and in June of this year began taking pre-orders for the phone which had been promised for the summer of this year, with 100,000 pre-orders said to be signed up.
In a ½ hour event the phone was announced under the concept that it was designed with ‘less distractions. More Soul and pure instinct’, with a self-effacing video that describes how the inventors were imbued with the idea of removing the barriers between technology and people by eliminating silly product names and tech-speak, leaving just artistry, passion, and trust.  What came out was a phone that looks a bit different in that it is made with clear glass, allowing the insides to be exposed, and uses ‘Glyphs’, essentially LED lights, to notify users of calls or other functions if sounds are turned off.  While flashing lights in someone’s pocket might play well at meetings or in movie theaters (remember those?), LED lights do seem to be a way to attract the attention of young buyers, likely an outgrowth of in vitro disco hopping by their parents.
We compared the feature set against the Apple (AAPL) iPhone SE and the Samsung (005930.KS) Galaxy A53, as both are popular mid-range priced smartphones.  As far as we can see, at least from a hardware standpoint, the Nothing phone is about what might expect from a manufacturer trying to compete with a wide variety of $250 to $500 smartphones that was looking to add a bit of pizazz to their marketing campaign and as we have yet to see the actual phone or the OS we cannot yet evaluate how well it interfaces with other CE products (both Android and iOS) as it was originally touted, so we reserve full evaluation to a later date .  We do expect lots of excitement from fanboys, who will see the pictures of Twitch (AMZN) and Reddit (pvt) founders on the site and buy the phone regardless of how it functions or how practical it is, and some who will appreciate the odd-ball features, but as to sustainability, the company will have to sustain the flashing light mantra going forward or continue to find other shiny objects to attract the attention of younger smartphone buyers when there are over 100 brands and thousands of models to choose from.  

We have been hearing that a dispute between Samsung Electronics and BOE has resulted in Samsung reducing its display panel orders from the Chinese producer, supposedly over failed negotiations concerning royalty rates.  In order to recover part of the cost of advertising, brands can negotiate with suppliers for the right of the supplier to ‘advertise’ as part of the device’s promotion.  In some cases this comes as a ‘royalty’ the brand would charge the supplier to have their name appear in the advertising as ‘…display produced by xxx’ or something similar, although component cost reductions can also be used for the same purpose.  The larger the brand the more leverage it has to make such adjustments.
It seems that BOE has refused to accept Samsun’s royalty terms after 6 months of negotiations, and Samsung has therefore reduced the number of display panels it has purchased from BOE, and recent publicity surrounding an upcoming visit to Samsung by the chairman of TCL (000100.CH), seems to indicate that other panel producers have sensed an opportunity and are looking to fill the gap in Samsung’s panel purchases left by the BOE reduction.  TCL is the owner of Chinastar (pvt) China’s 2nd largest panel producer, in whom Samsung Display has a 12.33% stake taken when they sold their Suzhou LCD fab to Chinastar in 2020.
While we expect there is the potential for the BOE/Samsung royalty issue to me a motivating force behind a reduction in panel purchases from BOE by Samsung, we note also that Samsung has severely reduced its panel purchases from all of its display suppliers for the month of July as it tries to reduce panel inventory across its supply chain.  Whether the supposed BOE reductions were in line with this plan or whether they included additional cuts as a result of the royalty disagreement remains an open question, although the push by TCL/Chinastar seems more like the latter, as a trip to Samsung by TCL’s chairman would seem unlikely if it were just to fill a short-term gap in production.  It will be hard to discern the split until we see BOE sales numbers for July and compare them against reductions from other suppliers, particularly Chinastar, but if BOE’s sales look worse than others, we can then make the assumption that additional reductions were made as a result of the rancor between the two, and could continue for the remainder of the year.

Smartphone shipment growth has been hard to come by over the last few years as the market has become saturated with ~120 brands, of which ~48 have trackable share on mobile networks.  Feature sets such as networks (4G, 5G, etc.), display size and type, chipsets, cameras, and battery size and life, have become so generic among new models that something as mundane as a new smartphone body color can spike sales for a short period, while OLED displays, once remanded to the very top of the flagship smartphone market, are now getting close to having a 50% share of the total smartphone market, which leaves brands at a loss for the differentiation that could attract customers.
Foldable smartphones have created a ‘new’ feature category that continues to grow from its onset in 2019, and as the technology continues to improve, should continue to grow and capture premium pricing.  At this relatively early stage in the smartphone foldable market, there are few brands and relatively few offerings as can be seen in Figure 1 with Samsung (005930.KS) the dominant brand and among the category’s biggest supporter given its semi-captive display supplier Samsung Display (pvt).  That said, China’s Huawei (pvt) has also been a competitor and has been gaining global share as it continues an active foldable release schedule that rivals Samsung's, and newer Chinese foldable entrants, such as Oppo (pvt), Vivo (pvt), Xiaomi (1810.HK), and Honor (pvt), have recently entered the market with their own offerings.
Logic holds that Samsung’s dominant share of the foldable smartphone market, which has been as high as 95% in some periods, is going to decline as more entrants eat away at that customer base, but nowhere is that more evident than in the world’s largest smartphone market, China, where Samsung is a relatively small player overall.  While the Chinese smartphone market is experiencing the same unit volume contraction that is seen globally (Figure 2 & Figure 3), domestic brands still maintain a trend line share of ~85% (Figure 4) and according to data from Counterpoint Huawei is the dominant foldable smartphone brand in the domestic Chinese market. (Figure 5) currently, while Samsung’s Mainland share has declined from 25% to 15% since the beginning of the year.
As the number of foldable smartphone offerings both globally and in China is still quite small, share calculations are very dependent on the timing of new releases and at least a portion of Samsung’s smartphone foldable share  decline in China can be attributed to both its and Huawei’s release schedules.  Huawei released its latest foldable, the Xs2 in April, a full size foldable, and the P50 Pocket, a lower priced clamshell foldable last December, while Samsung’s last offerings (Galaxy Z Fold and Galaxy Z Flip) were released in August of last year, so while Samsung’s foldable China share will likely continue to decline as local competition increases, we would expect to see some share improvement when the new line of Galaxy foldables is released in August.
As noted, the Chinese smartphone market remains domestically brand loyal, with some of that loyalty a reaction to the US trade sanctions against Huawei and ZTE (000063.CH) that have stymied their growth outside of the Mainland, however the foldable smartphone market is new and additional display suppliers and brand offerings will become available over the next few years with the potential for Apple (AAPL) to enter the foldable market in 2024 or 2025, which will have considerable influence over share, as in new release quarters, the iPhone can have a dominant share both globally and in China.  While there is considerable speculation about Apple’s foldable plans, we expect Apple is far more interested in developing a foldable that would not require the user to compromise on display quality and would provide some more specific device functionality (triple-fold, scroll, etc.), rather than to join the foldable market just to be competitive.
All of that said, we believe the real test for the foldable smartphone market is functionality, as we expect the foldable premium currently available to smartphone brands will evaporate relatively quickly as more foldable panel suppliers enter the market, particularly China’s BOE (200725.CH) who has been a foldable display supplier to Huawei and has shown a wide variety of foldable prototypes and demos over the last year.  BOE will compete with primary smartphone foldable panel supplier SDC by offering a comparable product at a lower price, as it has in almost all of its other display segments, eventually forcing SDC to use its foldable production experience to generate new form factors that will increase the appeal of foldables to consumers.  We don’t consider foldable devices to worth a premium unless they provide functionality over existing smartphones, so while we expect the category to continue to grow, we expect the novelty to wear off and premiums to evaporate unless smartphone brands can utilize ‘foldability’ to create devices that radically improve the customer’s experience.

​As far back as April 2021 we noted our thoughts on a mindset change regarding CE component inventory in China.  “Over the last two years, we believe such trade restrictions have changed the way Chinese CE managements look at inventory.  When sourcing was unrestricted, many Chinese CE companies operated under JIT inventory rules, maintaining low inventory levels to keep costs low and avoid end-of-year write-offs.  Once it became apparent that the US trade restrictions would have a real effect on sourcing, Chinese buyers became more aggressive and began building inventory in components that were specified in the US restrictions.  After early January, when it became apparent that the new administration was in no rush to change the government’s stance on such restrictions, Chinese CE companies and OEM/ODMs stepped up ordering to build inventories further, unbalancing the supply chain even further than it already was.”
Later in 2021 we noted that certain components needed for display modules, such as drivers and TCONs (Timing controllers), that had been part of the aggressive inventory building mentioned above, still had not seen the effects of a slowdown in TV panel and set demand, as Chinese OEMs and assemblers were still stockpiling the parts as they assumed IT displays, such as monitors and notebooks would not be part of the slower demand seen for TVs, and prices for those components continued to rise against what was reduced demand. 
Early this year the weakening demand for CE products caught up to CE IT products and prices for IT panels began to fall, considerably faster than most had expected, and suddenly the aggressive inventory accumulation, which had helped OEMs last year during silicon shortages, seemed less necessary, although buyers were relatively slow to adjust purchases and inventories for driver ICs remained relatively high into 2Q.  Now that CE brands have made cuts in orders, pushing panel producers to curtail production, there is now an oversupply in the driver IC sector, with recent expectations of a 3Q price decline of between 8% and 10% and the potential for that to continue through 4Q.  Foundries who had allocated resources away from drivers toward higher margin products last year are now looking to fill potential utilization gaps by filling driver IC contracts while driver buyers are trying to renegotiate those contracts toward lower unit and price levels.
We see these cycles are part of the natural order of things in the CE space but the overstocking seen last year was more than we might have expected.  What was a reaction to the global COVID-19 pandemic in 2020 and the first half of 2021 was seem as the ‘new normal’ by many in the CE space, with a concomitant change in risk assessment, especially regarding inventory, and now, as the ‘new normal’ returns to the old normal, the question is whether the next demand stimulus, whatever it happens to be, will cause the same psychological blind spots across the CE space.  Will lessons be learned or will be bounce right back into another up cycle that will suddenly become an abyss of inventory that buyers were willing to pay anything for months before?  Perhaps the understanding that the politics of trade sanctions and tariffs don’t always work the way intended or have deleterious side effects might make some difference in the next cycle and that striving for market share is not always the way to go might have an impact, but more likely is the endorphin producing mantra that the new normal has finally arrived and the CE space can once again charge into the fray with a willingness to do or pay whatever it takes to squeeze out an extra 0.5% market share.
 

​Given the relatively small number of major display panel producers that supply the CE market, it seems surprising that the number of display glass suppliers that feed such businesses is even smaller, however the cost of building and maintaining the facilities needed to produce this high quality specialized glass is extremely high and limits those who have the financial strength to build and sustain those facilities, and to compete financially in that market.  Dominant players, such as Corning (GLW), AGC (5201.JP), and NEG (5214.JP) have built relationships with display producers, with some glass production lines built alongside display production fabs to facilitate the rapid transport of such large and fragile glass substrates without the need for the extensive packaging needed for long-distance shipments.  As the largest substrate (Gen 11) can run to over 11.5 m2 (118.6 ft2 or eight 65” TV panels) and can be less than a millimeter thick, they are extremely difficult to move and even more difficult to transport to other locations.
Given that the production of LCD TVs is based on glass substrates and that a relatively small (15,000 sheet/month) Gen 8 fab line can produce up to 120,000 65” TVs/month, there is a very significant need for fabs to have both substrate inventory and short-term access to supply as a shortage of glass mass production stops, which not only leads to missed display delivery deadlines but can require equipment resets and recalibration of tools remain idle for an extended period, adding to delays.  Therefore it is incumbent on panel producers to maintain strong relationships with the few glass producers that are able to produce the quality and quantity needed, with those relationships being based on contracts that can specify area, unit volume, or percentage of production requirements, which can create an imbalance in glass supply for smaller panel producers.
In addition to the above, the dominance of Chinese LCD panel producers has intensified the desire of the Chinese government to extricate itself as much as possible from the display supply chain, with a long-term focus on display glass given it underlying importance to the industry.  Over the years the Chinese government, along with provincial and city governments have financed and subsidized an number of projects to build a display glass infrastructure on the Mainland, however it has proven more difficult than expected, both from a technological and from a financial perspective.  Chinese display glass substrate companies have made headway over the years and supply smaller glass sizes to a number of Chinese LCD display fabs, but have note been able to reach the quality and quantity levels needed for larger panel sizes where margins are higher and demand is still growing.
Companies like IRICO (600707.CH) and Dongxu Optroelectronics (000413.CH) have either been funded by the government or partnered with foreign glass producers to develop their own more advanced display glass production facilities in China to less the country’s dependence on foreign glass imports, but not all of those projects have turned out to be as easy as expected, even when paired with Chinese panel producers.  Recently Dongxu Optoelectronics gave guidance of another loss for the 1st six months of this year, and while the loss range was slightly less than last year’s 6 month loss, the company has yet to show a profit after years in the business, indicating that even with tax incentives and operating subsidies, the profitable production of display glass requires much production experience and process knowhow.  Dongxu stated that the reason for the loss was the company’s investment in R&D for the development of display materials, production line costs, and the amortization of intangible and fixed assets during the early stage of expansion, but it also includes interest payments on bank loans and lower sales as the display business contracts.
Further, the company tried to diversify a few years back, expanding into LED based products and glass related automotive products and we believe is one of the automotive glass suppliers to LG Display (LPL), but the company side businesses generated even larger company losses and helped to produce quarterly losses for the company for the last three years.  In 2020 the company refocused on developing a glass product line for OLED displays and lessened its focus on non-glass products but this has done little to stem the losses. In fact Dongxu failed to repay principal and interest on bonds it issued in 2016, which amounts to a bit over $605m in the aggregate and while the company, as part of its expansion, created its own finance company, the company it limited in what it can withdraw from the financing unit.  Dongxu itself has a capital book balance of 9.4b yuan ($1.39b US) but 91.5% of that capital are restricted funds and the book balance of interest bearing liabilities is 24.87b yuan ($3.681b US) of which 8.1b yuan (~$1.2b US) remains unpaid, making it difficult to see how the company can extricate itself from its financial issues.
While the company’s parent Tunghsu Group (pvt) has agreed to buy ‘up to 1.5b yuan worth of shares within six months and the company is working toward extending its debt maturities despite the plan’s initial rejection by shareholders, this all goes to point that throwing money at an industry does not always guarantee dominance or even success, especially in an industry where some of the participants have been suppliers since the industry began  We expect Dongxu to survive in some form given the potential support of Tunghsu Group and potentially the local government given that the company has over 4,000 employees, but the desire for a localized supply chain in a global market is not always the answer to the natural or political conflicts that occur in the course of doing business on an international basis, and while China has been successful in a number of instances in the CE space, nothing is guaranteed.

​On 7/12/22  we noted that the Indian Law Enforcement Agency froze 119 accounts totaling $57.4m, along with fixed deposits, 2Kg of gold, and cash of the Chinese smartphone firm Vivo (pvt), under the accusation that the company had been funneling sales revenue back to its parent BBK Electronics (pvt) in China to avoid paying taxes in India.  Vivo is a sister brand of BBK along with Oppo (pvt), OnePlus (pvt), RealMe (pvt), and iQOO (pvt), and to understand how important Chinese brands are to the Indian smartphone market, in 1Q of this year, Chinese brands represented 84.8% of the Indian smartphone market, with only Samsung (005930.KS) and ‘other’ making it into the top 6 group.
It seems that the India\n government has struck again, with the Directorate of Revenue Intelligence, part of the country’s finance ministry, indicating that it had found evidence that Oppo “willfully and wrongly declared description of certain items it imported which allowed it to improperly avail duty exemption benefits of $374.3 million,” with management accepting the wrongful submissions before the Customs Authority at the time of import.  The ministry searched the offices of the company and the residences of the management team as part of the investigation which led to the recovery of incriminating evidence.  The Ministry also added that Oppo had made $176m in license and royalty payments to other companies, both in and out of China that it did not disclose in the value of goods it imported into India, which violates Indian customs law.  Oppo has voluntarily deposited $56.5m as partial customs duty since the investigation.
Oppo’s view however is a bit different than that of the Indian government in that it believes such issues are ‘industry-wide’ and is reviewing a recent warning that the ministry issued after the earlier Vivo incident and an even earlier investigation that led to the seizure of $725m of assets owned by China based Xiaomi (), which erupted into threats of physical violence and harsh statements from the Chinese government during the investigation.  The enmity between the two countries stems from border wars that began in the 1960’s but reignited in May of 2020 when Chinese and Indian troops battled along disputed border areas, eventually erupting into gunfire in September 2020 after 45 years of relative peace. 
Those battles resulted in the Indian government banning Chinese software applications and some cancellations of contracts between Chinese companies in strategic Indian markets and considerable anti-China protests.  While the effect on Chinese smartphone brands was felt for a shot period, they regained popularity with Indian consumers because Chinese smartphone brands designed products designed for the Indian population that had some very specific needs, while more global brands did not, leading to a very loyal following on the sub-continent, aside from the political wrangling..