While the challenges facing the smartphone market are considerable and well-documented in our notes, 5G has been the only shining light in a sea of smartphone darkness and June results continue that trend.  5G smartphone offerings grew 5% m/m in June, putting y/y growth at 85.6%, while overall 5G device growth continued at 3.7% m/m and 79.0% y/y.  As expected, the number of 5G form factors (types of 5G devices) has stabilized at 24 as has the number of 5G vendors at 193, while CPE device offerings increased 1.9% for the month and 51.4% for the year.
We expect that customer transitions to 5G are among the few justifications that consumers are using to purchase a new or replacement smartphone currently, with the release of the iPhone 14 series later this year the only seminal event that will empower consumers to return to the smartphone market.  That said, it is also essential that Apple differentiates the iPhone 14 from the iPhone 13 enough to justify an upgrade, or, although a lesser possibility, offer the ‘same’ phone for less and is able to deliver devices on a reasonable schedule.  Thus far we have not heard of any ‘leaked’ iPhone 14 features that might move the needle, but while iPhone aficionados might take umbrage with that comment because of a slight variation in camera setup or ‘notch’ placement, we hope there is something in Apple’s iPhone 14 arsenal that might bring back a bit of life to the smartphone market.  Since Apple is already 5G compliant (both Sub6 and mmWave) there would be no 5G based incentive for iPhone users to upgrade.
 

AU Optronics (2409.TT) reported June Sales of NT$20.69b ($69453m US), ↓5.8% m/m and ↓39.0% y/y, putting the 2nd quarter sales at NT$62.881b ($2.111b US), ↓22.9% q/q and ↓34.3% y/y and 1st half results are ↓19.1% y/y.  Typically (5 year average) June is up 0.4% m/m and 2Q is up 7.0% q/q, so from any perspective June and 2Q were weak for AUO, although no surprising given the weakness seen across the CE space and the display space in particular, as overall display panel prices declined 12.0% during the 2nd quarter and panel orders from brands were reduced.  Area shipped was 1.59m m2, ↓9.7% m/m and we do note (see Figure 2) that AUO has been able to maintain fab efficiency (not utilization), meaning the sales value of each m2 of display produced, at a reasonable level since the beginning of the year, which points to the company’s focus on high value display products rather than generic displays.
While we wait for Innolux (3481.TT) and Hannstar (6116.TT) to report June sales and shipments to complete the Taiwan panel producer data, we expect July results for most panel producers will see further declines, more weighted toward order reductions than price declines, giving a messy start to 3Q.  With Samsung Electronics (005930.KS) reducing or eliminating TV panel orders from suppliers to reduce inventory, as we have previously noted,  it will be difficult for panel producers to maintain production at earlier levels, unless they are willing to offer larger discounts than in previous months, which will amplify panel price declines.  Our hope is that the order cuts will be enough to reduce inventory to more normal levels by mid-August, and that the panel price declines that have been evident for part of last year and the 1st half of 2022 will slow to more ‘normal’ levels as we enter September.  Brand targets have been reduced but consumers have yet to jump at discounts thus far, and the macro environment leaves a bit to be desired, so again we look at such prospects as possible but less probable than an extension of the current CE malaise into 4Q.  As of yet there are few signs pointing toward a better than expected outcome, but we keep looking.
 

​Samsung Electronics gave preliminary guidance for 2nd quarter of 77t won ($59.27b US) in sales and 14t won ($10.78b US) in operating profit, with sales slightly above consensus of 76.7t won and OP slightly below consensus of 14.5t won.  While Samsung will not give detail until later this month, we expect Samsung’s smartphone division to have seen a drop of between 18% and 19% in profits on a similar decline in smartphone shipments, while Samsung’s semiconductor memory business offset much of that decline. 
While Samsung continues to balance weak CE businesses with strong semiconductor sales, we expect 3Q guidance later this month to be a bit less optimistic given the inventory issues Samsung is facing in the TV space and the continuing weakness in the smartphone market and a bit of price pressure in the DRAM space, which will likely give the company a lesser ability to offset CE weakness.  We do expect Samsung’s smartphone business to see some momentum as SDC begins to supply iPhone 14 displays in 3Q, particularly as we expect Samsung to have taken back some share from China’s BOE (200725.CH), who we expect to be a bit more limited in how many iPhone 14 units they will be shipping this year, but Samsung’s own demand also needs to pick up, and that will be driven more by macro factors than new smartphone release timing.

​We have mentioned a number of incidents where criminals or ex-boyfriends have tried to use Apple’s (AAPL) Air Tags to track people or items (high value cars most often) and Apple’s noteworthy attempts to make such use considerably more difficult, but once again criminals have tried to stalk a vehicle by attaching an Air Pod in the hope that they could track the whereabouts of a Japanese police detective.  Last May a detective in the Aichi Prefecture police force was about to get into his unmarked car parked in the station’s visitor parking lot when he noticed a small black box attached to the car’s muffler.  When he removed it he found it contained an Air Tag, at which point he alerted other officers about such a possibility, although no other tags were found.
In Japan it is hard to buy an Air Tag for cash so the odds are that the purchase can be traced, and whoever planted it knew little about car mufflers, which heat up to over 500⁰ and would have likely melted the box and the Air Tag, which has a temperature tolerance of 140⁰.  Considering that Air Tags have serial numbers that link the devices to the Apple account ID that activates them, the police should have an easy path toward discovering the person that planted the device, and Apple has stated publicly it will cooperate with any legitimate law enforcement requests concerning the illegal use of Air Tags.  While the idea of the tag was likely to stay one step ahead of the detective, the choice of using an Air Tag and its placement was a bit amateurish, as the Japanese police take even the pilfering of fruit or candy as a crime worth investigating, and other tag types have less traceable roots, but the choice of the muffler as the hiding spot was a new low in criminal intelligence. 

Security Software is complex at best and those who delve into this arcane science are want to spend hours poring over lines of code that could as well be a foreign language to most, but black hat or white hat, discovering a vulnerability buried in millions of lines of code is like cracking the Da Vinci code and can catapult the discoverer to fame in this very specialized world.  Apple (AAPL) has been battling with a small Israeli company, NSO Group (pvt), and Q Cyber (pvt) who developed one of its security software products based on a zero-day[1] vulnerability discovered in iOS.  The defendants allege that they sell their software known as Pegasus, only to governments and law enforcement agencies as ‘lawful tools to fight terrorists and pedophiles’, while Apple alleges that’ the software has been used to perpetrate attacks on Apple users and data stored on user’s devices’, although not on Apple’s own servers.
Apple classifies the defendants as hackers and to their point the US government has placed the company on its trade blacklist, although the company insists the software cannot be used for surveillance in the US, while Apple alleges that it has been used on iOS mobile devices owned by US citizens and has therefore crossed international borders.  NSO and Q Cyber have also faced lawsuits by other major CE companies, among whom are Microsoft (MSFT), Meta (FB), Google (GOOG), and Cisco (CSCO) but claim immunity from revealing customers as the governments to whom they sell their software should receive, although a recent 9th Circuit Court ruling held that the companies are not sovereigns and are therefore unable to claim immunity.
The iPhone and Apple products generally are considered among the most secure and are therefore used by lawyers, political officials, activists, and others who count of Apple’s security features to protect them from surveillance and data collection, but Apple alleges that while the company says they only sell the software, they have created fictitious Apple accounts  and even admitted that their products have been used (maliciously) to violate fundamental human rights, but at the same time has continued to update the software to exploit multiple iOS vulnerabilities in order for the software to continue to capture communications, location history, Wi-Fi passwords, and a variety of other private data on phones that have been infected by the software tool.
Apple has just announced that it will be adding ‘Lock Mode’ to iOS 16 that will put the device into the highest security mode possible, for what will likely be a relatively small group of iOS users that need to be protected from what is military grade hacking software. The new mode will block all message attachments except images along with message previews and will do the same for Facetime invites from anyone outside of your list, while blocking all wired connections with other computers, principally closing the Lightning port for everything other than charging, and finally Lockdown mode will not allow any new configuration profiles to be added to the device or will it allow any unrecognized code to be run from the messaging app.  Apple is so serious about this software that it is offering $2m[2] to anyone who can find a way to bypass the new mode and will donate $10m plus any proceeds from the lawsuit to organizations that investigate or expose targeted cyberattacks against journalists, human rights activists, and other targeted individuals. 
All in, the security space is one that pits power and greed against the conveniences that consumers want and expect and that balance changes constantly.  With every new update or patch comes the resources of those who wish to exploit individuals for their own purposes, political or otherwise, so the battle will continue, essentially using resources that could be used for more altruistic purposes, but the battle really comes down to how much security inconveniences the consumer, who thinks they have a handle on security because they change their password once or twice a year.  In this case, the fix is really targeted to a very small group of Apple customers and would not be used by most, but on a general basis the average consumer is vulnerable to a wide variety of malware and corporate security remains lacking as noted in the list of the 5 largest security breaches compiled by UpGuard last month.


[1] A zero-day vulnerability is one that has been discovered and disclosed but has not been patched.  Usually these are discovered by developers or research scientists before the company that originated the software, leaving users open to the vulnerability until the software’s developers can correct the flaw with an update or patch.

[2] Twice what Apple normally offers

​AR or Augmented Reality needs one very important piece of information if it is to provide a service to consumers, and that is where it is.  While you can see where you are through the AR lenses, if the system is to project other images or data onto your actual image, it has to know where in space the glasses are to position things correctly, especially directional information, which we expect to be an integral part of AR for consumers.  Without location data the AR system will not be able to point you toward a particular destination or help you pick out your rideshare in an airport waiting line, and more importantly, it could point you in the wrong direction if being used in a driving situation.  At a recent conference, Google (GOOG) highlighted its work in what it calls Google Live View for developers, which is based on Google’s Street View database, a 20m+ GB collection that comprises satellite imagery, geological surveys, municipal maps, and the 10m+ miles of roadway taken by its Street View cars, all combined to produce accurate maps, turn-by-turn navigation, business locations and real-time  traffic information, much of which is sourced from GPS enabled smartphone users, all of which will be licensed (API) to developers who wish to use this incredibly accurate mapping data.
While we expect Google will certainly be a player in the AR application market, the company is limited in what applications they can develop, both by resources and by the necessity not to undercut their client base, so by licensing this vast data resource, the API gives developers direct access without having to build their own interface which might include built-in sensors or ‘anchors’ that would have to be pre-defined and expensive and completed to develop on their own.  Google seems to have stepped forward as the de facto supplier of the geospatial information needed to make AR work, and is already using the API as part of its Live View mode inside the Google Maps application and as the AR Places filter in Google Lens.  The idea of the API is to free developers from having to build out their own spatial information interfaces by just using (and licensing) the Geospatial API.
GPS is commonly used for location data, but the accuracy of that data is not always accurate, especially in densely built-out areas, leading to between 5 and 10 meters of positional accuracy and 35 to 40⁰ of rotational accuracy, which could lead to AR images being out of view or the necessity for consumers to place anchors at a particular location to allow the system to have a point of reference, which might work well in a small space but not in a larger venue  By using the Google Geospatial API all of the amassed location and image data that Google has collected over the last 15 years becomes available to the developers application, at least anywhere where Google has StreetView data (not in Germany, North Korea or China and a number of other countries), which gives almost pinpoint accuracy and an easy way to guide users to location where they might spend some money.
After spending some time understanding how the Google API works from a technical standpoint, we were even more impressed than just listening to the company’s promo.  Without going into detail, the API links the user’s mobile camera to the company’s servers and matches the cameras image to the Google data.  Given that the StreetView data has been filtered by Google AI to eliminate non-stationary objects like cars and people, the algorithm matches the camera image by comparing against the buildings in its database, which includes buildings all over the world.  Once a match is made, the detailed coordinates are sent to the API from the Google servers and the AR application can then accurately overlay the new information on the camera image.  Considering the billions of buildings the algorithm has to ‘look at’ to match the camera image, the technology is quite incredible
While it might seem that we are favorable toward Google, as we have singled out their AR translation application previously and the API mentioned above, Google has amassed such a large volume of disparate data that it seems able to coordinate, that they can easily create applications and data for developers and customers that is unavailable from other sources.  In reality our favorable view of Google from an AR point of view comes from the fact that the company not only collects user information, as many social platforms do, but has been collecting other, sometimes seemingly strange data, for so many years that its databases are the most fertile grounds for AI learning, whether it be image related or data related, so the edge that it gives the company for things like the positional data mentioned above or the translation data we have mentioned in the past is a distinct advantage over other data collectors that have not been doing so for an extended period or to the extent Google has. 
As the globes primary search engine, the company has had access to so much consumer data that would likely be unavailable to others, it puts the company in the sights of those concerned with anti-competitive behavior.  But the fact that the company has had the foresight to spend the time and resources to collect what might have seemed irrelevant data is more the reason why it was collected and not as much for the world domination that some consider Google’s goal.  They had the opportunity and were willing to allocate the resources likely without the ultimate goal of using it for such specific applications.  That’s smart thinking, and while it might lead to world domination in data resources, it was good planning years ago that made it possible. 

​Way back in February 2020 we noted that Samsung Display (pvt) had been evaluating ink-jet printing equipment from a number of suppliers for use as part of the development of the company’s QD/OLED process, which has recently become available for TV and monitor panels.  The ink-jet process was expected to be used for depositing quantum dots that convert the blue/green OLED materials to a full RGB pixels, and, as is the case in other OLED manufacturing, to encapsulate the OLED materials to protect them from exposure to damaging air and water vapor.  As the encapsulation process is one where a large swath of raea is covered with organic and inorganic materials, the IJP technology used is less advanced than what is necessary for the more precise placement of quantum dots, which must be precisely registered with the emitting OLED materials and the TFT below.
SDC was evaluating IJP tools from Kateeva (pvt) the leader in encapsulation IJP but chose tools made by SEMES (pvt), a Samsung affiliate, despite what we believe was data that indicated that the Kateeva product was the superior choice.  While we speculated that SDC was helping to bail out SEMES, which was seeing its LCD tool business decline as SDC wound down its large panel LCD production business, at the time we could only cite 2nd hand data.  SDC’s choice caused significant disruptions to Kateeva, who had produced working tools with the hope of recovering pre-order costs from SDC, and the company had to reduce its staff by over 50%, and refocus its attention on potential Chinese customers for its encapsulation IJPs.
It seems that HB Solutions (297890.KS) invested $13.5m in Kateeva earlier this year after it was thought that Samsung Display will be using Kateeva’s ink-jet printers for the potential expansion of its QD/OLED production line, after experiencing problems with the SEMES tools, with Kateeva collateralizing a number of its South Korean patents to secure the loan.    HB Solutions is also said to have purchased rights to additional Kateeva patents in the US, although those might be subject to the preferential rights of another purchaser.  HB Solutions would be the end supplier of the IJP tools to SDC, with Kateeva the actual source of the IJP tools.
As there have been a number of delays in the development of the QD/OLED process by SDC, with questions still remaining about how well the product is being accepted by consumers and parent Samsung Electronics’ (005930.KS) commitment to the QD/OLED product line, the pressure is on Kateeva to secure the hard orders for the equipment to maintain it ownership of its IP.  As we have noted yesterday, Samsun expanded its QD/OLED marketing footprint, and while we are want to take this as a positive sign toward the QD/OLED product line, the macro environment is such that a delay in stepping up production capacity at a 2nd QD/OLED fab could push what we originally though would be an end-of-2Q decision further down the road, putting even more pressure on Kateeva.  Hopefully the long-term picture for QD/OLED at Samsung Display will take precedence and a decision (including Kateeva’s IJP) will be forthcoming, but the heat is on once again at Kateeva. 

5G is typically touted as a mobile technology, giving us faster and more reliable connections while we move from one location to another, however the technology is certainly not limited to mobile to connectivity that is provided through a cable or fiber for the last mile, particularly where the cost of such fiber or cable is prohibitively expensive or faces limited access.  LTE (4G) FWA has been around for a number of years but has proven to be costly to deploy and is relatively inefficient when compared to wired broadband, so FWA LTE has not become the solution originally hoped for years ago.  5G however, should be able to offer broadband FWA to subscribers at data rates equal to or better than those provided by copper or fiber transport technologies, particularly when using mmWave spectrum.
That said, there are issues that surround 5G, especially mmWave, and understanding what is necessary to create a FWA system in a home or business is essential.  Instead of a connection to an external fiber line through an ONT (Optical Network Terminal) an FWA system has an antenna that is mounted outside of the home or office, with the height of the antenna determining the number of obstacles that might block a line-of-sight view of the 5G transmitting tower.  The issue of signal blockage increases with the frequency being used by the 5G carrier, with low sub6 bands providing the greatest ability to be transmitted over large distances, but provide slower speeds, while higher frequencies, such as those used by mmWave systems, are more easily blocked by everyday items such as trees or building, but can provide much higher transmission speeds.
Before we go further, it is necessary to address the 5G distance limitations noted above, as they are different than those for 4G.  4G signals can  travel ~ 10 miles if unblocked, which allows for a relatively sparse network of towers, while 5G signals can travel considerably less before they need to be captured, amplified, and retransmitted, and while 4G signal distances are well known, 5G transmission distances are very dependent on the frequency being used, which can vary considerably by carrier and location. The table below gives some indication as to the relative speeds and signal distance for each of the three primary 5G spectrum bands, although these vary considerably based on terrain, with mmWave urban distances as low as 250 feet.  That said, in urban or suburban areas, small cell repeaters can be placed on existing street light or traffic poles, which allows for extending a grid network without the expense of unsightly towers in urban or local communities.

Once the antenna has picked up the 5G signal, it is sent to CPE (Customer Premise Equipment) and a Wi-Fi router, which can sometimes be contained in the same box.  At that point, the 5G signal would be distributed around the home or office as Wi-Fi, as would a typical wired broadband signal.  In larger installation Ethernet cable can be used to spread the 5G signal to other local routers, which then create a larger Wi-Fi footprint at speeds that are up to 100 times faster than 4G at far lower latency rates.   Given the fact that 4G has been around for many years more than 5G there are a significant number of operators across the globe that provide 4G (LTE) FWA services, which as noted, is a rather inefficient transport system, with 5G FWA offerings representing about 1/5 the number of 4G FWA offerings, but there are regions where 5G FWA has quickly become the preferred FWA technology, such as in the Mid-East, Eastern Asia, or Western Europe, where the number of FWA offerings represents up to 87% of  combined 4G and 5G offerings.
Given that FWA CPE equipment that is installed outside usually requires an expensive truck roll for initial provisioning, operators almost uniformly prefer indoor installations, which rely on installation by the customer and equipment delivery by mail rather than by the carrier, but the 5G CPE market being relatively new, has seen relative little growth in equipment vendors recently, after big spurts in 2020 and 2021.  Both the 4G CPE and now the burgeoning 5G CPE equipment market are extremely fragmented, with no company controlling more than a 6.2% share for 4G and a 5.6% share for 5G, with the ‘other’ category representing 55.1% share for 4G and 47.7% share for 5G, leaving FWA equipment an open field for larger communications companies, and based on a study by Ericsson (ERIC), at the end of 2021 there were almost 90m FWA connections, which is expected to grow to over 100m this year and to more than double to 230m by 2027, or about 15% of all fixed broadband connections, while FWA data traffic represented almost 20% of global mobile data traffic by the end of last year.  FWA traffic is estimated to grow by almost 5x by 2027.
While there are certainly challenges to the expansion of 5G generally, and some more specific to FWA, the need for speed, bandwidth and low latency across both commercial and residential customers is a fact of continued technological advances across a wide spectrum of components and CE products and a generational acceptance of the fact that life without high speed data is an uncomfortable situation for many consumers and an almost necessity for businesses.  While wired broadband is well deployed in many environments, and mobile broadband is an integral part of life in almost every corner of the globe, FWA, particularly 5G FWA is the new kid on the block who has a Audi RS 7, while everyone in the neighborhood has a Honda CR-V.  Sooner or later everyone else is going to want the same, laying the groundwork for 5G FWA, along with the soon-to-be hundreds of sensors that will be sending and receiving data from everything in homes and businesses.  With 6G on the horizon a few years out, which will carry with it similar distance challenges, building out 5G infrastructure for both mobile and FWA is a necessary path for carriers who find the cost of laying cable or fiber to outlying customers too expensive to justify, and for those that are anticipating what their networks will need to support 10 years out.  Resistance is futile…

​Against rising raw material prices and a weak yen, Japanese semiconductor material companies have already been raising prices this year, but it looks as if that trend will continue as Showa Denko (4004.JP) has indicated that it will have to raise prices for a number of materials used in the semiconductor process (etchants) as the company, along with others, struggles to find a way to convince customers to carry more of the burden of higher raw material and transportation costs.   While convincing customers such as Taiwan Semiconductor (TSM) that it will benefit them in the long run to pay the higher prices is a difficult task, the inability to pass through those increases will cause Showa and others to abandon a number of less profitable materials and cancel contracts with smaller customers, further extending the inflationary spiral the CE space finds itself in currently.
Wafer supplier Sumco (3436.JP) will raise prices on long-term contracts while it increases capacity over the next two years, and Sumitomo Bakelite (4203.JP), a major producer of packaging encapsulants and Shin-Etsu Polymer (7970.JP), a producer of wafer transport containers have also raised prices, and we have noted that the war in Ukraine has limited the supply of neon gas a necessary component of photolithography tools and caused significant price increases.  At this point, it seems that semiconductor foundries are still willing to accept higher prices in order to ensure they have the necessary materials, but we expect as global electronics demand slows there will be a point where there will be some resistance to continued price hikes.  With weak demand continuing through the 2nd half, we expect Japanese material suppliers to institute those price hikes in the near-term or miss their opportunity if foundry demand slows in 2H as we expect it will be increasingly difficult to convince semiconductor manufacturers that such price hikes are appropriate and will benefit customer over the long term, as Showa employees have been instructed to do. 

​Samsung Electronics (005930.KS) is said to have suspended orders for LCD TV panels from its suppliers for between 30 days and 45 days according to a number of sources in South Korea.  This comes after it was widely noted that Samsung had reduced its TV set shipment plans for the year a 2nd time, from an original 53m – 54m units to 45m units and then to the current 40m units, as inventories grew to  2x pre-pandemic levels while demand slowed.  The original estimations would have built in an increase over last year’s 50m units, which was 10% above the shipment rate in 2020.
While the impact will be different for each of Samsung’s suppliers, we expect Samsung’s monthly order rate to be between 3.3m and 3.75m panels, which would represent between 5.8% and 6.6% of monthly panel production based on most recent data, and with an average price of $76 (TV panel ASP) a value of between $250.5m and $285m, would represent between 5.0% and 5.6% of large panel sales on a monthly basis.  Given that the 5 suppliers most likely affected would represent ~69.2% of monthly large panel industry sales, we expect the impact to be significant for BOE (200725.CH), Chinastar (pvt), HKC (248.HK), AU Optronics (2409.TT) and Innolux (3481.TT), but again, specific impact by company would depend entirely on order concentration and the type and price of the panels ordered as we are using an average price across all panel sizes.  Those with orders for 65” and larger panels, which carry a price considerably above the average would see a greater impact.  We expect BOE and Chinastar, both of whom have Gen 10.5 LCD panel fabs which specialize in large panel production would see the biggest impact.
As we have noted previously, much will depend on how quickly TV panel and set inventory can be reduced to more normal levels, which would entail a period of watching demand in a steady state environment (June) and then gauging how much discounting is necessary to bring those levels in line.  As raw material and component prices have risen, offsetting some of the declines in panel prices, TV set brands will likely tread softly when it comes to discounting, at least at the onset, but we suspect if normal levels have not been reached by the end of July, we will see even more aggressive discounting and the potential for Samsung’s cuts to extend into the first two weeks of August, exacerbating the potential impact to LCD large panel producers.  That said, we expect at least a modicum of stability by September but worry that at the first sign of even modest demand improvement at the set level, panel producers will increase utilization to bail out what is shaping up to be a weak 3Q.