While we expect the National Retail federation, an 18,000 member trade group and lobbying organization that represents department, specialty, discount, catalog, internet, drug, and grocery stores and chain restaurants, might not be completely neutral with its forecasts for holiday retail sales, they do have a vast network of touchpoints to develop their forecasts, having been off by an average of only 1% from actual results over the last five years (higher than actual in every year except 2020).  This year’s prediction is for a range between 8.5% and 10.5% y/y or between $843.4b and $859b[1] (we use single point in Fig. 1).  If correct, this would be the biggest yearly gain after last year’s 8.2% y/y increase, considerably above the 5 year average of 4.4% and the 3.6% long-term average going back to 2003.   
NRF President and CEO Matthew Shay stated “There is considerable momentum heading into the holiday season.  Consumers are in a very favorable position going into the last few months of the year as income is rising and household balance sheets have never been stronger.  Retailers are making significant investments in their supply chains and spending heavily to ensure they have products on their shelves to meet this time of exceptional consumer demand.”  While such a statement from a retail trade association president is to be expected, the NRF Chief Economist was a bit less sanguine noting that “Pandemic-related supply chain disruptions have caused shortages of merchandise and most of this year’s inflationary pressure.  With the prospect of consumers seeking to shop early, inventories may be pulled down sooner and shortages may develop in later weeks of the shopping season.  However if retailers can keep merchandise on the shelves and merchandise arrives before Christmas, it could be a stellar season.”
Other estimates that we have looked at call for a slightly less robust view, with most around the 7% to 7.5% range, which, while lower than the NRF forecast, is still considerably above average, with the season extending even further this year given consumer concern over potential shortages and late deliveries.  A Deloitte survey indicated that overall holiday budgets are expected to increase by ~5%, while 68% of consumers in the survey expect higher prices this year, the effect being a 15% budget increase for high-income groups and a 22% decline for low-income spenders, with 70% of retail executives expecting consumers to spend more this year than last.  That same survey also indicated that while gift spending is expected to be up 3% y/y, non-gift spending is expected to be down 2%, while the ‘Experience” category, which includes travel, hotel, restaurants, concerts, etc. is expected to be up 15% as restrictions on such venues are lifted.  Looking at just the gift and non-gift spend, the increase in spending would be 0.54% y/y.
Expectations for how that spending will be allocated indicates that clothing will remain the most popular holiday spending item, garnering 18.5% of planned spending, with pets the smallest (6.5%) of the major categories.  Health & Wellness is expected to see the most growth (22.8% y/y) while gift cards are the only spending category that is expected to see negative growth.  25% of shoppers do not expect to find any items out of stock, leaving 75% that do.  49% of shoppers expect stock outs in electronics while only 9% expect stock outs in the pet category.  Interestingly 33% of consumers in the survey indicate that they hold the delivery company as the party responsible for delays or stock outs, while 27% believe they are tied to weather or supply disruptions, and 27% blame the retailers themselves.  Only 6% blame delivery personnel or company employees, and 85% of respondents indicated that free delivery was more important than fast shipping and 69% of consumers in the survey indicated that the biggest criteria for selecting a particular retailer was ‘getting a great deal’, with ’variety of products’ and ‘high quality (trust)’ coming in tied for 2nd place at 49%. 
Given the inflationary pressures already seen this year, 50% of consumers polled cited increased food prices as a reason for spending less and 39% of those spending more this year cited the higher cost of products in general as the reason, and while the CPI for all items has increased 5.4%[2] over the last year (9/20 – 9/21), the Bureau of Labor says that ‘Food at Home’ costs have increased only 4.5%.  Anyone buying groceries would likely find that number hard to believe given that the price of corn has increased 59.2% and the price of chicken has increased 31.6% over the last year (wholesale) as an example.  As we have noted in the past, typical holiday discounting, while still available, will both start from a higher base and will likely be offered on less products.  While we expect the holiday season to grow from last year’s level, we expect much of that growth to come from higher prices and a longer selling season with early ordering a metric that could make the holidays look better early on and fade later.  We are optimistic for CE spending during the holiday season, but less so that last year where pent-up demand fueled a strong season.


[1] Excludes Auto Dealers, Gasoline stations, and restaurants.  Includes the period between November 1 and December 31

[2] Not Seasonally Adjusted

​[1] Not Seasonally Adjusted
[1] Category-level averages are based on the no. of shoppers who plan to purchase the category. The sum of category averages would not equal the average retail spend ($927) which is calculated based on the no. of shoppers who plan to purchase at least one category. Sample size (N)=3,836

​Last year Apple decided to no longer ship new iPhones with a charger or earphones, citing the desire to reduce carbon emissions and the use of precious materials, under the assumption that consumers already had multiple adaptors and chargers.  Most consumers took the change in stride, although others looked at it as a typical move to reduce costs.  As some consumers have discovered, price increases are not the only way manufacturers can cut costs, with smaller product amounts in larger packaging a common way to keep consumers from noticing a technical price increase, but in the case of the iPhone, the difference was quite noticeable.
The Brazilian Consumer Protection Agency did not take kindly to the change and this year fined Apple $2m for making the change, considering such devices as ‘defective’, and the EU has proposed regulations that would force all smartphones to use the USB-C standard, which Apple does not use.  Taiwan has also taken up the cause with the country’s Consumer Foundation petitioning the government to begin an investigation into the new Apple practice and the government of France has forced Apple to include the earpods in the box with the iPhone 12, citing a law that says all smartphones must include a ‘handsfree kit’ to protect children under 14 from the effects of electromagnetic radiation on developing brains.
While Apple still cites the positive environmental impact of the removal of the charger and earphones, those claims are refuted in a new lawsuit against Apple instituted by a group of law students in China.  In a 2 hour on-line court appearance the students defended their lawsuit (which asks for compensation of $16 + legal fees) noting that 1) the Apple interface is not compatible with USB-C chargers, which are the de facto standard, forcing iPhone 12 users to buy a specific charger for the iPhone; 2) Apple’s contention that separate charger sales are common is untrue as before the iPhone 12 most mainstream smartphones were equipped with chargers 3) Apples claim that environmental factors were the basis for the change is false given that  Apple advertises the MagSafe wireless charger in the iPhone packaging, which uses the most inefficient charging method, putting the value of the charger ahead of environmental issues;, all of which add up to ‘fraudulent behavior’ by Apple.
The case, which was defended by a group of Apple lawyers, is in limbo as supplementary evidence and written materials are being submitted, but the plaintiffs “…hope to awaken consumers' awareness of protecting their legal rights through this case, with the courage of a single spark can start a prairie fire…” While no determination has been made, if these young ladies prevail, Apple could face further legal action pushing back on their charger/earphone decision, which was also followed by Samsung.  Many Chinese brands offer separate smartphone packages with or without chargers and earphones, allowing consumers to choose, and China has been rather aggressive toward big tech recently, so it might behoove Apple to find a solution that does not draw publicity, attracting increased focus by Chinese authorities.  In the long run however, the most important issue for Apple is the ‘forced’ standardization of USB-C adaptors in the EU, which could force Apple to either change adaptors for the region, an expensive proposition, or change across the board.  We expect Apple to spend millions on lobbying to prevent either result, but its hard to get the genie back in the bottle once it is out.

Note:  We are only looking at Samsung’s display, TV, and mobile businesses in this note.
Samsung Electronics (005930.KS) reported 3Q sales of 73.98t won ($63.24b US), up 17.4% q/q and up 10.5% y/y and operating profit of 15.82t won ($13.52b US), up 25.9% q/q and up 28.1% y/y.  The company generated gross margins of 42.0%, the best since 3Q ’18 and operating margins of 21.4%, also the best since 3Q ’18.  On a comparative basis 3Q is typically up 8.9% (5 year avg.) q/q and up 6.1% y/y.

Samsung’s display business, which represented 12.0% of sales, was up 29.0% q/q and up 21.0% y/y, and saw a decline in operating margins from 18.6% in 2Q to 16.8%, as costs increased. TV panel prices declined in the quarter, continuing to generate losses in Samsung Display’s (pvt) large panel display business, but small panel sales were strong as Apple (AAPL) and other customers built inventory toward recent model releases.  Samsung did mention strength in foldables but gave little detail on their contribution to total display results.  Samsung guided for continued growth in the display business in 4Q, again led by small panel OLED displays offsetting losses in the large panel TV business.  There was mention that OLED devices, other than smartphones, would begin to play a bigger part in total OLED sales, although are expectations for real growth in that space are oriented toward 2022 and there was also mention of Samsung’s program to begin production of its new QD/OLED TV product as an offset to its (intentionally) declining TV display business.  There was also mention of component costs and shortages, neither of which are specific to Samsung, as points of concern for both 4Q and 2022. 
On an overall basis Samsung’s display business, which is greatly tilted toward small panel OLED, is better positioned than most, although that was not the case for much of last year and earlier this year.  Samsung Display had been the most aggressive of display producers in reducing its exposure to the large panel TV production space in 2019 and closed or sold much of its large panel production capacity.  As large panel prices rose during 2020, SDC held off closing remaining large panel LCD production at the request of Samsung Electronics, its large customer in that market, but SDC’s overall outlook on generic large panel LCD production has likely changed little, especially with the large panel price reductions seen recently.  SDC hopes to replace the generic large panel LCD business with its soon-to-be-released/announced quantum dot/OLED displays, which will become an integral part of the company’s large panel display business if successful. 
As we have noted in the past, there is significant risk associated with developing a new commercial technology in the display space, but if the product passes muster, it will leverage Samsung’s TV business into a ‘premium’ panel category, something Samsung Display has been missing and will give SDC a display product with which it can use to compete against LG Display’s (LPL) OLED TV panel business.  That said, such a product would generate losses for some time, so we expect no profit contribution from that business until 2024.  While we expect SDC to be successful with QD/OLED, we put more emphasis on SDC’s push to expand its OLED display business into the notebook and monitor space, which began in earnest this year, and see continued expansion in that business as SDC improves its OLED notebook cost structure over the next year.  While OLED notebooks will remain in the ‘premium’ notebook category in 2022, we expect their use in mid-tier notebooks to expand in 2H 2022.

​Samsung’s consumer electronics division (~56% is TV), which is ~19.1% of sales, grew sales 5.2% q/q and 0.1% y/y but operating margins for the division as a whole declined from 7.9% in 2Q to 5.4% in 3Q.  While the TV division margins are not broken out, costs associated with the TV business (components, panel prices, logistics, etc.) were responsible for much of the margin reduction.  However the TV segment itself (10.6% of total company sales) grew 9.1% q/q but declined 5.1% y/y against a strong 3Q last year.  Typical 3Q q/q growth (including last year’s +55.2%) is 13.1%, although excluding 2020 would be a more normal 2.6% q/q increase, so it was still a strong quarter in terms of q/q sales averages with Samsung’s QD TV (not QD/OLED) and other premium products leading the way.
4Q guidance for the TV segment is for growth q/q but down again on a y/y basis as lessening COVID-19 restrictions move consumers away from a sequestered lifestyle.  Guidance for 2022 in the TV segment was less optimistic, with more emphasis on logistical issues slowing TV market growth.  While logistics are certainly an issue, we question whether that is the source of reduced demand, but we do agree with the lower demand outlook for TV sets.  That said, if TV panel prices continue to decline in 2022, while it will hurt LCD panel producers, it would be beneficial for Samsung’s TV business, giving them room for the discounting needed to compete against Chinese competitors. 
Samsung, as are almost all other TV set brands, is hoping that ‘premium’ TV products will offset lower overall set demand, and while the premium market will certainly be the growth driver for the TV set business in 2022, we expect Samsung’s broad range of premium TV products will take considerable shelf space in 2022.  With quantum dot enhanced LCD TV, Mini-LED TV, Ultra-large TVs, and potentially QD/OLED TV offerings, Samsung will certainly give consumers ample choices in the premium category, but competition from Chinese brands such as TCL (000100.CH) and Hisense (600060.CH) in key markets will still be an issue in 2022. 
Samsung will have less of a cost burden to carry than those Chinese brands that have their own TV panel production as large panel prices decline, and will be able to cherry pick the market for the best supply deal, which was the intent back in 2019, but the margin leverage usually gained by TV set manufacturers when panel prices decline could be offset by continued component shortages and logistics costs.  If we had to be somewhere in the TV space in a year when demand is reduced, it would be with either Samsung (more premium product and little large panel LCD production drag) or LG Electronics (066570.KS), given the growth of their OLED TV business in 2022, although LG Display (LPL) still has enough large panel LCD production to see some negative influence from that part of their business next year.  

Samsung IT/Mobile division (38.4% of sales) saw sales up 27.6% q/q, against a weak 2Q, but down 6.8% y/y against last year’s strong 3Q.  The mobile segment itself (37.0% of total sales) grew sales 27.6% q/q but declined 8.3% y/y.  IT/Mobile operating margins declined from 14.3% last quarter to 11.8% in 3Q.  Overall, Samsung’s smartphone shipments grew in the quarter with the introduction of new foldable smartphones and an expanded mid-tier lineup, but increased marketing costs (foldables) squeezed margins a bit.  Guidance for 4Q is for increased smartphone demand with a caveat toward component issues.  2022 guidance was still optimistic, with a focus on growing the foldables line, making it a significant part of its ‘flagship’ Galaxy offerings, which have been weak over the last two product cycles.  Samsung has begun to offer a ‘bespoke’ service for its foldables, customizing devices to customer specifications, which the company hopes will increase consume focus on foldable overall, but the service is too new to gain any insight in whether it will serve to generate additional sales without lower margins.

​Across the board, the segments we look at, Samsung did as well or better than most, and given their size, volumes, and internal capacity, they were able to sidestep at least some of the component and logistical issues facing most in the CE space.  The company still seems optimistic about 4Q but a bit less so for 2022, although we expect they are better positioned overall if 2022 looks more like pre-COVID years.  That said, Samsung’s success in 2022, in the markets we cover, will depend on their ability to differentiate their CE products.  Without that differentiation they will face the same diminishing returns that a slower CE growth environment places on participants.  They have a better shot than most but we expect 2022 will be a more difficult year.  

The OLED production equipment space is one that is dominated by a number of companies that produce a number of tolls that are the core of the OLED display production process.  The key tools are those that deposit OLED materials onto various substrate types.  With Chinese panel producers pushing hard to gain traction in the OLED space, they are willing to spend as much as is needed to challenge South Korea’s OLED dominance, but when it comes to deposition equipment, money is a secondary consideration.  The leader in the space is Canon-Tokki (7751.JP), who produces such deposition tools for Samsung Display, LG Display and a number of other OLED producers.  The problem is that these tools are extremely complex and take a considerable time to build, which means orders have to be placed far in advance of delivery schedules, and orders from principal customers, meaning Samsung Display, usually get both priority and considerable attention given SDC’s substantial OLED capacity.
 
Aside from the delivery times, which can range from 6 months to over a year, the cost of such machines for volume panel production runs between $100m and $150m each, so such commitments are not made lightly.  Even LG Display, the only supplier of OLED TV displays and a producer of small panel RGB OLED displays, has found itself unable to work its way into the queue for such tools at times, and has had to buy deposition systems from less popular suppliers.  Note also that most fab managers will try to keep tools common across a fab in order to keep maintenance costs low, so if a fab has already installed a Canon tool on a line, it will want to remain with the same supplier as it expands capacity.
 
Chinese OLED producers have access to considerable capital, particularly at the current stage of OLED development, but are just beginning to develop the volumes needed to compete with South Korean producers.  Government subsidies have allowed them to develop OLED fabs at a rapid rate, but even with the easy access to capital, they still have to deal with the production schedules for deposition tool producers, and given the well-known Chinese gift for bringing in construction ahead of schedule, this can lead to bottlenecks in OLED fab start-ups.
 
The obvious solution, and one that China has been working toward in a number of related fields is that of deposition tool self-development, a task that is formidable even for those that currently produce other tools for the OLED production process.  South Korean equipment companies have had some success in the deposition space, with Sunic Systems (171090.KS) having placed a number of tools over the last few years.  That said, most of the deposition tools developed by equipment manufacturers are for R&D or pilot line systems, and are not able to scale to the multi-chamber deposition systems that are necessary for cost efficient OLED display production.  Chinese tool vendors have produced some of these smaller systems but until recently have been unable to overcome the challenges of developing a multi-chamber deposition tool that can handle high volume production.
 
We say recently because a Chinese tool vendor, Hefei Xinihua (603656.CH) has developed what it says is the first Mainland developed OLED Evaporation tool for mass production.  The company itself has divisions that produce OLED and LCD materials, other display production equipment, and a recently released a high speed “Large Panel Mini-LED Transfer Tool” (Die Bonder) that it has provided to a number of BLU developers on the Mainland, but information is scarce, other than a few pictures shown below, most of which are R&D systems
 
If a Chinese company were able to enter the mass production OLED deposition tool, it would give Chinese OLED panel producers an alternative to the Korean dominated deposition tool queue, and given China’s desire to develop its own supply chain, would provide easier access to scarce production tools.  That said, a few pictures and a press release are a far cry from creating a product that can compete with established production tools on a realistic basis.  We would expect that the tools are being tested by OLED panel producers, although we have heard little other than a shipment to a Chinese OLD lighting manufacturer.  While we don’t have high hopes that such a tool will gain real traction, one can always be surprised.

​As a ‘pure’ display supplier and the de facto supplier of large panel OLED displays, LG Display (LPL) gives a good picture into the broad display space, albeit with a bias toward OLED over LCD.  While OLED displays have price characteristics that are different from LCD panels, especially large panel OLED, LG still has over 80% of its total capacity producing LCD displays, which means to a large degree it is affected by the same characteristics that affect LCD only panel producers.  This is reflected in such metrics as area shipped, which declined 5.6% q/q as TV panel demand waned in 3Q and to a smaller degree by component shortages, which began to affect shipments later in 3Q.  ASP/m2 increased by 6.7%, although the smaller shipment base likely accounted for much of that increase, along with less exposure to LCD TV panel production, which saw the biggest price drop in the quarter.  While hard to quantify absolutely, OLED TV panels likely saw less price pressure than LCD panels.
4Q Guidance was for area shipments to increase ~15%, based on a recovery in supply chain component issues.  Roughly one month into the quarter we have seen display driver shortages abate, likely a function of lower LCD TV panel orders and that will help to alleviate some of the supply issues that LGD has said limited shipments in 3Q.  There is some credibility to their 4Q area shipment confidence, although some of the improvement coming from IT product shipments that were deferred in 3Q and the growth in OLED TV based on the increased production at the Guangzhou fab and the generally stronger OLED TV shipments that occur in 2H.  4Q guidance for ASP/m2 is for growth of 2% to 3%, despite continuing LCD large panel price decreases.  This is more of a function of orders for OLED mobile devices, which we expect will increase for LGD in 4Q, as such have a higher ASP/m2 than large panel products.  We note that this metric is not absolute unit ASP but is based on area.
OLED TV saw 90% y/y growth as the company’s Guangzhou fab ramped additional capacity, which helped to improve the OLED segment’s profitability and is now expected to become profitable for the 2021 year.  OLED TV shipments are expected to increase in 4Q and to reach 8m units by year end, and with the additional Guangzhou capacity the company target for 2022 remains at 10m units.  We expect a more varied OLED display product line next year with specialized products for gaming and IT and profitability for OLED TV, but the risk for LGD’s OLED business is more in the small panel OLED space as success with Apple (AAPL) becomes more important as  parent LG Electronics (066570.KS) ends this year.  One of the two small panel OLED fabs that LG Display has in production is running profitably while the 2nd is facing some utilization issues and is generating losses, however management is expecting the combined operation to reach profitability next year, based on “customer and product structure”, which means Apple and their ability to produce LTPO small panel displays for same.
In the LCD space LGD is doing what other LCD manufacturers are doing, pushing LCD production away from TV and more toward IT products, where pricing has been more stable.  With little alternative other than to shutter low utilization LCD fabs, potentially converting them to OLED as Samsung Display (pvt) has done, demand for IT products, meaning notebooks, monitors, and tablets, must stay robust to offset the increased production focus.  There have been a few hints that some demand weakness in the IT space has been seen this month, with a few display producers citing a renewed focus on commercial customers rather than retail customers, but such monthly ‘bumps’ do happen.  If there is a more visible trend toward slower demand in the IT space, LG and others will have little choice but to reduce utilization.  The company has depreciated most of their current producing assets and believes that gives them a 5% to 10% cost advantage over their competition and has moved away from most generic production, giving them a higher ASP than others, but those are all concepts that need a positive or at least stable pricing environment, for which the industry is not known. 
The company was questioned about the overall plans for large panel LCD production, particularly at the company’s Gen 7 fab (P7) in Paju, which is one of the few (AU Optronics (AUOTY) also has one) Gen 7 fabs globally.  Such fabs are efficient at producing smaller panels for monitors and TV up to 47” but become less efficient for larger TV panel, other than ultra-large 85” displays.  LGD has been using that fab for such ultra-large panels (80”+) but is considering how to operate that fab over the long-term.  Samsung Display has converted its Gen 7 LCD fabs into small panel OLED production lines, which might become an alternative for LGD in the future if it decides to transition further away from the LCD TV production space.
The company did admit that it expects demand for IT products to decline in 2022 as COVID-19 restrictions are lifted, but expects that B2B demand will increase to offset the decline and goes further to predict a decline in monitor panel prices in 1Q and for notebooks in 2Q.  However they added the “…it’s going to be different this time…”clause, suggesting that premium IT product pricing will not be closely linked to commodity IT pricing and will not depend on supply and demand dynamics but more on customer TAM.  Since display price is based on demand, if commodity panel prices are falling, one would expect that overall demand was also falling, and while customers requesting premium display specifications would be willing to pay more for such panels, their overall demand would likely also be declining, so hoping that laws of supply and demand will not be in effect next year seems a bit of a stretch.  Such a scenario might keep things a bit better for those that cater to premium oriented customers, but the overall industry supply/demand undercurrents always win out.
All in it was a reasonable quarter for LG Display’s LCD business considering the pricing and component supply environment and a strong quarter for their OLED business.  With some of the shortages easing, the company should be able to grow, at least in area shipments in 4Q, with lower LCD TV revenue being offset by higher IT, OLED TV and OLED mobile sales.  While we are not expecting a record 4Q, with a bit of positive order flow LGD could generate another good quarter, but our fear is that 2022 will be a more difficult year, with the company facing decisions on how much LCD capacity it needs to meet customer demand and whether to increment large panel OLED capacity going into the 2023 production year.  Much will depend on IT product demand, basically the same issue that other display producers face, although LGD does have an improving small panel OLED business (as long as they are able to attract new customers) and a growing OLED TV business to offset some of the potential downside, a better place to be if things deteriorate.
Basics:
3Q Sales               +3.7% q/q
                              +7.2% y/y
Op Inc.                 -25.1% q/q
                              +220.1% y/y
Op Margin           7.3%                     Prev. Q  10.1%    3Q 20    2.4%                    
Capacity              +2.6%
Area Shipped      -5.6%    
ASP/m2                 +6.7%
Sales Share          TV          32%       Prev. Q  38%       3Q ’20   28%
                              IT            45%       Prev. Q  39%       3Q ’20   43%
                              Mobile  23%       Prev. Q  23%       3Q ’20   29%
Dividend              Under review

​A recent reveal of licenses granted to suppliers to Huawei (pvt) and SMIC (688981.CH), both of whom are on the US ‘entities’ list, has indicated that between November 2020 and April of this year 113 export licenses were granted to Huawei suppliers, worth ~$61b, and an additional 188 licenses worth $42b were granted to suppliers of SMIC, China’s largest semiconductor producer.  The data goes further in that it shows that while only 69% of requested licenses from Huawei suppliers were granted, more than 90% of requests by SMIC suppliers were allowed.  Partisan politics took the data for a ride with China hawks stating that the President is not taking the economic and security threat from China seriously and that transparency and public scrutiny on how the nation transfers it technology to adversaries is in our national interest.
The Commerce Department did note that the data was an ‘arbitrary snapshot’ of approvals and risks misrepresenting the national security determinations made by the government.  Even former Trump officials chimed in stating that the document is not an accurate window into the licensing process for companies on the entity list, especially when it was found that 80 of the 113 Huawei supplier licenses and 121 of the 188 SMIC licenses were for non-sensitive items that only required a license because the companies were on the list, and that $87b worth of Huawei licenses were approved after its inclusion on the entities list during the Trump administration.
A recent Chinese document concerning a potential new semiconductor fab to be built by SMIC has indicated that the company is focused on more mature nodes, rather than trying to compete with Taiwan Semi (TSM) or Samsung (005730.KS) at 7nm or less.  We expect while there is certainly demand for those nodes on the Mainland, there would be much difficulty in obtaining the wide variety of design and production tools that would be needed to build a leading edge semiconductor fab in China, and while the current administration might be a bit more inclined to authorize trade exceptions, it doesn’t seem that the US is giving away any leading-edge technology, nor is it allowing those suppliers outside of the US much leeway in bypassing US trade restrictions. 
Given the potential for an extended semiconductor shortage over the next few years, it might be in the best interests of the US to keep some of those trade channels open with Huawei and SMIC rather than focusing on the political outrage that has followed the data.  Semiconductor price inflation and shortages can take a nasty toll on the global (and US) economy and while we don’t have to hand over anything of consequence to get some reciprocal trade, a few licenses are not going to tip the balance of ‘technology power’ to the Chinese.

​Last month TV panel prices were the focus of attention as prices fell for the 2nd month by over 10%.  We expected a continuation of that decline in October, which was the case, although a bit less than we had expected.  IT panel prices (Monitors, Notebooks, Tablets), which we had expected to be flat, were weaker than our estimates, which is concerning considering that panel producers have been shifting capacity toward IT for the last few months.  The panel price reductions in IT were relatively small, especially when compared to TV panel price reductions, but without price increases in IT to offset some of the weakness in TV panel pricing, the industry must see increasing overall demand or face declining sales.  Some panel producers have cut back large panel production to match lower TV demand which will help to alleviate some large panel pressure but will also impact margins in 4Q.  We expect a continuation of weaker TV panel prices again in November, which are now down 35.3% from peak but still up 40.5% from the late 2019 low.

​On an overall basis the large panel display segment, which includes both TV and IT products (excludes smartphones and wearables), which saw a 2.4% decline in sales in September, will likely see weaker results again in October.  Strength from Apple (AAPL), which has helped buoy the small panel OLED space will not do much for the large panel LCD market, so both utilization cuts and weaker panel pricing will continue to pressure October large panel display results.  The one positive for the display industry that comes from weaker demand would be logistics, and while costs continue to rise, the necessity to use higher cost transportation to meet delivery deadlines will be reduced.  While this would normally be beneficial to display margins, the increasing absolute cost of all transportation, regardless of type, might offset much of that benefit in the current environment, so we expect the net effect to be minimal.
 

​In a not-so-surprising move, Samsung Display (pvt) has begun the process of building out additional small panel OLED capacity with a new line that will become part of the A3 and A4 lines that are the mainstay of the company’s OLED mobile display production lines.  The new Gen 6 lines are expected to be built in the former L7-2 fab, a former LCD production line in Asan that SDC closed last year.  These new lines, which will be built out in two phases, will add to capacity provided by A4 and A4-1, with A4-1 being another line that was built in the shell of the former L7-1 LCD line.  The reason for the new fab is to supplement the production of small panel LTPS OLED displays (and some LTPO), which SDC had been producing on the A3 and A4 lines, however when those lines were updated to LTPO backplanes, those used by Apple, the production capacity was reduced.  When the new lines are completed, SDC’s combined A3 and A4 capacity is expected to be 165,000 sheets/month. 
The first line (15K) is expect to see equipment move in next year, which puts our production start in 3Q ‘2022.  The 2nd phase is estimated to start ~ one year later.  SDC is expected to spend ~$850m on equipment for the first line, which will also use some of the tools removed from the upgraded A4 lines, but as LTPO tools are more expensive than those for LTPS, the cost of the fab will likely be higher than a typical LTPS Gen 6 line.  SDC is pushing to capture as much of Apple’s iPhone business as possible, despite competition from LG Display (LPL) and BOE (200725.CH), and with the expectation that Apple will increase the number of iPhone models using LTPO next year, SDC must be able to guarantee Apple that it has the capacity to be the dominant supplier of LTPO OLED displays going forward.

​Corning (GLW) reported 3Q results a bit under expectations and guided to a weaker than consensus 4Q.  While sales were at an all-time high, it was almost impossible for Corning not to have been affected by both inflationary and demand issues.  While we will go into more detail tomorrow, both the display and specialty materials (Gorilla Glass, etc.) saw strength despite weakening demand, and glass prices increased a bit in the quarter, but despite some positive design news for Gorilla Glass in the automotive segment, weak auto sales due to semiconductor shortages offset the display growth.  Specialty materials itself was strong, despite relatively weak smartphone shipments across the industry, but management indicated that the build-out of new products could pressure margins a bit going forward.
Inflation was a big topic in Q&A and Corning management admitted that what they thought a few months back was a short-term bout of inflation now seems to be something longer-term in nature, with the company taking steps to negotiate new pricing with customers in those areas that have seen the most cost increases.  The display glass market, which has been quite tight during the last year and saw price increases last quarter, something rarely seen, seems to be a bit less so, as the company is implementing glass melter shut-downs and relining whenever possible, something that was past due but would have meant being unable to meet customer production goals in the past.  With lower large panel utilization levels from customers, GLW will have the opportunity to rebuild some of that older and less cost effective capacity, but the fact that they are able to consider that process indicates a lower level of overall demand.
While Corning performed well in 3Q and remains in the best spot possible in the display space, the ultra-large (Gen 10.5) glass market, they are not immune to the overall economic pressures that have been affecting other CE suppliers.  They remain optimistic about their ability to grow, but seem also to acknowledge that things are evolving differently than they might have predicted earlier in the year.  Typical growth generators in the company’s display business, particularly panel size growth will continue, but the generous pricing environment that was the case for much of last year and this year, is now being eroded by rising costs.  Because the display glass market is one with few players and high upfront costs, Corning is better situated than any other glass producer, but a sustained downturn in the display space and a continuation of cost increases will make generating growth a bigger chore than it has been in recent quarters.

​Now that supply chain issues have become front page news, the press has begun to focus on some of the issues that have caused these disruptions, with videos of freighters waiting offshore for a call to unload and trucking companies lamenting a lack of drivers.  As we have been focused on these issues since COVID-19 appeared, we look was askance at these very simplistic ‘examinations’ of supply chain problems and wonder where lawmakers were when trade issues with China and other trading partners were a key part of generating political capital. 
We won’t rant but rather focus on the idea that the US government is asking manufacturers all over the world to fill out a “Notice of Request for Public Comments on Risks in the Semiconductor Supply Chain” as supplied by the Department of Commerce, the Office of Technology Evaluation, and the Bureau of Industry & Security as part of the 100 day Supply Chain Review mandated by Executive Order 14017 on February 24.  As part of the review, the questionnaire was sent to semiconductor related companies on a voluntary basis, with a due date of November 8, but comments by the DOC have indicated that if they do not get the quality of information they need, they will take steps to ‘compel’ semiconductor companies to provide same, including those outside of the US.
Most recently Taiwan Semiconductor (TSM) indicated that they would comply with such a request, although still ‘assessing the contents of the questionnaire’, with the Taiwanese government saying they will respect US commercial law and rules but will help Taiwanese companies if they receive and ‘unreasonable’ requests.  TSM counsel said, “Don't worry. We definitely will not leak our company's sensitive information, especially that related to customers, Customer trust is one of the key elements to our company's success, If this is to resolve supply chain issues, we will see how best we can do to help them.”   This made us take a look at what the US was actually asking for, which seems to have been confusing enough that the government is preparing a FAQ page to detail some of the requests.
Here’s what the questionnaire asks of semiconductor product designers, front and back-end manufacturers, microelectronics assemblers and their suppliers and distributors.  There is another set of questions for ‘intermediate users and end users of semiconductor products or integrated circuits’:

• Identify your company's role in the semiconductor product supply chain
• Indicate the technology nodes (in nanometers), semiconductor material types, and device types that this organization is capable of providing (design and/or manufacture).
• For any integrated circuits you produce—whether fabricated at your own facilities or elsewhere—identify the primary integrated circuit type, product type, relevant technology nodes (in nanometers), and actuals or estimates of annual sales for the years 2019, 2020, and 2021 based on anticipated end use
• For the semiconductor products that your organization sells, identify those with the largest order backlog. Then for the total and for each product, identify the product attributes, sales in the past month, and location of fabrication and package/assembly.
• List each product's top three current customers and the estimated percentage of that product's sales accounted for by each customer.
• For each phase of the production process, identify whether your organization carries out the step internally or externally. For your organization's top semiconductor products, estimate each product's (a) 2019 lead time and (b) current lead time (in days), both overall and for each phase of the production process. Provide an explanation of any current delays or bottlenecks.
• For your organization's top semiconductor products, list each product's typical and current inventory (in days), for finished product, in-progress product, and inbound product. Provide an explanation for any changes in inventory practices.
• What are the primary disruptions or bottlenecks that have affected your ability to provide products to customers in the last year?
• What is your organization's book-to-bill ratio for the past three years? Explain any changes.
• If the demand for your products exceeds your capacity, what is the primary method by which your organization allocates the available supply?
• Does your organization have available capacity? If yes, what is preventing the filling of that capacity?
• Is your organization considering increasing its capacity? If yes, in what ways, over what timeframe, and what impediments exist to such an increase? What factors does your organization consider when evaluating whether to increase capacity?
• Has your organization changed its material and/or equipment purchasing levels or practices in the past three years?
• What single change (and to which portion of the supply chain) would most significantly increase your ability to supply semiconductor products in the next six months?

Of course the instructions specify that anyone submitting confidential information should clearly mark it as such although it seems the public data will become available under the Freedom of Information Act, but it would seem that while such information might come in handy for government officials that are involved in potential supply chain related legislation, there are many, especially outside of the US, that expect the US to use said information in trade negotiations or potential restrictions, and given the potential access to the confidential data by government officials such as members of congressional committees, there does seem to be some reason for semiconductor companies outside of the US to be a bit suspect. 
While the global semiconductor supply chain is an important topic, amassing data about the reasons behind the current issues will serve to educate those that might legislate solutions, but more likely will be used to further political agendas as needed.  Rather than ask companies for information that they will spend millions of dollars to obfuscate, we might be better served trying to understand how to better interface with a global semiconductor supply chain rather than trying to control it through trade restrictions.  The US is best at developing semiconductor technology yet has rarely developed the production capacity and tools that are essential for maintaining a leading position in the global market. 
Yes, the US has a higher manufacturing cost structure than other countries, but how did a Netherlands based company (ASM (ASML)) become the sole supplier of EUV equipment to the semiconductor industry when Intel (INTC) was behind the development of the technology as far back as 2003, especially as a number of US based companies were instrumental in solving some of the issues surrounding the commercialization of the technology?  They cooperated with a number of other European companies and created the necessary supply chain.  They didn’t stop others from trying to develop a competitive solution, they just did it better than anyone else and now dominate the industry. 
It’s not simple and it takes a lot of support from the government and intelligent legislators, which seems to be something that stands in the way of the semiconductor industry in the US, but the knowhow is not the problem with the US semiconductor supply chain, just the coordination of the government and the industry working toward the same goal. “ If a man has good corn or wood, or boards, or pigs to sell, or can make better chairs or knives, crucibles or church organs, than anybody else, you will find a broad hard-beaten road to his house, though it be in the woods “ aka “If you build a better mousetrap the world will beat a path to your door.” – Ralph Waldo Emerson