​We have noted that expectations for Samsung Electronics’ (005930.KS) smartphone shipments have been declining as the company pulled back orders from component suppliers and OEMs.  Expectations for Samsung’s own smartphone production have also declined from the initial plan to produce 333m units, while shipping almost 300m, to shipping 260m units, less than the number shipped last year, although still better than 2020 when only 250m were shipped, according to South Korean press, although our 2020 number of 257.6 is a bit higher.
Samsung had expected to ship 60m units in the 1st quarter, and met that goal, but fell short of the 53m it expected in 2Q, shipping 48m units.  3Q internal expectations were for 47m units, and expectations are for 46m, which is expected to be met.  Samsung has yet to set a target for 4Q shipments, particularly as they will begin to produce phones for the Galaxy S23 to be released in 2023, but looking at just October/November expectations of 30m units, production estimates seem to be falling below last year’s total, although we see less of a shortfall (-2.8%) than others as we build in ~20m units for December production. 
Actual total units shipped will also include OEM units and channel inventory from 2021, but we expect that Samsung has cut back OEMs even more than it has cut back its own smartphone production as we expect internal margins are higher than those from OEMs.  All in, macro issues have affected almost all smartphone brands, with Apple (AAPL) expected to be the only major brand seeing growth this year, but we expect even iPhone shipments felt the sting of weak consumer confidence as we entered 3Q, which means the iPhone 14 needs to be enough to give consumers a reason to upgrade.  It is going to be a difficult 2H for all smartphone brands, with Apple still at risk for a bit of disappointment in 4Q in our view.

Micro-LED technology has been heralded as the eventual basis for a new display industry, citing high brightness, high contrast, and the potential for low cost production, and a number of leading CE companies have taken up the micro-LED flag, promoting the concept and funding component development and process research.  That said, there are a number of significant challenges that must be met before the technology can be applied to consumer devices in a cost-effective manner, and while micro-LED research continues to find point solutions to some of those problems, the segment remains in the R&D stage, despite the few ‘showpiece’ products that appear in the press.
Some of the issues concerning the cost structure of the micro-LED production process have to do with moving the vast number of ultra-small LED structures from a wafer to a substrate, but making that process even more complex is the necessity to evaluate each micro-LEDs characteristics before they are moved, without doing damage.  Once each of the almost 25m micro-LEDs needed for a 4K display have been characterized, which at the least would encompass brightness, color point, and electrical characteristics, after which those die that did not meet minimal standards would be marked as unusable and exempted from the transfer process.  This means that the transfer process, which in most cases needs to be done in groups, would have to be able to skip those micro-LEDs that do not meet standards, making bulk transfers like stamping, considerably more difficult, or more complex at the next stage, where those under=performing micro-LEDs would have to be removed and replaced.
This is just one area that keeps the commercialization of micro-LEDs a less than near-term realization, which makes us doubtful that recent estimates as to the growth of the micro-LED large display market are realistic..  The only factor in favor of such large incremental gains would be the extremely high cost of such devices, rather than high unit volumes, as the sale of units that cost upwards of $75,000 could boost micro-LED industry revenue with relatively few units, however that goes against what is necessary for the industry to grow as unit volume is necessary to support the development of a substantial micro-LED infrastructure.  While we present the data below, we have a less optimistic view of how quickly the micro-LED industry will generate revenue over the next few years, and while we would like to be proven wrong, we take the low road when it comes to the development of new technologies in the display space.  We believe it will happen, but perhaps not as quickly as Trendforce expects.

Over the last two years we have noted the somewhat unusual price volatility among raw materials used in consumer electronics and how they have affected component and device pricing.  During that period, many of the raw materials used in consumer electronics manufacturing and devices have increased in price, some to record levels, which in some cases has limited supply and in others just raised BOM costs.  While the effect has been pronounced up and down the CE supply chain, while some CE product categories able to keep pace with matching price increases while less price flexible product classes absorbing the increases, lowering margins and increasing inventory carrying costs.
Roughly 50% of a typical PC is made from various metals and in our 01/07/22 note we showed a table that noted the price increases of various metals used in consumer electronics during the 2021 year, and while the table does not represent a complete list of such metals, it does give some reference points as to how those same metals have performed so far this year.  The average increase in the prices of the metals in our list in 2021 was 79.67% while thus far in 2022 the same list has seen a decline of 3.6%, but what is more significant is that from the end of 2021 to the peak (March/April)) the list generated a gain of 31.3%, and since that peak the list has seen a 26.8% decline.
All in, things looked extremely bad in March/April, and while they are only modestly below last year’s closing prices, they are well below the peak.  We expect 3Q CE product production costs to have declined relative to 1Q, giving CE companies a small bit of breathing room as to holiday pricing, but there was considerable finished inventory in the channel for many products coming into the quarter, a portion of which carries some of the earlier high cost burden.  If brands are able to sell of a reasonable share of the excess inventory, some of the raw material price declines will begin to show toward the end of the year, especially if metal prices continue to decline.  While there are still many other pricing issues that remain, at least a number of raw material metal prices have begun to decline.  It’s a small point on which to hang a hat, but at least there is something to be optimistic about, which certainly was not the case earlier this year.   Selected charts are shown in Figure 1.

​Figure 1 - Metal pricing for Copper, Cobalt, Nickel, Gallium, Palladium, and Aluminum - Source: TradingEconomics

​Back in 2014 Mt. Gox (defunct) was a big deal, accounting for ~70% of bitcoin trading traffic, but the company was hacked and the company lost 850,00 bitcoin, which at the time was worth ~$570/BTC for a total loss of $484.5m in 2014 dollars.  The company declared bankruptcy after the incident, with the loss corresponding to ~7% of all the bitcoin in circulation at the time.  Last year the Tokyo District Court finalized a measure that would return the portion of the lost bitcoin that was able to be recovered to creditors, which is said to be 137,890 BTC, ~16.2% of what was stolen, but at the current price of bitcoin ($23535), the value of the recovered bitcoin is now $3.245b or 6.7x the original lost value.
So those who lost in the hack will recover what they lost and make a 570% profit, albeit having to wait 8 years to receive it, but the celebration is not felt in all quarters as the bitcoin market is concerned that the recipients of the recovered bitcoin will quickly take profits, with that volume (all) representing ~8% of the bitcoin daily volume, which would certainly have a deleterious effect on the market, even if it was for a short time.  The question of how creditors will respond to the ‘windfall’ is open to speculation, although the current thinking is mixed, albeit extremely source biased, with those in the industry thinking that creditors, having taken the hit years ago would be open to speculating further by not selling, while those outside of the industry seem to be leaning more toward the side of selling after having to wait 8 years and undergoing the pain and suffering the hack likely caused.  Either way t is an unusual ending to a bankruptcy and one rarely seen…

5G is a big topic for the CE space as it is cited as a driver for smartphone growth, a key to autonomous vehicle proliferations, a driver for AR/VR, and the basis for widespread IoT data collection, so it gets considerable ‘low-tech’ press coverage, especially when it becomes a political football for those who believe it makes a difference to the lives of everyday consumers whether the US is ahead of China in deployment, speed, or other nonsense, but there are some technical issues which make 5G different and more complex than 4G and are necessary to understand if one is to develop a realistic picture of 5G as it is deployed across the globe.
To begin with, as we have noted in the past, 5G performance is based on spectrum, which tends to be defined as three bands, with a number of gradations, but one of the most important characteristics of 5G is its coverage (area) is determined by the spectrum band, with lower frequencies covering a wider area, while higher frequency bands cover a smaller area.  Logic holds that the smart move would be to deploy low band spectrum to reduce the number of base stations needed for maximum coverage, however while the lower bands offer greater coverage, they operate at slower speeds, and one of the key selling points for 5G is its speed improvement over 4G.  This leads carriers to spend much capital in the lower bands, especially in the early years of deployment, with the future intent of adding higher band capacity after coverage of major population areas has been completed.
While this is a relatively successful strategy from the carriers standpoint, and certainly the most cost effective, it has a tendency to short-sell just the 5G characteristics that consumers want, higher speeds and low latency, and given the ever declining premiums carriers are able to charge for premium services, carriers will find that the competition will continue to push them toward higher 5G frequency bands to provide increasingly higher 5G connection speeds and lower latency, particularly for business customers. This leave carriers in the unenviable position of having to continually build out more base stations in order to maintain coverage at higher frequencies.
There is a solution however, and that is the use of what are called small cell base stations (about the size of a pizza box), as opposed to the ones we are more used to seeing on towers, which are called macro cell base stations (50 to 200 ft. high)(, and femto cells, a cell with the footprint of a paperback book.  While expensive macro cells give carriers early coverage, small cells allow higher frequencies to be used, increasing speed and reducing latency and can be easily situated on existing structures, such as light poles as we have noted previously.  At a cost of less than a macro cell, small cells can be deployed over the same area, enabling the carrier to offer subscribers higher speeds and lower latency, but we note that small cells need to connect to the core network through a dedicated link, which could be copper or fiber.  This can limit their ability to be located where coverage is needed and potentially increasing the operating cost of the small cell, but a number of other solutions exist for connecting small cells to the network core.
Wireless small cell backhaul options that allow small cells to communicate with the macro cell with the option to communicate to other small cells if that communication link is affected by weather.  This can be accomplished using Sub6, microwave, mmWave (5G high frequency) and satellite spectrum, each with its own positives, negatives, and best case applications[1] , while femtocells, which would typically be used for local applications such as malls, hotels, offices or homes, connect back through the internet, essentially sharing bandwidth and creating what are small ‘private networks’ rather than small cell networks, which are public.  Think of femto cells are wireless routers with limited coverage while small cells are more akin to roof top cell installations seen in towns and cities that create local hotspots.
Despite the relative immaturity of the 5G small cell market, the rapid increases seen in data traffic will push carriers to upgrade networks to 5G, and with a relatively limited number of potential macro cell sites and available 5G spectrum, small cell carrier deployments are expected to grow rapidly starting in late 2024 and 2025, while their use in industry for private networks has already begun, particularly as such locations already have wired backhaul options available, but such predictions have been made before, with small cell deployment of 4m small cell sites by 2026 predicted back in 2020.  Those numbers do not now look realistic but encouraging signs from US carriers, particularly Verizon (VZ), who is building out its mmWave Ultra-Wideband network using small cell technology, recently noting that it had added 15,000 additional 5G mmWave small cells on line, putting it ahead of its annual goal.  Small cell equipment suppliers are Samsung (005930.KS), Huawei (pvt), NEC (6701.JP), ZTE (763.HK), Ericsson (ERIC), Nokia (NOK), Airspan (MIMO), Commscope (COMM), and Comba Telecom (2342.HK), and a variety of smaller suppliers and component producers.


[1] Siddique, Uzma, et al. “Wireless Backhauling of 5G Small Cells: Challenges and Solution Approaches.” IEEE Wireless Communications, vol. 22, no. 5, 2015, pp. 22–31., https://doi.org/10.1109/mwc.2015.7306534.
 

Yesterday we noted that a number of regions and cities in China were facing an unprecedented heat wave that had caused local power authorities to cut production from August 15th to August 20th.  According to China’s largest panel producer BOE (BOE), the four display production lines that it runs in Sichuan province have been notified by the Sichuan Power Authority that “in order to ensure the safety of the power grid in Sichuan Province and ensure people’s livelihood enterprises need to make production adjustments.”  The company goes further stating that it will cooperate with people’s livelihood, security policies, and minimize electricity load, and flexibly arrange production operations, although the company will make ‘timely’ adjustments to the TFT-LCD production line, performing routine equipment maintenance.  However they also state that “Based on the above situation, after evaluation, this power cut will not have an impact on the company’s overall operating performance.
BOE’s fabs in Sichuan province are:

​Based on the fabs affected, potential production outages could represent 9.6% of BOE’s overall display capacity should they all be shut down, with 8.6% of the company’s LCD capacity and 55.2% of its OLED capacity more specifically.  We do not yet know which lines and by how much production cuts are being made, but the metrics here represent the worst case and are not actual estimates of actual production reductions.  We would expect that ongoing negotiations with the local power authority are continuing, as they are with HKC (248.HK) and other CE supply chain companies in the region, but we are a bit more focused on BOE considering its entry into the Apple (AAPL) OLED supply chain this year and the problems it has already faced in that regard.  As we noted yesterday, forecasts for Chengdu and the region call for continued above average heat through the 25th, so we expect that the original restriction end date of 8/20 will be extended for an extra few days.

Professional gaming is a lucrative business for the very top players, with team prizes in the millions, Twitch streaming, and ‘influencer’ contracts piling on the bucks, but numbers like those do not come to the average gamer, with mid-level pro gamers taking in between $12k and $60k/year on average, and while that certainly looks attractive to a 15 year old who has spent thousands of hours mastering a particular game or genre.  Once gamers move up to higher skill levels, looking for an edge becomes a bit of an obsession, and while the best gamers are skilled at what they do through days, weeks, and years of practice, there is an obsession with eking out every possible edge when it comes to hardware, and that means both at the processor level and at the monitor level.
Graphics cards are the point at which calculations for each pixel must be processed and rendered.  This includes color, brightness, contrast, texture, shadow, and a variety of other characteristics that make an image seem realistic, and with 4K as the standard resolution for almost anything gaming related, that means 8.294m pixels must be rendered by the graphics card’s GPU at least 60 times each second, with that information transmitted to Red, Green, and Blue sub-pixels individually for each pixel.  Aside from the fact that graphics cards are also used by crypto-currency miners to perform the millions of calculations necessary to generate bitcoin or other crypto-currencies, which keeps them in short supply, there is an intense competition between Nvidia (NVDA) and AMD (AMD) for supremacy in the graphics card market that pushes the envelope toward faster and more powerful graphics cards on an almost daily basis.
That said, none of that matters if you can’t see the game play accurately, and that is the ‘other’ gamer obsession, as gaming monitors have become a big enough category that display producers are designing panels specifically for the category, and monitor designers are following the trend by building gaming monitors that are focused on those characteristics that can give gamers even the slightest edge over their opponents.  Traditional monitors, such as generic desktop displays are typically 17” to 21.5” and designed to be accurate for typical office functions, while those in the graphic design field tend to use larger and higher quality monitors that more accurately represent color.  Gamers need more from their monitors, and that can mean bigger, higher resolution, and higher refresh rates, and in some cases a monitor that wraps around the gamer, helping peripheral vision and off-axis quality.
In years gone by gamers tried to use larger TV displays for gaming but found that they were unable to match the necessary resolution, refresh rates, and other characteristics that were necessary for gaming, and were forced to use monitors designed for graphics processing, a better but not ideal solution.  But as gaming became more popular and the COVID pandemic kept folks indoors, monitor manufacturers realized that they could design a premium priced monitor specifically for gamers that would not require major factory retooling or technology that was beyond the reach of most panel and monitor producers.  Now gaming monitors up to 65” have become available, for a price, with many selling out quickly upon release, despite their high cost, as gamers look to edge out the competition and keep themselves from becoming fatigued after hours of game play.
In that regard, Samsung (005930.KS) has just released pricing on its 55” Odyssey Ark 4K UHD Quantum Dot/Mini-LED curved gaming monitor (LS55BG970NNXGO), a 55” monster that can swivel between typical landscape mode and vertical mode, and has a refresh rate of 165Hz, according to Samsung, the highest for that size monitor available, along with a response time of 1ms.  At 1,000 nits, the display is considerably brighter than most, due to the Mini-LED array, and has a curvature of 1000R, which would be the curvature of a circle with a 39” radius, and includes Samsung’s gaming hub, which allows gamers to play through the cloud rather than through a dedicated game.  The gamer is also able to adjust the aspect ratio and screen size to best fit particular games while allowing for multiple image sources.  Of course this does not come cheap at $3,500 and will not by itself move the needle closer to the 20m gaming monitor units expected this year (up from 7.7m in 2019), but it sets the bar a bit higher for gaming monitors, a challenge that LG Electronics (066570.KS) will take up with an update to its gaming monitor line based on OLED displays, which it insists are the highest possible quality for gaming.  Their 48” version sells for $1,500 but has no curvature.  Let the games begin… or continue.

As skeletons are found as lake waters retreat across the US, things are just as bad in China where certain regions have been under high temperature alerts for over three weeks setting the tone for the most aggressive heat wave in 60 years.  With temperatures over 100⁰ conditions are taxing the Chinese electricity grid, the world’s largest (larger than the US, India, and Russia combined), and despite a 9.8% y/y increase in power production in 2021, consumption increased 10.6% over the same period and the grid has been faced with brown-outs and black-outs, especially during the most recent heat wave. With the heat wave causing drought conditions, tourists are faced with closures, such as the Chishui Waterfall in Guizhou, a 250 ft high and 260 ft wide attraction closed last weekend as the waterfall’s feeder river dried up 

​In order to conserve energy local governments have been issuing orders to shut down air conditioning systems in theaters and other businesses to funnel power to residential customers and given that this heat wave began earlier than the former record holder in 2013, meteorologists at the National Climate Center expect that this type of heat wave will become the ‘new normal’, starting earlier and lasting longer each year.  The current heat wave is expected to last another two weeks, making it the longest since record keeping began in 1961 
Power restrictions in some cities have gone further, limiting production or closing factories in a number of provinces, and while Foxconn (2354.TT) in Chengdu and Compal (2324.TT) in Chongqing say the restrictions have ‘limited impct’, an extended heat wave could pressure the supply chain for a number of CE companies, with concern that Apple’s (AAPL) expected October iPad update might be affected by the production restrictions, which were implemented yesterday and are initially expected to last until 8/20.  With South Korea is facing extreme flooding and China facing both power and drought issues, we have to consider the possibility that CE component and device pricing will remain higher than we might have expected, although trying to predict Mother Nature is a fool’s game.  Based on Figure 2 there is some hope toward the end of August…

As Russia continues it war against the Ukraine, a number of Chinese manufacturers have been forced into the spotlight with their products being mentioned by Russian military authorities, or being shown in compromising situations in the media.  Last month SMIC (688981.CH), China’s largest semiconductor foundry, answered investor questions about it ties with Russia stating that it “ …has never had customers in Russia, and remains in compliance”, in order to keep from generating more ill will with the US government, as the company is already on the trade restriction list limiting its ability to purchase advanced semiconductor tools and materials.. 
Chinese drone producer DJI (pvt) also has spent time trying to allay fears that its drones are being used by the Russian military after a statement of praise by a Russian official began circulating in social media concerning the company’s products.  Now, China’s Unitree Robotics (pvt), a producer of a $2,700 robotic ‘dog’, is trying to disarm the chatter that occurred when one of its robotic dogs was seen at a military hardware exhibition in Russia with a rocket launcher attached.  While the robotic dog was covered in black cloth, it was quite similar to the company’s household robot dog, the GO1, and while the Russian engineers who developed their implementation said it can be used in both civilian and wartime scenarios to deliver medications, they also noted it could be used to carry and fire weapons.
Boston Dynamics (pvt) has been building commercial quadruped robots since 2004, brothers of the dancing robots we have seen in a number of demos and segments on 20/20, but there is always the inevitable corruption of such devices for use in the military, singled out in a number of dystopian Sci-Fi thrillers that feature ‘Spots’ with weaponry and a mindless focus on killing hapless civilians.  While companies are very careful to disassociate themselves from the current worldwide bad guys and are hopefully careful not to sell directly to any military organization (other than our own) that might adapt them for warfare, it would be hard not to imagine that the human mind would not look at such devices as potential weapons, especially if they are able to be reverse engineered and easily copied.  Covering them with a black cloth (as shown in the first video below) does little to hide their origin and sets a depressing tone to what are certainly feats of engineering, so we also include the second video to put things in a better light…
https://youtu.be/WZlMq5LpN8Q
https://youtu.be/fn3KWM1kuAw
​

​As of today the US Department of Commerce, Bureau of Industry & Security, has implemented additional export control rules concerning semiconductors based on Gallium Oxide and diamond, and CAD software specifically designed for developing GAA (Gate-All-Around) FETs, along with certain technology associated with the production of gas turbine systems.  As we have noted previously, the US government has been in discussions with various government’s whose companies might be affected by this new ruling, particularly the government of the Netherlands, where EUV tool vendor ASML (ASML) is located.
The substance of the new rules are as follows:
GaO and diamond based  semiconductors are able to operate at higher temperatures and voltages as opposed to those based on Gallium Nitride or Silicon Carbide and are therefore more applicable to military applications.  Exports to countries that have been singled out by the US government as having aspirations in conflict with the US would now be required to be licensed. 
While there are no current devices using PGC (Pressure Gain Combustion), a process that increases combustion pressure while consuming the same amount of fuel as conventional gas turbine engines, the BIS has cited the large amount of research being done in the area.  Citing the use of this technology in missiles, rockets, and military engines, the new rule will require licensing for any technology utilizing PGC, when they might occur in the future. 
ECAD systems used to design IC layout and lithography artwork necessary for the production of semiconductor devices has already been included in the EAR rules however the new additions are explicit in that ECAD tools that are for the design of GAA devices, which is a process that is used for complex chip production at nodes below 5nm and allows for the reduction of gate control issues that increase as device size decreases.  The application of GAA technology allows for faster, more power efficient, and smaller devices, again with applications for the military being cited in the rules and the BIS is asking for comments from the semiconductor industry as to the scope of the new rule, asking for details as to a variety of design functions in order to make sure all of the possible GAA related CAD design software modules are covered.  In order to receive these external suggestions, the implementation of the GAA rule is delayed for 60 days and items that have been previously licensed and are on loading docks or enroute are able to proceed as long as they are received before November 14.
At least on the surface the new rules would not add to the limitations already placed on ASML, given that the government of the Netherlands has not allowed the export of EUV tools to Chinese entities at the behest of the US government, while still allowing export of DUV tools that are able to produce at larger nodes.  EDA software vendors face a more complex challenge as the new rules are still broad enough that EDA companies might find that their internal thoughts on the application of certain modules might differ with those of the government, triggering a conflict as to whether they can be sold to those entities that fall under EAR guidelines, which is likely what much of the public commentary concerning the new rules will encompass.  Depending on the government’s ultimate decisions, the rule on EDA restrictions can be narrow or broad, with key EDA design firms such as Synopsys (SNPS) and Cadence (CDNS) generating 16.8% and 13.2% of revenue from sales to China in the most recent quarter, the most focused on the change, although the specifics as to GAA design revenue regional sales are not specified.