China is not the only country that spends to enhance the infrastructure around its key technology sectors, but while the government of Korea has many programs that support the country’s vast technology businesses, Samsung Electronics (005930.KS), the country’s largest technology company, has been making some infrastructure investments in Korea since last year.  At roughly $200b US in sales, Samsung would rank just below Greece and Peru if it were a country, so not only can it make significant investments, but it can also protect the country from the ravages of trade conflicts, while helping itself, of course.
To those ends, Samsung embarked on a plan to make investments, some large and some small, in 9 South Korean companies that strangely were or are now part of the Samsung supply chain.  In many cases these companies are developing or supplying products or components that Samsung was purchasing from suppliers outside of the country and found themselves part of the inevitable trade and/or political conflicts that entangle companies on a daily basis, but were also key, primary, or sole suppliers.  By making such investments in local companies, Samsung has been laying the path to either creating a competitive pricing environment for out of country sources or to eliminate those entirely.
Samsung’s investment in public local companies over the last 14 months has totaled $234.4m US, but the size of the investments is far less important than the fact that it further cements these companies relationship with Samsung, who is not only a customer, but a source of information and expertise in a wide range of technologies.  One obvious one that we have noted in the past is Soulbrain (036830.KS), a company that is a producer of Hydrogen Fluoride used to etch semiconductors.  As Japan is the source for much of the world’s hydrogen Fluoride, a conflict between Japan and South Korea of WWII reparations caused some shortages in the material last year, and while some stability has been achieved, Samsung does not seem to be convinced that all is back to normal.  We have also noted in the past the dominance of Japan in the production of FMM (Fine Metal Masks), with Dai Nippon Screen (7912.JP) essentially owning the market.  Given that Samsung affiliate Samsung Display (pvt) would essentially close it doors if that supply line was damaged, they have included Fine Semitech (036810.KS) in their more recent investments to make sure that they can protect themselves from any disruption in essential components and materials. 

Silicon wafers are the foundation of the semiconductor business, with the supply/demand balance a major factor in chip level pricing, although to the average investor a wafer is a wafer, but there is a bit more nuance that can give a bit more understanding of how the semiconductor industry functions, and “The intelligent investor is a realist…” (B. Graham). 
Silicon wafers are grown from metallurgical grade polysilicon, which is produced by mixing silica (Silicon Dioxide – SiO2) with Carbon and heating to 1,900⁰C in an arc furnace and is then converted to TCS (Trichlorosilane – SiHCl3), a liquid and further refined through distillation.  The TCS is then converted to solid polysilicon through the Siemens process, and then reheated in a crucible (Czochralski Method).  A seed crystal is dipped into the melt and is slowly pulled from the liquid as the silicon grows around the seed.  By controlling the heat and ‘pull’ rate, the size of the silicon rod can be set.

After the crystal cools it is ground down to more exact tolerances and the top and bottom are trimmed and eventually returned to a subsequent melt.  The silicon ingot is then sliced into wafers with either a wire saw or a diamond blade, edges are defined, and the wafers are then ground or lapped to flatten the surface and then etched to remove any physical imperfections.  The wafers are polished using a colloidal silica slurry that includes not only the physical surface polishing, but a chemical reaction that oxidizes the wafer surface.  Then the wafers are cleaned using a number of chemicals, each to remove a specific type of contaminant.  While this is a very simple explanation of the wafer process, it is a complex process and many steps are done in various level clean rooms, so understanding the intricacy of the process gives a better understanding of how the wafer market operates.

On a general basis bigger is better with silicon wafers although production cost rise as they get larger, but at a lesser rate than the number of dies that can fit in the larger wafer[1].  That said, wafers are circular and die are usually square or rectangles so die that overlap the wafer edge must be compensated for by adding an edge exclusion metric and as die need space between them, room for ‘scribe lines’ and ‘singulation’ spacing must also be calculated so the die can be removed from the wafer individually.  But there is also a very important factor that has a far greater effect on wafer production and that is the fact that there are only a few companies that dominate the silicon wafer business, and their ability to anticipate industry demand makes all other wafer calculations almost immaterial.  But its Friday, the end of the summer, and the old clock on the wall says its time to take a walk outside before the leaves are off the trees, so we will continue with ‘Wafer Basics’ next week.  Stay tuned.

 

We noted on 7/15/21 in our note “Notebook Who’s Who” and again in our 7/30/21 note “OLED Laptops” that Samsung Display (pvt) was trying to develop further its OLED business by expanding RGB OLED production into notebook size panels at the beginning of this year.  Aside from the fact that Samsung Display is the leader in RGB OLED panel production, they have already established production capabilities for notebook panels, supplying to notebook leaders ASUS (2357.TT), Lenovo (992.HK), Dell (DELL) and parent Samsung Electronics (005930.KS) with two panel sizes (13.3” & 15.6”) while competitors LG Display (LPL), Everdisplay (688538.CH), and JOLED (pvt) are limited to single size panels.  As part of this expansion program, SDC has recently begun production of 14” OLED Notebook panels, which have already been allocated to new laptops from ASUS
The new 14” panels, which have a refresh rate of 90 Hz, are expected to appear in the recently announced Asus Zenbook, which will offer both a 4K and 2.8K option, starting at $1,400.  This is a big step up in price over the Asus Zenbook 13, which offers a 13.3” FHD OLED display option for ~$800, but the 90 Hz. refresh rate is a valuable on to gamers, who are the likely buyers, so we expect the higher price might not be as much of a stumbling block to gamers as it might be to the average consumer.  If there is some resistance to the higher price, the more budget oriented Asus line, the VivoBook, is expected to offer three size optional OLED screens starting at $750 and for those with deeper pockets and a flair for the dramatic can purchase the ZenBook Pro Duo 15 which has two OLED screens for a bit over $3,000.

But wait, there’s more…Asus’s competition is not to be vanquished when it comes to OLED laptops, with competitor Lenovo also announcing a number of OLED notebooks (SDC displays), including the Idea Pad Slim 7 Carbon, due next month that will also sport the SDC 14” OLED display, creating what the company says is the world’s lightest 14” laptop, coming in at just 2.37 lbs., albeit at a lower resolution than the Asus 14” offering, and for the very, very budget conscious, next month Lenovo is also offering the Chromebook Duet 5, an Chrome tablet with a detachable keyboard and an OLED display for only $430, likely the least expensive OLED notebook/tablet, at least for now.
All in, what it comes down to is that Samsung Display seems quite serious about living up to its own hype over laptop OLED displays and is following through on its commitment to expand offerings, and, as we mentioned in our July notes, is considering dedicating OLED capacity specifically for the production of RGB IT devices.  There has been speculation that Samsung Display will either convert existing fab space to Gen 6 OLED production or try to build out a new production facility using new technology that would allow it to produce RGB OLED panels in a Gen 8 environment*. 
The seemingly rapid adoption of this new panel size by primary producers gives more validity to either OLED expansion modality and will ramp up SDC’s ability to further dominate the RGB OLED space.  While much will depend on consumer acceptance of the intrinsic value of OLED over LCD at the notebook level, if nothing else, SDC seems to have stimulated the industry’s interest in larger RGB OLED sizes and unless there is some economic or technical impediment to using OLED in notebooks (which we do not expect), we see this as an open field for OLED expansion.  Expectations for OLED Notebook unit volumes and share are modest, with forecasts for this year between 3m and 4m units, or between 1.1% and 1.4% of total notebook shipments, and while up over 400% vs. the miniscule amounts produced last year, growth in 2022 is estimated to be between 55% and 80%, or between 5.6m and 6.5m units. 
These are paltry numbers when compared to unit volumes for RGB OLED smartphones, where expectations for OLED smartphone unit volumes are between 590m and 630m this year, however if we model the average size of an OLED notebook in 2021 as 14.5” (9:16 aspect ratio) and the average size of an OLED smartphone being 6.5” (9:19.5 aspect ratio), the 3.5m units expected this year would be the equivalent of just under 20m smartphones, and next year’s just over 6m OLED notebook units would be the equivalent of 34m OLED smartphones, assuming no average size growth for notebooks, which will likely not be the case.  As the growth in average smartphone area is close to a peak (excluding foldables), and the OLED notebook (and potentially monitor) sizes are still at the low end, that multiplier will continue to grow alongside the unit volumes, giving the RGB OLED notebook business a number of heady expansion years going forward.
*To learn more:
http://scmr-llc.com/blog/gen-8-rgb-oled-expands
http://scmr-llc.com/blog/samsung-display-the-big-oled-story-continues
http://scmr-llc.com/blog/samsung-oled-tv-update
​

China’s largest panel producer BOE (200725.CH) has been trying to break into the Apple (AAPL) iPhone OLED display supply chain since Apple began using OLED displays back in 2017, and while the Chinese trade press has applauded any rumors to the positive, citing China’s and BOE’s eventual dominance over South Korean OLED panel producers, there has been little to get excited about.  There have been reviews where Apple has requested samples from BOE to meet certain evaluation standards and production abilities, but Apple is a strict taskmaster when it comes to components and requires both tight specification control and yield compliance which heretofore has not been met.
We believe at times BOE has been able to provide small quantities of OLED displays, primarily for screen repair and replacements, but has not quite been able to meet Apple’s standards.  While likely embarrassing for BOE management, since the dance between the company and Apple has been reasonably public, we certainly give them credit for trying without hesitancy, especially knowing that even LG Display, second only to Samsung Display as Apple’s RGB OLED display supplier, saw its share of Apple’s OLED display business shrink after a problem with a limited number of LGD’s displays were made public.
There could be some celebrating at BOE headquarters in Beijing as it seems Apple has given BOE ‘conditional’ approval as an OLED supplier for the iPhone 13.  In this case conditional means that BOE has not yet met full compliance with Apple’s standards, but has a prescribed period during which to fix issues or to meet other Apple requirements in order to become a fully approved supplier.  We believe this is not the first time BOE has reached this stage with Apple, having failed to fully qualify previously, but at least they are back in the running once again and given the close similarity to the iPhone 12, which BOE has been approved to produce, this go round should be a bit easier than last year.
Regardless of whether BOE gets final approval we would expect volumes to be relatively small, likely less than 5m, potentially due to the fact that BOE would likely have to be separately qualified to produce LTPO OLED displays that are used in the two upper-tier iPhone models.  As Samsung Display is currently the only supplier of LTPO (VRR) OLED panels, both BOE and the more experienced LG Display would be looking to take share from SDC.  While LGD’s more extensive small panel OLED experience, we would expect that battle, should it occur next year, to be considerably more toward LGD’s favor.
All in, any progress Is a good thing for BOE on the Apple OLED front, given the typically high unit volumes and ‘once-a-year’ release process, but from Apple’s standpoint, BOE is the ideal leverage point to be used to squeeze out a few more pricing concessions from SDC and LGD.  We would expect Apple to push BOE with “if you were to get approval, we would need a better price”, and then take that back to SDC and LGD, and we would expect BOE to be a willing participant and one that would be willing to work for very tight margins in order to garner Apple’s favor.  But for BOE to become a high volume small panel OLED supplier to Apple, price is not the biggest factor and the massive amount of experience SDC has with small panel OLED will take years for BOE to develop while at the same time SDC and LGD keep pushing the OLED development cycle.  South Korea will inevitably lose small panel OLED share to China, but Chinese dominance is still a ways away as having the capacity to dominate is a paper metric while having the experience to dominate wins the game.

“I’m of the age where we didn’t have television as kids.  So when I saw my nieces and nephews watching Howdy Doody (1947), Kukla Fran and Ollie (1948), and so forth, I thought the world had gone mad” – Jack Nicholson.​

It seems that Mr. Nicholson was right, and with the announcement that LG Electronics (066570.KS) made yesterday, it seems we have delved even further into that madness.  LG announced that it was releasing its first DVLED (Direct View LED) ‘Extreme Home Cinema’ designed for high-end residential installations ‘based on the company’s years of building premium consumer electronics, keen understanding of affluent consumers, and deep expertise as an innovator of DVLED technologies.’  While ‘DVLED’ is LGE’s wording, it seems that this line is really an expansion of LGE’s Micro-LED products, which have been available to commercial rather than residential customers and would compete with a similar product from Samsung Electronics.
The difference between the LG system and the Samsung system  is primarily size, and while both systems are modular and therefore can be custom designed, Samsung’s “The Wall” Micro-LED system taps out at a mere 292 inches (diagonal) while the LG system can be configured to a mind-boggling 325”.  Using a 9:16 aspect ratio, the Samsung system would come to a display size of 9.9’ x 17.6’, or 25,027 in2, while the LG system comes to 13.25’ x 23.6’ or 45,136 in2 or 80.3% larger.  Even the smallest LG DVLED system which is a tiny 81”, can be configured as 2K, 4K, or 8K and even at 8K the LEDs are above 100um in size, which means both systems are not true Micro-LED products, especially as the LEDs can increase in size as the display gets larger, but they are still very expensive to produce, with the 81” 2K model costing ~$70,000 while the top of the line 325” 8K model clocks in at $1.7m, quite a bit for a home TV.
Aside from the promises of ‘exceptional brightness, years of residential lifespan, incredible viewing angles, and very high color gamut’, the organization in LG that is responsible for such systems (you cannot buy them at any store) not only includes installation from an LG field engineer and twice yearly ‘health check’ visits for three years along with a 3 year limited warranty, which LG estimates is worth ~$30,000 all told, but only applies to those not buying one of the 30 pre-configured packages.  LG goes as far as to explain that the high-end nature of the product is such that they do not ship the components in boxes or wood crates but only in LG branded flight cases, and while the Samsung system allows for multi-window viewing, meaning the display can break the display image into 8 segments, each with a different source, the LG system can window up to 20 sources, allowing the owner to watch multiple games at once while still keeping an eye on the baby and the front door.  If the baby wakes up from all the noise, just bring him/her in a put him/her next to a corner of the screen and put that screen segment on “Pete the Cat”!
Of course, the realities of these systems are such that only a rarefied few can afford the luxury of having such an entertainment devices but if even a few such systems are sold, it will continue to incentivize TV set producers to continue the development of Micro-LED technology and the costs will begin to decline.  We have covered many of the issues surrounding the ‘real’ commercialization of Micro-LED technology, and we would sure like to try the new systems, even for just a few days (weeks?), but in the long run we are still happy with the 55” TVs we have that seemed so large a year ago and now seem, well, a bit small….

Apple (AAPL) has announced the next iPhone (13) family, which at this point given the massive number of feature leaks, seems somewhat anti-climactic.  Further, the difference between last year’s models and this year’s is so small as to focus all attention on price, which is also identical to the previous year, using the same size memory configuration, so we see little to get excited about that has not already been the focus of innumerous notes, blogs, and stories in the trade press.  Rather than spend considerable time going over the features and hardware of the iPhone 13, we compare it to the iPhone 12 and highlight those metrics that differ in the table below.
Price is a factor with the iPhone 13 series as prices for all models have remained the same as last year’s models (initial prices) so we expect consumers will have to decide whether the style changes or modest feature upgrades make it worthwhile to buy into the iPhone 13 series or watch the iPhone 12’s all drop in price.  While we are personally not iPhone users, it seems that the iPhone 13 changes are rather nuanced and not worth paying full price for, but the real issue is the cost to Apple of the iPhone 13 series, and we are still a bit away from gathering any BOM information. 
That said, component costs have been rising in almost every category, and while Apple has the kind of leverage that can mitigate most of those increases, we have to expect at least some BOM cost creep.   Speculation  that Apple’s high volume purchases from TSM (TSM) at the 5nm node have culled better pricing across the board for the company, with prie increases of 3% to 4%, while others have seen increases between 10% and 20%.
If, in fact the margin is slightly lower on the iPhone 13 series, the question would be is it in line with similar BOM increases in the iPhone 12.  If the BOM for the iPhone 12 has moved at roughly the same amount over the last year than Apple needs to sell iPhone 13’s to maintain margins and the extra month of sales will certainly help, but if the BOM for the iPhone 12 has been stable, then the iPhone 12’s discounted pricing will be the key to maintaining stable y/y margins for the line.  In that case it would be less important which type of bologna you sell, as long as you sell more.
We do note that there has been considerable talk concerning Apple’s order levels for the iPhone 13, which are expected to be ~90m units by year-end.  At 20% above last year’s order rate, much has been made about the optimistic view that Apple has on the iPhone 13 family, however it seems there is more to the numbers.  As the announcement date for the iPhone 13 is ~1 month earlier than the iPhone 12, the number or pre-order and selling days would increase by ~36% while the orders have assumedly increased by 20%.  Assuming that the early weeks would see the highest order numbers, we set-up a sales schedule to make a more realistic comparison. 
Despite the difference in the starting dates, we decreased the starting (Day 1) unit sales by .1% each day from the pre-order date until the end of the year.  By adjusting that initial unit sales value, we were able to model theoretical weekly sales for both the iPhone 12 and the iPhone 13 to the previous year’s total (75m units) and expected total units sold in the initial year for each.  In order for the iPhone 13 series to meet its goal of 90m units this year, inclusive of the extra days, it would have to outsell the iPhone 12 by ~18.7% in its 1st week of sales, so we should be able to understand how close Apple will be to its goal for the iPhone 13 line as the estimated data becomes available.
All in, while Apple has made some positive changes this year, we see little to get excited about, other than the extended battery time.  Earlier in the year we had expected that Apple might lower the price of the iPhone 13 family, but the increasing component costs that have plagued the CE space seems to have dashed any hopes of same, although there is still some time for holiday discounting.  We believe it could be a bit of a struggle this year for Apple to meet its 90m unit goal without stepping up marketing spend.  Hopefully there will be a bigger increment to the feature set next year and a real reason to upgrade.  BTW, Apple has lowered the initial price of the iPhone 13 in China (higher than in the US) by ~$124 relative to last year’s model, so we do expect sales in China to be stronger this year, especially with Huawei (pvt) being almost out of the smartphone business.  Last year China was ~20% of Apple’s sales.

As we noted, Apple has maintained pricing for this year’s iPhone 13 family relative to last year, however in China the price of the new iPhone 13 series, while higher than in the US, is lower than the starting prices seen for the iPhone 12.  As can be seen in the table below base models of the iPhone 13 are less expensive than the iPhone 12 (original price) by between 3.2% and 13.3%, but still remain at a premium to US prices, which are between 13.5% and 21.5% less expensive.  Currency has played a part in the decrease, but Apple’s component cost leverage and a desire to stave off domestic competition are also factors.
Apple’s biggest competitors in China are from domestic brands, particularly Oppo (pvt), Vivo (pvt), and Xiaomi (1810.HK), whose share of 21.2%, 23.7%, and 17% all outperformed Apple’s 11.8% share in 2Q ’21.  That said, Apple will have at least a part of 3Q and all of 4Q to gain share now that the iPhone 13 has been released and we expect the lower price could attract a bit more attention, or at the least provide some competition against those Chinese domestic brands that have tried to move up to more premium oriented smartphone models, especially given the massive pressure put on Huawei by US trade sanctions.   While we expect Apple is looking to squeeze a few more share points out of China for the remainder of the year by lowering prices a bit, they will also likely slow those domestic brands from moving up the price curve at the same time.

Whenever we hear comments like this from panel producers, we get very nervous.  We don’t have full details, but we understand the “Whistle by the graveyard attitude” given how much panel prices have risen over the last year.  What we are speaking about is a quick clip from Taiwan’s AU Optronics (AUOTY) that fell under the headline “Taiwan Makers Increasingly Immune to Sharp TV Panel Price Falls” and while there was little other detail in the Digitimes article (unless you pay for a yearly subscription), part of the ‘premium content’ that we were allowed to see read as follows:
“Chances are slim for LCD TV panel prices to plunge to the cash cost level and Taiwan panel makers are now much more immune to the ongoing round of price falls amid changing industrial structures and their increasingly robust financial strength, according...”, and we assume more details are given as to why this cannot happen again, despite the fact that it happens regularly.  Based on estimates for TV panel prices in September, TV panel prices are down 16.7% from their peak in July of this year, but to put that into better perspective, looking at the low point for aggregate TV panel prices back in 2019, TV panel prices had risen 117% as of July.  By the end of September, if estimates are correct, that gain will have been cut to 80.2% and if the same rate of decline were used (8.9%) through year end, the gain from the 2019 low would be 36.3%.
Don’t get us wrong, that is still a very strong gain for TV panel prices over that period, but is there really anything that will protect panel producers from a continuing decline in TV panel prices?  In some instances, panel producers have lowered their exposure to TV panel production in lieu of more lucrative IT product production, but much of the demand for IT products has come from the lifestyle changes brought on by COVID-19, and while that seems to be a much more persistent problem than thought back just a few months ago, it will become diminished over time, leading to more normalized demand for notebooks, monitors, and tablets, while TV demand remains relatively weak.  With both major demand lines weakening, there is really little to prevent panel prices to decline back to cash costs and history proves that out.
We certainly do not rule out any of a number of panel pricing scenarios, but whenever folks in the industry say something cannot happen it makes the hair on the back of our neck’s stand up.  It is easy to be feel comfortable when profitability has filled a company’s coffers but it has no bearing on whether the next cycle will be a winning one for panel producers or a losing one.
 

The AR/VR market is growing and there are gobs of statistics and estimates to prove that fact, but even with gobs of data on how big the AR/VR market is expected to be, it needs to be validated by a true believer and not just any true believer, but one who carries significant weight.  While Samsung (005930.KS) is known to lead markets from a technological standpoint and has a vast customer base that loves to try new technologies and new features, when it comes to validating a technology there is none better than Apple (AAPL).  Apple is rarely first with technology advances, waiting to see what might fit into the basic Apple model of selling more stuff for higher prices, and even when they dip their toes in the waters of a new technology they tend to take it slower than most.  However, if they find that a technology allows them to sell more stuff, they go all in, and for the industry that can be game changing.
Recently it has been reported that Apple has requested samples of FMM (Fine Metal Masks) from a South Korean display equipment producer APS Holdings (054620.KS).  Masks like these are used to pattern OLED materials on various substrates to produce RGB OLED displays.  What makes these masks a bit different, aside from the fact that they are not produced by the industry leader Dai Nippon Screen (pvt), is that they have a resolution of 3,000 pixels/inch, which is 4.7x the highest ppi in the smartphone market, and almost 22 times the pixel density of a 32” 4K TV.  These masks are potentially to be used for small, high resolution displays such as those in VR headsets, and while we expect this is little more than one of Apple’s R&D projects, it underlies the industry’s need for a major CE player to get involved.
While big electronics names like Hewlett-Packard (HPE) and Sony (SNE), are players in the commercial VR space, the industry needs a well-known hardware name to gin up consumer interest in VR and there is none better than Apple for legitimizing a technology, even if it has been around for years.  In the case of the APS Masks, they are produced using laser drilling rather than the typical wet etch method, which allows the masks the higher resolution.  Further, most VR devices use white light that is colored by a color filter, similar to the way LG Display (LPL) produces OLED TVS, but just as it does in OLED TVs, the color filter reduces the amount of light the display is able to generate, so the ideal circumstance would be to produce true RGB patterning on a silicon substrate that would eliminate the need for the color filter and produce a brighter display.  If Apple finds the APS masks viable for production, it could set the tone for Apple to venture further into the world of commercial VR.
Before we all get re-excited about VR, we note that looking back to estimates made in 2017, expectations for VR unit volume were for ~100m units to be sold in 2021.  Current expectations are for 6.1m units this year so we are a bit cautious about how quickly even a CE behemoth like Apple could move the market, so we take forward VR estimates with a grain of salt, but hope that Apple does find a way to utilize the APS high-resolution technology that will benefit consumers while keeping us with at least one foot in reality.

China’s Xiaomi (1810.HK) has ‘announced’ a pair of smart glasses that are based on a single color (green) micro-LED display that according to the company, due to its ‘higher pixel density and longer lifespan while having a simpler structure” when compared to OLED.  Unfortunately the company also said that they have no plans to put them on sale but are looking at the device as a concept that shows how such AR devices might one day replace smartphones. 
The glasses themselves are quite normal looking but include a quad-core ARM (pvt) processor, Wi-Fi, Bluetooth, a 5MP camera and the tiny (2.4mm x 2.4mm) Micro-LED screen that is said to be able to generate 2m nits of brightness.  The glasses themselves are running on Android and therefore do not need to be paired with a phone and weigh only 51 grams (1.8 oz.), which is exceptional as they contain 497 components, sensors, and modules and a complex light guide and grating structure to focus images on your eye without the mirrors and lenses usually used

​The software is said to understand what notifications the average user wants to see without confusing or over-burdening and allows for direct calling through a microphone and speaker but most impressive is the device’s ability to translate a foreign language document through the camera and allow the user to see the translated image while speaking with a companion or meeting group.  Again we keep in mind that Xiaomi insists it has no plans to commercialize this product, but it seems as if they went to quite a bit of work and detail to make the devices as practical as possible.  Watch the video below:
https://youtu.be/I9bnmES7O74