On 6/7/22 we noted that Austin Li Jiaqi, aka the ‘Lipstick King’, an unbelievably popular influencer in China saw his broadcast on Taobao Live go blank after he brought out a plate of Viennetta ice cream with Oreos and chocolate, which some say looked like a military tank.  While Austin noted in a post that there had been some technical difficulties, he did not appear two days later for his next show and has disappeared for over three months.  There has been considerable speculation on Chinese social media concerning the reason for the cancelled broadcast and his disappearance, with the most popular explanation being that the ice cream looked too much like a reference to Tiananmen Square, a topic that is forbidden in any form.
It seems that with little fanfare the Lipstick King returned to his live streaming platform on Tuesday at 7PM, showing a variety of cosmetics, skincare products, and underwear.  According to media statistics, the show began with ~100,000 viewers but an hour later was topping 25m, with over 50m by 9PM.  Given his high profile and his disappearance, most of the products he was hawking sold out immediately causing him to ask for both buyers and sellers to remain calm, asking viewers not to buy just to support his program but only if the product is needed, an unusual statement for an influencer.
All of that said, he was not the only high-level influencer to disappear since last year when the Chinese government began investigations into ‘non-state’ influencers, citing potential irregularities in content and taxation.  China’s most bankable influencer Viya, disappeared after she was handed a $201m fine for tax evasion last December and has yet to reappear.  Who says being an influencer is an easy job!

​$5.15m to move the battery technology it has developed from the lab to commercial production over the next few years.  While there are literally hundreds of companies developing automotive batteries to feed the growing hybrid and electric automotive industries, there is a bit more promise in the technology developed here than in standard lithium ion batteries that are under development currently. 
While still in lad scale, the technology, which uses lithium itself, rather than lithium ion material to create an electrical charge, is able to last through 5,000 to 10,000 charge cycles as opposed to typical lithium based batteries which last between 2,000 and 3,000 charging cycles.  Given that 37% of the US population does not have a garage in which to charge an electric vehicle, the industry must rely on external charging stations, which take hours for a full charge. 
The prototype of Adden Energy’s solid state lithium battery takes only a few minutes to charge, essentially the time it would take for a fill up at a typical fossil-fuel gas station.  Lithium metal battery technology has been and continues to be a subject of considerable research given it superior energy density and capacity, but there is a problem with the metal as it is repeatedly charged.  When metallic lithium is charged over time it forms dendrites, small structures that ‘grow’ from the anode of the battery to the cathode, essentially shorting out the device or even causing it to overheat. 
While not stopping the growth of dendrites, Adden researchers have found a way to keep them from growing by inserting less stable formulations of lithium between stable versions, sort of adding condiments to a sndwich, and while this seems counterintuitive, it makes the entire package more stable.  The dendrites from the stable lithium (aka LPSCl) still grow, even though the next layer made of graphite, but are unable to grow through the less stable lithium electrolyte and do not reach the cathode and short the battery.  Of course, there is considerable work to be done to scale the process to the larger sizes needed for commercialization although thus far no scaling issues have been found and the recent funding will give the company the financing to begin the process, which will hopefully lead to the refinement of the process and a step forward for automotive battery technology.

​Japan’s Sharp Corp (6753.JP) has had an ongoing relationship with Taiwan based Foxconn (2354.TT) since August of 2016 when Foxconn purchased a 66% stake in the ailing company for ~$3.43b, a bit under $1b less than Foxconn’s original offer, as Sharp’s financials revealed some inconsistencies.  This came about a year after Sharp sold the rights to its US brand and Mexican assembly factory to Chinese TV brand Hisense (000921.CH), a deal that was later seen as a mistake and a thorn in the side of the company.  Much of the impetus behind Foxconn's original stake was the company’s Gen 10 LCD fab and Sharp’s leadership in IGZO TFT technology, which was relatively new at the time and could be shared with Foxconn’s other LCD assets, primarily Innolux (3481.TT), which it purchased in 2009.
Over the last few days Foxconn affiliates have purchased 51m shares of Sharp (500k voting rights) raising the company’s stake from 46.85% to over 50%, giving the company controlling interest once again.  We believe the purchasing entity was a Cayman Island company known as SIO International Holdings (pvt), a shell corporation created by then Foxconn chairman Terry Gou, which also held title to the company’s Wisconsin ‘Super Factory’ that was touted by former President Trump as the ‘Eighth Wonder of the World’ at the groundbreaking.  Most of the site remains idle and the 13,000 jobs said to be created by the facility, which was to be the first LCD TV panel production fab in the US, never happened.
It is hard to know for certain what is behind the increased Foxconn stake in Sharp, other than the thought that things in both the CE space and the display space are at low points, along with Sharp’s stock price, which is close to the low of the last 20+ years.  Gou, while vowing to give away 90% of his fortune away, has a net worth of $6.3b, so tossing a few NT$ around bargain hunting Sharp is like  every day folk looking to save a few bucks with a 2 for 1 coupon…   
LG Display Waiting for the Apple OK for LTPO
According to South Korean trade press, LG Display (LPL) has submitted new batches of LTPO (Low Temperature Poly Oxide) displays for Apple’s (AAPL) qualification.  If approved, the company will begin to produce such displays for the iPhone 14 Pro and Pro Max, whose displays are currently being produced by Samsung Display (pvt).  The most recent qualification process follows a previous submission which did not meet Apple’s standards in reference to encapsulation and the camera cut-out and is expected to take about two weeks.  If the most recent displays are not qualified it is expected to take another month before an updated batch can complete the qualification process.
Samsung Display, as we previously noted, has been ordering additional production equipment, likely under the idea that LGD will be a smaller supplier than originally planned due to the potentially late start.  SDC has been producing LTPO displays for its customers since 2020 and is the only supplier of same to Apple.  LG Display and China’s BOE (200725.CH) supply LTPS OLED displays to Apple for the iPhone 14 and 14+, with BOE the most recent addition to this exclusive roster.  Apple’s strict requirements for displays, including the display technology and the ability to meet production yield requirements have been a problem for BOE in the past, as well as LG Display and even Samsung Display at times.

Smartphone shipments in China in July declined 28.9% m/m to 19.9m units, down 30.6% y/y against a typical July (5 year average) of -1.3% m/m.  While not the lowest shipment month this year, July was a bit disappointing after strong June shipments which showed the first month of positive y/y shipments this year.  On a YTD basis Shipments of smartphones in China this year are down 23.02% y/y.  5G smartphone shipments fell 36.1% m/m, also down 35.6% y/y, with 5G share of total smartphones shipped falling to 73.9%, the lowest share this year, while domestic brand shipments on the Mainland fell 25.3% m/m and fell 29.3% y/y in July, while domestic brands saw a 92.0% share of the Chinese market, the highest share in almost a year.  We expect some of that might have to do with the then pending Apple (AAPL) iPhone 14 family release, but on a general basis it would seem Chinese smartphone buyers stuck with domestic brands during lockdowns.  While we do not have sales value data yet, we expect the focus was on less expensive models as the global economic situation deteriorated and COVID lockdowns began to have a more serious economic impact on a more local basis.
All in it was a particularly bad month for Chinese smartphone shipments and with the exception of a shipment bounce in June, the year has deteriorated from the very strong January that we had hoped would set the tone for the year, or at least would have indicated that the 2022 was going to see Chinese domestic shipment improvement.  As the year progressed, with both the continuing stringent COVID lockdowns that the Chinese government continues to use to minimize the spread of COVID variants and the effects of increasing inflation across the globe, our optimistic view of Chinese smartphone shipments has deteriorated.  In February that optimism generated a full year estimate of Chinese smartphone shipments of 381.24m units, up 8.7% y/y, which we admit seems more that a Chinese state-propaganda piece than a realistic estimate, but at the time COVID was waning (China was averaging ~100 new cases a day) and inflation was less than 1% domestically, while January smartphone shipments in China remained strong after a strong December ’21.
So, while we can make a myriad of excuses as to why we expected a stronger year of smartphone shipments in China, we are bringing down estimates to better reflect the past few months and our expectations for the remainder of the year.  Statistically, based on 5 year averages of m/m shipments for the remainder of the year the estimate should be 255.13m units down 27.2% y/y however we expect that is a bit more negative than actual results, so on a slightly better than statistically average year, we estimate shipments to be 260.5m units, down 25.7% y/y and the worst year since 2012, which is the earliest data we have.  The good news would be that Chinese New Year 2023 comes a bit early (1/22/23) so there is a chance that discounting in November and December to clear older inventory will take place, moving shipments above seasonal norms, but it is hard to find scenarios that would boost shipments much further than our new estimate unless the government changes its attitude toward COVID lockdowns or the Chinese economy takes a sharp upward turn, neither of which seem particularly likely.
As a consequence of our substantial reduction in full year Chinese smartphone shipments, we also have to revise our estimates for 5G shipments in China.  Based on an average share of smartphone shipments of 80.5%, we now estimate that 5G smartphone shipments will total 210m units, the first down year since 5G smartphones were offered in China.  There is a bit of possible upside as 5G share of new models offered for the remainder of the year should increase from the unusually low share in July, but the increment is still rather small.

The concept behind image sensors is a simple one; a light wave hits a photodiode that converts the light to an electrical signal.  The photodiode is a semiconductor device similar to a solar cell and by changing the material from which it is made, it can be tailored to be sensitive to visible light, UV light, or infra-red,  and can be used in many applications in consumer electronics although the most visible is use in digital cameras, either as standalone devices or as part of smartphones or similar devices, which use large arrays of photodiodes to create high resolution image sensor based cameras.  Once you get further than the basic concept behind image sensors the technology becomes complicated and beyond the reach of the average investor, however the important characteristics of image sensors are far less technology driven as they are application driven.

While smartphone shipments grew rapidly between 2012 and 2015, image sensor sales grew more modestly as the number of main cameras in smartphones during that period stayed relatively the same, typically one per phone, but that began to change in 2015/2016 as brands began to add camera to differentiate high-end models from low-end models (see Figure 4).  At the same time the cost of image sensors decreased as volumes increased, keeping total image sensor revenue relatively flat through 2019.  The COVID pandemic had only a minor effect on smartphone shipments in 2020, but competition among image sensor producers pushed down industry sales in 2021and brands began to respond by reducing the number of cameras on flagship models back to a more reasonable 3 while improving the camera quality.
This offset the reduced camera count and allowed image sensor sales to increase in 2021.  Unfortunately  the impact of inflation, the war in the Ukraine, and a generally more hesitant consumer is likely to take a toll on image sensor sales this year, as both smartphone shipments decline and consumers look for smartphone bargains, which translates into mid-range phones which tend to have a smaller number of camera and ones that carry a smaller premium.  This will bring image sensor industry sales down y/y for the first time since we have been tracking the data, albeit after a strong 2021, with estimates for 2023 showing y/y growth, but still under trend line (see Figure 3).
This would indicate that the image sensor market is maturing and that it will track more closely to its underlying applications.  The trend of increasing the number of cameras in smartphones seems to have ended, while resolution and quality improvements continue, which gives us confidence that image senor sales will grow, but likely at a slower pace than in the past.  With smartphones still the largest image sensor application (64% share last year), much will depend on consumer’s perception of whether continuing camera/image sensor improvements are worth a premium, and we would expect that to be a relatively tough sell in the current environment, which leads us to feel that 2023 growth estimates should remain modest, as there do not seem to be any applications that are growing share rapidly.
We note that it has been difficult over the last few years to quantify image sensor application share growth.  In Figure 5 we show application share in 2015 and in 2021 while the middle column shows the forecasts for 2022 that were made back in 2015, which predicted smartphone share to decline to 48% from 70% during that 6 year period, a 31.4% decline, while the actual (using 2021 actuals) was a decline of 8.6% and while the automotive sector was expected to see 367% share growth back in 2015, it grew at a lesser (167%) rate, albeit substantial.  All in, we believe the image sensor market will continue to grow but will be more dependent on the growth of underlying applications and the macro environment than in the past, with producers looking for less concentrated markets where premiums remain high. 
While we expect smartphones and related consumer product share will remain high, we expect to see the use of image sensors in industrial applications grow more rapidly as production environments utilize high-speed FWA systems and IoT to increase yield.  Such changes do not happen overnight, but increased data collection across the factory is a given and image sensors are able to provide extremely rich data.  As AI systems become more sophisticated facial recognition based security systems will become more commonplace, with image sensors again the source of that data, leaving an open ended path toward image sensor growth over the long-term.  The road will be a bit bumpier than it has been in the past, but the necessity for visual, UV, or IR data will continue to increase, with image sensors as the collectors of that data.
 
 
 
 

The White House issued an executive order today that references the Committee on Foreign Investment in the US (CFIUS) review of transactions between US companies and foreign, specifically those transactions that involve the purchase of company assets and IP that might be considered sensitive to US security or its place in the world economy.  As ‘foreign adversaries’ are the focus, which translates to China, Russia, Iran, and a few others, what the order is considering is the potential for transactions that could affect the US supply chain, essentially those that could allow a foreign power to place restrictions on or limit completely access to assets that the US deems necessary.
Noted are technology, which certainly has been a focus, manufacturing, services, and mineral resources, and how they relate to national security, with the subset of microelectronics, AI, biotechnology and bio-manufacturing, quantum computing, advanced clean energy (including battery, storage and hydrogen), critical materials such as Lithium and rare earths, and food security.  While the EO does not change the committee’s powers, the order reinforces the mandate of the committee to protect the US when it comes to transactions by said ‘foreign adversaries’ or 3rd parties that might give access to those adversaries.  It further warned of the potential for ‘incremental investments’ that, over time, could lead to control over a sector or technology, essentially a series of transactions that might look disparate individually but could, in the aggregate, cause the US to lose control over resources or technological leadership.
Outside of the reminders on the risk of transactions made by foreign entities, the EO also focuses on cybersecurity risks, that is, allowing foreign entities access to systems and data that could be used maliciously.  US elections were referenced, as was critical infrastructure and defense, including the personal data of US citizens, especially identification and health data, citing the potential for the use of that data to target various US population sub-sectors, tacitly referring to data that would help a foreign entity to influence or incite a particular group that it believes would be more receptive to such disruptive influences.
The EO doesn’t actually change anything but it paints a more aggressive picture of the current administrations face on China as the mid-term elections approach, while making almost any transaction that falls to CFIUS one in which they could cite a threat to national security.  Should a Chinese entity want to buy a US farming firm, CFIUS could cite a potential threat to the US food supply years down the road as a reason to disallow, and any transaction that involves personal data could be nixed under the increased focus on data protection.  Unfortunate as these ‘reminders’ tighten the potential reign of CFIUS, it also increases the number of transactions that can be rejected, which will likely cause foreign entities to take less interest in purchasing US companies and could result in additional trade sanctions by those entities. China recently banned the purchase of certain medical equipment made outside of the Mainland and has at times restricted the export of even more basic medical supplies in response to increasing US trade sanctions or similar issues.  While the EO will not actually force a change, it is another public slap that will likely elicit a response, making the tightrope that we walk with China that much thinner.

At the end of last year notebook brands were saying that a weakening in consumer demand for notebooks would be offset by corporate notebook demand as workers returned to offices as COVID waned.  Based on the fact that demand during the pandemic was so far out of line with normal notebook shipment levels, we found it hard to imagine that like the TV set business, demand would return to pre-pandemic levels despite the location shift, especially as many workers had already upgraded during 2020 and 2021.
It turns out we were right as to general notebook demand while inflation pushed notebook shipments even further down than we had expected.  2Q aggregated notebook shipments were down 32.8% q/q and down 35.2% y/y, with shipments less than 1% above the low point seen when COVID became a global crisis and below pre-pandemic averages.  We expect a bit of a recovery during the holiday season but 3Q notebook shipments are typically up 8.7% q/q and 4Q up 6.4%.  If we plug in those numbers to the 2Q data, 2022 shipments would be 252.5m units, down 26.0% y/y and lower than either of the two years before the pandemic, and would be disastrous for notebook vendors and brands. 
This would lead us to make the assumption that 3Q will see a more substantial q/q shipment recovery although July and August were likely less than spectacular.  We expect inventory levels are being worked down, leading to lower cost inventory as panel prices decline, which should mean more substantial discounting.  However, since much of 3Q has already passed, we would see much of that potential discounting in 4Q rather than 3Q, which would help to boost the full year number a bit but still leads us to only a marginally better 3Q shipment number.  All in it is going to continue to be a very difficult year for notebook brands.

​The Chinese government, particularly provincial and city governments in China, are maligned for providing what seems like unlimited funding for 5G projects, particularly infrastructure related funding that results in statistics that can show that China is competing in or leading global markets, and there are few countries that have a more positive attitude toward growth.  However, this also leads to some bitterness given that smaller or less financially viable countries malign China as the funding removes some of the growth barriers that limit publicly or privately funded companies that have to prove themselves a bit before early funding or must live or die in the public markets without outside support..  We admit that our attitude toward China’s growth in the display space is colored a bit by the fact that the industry was, and still is, funded by state and local governments, so we poked around to see what the US has to offer in the way of subsidies for broadband and we were surprised at the number of broadband funding projects and their size.
Here are a few[1]:
Infrastructure Investment & Jobs Act – 11/2021 - $65b for Broadband – “Access to affordable, reliable, high-speed broadband is essential to full participation in modern life in the United States.  The persistent ``digital divide'' in the United States is a barrier to the economic competitiveness of the United States and equitable distribution of essential public services, including health care and education.  The digital divide disproportionately affects communities of color, lower-income areas, and rural areas, and the benefits of broadband should be broadly enjoyed by all.  In many communities across the country, increased competition among broadband providers has the potential to offer consumers more affordable, high-quality options for broadband service”.
 
The plan funds projects that provide broadband service to locations that have no service or speeds less than 25MBs.  $100m is allocated to each state, including the US Virgin Islands, Guam, Samoa, and the Mariana Islands, with the remainder allocated on an application basis.  No more than 5% of the funds can go to planning and no more than 2% for grant administration.  All project requests must show a 5 year plan for deployment to be considered.
 
Broadband Equity, Access & Deployment Program (BEAD) - $42.45b for new Broadband equity – Each of the 50 states receive an initial allocation of $100m with the remaining funding being distributed based on coverage maps to be provided by the FCC.  Each state must submits a 5 year plan including prioritized locations.  State grants require that the applicants offer at least 100MBs speeds and is open to cooperatives, non-profits, public/private partnerships, private entities, utilities and local governments.  The program began in January of this year and by May 32 states had requested program participation.
Affordable Connectivity Program aka Emergency Broadband Benefit Program – Currently $14b – Allocates a $30 credit to qualifying families toward their internet service and $75 for those on tribal lands.  Eligible households can also receive a one-time discount of $100 toward the purchase of a laptop, desktop computer, or tablet if they contribute between $10 and $50 toward the purchase.  Eligible households must have an income at or below 200% of Federal Poverty Guidelines or participate in USDA breakfast/lunch program, SNAP, Medicaid, WIC, public housing, or are on a veteran pension. Under this program an additional $7.75b has been set aside for additional smaller projects for distance learning, telemedicine, and ‘middle-mile’ infrastructure.   In June of this year there were over 12.2m participants in the program.
American Rescue Plan Act of 2021 - $350b for all projects – States decide how much goes to broadband.  Virginia allocated $700m toward providing universal broadband access across the state, while California allocated $3 toward a $6b commitment to expand middle and last mile connections.  Late last year the US Department of the Treasury issued guidance as to how states should use money from the $10b Capital Projects Fund that was created by the ARPA, emphasizing its use for investments in fiber technology, broadband networks owned or operated by local governments or non-profits.  The awards for Louisiana, New Hampshire, Virginia and West Virginia total $582.8 million and will cover projects designed to deliver connectivity to 200,373 locations.  Louisiana has qualifying broadband coverage across only 75% of the state and the new funding will serve 88,500 locations while the funding for West Virgina will cover 20,000 locations and New Hampshire’s allocation will cover 15,000 unserved locations.  Virginia was approved to receive the entirety of its $219.8 million Capital Projects Fund allotment, which will allow it to deliver broadband to an estimated 76,873 locations.
Emergency Connectivity Fund - $7.2B – Administered by the FCC, this fund is to help schools and libraries purchase broadband devices such as routers, tablets, and hotspots or add connectivity if it is not currently available.  By May of this year, about 9 months since the initial program funding, there was only $1.5b remaining as 7,369 schools or school districts, 628 libraries and 133 related groups had applied for grants.
Of course even the most abbreviated summary of broadband funding in the US would not be complete without the December 2020 Consolidated Appropriations Act (aka Huawei (pvt) ‘Rip & Replace’), a $5b program that was the original funding for the Emergency Broadband Benefits Program and allocated $1.9b to carry out the ‘Secure & Trusted Communication Networks Act of 2019 which required carriers to remove network equipment from Huawei and ZTE (000063.CH).  By February of this year the FCC had received over $5.6b in reimbursement requests for the replacement program and the FCC indicated it will ‘prioritize’ the funding starting with service providers with 2m customers or less (Priority 1) and then move to public or private educational institutions (Priority 2), although the FCC indicated that all priority 1 requests must be covered before funds are allocated to priority 2 and lower priority requests, which means that the FCC will head back to Congress for more funding.
These are only a few of the many broadband funding programs available in the US, others like the Rural Digital Opportunity Fund ($20.4b), the USDA’s Broadband Reconnect Program ($1.5b), and a myriad of smaller ones are or have been allocating capital toward expanding the US broadband network to potential users that are outside of typical coverage zones.  In most cases these are not 5G related and based on fiber, although speed is the requirement regardless of the connection mode, so that infrastructure would be up to the carrier or government agency running the project.  All 50 states have applied for funding from at least one program although we note that some of the states have allocated funding toward creating broadband ‘offices’ as part of the state government, so not all the dollars will wind up in the ground.  All in, after even this quick look, we look back at China’s 5G funding with a slightly less biased view given the extent of funding for just these few programs.  As to whether the dollars will be spent wisely, that is fodder for another note but China is now facing a number of internal investigations as to where some of its funding programs actually went, so we would expect a similar situation here down the road if history is any teacher[2]


[1] Thanks to Diana Goovaerts @ Fierce Wireless for building the dataset.

[2] As far back as the Andrew Jackson administration (1829) political monetary corruption was a hallmark of US politics.  The 1st we could find was Samuel Swartwout, a presidential appointee to the New York City Collector’s Office, who embezzled $1.25m in customs receipts to purchase land.  He fled to Europe before prosecution.  There were many earlier scandals but none involving the theft of funds.

There are few winners in the trade wars between the US and China, with the Chinese semiconductor industry now severely limited as to its access to what is basic semiconductor technology, along with existing restrictions on advanced tools.  The recent round of restrictions, which restrict IC design software were another blow to China's chi’ advancement, however the even more recent ban by the US government on the sale of NVidia’s (NVDA) A100 and H100 to firms in China, will put a dent on China’s burgeoning AI project portfolio, and foster a growing fear in China’s AI community that restrictions will be placed on all NVidia products, which are the heart of most AI learning systems.
 
Nvidia owns almost the entire GPGPU (General Purpose Graphics Processing Unit) market, and while these devices are the heart of computer gaming systems, they are also contain a GPU that is able to perform ultra-high speed mathematical transformations that are used to mine bitcoin.  That said, more importantly is their use in systems that ‘teach’ AI devices by processing large datasets that allow for various types of matching or recognition by the AI.  As the larger the dataset, the more ‘examples’ the AI can learn from, the necessity for high speed is absolutely essential, with the Nvidia A100 delivering 312 TFLOPS (TeraFloating Point Operations per Second or 312 million decimal based simple math functions/second).
While the ban does not go into effect for US companies with data centers in China until March of next year, license requirements for direct sales to Chinese firms begins immediately.
 
While the collateral damage to Nvidia is substantial, AMD (AMD) who also faces some restrictions on its high-end GPUs says the impact will be small, but while the bans will put a dent in US company sales, it will limit China’s ability to grow its AI development, a key piece of Chinese technology strategy.  However there is a silver lining for one company, albeit not a US one, and that is Shanghai Tainshu Zhixin Semiconductor (pvt) aka Iluvatar CoreX, the only company in China able to produce a GPU that compares to the Nvidia or AMD CPUs.  The company was formed in 2013 as a joint venture between the Shanghai government and Taiwan based Via Technologies (2388.TT).  The company has raised $334m in two rounds, the most recent being $149m raised in July of this year (previous was 3.2021).  The company has developed a high speed GPU that is specifically designed as an AI ‘training’ processor and does not contain the additional hardware for gaming that is found in the Nvidia GPU system.
 
The Tiangai 100 chip, Iluvar’s first release took about four years  to design and produce  and is said to have received ~$33m in orders since its announcement at the World AI conference, has a performance rating of 147 TFLOPS (company), but things have not been all that pretty for the company up until the recent announcement.  It seems the company’s chairman, Diao Shijing, previously the co-president of Tsinghua Unigroup’s (state) semiconductor business and executive director of YMTC (pvt) (see our note of 9/12/22), have been under investigation by the Chinese government and as of the middle of last month were still ‘missing’.  The investigation centers around the bankruptcy of Tsinghua Unigroup, a company in which Taiwan based Foxconn (2354.TT) is hoping to make an $800m investment, although that investment is being investigated by the Taiwanese government due to Tsinghua’s ties to the Chinese military.
 
All in, while there continues to be considerable collateral damage on both sides as the US/China trade war continues, China continues to fund almost anything that is semiconductor related, and while still struggling under some of the more rigorous US semiconductor restrictions, seems to be making at least a bit of progress toward trying to reduce the semiconductor technology gap with the US.  The Chinese government’s strategy of developing a technological industry by funding everything and hoping that some of the spaghetti sticks to the wall can be a messy one, as much of the capital is loosely supervised, but that strategy worked with LEDs and LCD displays, so we expect more funding and a few more ‘disappearing’ semiconductor executives over the next few years.  While South Korean panel producers saw the handwriting on the wall for LCDs years ago and made the transition to OLED, ceding LCD to China, we doubt the US has the mindset to even imagine that China could one day become an equal in the semiconductor space and will fight such a battle to the last man or woman, cutting the tentacles from any Chinese semiconductor successes with new sanctions, like a Sushi chef preparing Tako.
 

​Speaking at a conference yesterday Corning (GLW) management indicated that while all other segments are operating in line with 3Q guidance, the display business is not and is expected to come in at or below the previous guidance.  In order to put that in perspective, here are some notes on 2Q Display segment performance and 3Q guidance:
2Q Display Performance

• Display Sales $878m – Down 8.4% q/q – Down 6.5% y/y
• Display Segment represents 24.3% of reported sales & 23.3% of core sales
• Display Net Income $228m Down 3.4% q/q – Down 8.1% y/y
• Glass Pricing – Up slightly

 
3Q Display Guidance
 

• Overall company sales (full year) slightly above $15b which implies (reported) sales of ~$7.715b in 2H, up 5.7% h/h or up 3.7% h/h on core sales.
• Expect 3Q sales flat q/q and up y/y, implies $3.65 to $3.85b
• Expect Glass volume to be down ~15% q/q across industry & company
• Expect flat glass pricing q/q
• Expect TV units to be flat to down y/y

 
3Q Updated Display Guidance
 

• Lower than anticipated glass volume brings overall guidance 3Q guidance to low-end ($3.65b) or below original range, taking at least $100m (single point) from full year unless 4Q is stronger than expected overall.
• 3Q will be the low in quarterly display glass demand
• TV units still flat to down
• Too early for 2023 TV shipment estimate but likely to return to ‘normal’ range of 225m to 235m

 
A 15% volume reduction (already anticipated) would result in 3Q display sales of $746m.  As it seems glass volumes have deteriorated further and pricing expected to be flat, that would imply display sales ~$700m, down roughly 26% y/y for 3Q (down 20% q/q) or about $50m lower than guidance which leaves us with the possibility that either a 20% reduction in glass volume is not enough or there are other segments that are weaker than expected.  We would assume the former, although it could be a bit of both given the macro environment.  Corning indicated that the incremental display glass volume shortfall was a result of the COVID lockdowns in China, despite the insistence of affected Chinese panel producers that there would be little effect on production, with Corning being a far more credible source.
 
Corning did say that on a long term basis they believe the prospects for the display business remain ‘good’ and acknowledged that the pandemic caused ‘advanced purchases’ to be made in the TV space which pushed TV units above the normal range, but while not giving an estimate for 2023 they indicated that TV units in 2023 would likely be back to that ‘normal’ range.  If one looks at the display industry from a capacity perspective, production capacity for fabs above Gen 6, which would be used primarily for TV panel production, make up ~73.2% of overall LCD capacity (100% yield), so the TV space is of great importance to Corning, especially in China where Chinese display glass producers supply primarily Gen 6 and smaller glass substrates and Corning is the share leader in large size substrates.
 
One point that is critical to the glass substrate market is glass prices, which have been stable to positive for the last few years as glass demand has either outstripped or been equal to supply.  While overall available capacity has not changed significantly, given the high cost and technical knowhow needed for new entrants, with the very weak demand seen this quarter, low panel producer utilization rates, and panel prices at or below cash costs, panel producers will be under pressure to reduce costs further.  While they are always looking to bring down material costs, glass is so essential to making LCD panels that sustainable availability has taken preference over price, leading to stable or rising glass prices.  Corning believes that glass substrate pricing has only a small effect on the overall profitability of the TV industry and that rational behavior by the small number of substrate glass competitors, meaning balancing production capacity against demand, is responsible for the stable glass pricing seen in recent years, but we are always concerned that a sustained period of weak panel production, and/or weak consumer demand will push panel producers to negotiate pricing with a bit more emphasis on absolute price. 
 
With the weaker demand seen currently, display glass producers are taking tanks off-line to do maintenance tasks that have been postponed over the last few quarters or years in order to meet demand.  While fewer tanks will keep capacity tight, once relining or other tasks are completed, a decision as to restarting the furnace must be made, with the cost of maintaining a non-producing furnace line a major consideration.  If display demand returns, all will be right in the glass substrate world, but sustained weak demand could put pressure on glass producers to restart idle tanks and to fill those tanks some price concessions could be offered.  We are always concerned about material costs in the display space, but since 2020 the industry has seen what we call ‘artificial’ demand change some of the rules.  Without that demand, do we return to the old normal where glass prices decline a bit each quarter or has the glass substrate industry learned that profitability is more important than share, a lesson not everyone in the display space pays attention to.  If the next two or three quarters do not show signs of improving demand, we would expect glass prices to flatten or go negative later next year.  We give that scenario relatively low odds but given the recent environment they have to be considered.