​OK so you forgot to come up with a gift for your 6 year old while you were at the conference in Tokyo, but did you really buy that $400 Inflatable Water Park with Slide and Water Gun out of the SkyMall (pvt) catalog while you were dozing off in the middle of the Pacific?  Since its sitting at your front door, it looks like you did, but you can make sure the wife knows that you got it at a steep discount from its original price of $600, so it was really quite a bargain and its going to be tons of fun for the kids until it gets punctured and put in a box in the garage to be dealt with next year or until the kids are teenagers and the garage gets converted into a band rehearsal ‘studio’. 
But that is all going to change according to a project involving Royole (pvt), a Chinese display manufacturer who is credited with releasing the first foldable smartphone, the Flex Pai.  In a partnership with Airbus China (AIR.FP) put together in 2018, the companies have been working on replacing the typical airline magazines like SkyMall and those particular to a specific airline (many of which have been terminated as a result of COVID-19), with something a little more sophisticated and potentially practical, an OLED magazine.
The device, which is just entering actual test mode on one plane, is an iPad-like OLED display device that is flexible enough to be called a ‘magazine’ but still able to be used to order food (accepts credit cards), read ‘digital’ magazines and newspapers, stream TV and movies, and even give access to the internet.  Of course, there is hardware that must be installed on the plane and internet access would be governed by the plane’s Wi-Fi capabilities, but the idea is to replace both paper magazines and the back-of-the-seat entertainment systems that are currently on most airline flights.
While the product is not quite ready for release, it helps airlines from having to clean magazines after each flight (really?) and maintaining the oddball seat display systems that are currently available, bringing it down to cleaning just an iPad like device.  We expect there will be a system for checking passengers as they leave the plane in case they ‘accidentally’ place the device in their carry-on luggage, but despite our long-standing criticism of Royole, at least the concept is valid and could one day be an alternative to paper.
The question will be whether it is priced correctly, both to other carriers and to advertisers.  While flyers tend to be a captive audience, ad and content pricing also needs to reflect a reasonable rate that leads to a sale, such as an in-flight movie or similar content, and the system needs to have access to content that does not limit the passenger’s choices to make secondary purchases.  These are not simple tasks, especially while flying at 40,000 feet, but at least the device itself is beginning to take shape.  Airlines themselves will likely be a bit cautious about spending for such new projects after the ravages of COVID-19, but if there is no more alcohol on flights, what else is there to do but read, watch movies, or buy stuff.  Isn’t that what OLED was invented for?

​The UK’s Competition & Market Authority has issued a report that suggests a Phase 2 investigation into the proposed merger is warranted on competitive grounds.  The CMA stated, “We’re concerned that Nvidia (NVDA) controlling ARM (9984.JP) could create real problems for Nvidia’s rivals by limiting their access to key technologies, and ultimately stifling innovation across a number of important and growing markets.”  The report summary goes a bit deeper in that it uses ARM’s estimation that 70% of the world’s population engages with ARM-based technology, which is a bit like saying 100% of the global population walks on silicon based products (sand).
That said, the report did note that it saw the possibility for SLCs (Substantial Lessening of Competition) should the merger proceed concerning CPUs and GPUs for data centers, network interface controllers, SoC’s for IoT, automotive, autonomous vehicle and driver assistance systems, and most important to the ‘real world’, the supply of SoC’s for gaming consoles.  This covers quite a wide swath of silicon production and while the wording might be a bit melodramatic, the conclusion that the CMA came to was quite specific. 

• The CMA does not consider that the conduct required to address the competition concerns identified can be specified with sufficient clarity, to provide a lasting remedy that is capable of effective monitoring and enforcement.
• This risk is significant in this case, having regard to the complexity and evolving nature of the contracts and markets, the magnitude of the concerns identified, and the breadth and technically specialist nature of the offer.  The CMA found that such a behavioral remedy would carry material specifications, circumvention and monitoring risks.  Therefore the CMA does not believe any form of behavioral remedy would address the competition concerns identified.
• It also does not believe and partial divestment of ARM’s IP business(es) would be sufficiently clear-cut and comprehensive for phase 1. 

Simply, the CMA does not like the merger and recommends that the Secretary of State initiate a deeper investigation into the impact of the proposed merger.  Nvidia says ARM would be kept neutral if the acquisition takes place, but actress Shirley MacLaine said it better, “It’s useless to hold a person to anything he says while he’s in love, drunk, or running for office.”  Just add ‘or making an acquisition…’
 

​It was only 3 or 4 months ago when we were being told by suppliers that customers didn’t seem to mind the price increases that were being put into effect during the latter part of 1Q and early 2Q.  Component suppliers commented numerous times that customers “were just happy they could get product, and didn’t mind the cost”.  While there are still many CE products and components that are in short supply and are seeing price increases, particularly semiconductors, we have noticed a number of times recently that the easygoing attitude toward price increases has waned and the seller’s market seems to have lost a bit of its vigor.
Much of this is anecdotal, although the weakness in TV panel prices seems to indicate a certain amount of reluctance toward the price increases that have already been built in over the last year, and IT panel buyers (monitors and notebooks) are becoming more cautious with inventory into the holiday season.  This is not to say that price increases will still not occur, but we sense a ‘disturbance in the Force’, rather than the complacency seen over the last 12 months.  It is hard to gauge what underlies this change, but it would seem that the enthusiastic demand seen as the global economy emerged from a shelter-in-place environment has perhaps been sated, or at least has shown that it is not all consuming and has limits as to how far it will go to be satisfied.
We note that there have been smaller ups and downs throughout the last year in terms of CE demand, but, while we don’t believe that price increases or shortages in a number of components will abruptly end, the sense that those price increases need to be far more justifiable than in the past seems to be the case.    Those brands who came into the year with very high expectations are now beginning to question the sustainability of those forecasts and targets.  There is still some time before the key selling months (November & December) and final adjustments, positive or negative, will still be made, but the bloom is off the rose so to speak. 

​On Tuesday we noted that UMC (UMC) had notified customers that it would be instituting another price increase for products developed on its 22nm and 28nm nodes starting in September and November, with another expected in January.  This followed a ~13% price increase at UMC in May, again for their 28nm node.  According to local press in Taiwan, Taiwan Semiconductor (TSM) has also given notice to customers that it will be raising prices between 10% and 20% for 7nm, 12nm, 28nm, and 40nm nodes in 1Q 2022, although some customers have indicated that TSM has already put those increases into place.  TSM increased prices once in 3Q last year and in 2Q this year.  The basis for the increases are said to be to cover the higher operating costs of the new fab being built in the US, although it will not be in production until 2024, though more likely to keep margins at current levels or higher.
Rumors have already surfaced that the price increases will affect the retail price of the iPhone 13 series, whose A15 processor is produced on TSM’s 5nm node.  Until a real teardown is done it will be difficult to define the effects of a TSM price increase as Apple (AAPL) is expected to add a number of photo and video features that could also add to cost, but the iPhone 12, which was the first to use a 5nm processor, saw an estimated cost increase of over $17.  With wafer costs rising this year, even with the higher volumes predicted for the iPhone 13, the BOM will likely see another increase.  We note that TSM’s price increases for 5nm and 7nm are expected to be between 7% and 9% while more mature nodes could top out at ~20%.

​Toshiba (6502.JP) has been around since 1875 and at one time was among the top TV and PC brands, but the company has gone through some hard times, with an accounting scandal in 2015 where the company was found to have inflated profits by $1.2b over a seven year period, and a 2017 debacle over $6.3b in losses at its wholly-owned Westinghouse nuclear plant construction business.  The company still produces a number of CE products, medical products, and semiconductors, but has lost much of the cache it once had in the CE space. 
The company did receive a $20b bid from Britain’s CVC Capital (pvt), but rejected the offer, with Toshiba’s president & CEO stepping down after accusations that the rejection was made to protect his position (he also previous held a position at CVC).  But it seems that things are not quite back to normal at Toshiba, as sources in Japan say that the company is discussing options with a number of private equity firms on ‘suggestions’ about how the company might embark on a new strategy.  It is doubtful that Toshiba is soliciting offers for the company or specific assets, but more some help in formulating a plan for its business lines, as a recent story that the company was secretly cooperating with the Japanese government to put pressure on foreign institutions concerning funding for would-be acquirers began a strategic review of the company after the recent management shakeup.  The company expects to release its new business plan in October
 

​As Apple gets ready to release its next iPhone series next month, the COVID-19 pandemic, particularly the Delta variant, has caused difficulties in the iPhone supply chain, particularly as Apple is expected to have upped their production targets for this year.  While Apple’s primary iPhone assembler Foxconn (2354.TT) has been able to stay infection free at its massive assembly plant in Zhengzhou, China, even relatively small outbreaks have caused lockdowns that have limited Foxconn’s ability to hire staff.  Local press is indicating that Foxconn is looking to hire 200,000 more workers by the end of next month to produce roughly 500,000 smartphones each day.
The Zhengzhou factory is part of what is called ‘iPhone City’, a science park about 20 miles from downtown Zhengzhou, that employs over 350,000 workers who live in 12 story dormitories and work 6 days a week.  The complex which was built in 2010 and received $600m in financing from the provincial government, along with much of the external infrastructure, such as power plants and paved roads, and still gets government help during periods of recruitment, with some cities required to meet quotas as to how many residents must work at the factory. The government even provides transportation for workers from other cities who wish to sign up, picking them up locally and bringing them right to the factory’s front gate.  That said, it is still a struggle to get the factory fully staffed to meet Apple’s goals and the company is offering signing bonuses of up to $1,960 for production line workers that make it through 90 days of employment and existing workers get $185 for each worker they refer.  These are the highest bonus levels ever offered at the factory since 2010. 

​Beijing based Xiaomi (1810.HK), primarily known for its smartphone business, is adding to its autonomous driving capabilities with the acquisition of ~71% of Deepmotion (pvt) common and ~29% of the company’s preferred stock for a bit over $77m in cash and stock   Deepmotion was formed by a number of Microsoft (MSFT) scientists in 2017 to develop object recognition and behavior prediction software for autonomous vehicles.  The company had been financed by Redpoint Capital (pvt), Andromeda Ventures (pvt), and Source Code Capital (pvt).  The company lost $1.8m last year and $2.7m in 2019.
Xiaomi has indicated that it has been aggressively recruiting engineers and experts after initiating its electric vehicle project in March, and has taken or raised stakes in Geometrical Pal (pvt), company that specializes in radar and light based sensing for positioning and route planning, and Zong Mu (pvt), a company developing localization and mapping software.  A number of Chinese CE companies have been branching out into the autonomous vehicle market over the last year or so, including Huawei (pvt) who has agreed to invest $1b in the segment, which has seen estimates grow from $54.2b in 2019 to $556.7b in 2026, and Baidu (BIDU), and with the challenge of trying to top the US and Europe in that segment’s development, China is certainly not going to hold back spending for technology.  While spending will certainly be a focus, we are far more interested in the progression of driver assistance software and hardware, which we see as a far more viable way of developing the automated driving market than working toward a standalone autonomous vehicle.

Back in April we noted that Murata (6981.JP), the leading producer of MLCCs (Multi-Layer Ceramic Capacitors), a key component in 5G smartphones and electric vehicles, was ‘unofficially’ worried about distortions in the components markets caused by trade issues with Huawei (pvt) and the US, which were causing other Chinese smartphone brands to over-order components to try to capture Huawei customers.  The concern from Murata was a warning that things could change quickly if demand were to slow.  While that has not been the case thus far, Murata is facing another crisis that could push things in the other direction.
The company has indicated that a case of COVID-19 in a business office has spread, infecting 98 workers, causing the company’s main MLCC production line in Takebu, Japan has been shut down so all 7,000 employees and 3rd party workers can be tested.  As Murata holds a ~40% share of the MLCC market, the effect of the factory shutdown could be significant.  The shutdown was instituted on August 25 and will continue through August 31, at least thus far, which would reduce production across the industry by ~1%.  While this is likely not enough to cause MLCC prices to rise further this year, it does add a bit of uncertainty to the market, which has seen demand increase and inventory levels drop during this year.  The industry is not yet facing a shortage, but an extended shutdown at Murata could certainly push things in that direction, although we noted on 8/19/21 that MLCC producer Yageo (2327.TT) was expected to reduce MLCC prices by 10% to its Chinese customers in September.  While we expect that decrease was to stimulate business from Chinese smartphone brands, the picture for MLCCs is getting harder to decipher, although Yageo is building additional MLCC capacity, which could be the root for the share grab.

​Foldable devices are here, at least according to Samsung Display, Samsung Electronics, a number of other smartphone brands, and potentially ‘a large consumer electronics company’ sometime in 2023, but while all sorts of metrics are tossed about concerning the durability of foldables, who sits and opens and closes a potential foldable 200,000 times to test such statistics? Is there a factory worker sitting at a desk, smoking Lucky’s and opening and closing a device each second?  That can’t be because it would take such a tester 6.94 days working 8 hours a day to hit the 200,000 mark, but we know who can.

Samsung, LG, Apple, and BOE also know because they have purchased equipment for just that purpose from a South Korean company Flexigo (pvt), that has developed two tools known as ‘Foldy’ and ‘Rolly’ that replace that cigarette smoking worker, and that same company just announced another tool for testing sliding foldable displays, with the name (you guessed it…) ‘slidy’.  The company, which is backed by the venture arm of Korean tool vendor Wonik (240810.KS), is expected to generate $8m - $9m in sales next year, $85m in 2024, and $170m in 2026 when the company expects to go public.  “Twisty’ and ‘Stretchy’, two new tools expected next year will help to meet those lofty goals.
These tools are of extreme value to foldable brands and can not only test potential devices before consumers get their hands on them, but are instrumental in establishing standards for foldables, as many such longer-lasting tests of consumer devices are done through extrapolation, rather than full testing.  In fact when the original Samsung Galaxy Fold was tested, the results showed that the device worked normally through 265,741 folds, but the flexible PCB and the associated chips were the components first to develop problems, not the display or the TFT layer, and while the device was successfully folded over 260,000 times, brightness abnormalities began to show at 160,000 folds, despite the fact that there were no defects in the display itself.
Surveys on smartphone usage vary considerably, with age group rankings ranging from 18x/day for the ‘silent’ generation to 63x/day for millennials, to 79x/day for Gen X, but an Asurion (pvt) survey (they provide smartphone damage insurance) showed that the average American checked their phone (11/2019) 96 times/day, up 20% from the same survey done two years before, and while that seems like a staggering amount, the math says a foldable with a lifetime of 200,000 folds should last 5.7 years, which is more than twice the average life of a smartphone (2.5 yrs.), unless ‘foldy’ says otherwise..

​According to Taiwan press, UMC (UMC) has notified customers that it will be increasing prices for product produced on 22nm and 28nm nodes in September and November, with another hike expected in January.  This comes after UMC announced a ~13% price hike in May, again for its 28nm process. Taiwan Semiconductor (TSM) has stated that they will hold 28nm prices steady for the remainder of the year, after raising prices earlier this year.