Apple has been working to diversify its supply chain on a geographic basis for a number of years and has chosen Vietnam to become an alternative to assembly in China where many Apple products have been produced.  In the 1st quarter of 2020 Apple began an initiative in Vietnam to encourage suppliers to expand their capabilities, particularly for Air Pods, with the expectation that such expansion would lead to shifting assembly of the Air Pods 3 product from China to Vietnam, or at least a substantial chunk of production.  Apple also had planned to shift some MacBook and iPad production to Vietnam from China, but it looks like both sets of plans have been put on hold due to the COVID-19 outbreak in Vietnam.
While Apple had been trialing Air Pod production in Vietnam, border limitations between China and Vietnam have made it more difficult for engineering talent to move from China to Vietnam and has also limited the full development of the supply chain in Vietnam.  One area that such border issues have depressed is the joint development of new product between suppliers and CE brands, in this case in Vietnam, which is dependent on the same engineering expertise that has been limited by COVID-19 border restrictions.  This is not only an issue for Apple but has also affected Google (GOOG) who had planned to produce the Pixel 5 smartphone in Vietnam but found that it was necessary to bring production for that phone, which was released last October.
At least for now it seems that Apple has shifted AirPods 3 production back to China in light of the factory closings and travel restriction in Vietnam, although the company has indicated that it still intends to move some of the AirPod 3 production to Vietnam ‘later’ and reports that Amazon (AMZN), who was facing similar problems with production of a number of ‘smart’ products in Northern Vietnam factories, has also shifted production back to China.  Hopefully this is a temporary setback for CE production in Vietnam which has emerged as a strong contender for CE product development, but stories of furloughed factory workers on bicycles trying to leave Ho Chi Minh City but being turned back by police do not set the tone for a conducive production environment, at least for now.

MLCCs (Multi-layer Ceramic Capacitors) are small but essential passive components that appear in a myriad of CE devices, particularly 5G smartphones and electric or hybrid vehicles.  While these passive devices are relatively simple in operation, the expertise needed to produce MLCC limits production to a relatively small number of manufacturers, which at times, leads to shortages that can boost prices, particularly as past price cyclicality has keep manufacturers from adding significant capacity.  Given that there are many variations of MLCCs, it is hard to plot realistic pricing, but lead times are another metric that the industry uses to gauge supply/demand.  COVID-19 has also worked toward slowing passive component production, adding another variable to what has become a complex model for MLCCs.
Inventory levels at distributors have been declining since the beginning of this year and while the MLCC space is not in what would be considered a ‘shortage’, key manufacturers have been running at high utilization levels this year and distributors have been suggesting that electronics manufacturers look to substitute other passives for MLCCs whenever possible , ‘just in case’, it seems odd that a story that Yageo (2327.TT), the leading MLCC producer, will be lowering its MLCC prices by 10% in September.  Yageo management will not comment on the rumor, which also indicated a price reduction for passive resistors, for distributors in Greater China.
There is some speculation that the reduction is to incentivize Chinese distributors and increase the company’s share in the Chinese market, while others speculate that it is a push by the company to ensure it will remain at high utilization rates for the rest of the year.
China represents ~30% of Yageo’s sales and MLCCs ~29% of the company’s sales, so the impact of a price change for distributors in China is relatively low, and a 10% reduction holds that impact to a notional value below 1%, but the question really is why, especially when Yageo says their business is stable and other suppliers are also running at utilization rates over 90%?  Yageo is building a new MLCC production plant, but that will not be in operation until 2023 so there is little incentive for them to make a push now, however we do note that the Chinese automotive sector, with its focus on electric vehicle production, has been limited by shortages in silicon based products as overall global fab capacity is on allocation.  In light of that problem, which likely spurred Chinese automotive producers to over-order other components in previous months as those markets tightened up, has led to end-user inventories of passive components such as MLCCs to be higher than normal.  As silicon shortages force some electric vehicle producers to slow or suspend production, the necessity for new orders is lessened.
This is a viable explanation as to why a component leader would be offering lower prices to a particular (region) part of its customer base while maintaining prices for other regions, especially when utilization levels remain high, but deciphering Chinese individual component level inventories is like playing telephone in 3rd grade, the story changes with every person, so we can only speculate until we receive convincing evidence from an unbiased 3rd party.  Until then we will have to rely on industry chatter unless Yageo is willing to divulge their business plan…

In recent days we have mentioned FMMs (Fine Metal Masks) those screen-like components in the OLED material deposition process that allow those materials to be precisely placed in RGB OLED displays.  As noted, there are limitations as to the size of such masks, which limits their use to OLED production in fabs that are Gen 6 or smaller with Samsung Display (pvt) trying to find a way around that limitation so it might enter the OLED TV business with an RGB OLED TV.  In the interim, the RGB OLED industry continues to expand, new deposition tools are purchased and put into operation, which increases the need for FMMs, which are not only expensive, but need to be replaced regularly.
The FMM situation is made worse by the fact that there is really only one major supplier of such masks, Dai Nippon Printing (7912.JP), which holds an incredible share of the market at over 90%  Another Japanese firm Toppan Printing (7911.JP) also produces such makes, as do an number of smaller firms, but none even close to the scale of DNP.  Samsung Display, the leader in the small panel RGB OLED business, has a long standing agreement with both companies that guarantee’s it much of their supply, leaving others to work on allocation or find multiple smaller suppliers that tend to have inconsistent product or scheduling.  A recent study of the FMM market has indicate that there is a 31% gap between supply and demand this year as OLED RGB expansion projects continue, especially in China, and supply is strictly limited.
China has not taken the situation lightly as it impinges on both its goal of self-sufficiency and could limit its ability to compete with other OLED producers, particularly Samsung Display.  There are at least seven projects in China that are developing technology and process for mass production of FMMs, but even with over $500m spent toward that end, the most advanced is still in the product sample stage, which we expect will lead to both additional technology refinements and scalability issues, which leaves the industry in the same place it was last year and this year.  The same industry evaluation predicts that it will not be until 2025 until FMM supply and demand are close to being in balance, and that is if everything goes according to plan.  Until then, Chinese RGB OLED panel producers will have to line up behind SDC and keep those FMM cleaners running 24/7.

TV set demand has been a disappointing this year, as China TV demand has been weak for some time and the North American market, which had been the strongest region last year and early this year, has also been slowing.  TV set producers have been facing a number of problems, particularly the rapid rise of LCD panel prices, which are the most costly single component of most sets, and overall higher component prices, which have forced set brands to raise prices an offer fewer discounts to attract customers.  That said, the 2nd half is typically the stronger as brands build inventory for the holiday season, and while demand might be weaker than brand targets might have predicted late last year, they typically buy more large LCD panels in 3Q and 4Q than in the first two quarters.
Typical large panel shipment growth has been 13% (5 year average) on a half/half basis and typical (5 year average) growth in large panel shipments in 3Q (q/q) has been 8.7%.  While headlines might read that TV vendors are increasing panel procurement in 3Q, the numbers tell a bit of a different story.  Large panel procurement is expected to be up 4.4% in 3Q, just below half of the 5 year average and will be down 8.0% on a y/y basis, with only three of the top TV brands seeing a q/q increase and only two seeing y/y increases.  Samsung Electronics, one of the three increasing panel purchases over 2Q levels, has been unable to meet its panel requirements due to component shortages, while Xiaomi (1810.HK), who has been growing its TV business despite the slowdown, seems to have over anticipated that growth last quarter and will see a decline in large panel purchases of 36% q/q, despite still being up 20% y/y.
While many LCD panel producers have reduced their exposure to the TV panel market, it is still a significant revenue generator for producers and is an even more important part of capacity utilization given the size of TV panels, so the impact of relatively weak TV panel sales is considerable.  More importantly it gives some indication as to which brands have built set inventory that now might be a bit ahead of realistic sales expectations or that their earlier set targets were too high.  Here’s how the data looks for 3Q panel procurement:

​Yesterday we indicated that Chinastar (pvt), a subsidiary of TCL, has been rumored to be supplying small panel OLED displays to Samsung Electronics, the parent of Samsung Display (pvt), who has been the exclusive supplier to Samsung in the past.    We believe that Chinastar has supplied a small number of OLED panels used for the Galaxy M smartphones sold in India, with Samsung likely using those displays to evaluate Chinastar’s capabilities as a larger supplier, similar to the way that Apple (AAPL) has been testing BOE’s (200725.CH) ability to enter its OLED supply chain. 
While much will be made of the fact that Chinastar has supplied OLED displays to Samsung Electronics, we expect, as we noted yesterday, that Samsung will proceed rather slowly with Chinastar to limit the exposure to potential early production problems and potential delivery delays.  Credit is due to Chinastar for meeting Samsung’s specifications but thus far no supplier other than Samsung Display has been allowed to produce OLED displays for Samsung’s flagship lines, so the mainstay of the Samsung parent/child relationship is still intact, but while Samsung Electronics continues to push small panel OLED down the smartphone product line, they face competition from state funded Chinese OLED suppliers, who push Samsung to lower costs. 
If Samsung Display is unable to or does not want to compete with Chinese small panel OLED producers for Samsung’s low-priced smartphone products, the door will remain open to other suppliers like Chinastar.  Does it mean that the end is near for Samsung Display’s dominance of the small panel OLED market?  Not likely as SDC has the expertise to not only produce displays to Samsung’s flagship phone specifications, but has created and helped Samsung Electronics promote the flexible display business.  SDC’s ability to maintain a substantial lead in that business continues to separate them from other small panel OLED producers and gives them the option of walking away from what is likely low margin business, even if it is from its parent.  Of course also having Apple as a large customer (shared with LG Display (LPL)) doesn’t hurt either.

LG Electronics (066570.KS) is a CE giant.  #2 in the TV business behind Samsung Electronics (005930.KS) and ahead of Sony (SNE).   #2 in the appliance business behind Haier (600690.CH) and ahead of Whirlpool (WHR), and a top 10 global electronics company.  As such, they have little choice but to follow the always trendy ‘Smart Home’ approach to these businesses, helping consumers in their efforts to avoid having to touch said devices, instead using their smartphone or voice to exert control over their homes.  LG recently conducted an online survey of 837 users who had bought a smart home appliance within the last five years (age range 25 – 54) to get an idea of how their lifestyles influence the use of smart home appliances and (here comes LG marketing) ‘fascinating observations on how Smart Homes are redefining the meaning of intelligent living.’
The CE world is full of surveys, most of which are self-serving.  Similar to white papers, they have a bias toward supporting the product, technology, or concept that the writer happens to be associated with, and the LGE survey is no different in that LGE has a stake in the ‘Smart Home’ through its appliances and other CE products that are based on the company’s “ThinQ” control ‘vision’ that allows its devices to be controlled via a smartphone or similar mobile device.  The LGE product line encompasses this ‘vision’ in almost all of its products, at least those on the high-end of the lines, and allows for a multitude of automated functions, some of which are shown in the table below.

​[1] Styler’s are used to reduce dust mites and allergens on clothing

​But motivation for gravitating toward Smart Home products is really the important metric underlying how much consumers are willing to spend and how much they care about things outside of their personal wants and needs, and Fig. 1 shows the ‘motivation’ behind participant responses.  What we don’t know is whether these ‘reasons’ were suggested (multiple choice) or were freely stated by respondents, but at the least they give some indication as to why CE and appliance buyers were interested in Smart Home products.  While ‘Saves Me Money’ was not unexpectedly at the bottom of the chart (5.5%), given that the maxim, “anything that has a name is going to be more expensive” certainly holds true for consumer electronics, however we were surprised to see that ‘saves me time’ was not higher in the survey.  In all fairness, ‘,makes things more useful’ is really an adjunct to ‘saves me time’, so we feel the extra category might have siphoned off some of the ‘saves me time’ respondents, but it is what it is, at least in this survey.

​More surprising was the “Very Satisfied” part of the survey, which broke down buyers who indicated that they were very satisfied with their smart home.  We would have expected that those in the ‘oldest’ category (no age discrimination here) to be less satisfied, and the youngest age category to be the most satisfied.  In fact it was just the opposite, but the explanation, according to LG is that those in the highest age bracket tend to spend more time at home on family activities and therefore appreciate Smart Home products more than those in the youngest group, who are by implication, at home less.
The survey went a bit further with the ‘very satisfied’ question, as it broke out the percentage of ‘very satisfied’ Smart Home product buyers by their ‘knowledge of AI’, refuting the assumption that you had to have some understanding of artificial intelligence to be a supporter of Smart Home products.  According to the survey data those with the least understanding of AI were the highest percentage of the ‘very satisfied’ group, implying that you don’t have to understand the technology in Smart Home products to appreciate its value.  To us this is very self-serving in that it implies that artificial intelligence is a big part of such consumer products, when much of the ‘data’ drawn from Smart Home products is from relatively simple sensors and control systems.  Much of the ‘intelligence’ comes from look-up tables so ‘intelligence’ might be a bit of an exaggeration and few of such products actually ‘learn’ in the same sense as true AI systems do.  Also we doubt that those who indicated they have ‘high’ AI knowledge understand even the basics of natural language processing or object recognition algorithms that are basic forms of AI, so we put little credibility in the table below, which breaks out that data. 

What we did find interesting was the part of the survey that asked about what attracted buyers to Smart Home products.  Participants were given two choices, either ‘new technology’ or ‘performance’ and the results of this part of the survey were a bit more in keeping with what one might expect, with older buyers more interested in performance than trying new technology.  That said, Fig. 3 seems to conflict a bit with Fig. 1 in that other than ‘saves energy’, the top Smart Home benefits to buyers were ‘makes things more enjoyable’, ‘makes things more useful’, and ‘saves me time’, all of which seem to be performance related, yet until the 45 – 49 year old age group, Fig. 3 indicates that performance is the less important feature of Smart Home products.

​The survey itself goes into more detail as to how buyers benefit from such products, breaking it down by particular lifestyles, but the last page of the survey reveals its true colors with the banner “Lifestyle-Enhancing Smart Home is a Win for Everyone”.  Smart Home consumer electronics products are modestly helpful in that they have the potential to make our lives just a bit easier, sometimes in ways that we might not have realized were possible, but lumping things like automatic sound adjustment in TVs into the same category as getting a notification that your wash cycle is completed, is a bit of an oversimplification. 
Differentiation is a key tenet in the consumer electronics business and Smart Home products tend to be a way for brands to make their products stand out, but the idea that there is a universal ‘Smart Home’ system that will allow all of the devices in your home to constantly chatter with each other and keep your home in tip top shape is a fallacy.  Looking just at the number of apps one would need to have on their smartphone to control each brand’s products should be a good indication that we are not at Jetson level, and the simple fact that most Smart Home systems are not compatible with each other makes Smart Home more of a marketing idea than a practical one. 
Surveys are nice but are easily able to present a biased picture, and while this survey did its job of showing how Smart Home products can enhance your lifestyle, it does little to indicate the practicality of such systems.  We have been testing and using what might be called Smart Home products for over 20 years and still wait for the day when a universal hub application can operate them all.  It is certainly better today with smartphone control applications than it was years ago, chasing down a myriad of remote control devices, but the Smart Home industry still has a way to go before it really becomes ‘smart’.

Samsung Electronics (005930.KS) never ceases to amaze, now adjusting the prices of their latest line of Mini-LED/QD TVs for the eighth time since the line’s release on May 20.  Most of the price changes have been in the highest price tiers, but in this round, they got down to the bottom tier for the first time.  Of the 33 models in the new line that we track, 1 (3%) model is priced higher than original pricing, while 11 (33%) are flat and 21 (63.6%) are down.  22 (66.6%) of the 33 are at their lowest price point while 1 (3%) is at its highest price point.  Among the 8K Mini-LED/QD sets in the Samsung line up, the average decline from original pricing is 13.9%, while in similar 4K Mini-LED/QD sets the decline is 11.2%.  When looking at sets that are only QD (no Mini-LED), the average decline is 6.3%, with high-end QD sets down 9.7% and low-end QD sets down 3.5%.  Across the entire line of Mini-LED/QD and QD only sets, the average price has declined 9.0% from original pricing.
Samsung’s price changes in this new line, which is its first to contain retail level Mini-LED/QD sets, have been unusual, and we have noted previously that we believe Samsung’s initial pricing was more of a test given the lack of comparables (TCL (000100.CH)) was the only other TV brand with Mini-LED TV product and was not available in the US).  Subsequent to Samsung’s release, LG Electronics (066570.KS) also released its line of Mini-LED/QD TVs at comparable or lower prices, pushing Samsung to rethink some of its original price points.  Of course the true motivator in the TV space is moving units and keeping inventory lean at all levels, so the constant price adjustments seem to indicate that Samsung is still searching for pricing that will allow it to meet internal targets.  
At this early point in the Samsung Mini-LED/QD TV set lifecycle we doubt that component pricing has much to do with set pricing, at least at the top end of the line, but the recent price reductions at the bottom of the line, where component price increases would have the greatest effect, are indicative of the general slowdown in TV set sales and the need to attract consumers with lower prices, despite the effect on margins.  We expect that Samsung still has some margin ‘room’ on its Mini-LED/QD sets , but lowering prices on the bottom of the line when costs are rising seems a bit desperate to us.

​In our 7/28 note on LG Display (LPL) we indicated that the company has been reviewing plans for expanding its small panel OLED capabilities, an area that gets far less attention from the press than the company’s large panel OLED TV business.  With the dissolution of parent LG Electronics (066570.KS) mobile business, some questioned plans to expand small panel capacity, however Apple (AAPL) has been expanding its small panel OLED sourcing from LG Display and likely needs a strong commitment from the company if it is to go further.
LG Display made a statement today that indicates they have decided to proceed with those small panel expansion plans.  The investment will be $2.83b US to be spent over the next 2 ½ years but little detail was given so the possible alternatives are a Greenfield fab or and expansion or conversion of an existing fab.  LG Display’s main small panel OLED production fabs are E5 and E6, both Gen 6 lines with original capacity (combined) of 75,000 sheets/month, however LGD has already mentioned that an additional 10,000 sheet/month capacity expansion was expected at E6, which we expect will expand to 15,000 sheets/month.  Given the value of the announced investment we would expect another 15,000 sheet line, likely at the company’s production complex in Paju, South Korea, with the potential to expand to 30,000 if consumers warm to the concept of OLED for the iPad in 2023.
In the past Apple has made some upfront capacity investments by pre-paying for product.  This type of investment goes toward a ‘guarantee’ of capacity share or even a dedicated line, which we would not rule out as to how LG Display might finance this project, along with its other (large panel OLED) expansion plans.   Given the duration of the project, we expect LG Display will look to capitalize on that relationship or look toward the public markets to avoid adding additional debt, but we expect the investment in capacity will be staged carefully.  All in, it’s a medium sized project that will likely depend on how LG Display’s relationship with Apple progresses, and how successful Apple is with expanding its OLED product line over the next two years.

Samsung Display, the supplier of foldable displays for parent Samsung Electronics’ upcoming Galaxy Z Fold 3 smartphone has indicated that they have changed the pixel layout on the new phone’s display from what has been called the Diamond pixel layout, consisting of green ovals and larger red and blue diamond shaped sub-pixels, to a new layout called “Round Diamond Pixel™”, that gives the display a new name, Eco2 OLED.
Unless you take a microscope to the Z Fold 3 (when it is released later this month), you would not notice any difference in the way the phone looks, other than the fact that it might seem a bit brighter.  Samsung Display says that the new pixel arrangement eliminates the need for a polarizer that normally is used to reduce the amount of light that is reflected by the display, but also blocks some of the light coming from the display itself.  The new pixel arrangement eliminates the need for the polarizer, which SDC increases the transmittance of the display by 33%.  Such an increase, when throttled to the light levels of previous displays, would result in a power saving of 25%, so as a user, you will likely see less of difference in the display but an improvement in battery life.
That said, since the display is not the only power consuming component of a smartphone that 25% battery life improvement will likely not magically appear, but will be partially absorbed by other components that designers will add, knowing they have a bit more overall power to use.  As the new pixel arrangement allows the removal of the polarizer, the under display camera, also a new feature of the Fold 3, is able to gather more light, making it easier for the camera to work properly and avoiding pixel structure changes over the camera that have been the bane of other embedded camera systems.  Of course there is no free lunch, and the production cost of the new pixel arrangement, the first change for SDC since 2013, will be higher, even though resolution and ppi (pixels/inch) will remain the same.  Perhaps the lack of a charger in the Galaxy Z Fold 3 box will help cover some of that extra cost…

​TCL and it subsidiary Chinastar (pvt) purchased Samsung Display’s (pvt) Suzhou, China Gen 8 fab and panel business for $1.08b earlier this year, ending Samsung’s LCD panel production in China, but at the same time as the sale, Samsung purchased a $12% stake in Chinastar, making it the 2nd largest shareholder behind TCL.  Given that the Suzhou plant had been producing ~25% of Samsung’s TV panel needs, the sale to Chinastar and the share purchase seemed to indicate that Samsung would become a substantial customer of TCL/Chinastar going forward.  TCL has been providing ~15% of Samsung’s TV panel needs through both the Suzhou plant and its other large panel LCD fabs, but recently there have been rumors that Samsung will begin to purchase OLED panels from Chinastar, expanding that relationship into the OLED space.
What makes this a bit unusual is that Samsung Display has been almost the sole OLED supplier to Samsung Electronics, with Chinese panel producer BOE (200725.CH) also supplying some OLED displays, so the idea that Samsung is diversifying its OLED production base again begs the question as to whether this indicates a change in the parent’s relationship with its affiliate.  In reality, this is not the first time there has been some tension between Samsung Display and Samsung Electronics. 
When Samsung Display disclosed that it was intending to end production of large panel LCDs and develop its quantum dot/OLED technology, the assumption was that this was being done under guidance from Samsung Electronics.  However during the early development of the QD/OLED process, Samsung Electronics’ management did not express the confidence in the project that one might have expected and at one point it was hinted that they might not be the primary customer for the new technology.  Further, while Samsung Display had decided to close its large panel LCD production fabs by the end of last year, a request from Samsung Electronics has pushed out the closing of some of that production to a point later this year.  While the large panel price increases that have occurred since last year have made large panel production profitable, SDC seems to have acquiesced to its parent’s wishes, while getting the short end of the stick as to OLED, should the rumors prove true.
We expect that while Chinastar is pushing to ramp up their OLED production Samsung will proceed cautiously, as it has with BOE, as consistency is a big issue with OLED production.  Chinastar has one Gen 6 OLED fab that been built out to full capacity (45,000 sheets/month) and has R&D and development lines for large panel production, although we have seen little indication that the large panel lines are in commercial production, so much depends on that single Gen 6 OLED fab.  TCL did indicate that in the 1st half of this year they produced more OLED displays than through all of 2020, and that they were now the 4th largest OLED producer on a global basis, which implies either they shipped more units than we expected in 2Q 4m), or the value of those shipments was higher than we expected, as based on our 2Q OLED unit volume estimates for Chinastar, they would be 5th, just a bit behind Visionox (002387.CH) when looking at composite numbers, but they are #4 when it comes to flexible OLED only, so credit where due.