​Displays are not smart devices.  They need information presented to them in a very specific format in order to be displayed properly, and this is true regardless of the type of display, LCD, OLED, CRT, etc., but the image information produced at the CPU or GPU level would make no sense to a display if it were transmitted directly.  Between these essential components sits the display driver, a semiconductor based interface that translates the information coming from the aforementioned sources into voltage, current, and timing information that becomes a visual image on the display itself. 
While the complexity of display drivers is such that they do not have to be produced on 7nm or 5nm nodes, they do have to contend with other products that are produced in large process formats and for much of 2H ’20 and 1H ’21 display drivers for a variety of display products were in short supply.  This limited some display producers, particularly the ones that sold display modules, but most panel producers provide “open cell” displays, that is displays with no backlight, bezel or drivers, which gave them the opportunity to claim that a shortage of display drivers had ‘no direct effect’ on their business.  That said, those companies that packaged those open cell displays into modules, many of which are subsidiaries of display producers, found that such shortages either pushed out delivery dates or limited certain models.
The semiconductor space continues to see tight conditions, with wafer shortages, mask shortages, and a variety of issues that have extended delivery schedules and put semiconductor applications in contention for fab production time.  But there is some good news; Display drivers are no longer seeing allocation issues and have become more widely available.  How has this happened?  Has the semiconductor industry put display drivers ahead of other critical components, putting aside automotive silicon, 5G RF, or even microprocessor production for the lowly display driver? No, but something has changed. 
That change is demand, and as the price of displays, particularly TV displays rose to a point where consumers began to slow purchases, the price of TV panels fell and TV brands began to reevaluate their targets for this year.  As demand declined, which has happened over a relatively short period of 2+ months, panel producers began to cut back on TV panel production, and ipso facto, demand for display drivers also weakened, although demand for IT products kept the driver market from deteriorating rapidly.  Now it seems that the display driver market is more in balance with demand, and driver demand is returning to segment imbalances rather than total market issues. 
Demand for OLED drivers remains strong as Apple (AAPL) is in full production mode for the iPhone line and notebook and monitor demand is still a bit above production, but a more reasonable balance for drivers has been the result of the production cutbacks in the TV space.  It is always surprising to see how quickly a change such as has been seen in the panel space can affect other components, but while shortages are part of such a cyclical industry, they can disappear in a very short time as the balance between supply and demand swings from one side to another, or even moves away from peak by just a bit.  While we know that change is an integral part of the CE space and likely keeps CEOs up at night, even small changes filter through the supply chain quickly and can change to course of component suppliers almost overnight. 

Back in August we noted that Quanta Computer (2382.TT), the largest notebook OEM, indicated that it expected to ship less notebooks in 3Q than in 2Q, a result of waning Chromebook shipments, which represented ~17.2% of total notebook shipments in 2Q, up from 12.1% in 2Q 2020.  While there has been a push in the US to get kids back into physical school, which has lightened demand for notebooks/Chromebooks in the education market, demand from the corporate market has kept notebook demand strong, but Chromebooks are less apt to be purchased for corporate use.  Early projections for global Chromebook shipments are for a q/q decline of between 15% and 20%, and while we believe the push toward in-person education in the US has reduced demand to a degree, we believe there is another factor that has also contributed to the reduction in Chromebook demand.
Japan had instituted  a program in 2018 (pre-COVID-19) called GIGA (Global & Innovation Gateway for All) that funded the purchase of laptops, Chromebooks and tablets for the education market, with 2/3rds of the $2.2b US in funding going toward hardware.  The Japanese education system at that point had been operating under the “If its’s not broken, don’t fix it” theory, as ‘chalkboard’ test results continued to be strong, but COVID-19 changed all that when it was found that far fewer students were equipped to learn remotely than previously thought and tight educational budgets had done little to alleviate that problem before the pandemic.  The original program was to continue through 2024 but with the appearance of COVID-19 much of the spending was pulled forward.
The GIGA program allocated ~$450 for each student with the objective of “One device for one student” and incentivized schools to make those purchases in 2020 or lose 10% of the allocation, so much of the program spending was allocated last year and early this year, however thus far the program renewal, which was to come in 4Q, has yet to be approved, possibly a result of the country’s governmental reshuffling and there seems to be similar delays in approvals for other APAC countries for similar programs leading to what looks to be the first quarter where Chromebook shipments have declined since 4Q ‘19.
While Chromebook brands are mixed about the prospects for the segment going forward, in the US the FCC has tapped into its “Emergency Connectivity Fund”, a $7.17b program that Congress approved as part of the American Rescue Plan of 2021, that will allocate funds for schools and libraries provide tools and services that are needed for remote learning.  While the program will cover “reasonable costs of laptop and tablet computers; Wi-Fi hotspots; modems; routers; and broadband connectivity purchases for off-campus use by students, school staff, and library patrons”, there was a limited window for applications, approximately six weeks between June 29 and August 13 and a 2nd ending October 13.  The FCC will review all applications on ‘rolling basis’.  Not surprisingly, New York, California, Texas, and Florida were the states with the largest requests for funding, with total requests of $5.137b.  Spending for the program as its stands today, must be made by June 30, 2022.
A number of Notebook OEMs have indicated that they are pursuing the education market beyond High School and commercial customers by increasing the size of Chromebook products, but many are expecting the FCC program to keep Chromebook shipments strong through much of next year, even with the slowdown in Japanese procurements.  Whether ECF participants spend allocations in 4Q or 1Q, there seems to be a limited window for Chromebook shipments to grow, with hope from producers that such programs will be continued into 2023.  However the success of the COVID-19 vaccine programs, both in the US and globally, will certainly have an effect of Chromebook demand, and while we do not expect such demand to disappear in 2023, we do expect to see demand level off next year. 

​Mini-LEDs get quite a bit of coverage, both from us and the tech press, but most investors we speak with have little understanding as what Mini-LED backlights are and how they differ from what has existed in the past, so we look at a few examples to give a better understanding of what Mini-LED units are used for and how it is changing the display business.  This is not an all-encompassing note in that we are not going to delve into the detailed mechanics of Mini-LEDs and Mini-LED backlighting, but more toward giving a more practical look at the technology.
At the onset, it is important to understand that Mini-LEDs and their applications are not new or a radically different technology from what has existed since LCD displays were commercialized.  LCD technology is based on using liquid crystal as a ‘gate’ that opens and closes, letting light through the crystal or blocking it before it reaches a color filter that breaks it down into three colors for each pixel.  In early LCD displays that light was produced using fluorescent light strips but that type of light was not well suited for effective color production.  Eventually fluorescent LCD backlights were replaced with LEDs which gave display designers a bit more color quality and required less bulky components that allowed displays to become thinner and lighter.
LCD backlights based on LEDs initially began as rows of LEDs mounted on one or two edges of the display.  These LEDs were mounted so the light would be generated horizontally, shining into the edge of an acrylic plate (light guide) whose optical characteristics spread the LED light across the entire display.  Such edge-lit backlights were always on, using the liquid crystal pixels to block or unblock the light according to the image, but while this was a step up from fluorescent backlights, due to the physical characteristics of liquid crystal, some of the LED light passed through the liquid crystal even when it was ‘closed’.  This made pixels that should have been black a bit gray and at the same time, the LED light from areas where the liquid crystal was ‘open’ leaked into pixels that were ‘closed’ causing a halo or bloom effect.

​While this sounds bad, it was the norm for LCD displays until 2013 when OLED displays were introduced.  As each pixel in an OLED display produces its own light, when an OLED pixel is off, it is black, and since there is no backlight in OLED displays, there is nothing to leak into adjacent pixels.  Such contrast made the grayish blacks in LCD displays look inferior and LCD designers went to work to find ways to combat the threat of OLED.  One new iteration was to move the LEDs from the edges to directly behind the light guide, more effectively spreading the light across the display, but given that the LEDs were still on all of the time, the other issues remained.  Designers then came up with the idea of dimming the LEDs in coordination with the image by using silicon to sample each image before it was displayed, determining the ‘best’ overall brightness level and dimming the entire LED backlight to match.

​While dimming was certainly the right track, images are complex, with very different areas that can be widely different as to lighting.  Dimming the entire LED backlight to suit an ‘average’ caused bright areas to be dimmer and dark areas to be brighter, so designers then split up the LEDs into groups, taking what might have been 32 LEDs and breaking them into ‘strings’ of 4 LEDs each.  While this meant creating separate control circuitry for each ‘string’, by placing the 8 strings in this example across the careen, the silicon could now average the correct lighting for each string ‘zone’ and further refine how much light each string produced.

​Mini-LEDs take this concept of dimming to its next level by both reducing the size of the LEDs, allowing them to be placed closer together, increasing the total number of LEDs used, and breaking the LED backlights into what are thousands of zones.  By increasing the granularity of the LED backlight’s ability to control smaller image segments, the light leakage and the halo effect are reduced, creating deeper blacks without sacrificing the brightness in other areas of the image.  Mini-LEDs will continue to evolve, moving to smaller LEDs, smaller pitch (the distance between each LED) and more zones, but there are some issues that inherent in making such improvements, with the single most important being price.
More LEDs and more control circuitry mean it takes more time to produce.  At the chip level die need to be tested both to make sure they work and to check color and brightness.  Then they are usually transferred to an intermediate medium and then placed on the final substrate.  Increasing the number of LEDs and decreasing the size adds time and therefore cost to the backlight, and as Mini-LED levels, the cost increases as typical process equipment is not designed to operate at such dimensions and speeds.  We have noted that new technologies for sort and transfer are being developed, but it will take time for costs to be reduced, leaving Mini-LED displays in the ‘premium’ category.
By scaling production and equipment to these new levels, especially taking cues from semiconductor tools that are adept at smaller device sizes, costs can be reduced and one such path is based on the Mini-LED array itself.  Most LED backlights are built on PCBs, which mounts the LEDs on a T-pack that is soldered to the PCB board or by using surface mounted LEDs, which are packages that connect the LED to the PCB.  Smaller LED backlights were relatively easy to produce this way, but as the number of LEDs increased, the control circuitry became more complex, and the size of displays continued to increase, PCBs had to also increase in size, now fitting TVs over 80”. 
This became considerably more burdensome for TV designers, and with the move to Mini-LEDs, which can bring the LED count to 20,000 or more, PCB boards began to become unwieldy, having to be mounted in frames to keep them rigid.  Mini-LEDs are now transitioning to a process called COB (Chip-on-board) where the LED itself, not a package/LED is mounted on a substrate such as glass, that already has control circuitry in place.  This technique, which uses deposition processes similar to those used to produce TFT (Thin-film transistor) backplanes for displays, allows for more densely packed Mini-LED displays, and because spot soldering is not used, the failure rate is considerably less than with SMT arrays.  Given the smaller size and large numbers of Mini-LEDs used in displays, the cost of repairing a defective Mini-LED is high, which adds value to the COB process.  As the industry develops such processes, the price of Mini-LED backlights will decrease while the characteristics continue to improve.

While the price of Mini-LED backlit LCD displays is certainly higher than typical edge-lit or full-array backlighting, even less sophisticated Mini-LED processes have a place in the display space and takin a cue from one of the early leaders in Mini-LED backlight development, Taiwan based Lextar (3724.TT), show a few examples of their Mini-LED backlight product applications in Figs. 8 -11.  We assume that chips for such arrays come from affiliate Epistar (3724.TT), while other chip suppliers have aligned with other Mini-LED packagers and array suppliers.  Such is the case with China’s BOE (200725.CH) who began production of a Mini-LED display line in March of 2020 with an emphasis on COB on glass substrates, working with chip supplier HC Semitek (300323.CH).  HC Semitek has also been supplying Mini-LED chip product to TCL (000100.CH) who has been a leader in the Mini-LED TV space and Skyworth (751.HK).  Foshan Nationstar (002449.CH), and Shenzhen LongLi Technology (300752.CH) have also supplied Mini-LED chips to TCL, and one might notice a preference to use local LED suppliers coming from Chinese Mini-LED array producers.
All in, while Mini-LED technology is an evolution of long-standing LED backlight technology, as the cost decreases and availability increases, the technology will help to prolong the life of LCD technology, giving some protection to the massive investments made in LCD capacity over the last 20 years.  While OLED is certainly a competitive display technology, the cost of producing OLED displays remains high compared to LCD, and while OLED display quality has a number of superior characteristics to LCD displays, Mini-LEDs narrow the gap, at least from a consumer perspective.  Each iteration in the saga of LED LCD backlighting has proved expensive at the onset and eventually come down to levels where it has little effect on the average price of LCD TVs. 
While Mini-LEDs do have their particular cost issues currently, the fact that existing process technology can be used to improve production costs gives us hope that Mini-LED premiums will become less onerous by the end of 2022.  Apple’s (AAPL) careful adoption of the technology in the iPad and MacBook, and potential expansion across those lines next year will certainly help to give confidence to chip producers and array developers, which will increase competition and reduce costs further.  While still in the early stages of implementation, we see much activity in the LED space toward such product development and dedicated Mini-LED capacity expansion backed by both display and LED producers who see the technology as a way to extend LCD investment lifetime without massive spending, while we expect consumers will be happy to see another level of LCD display improvement, as long as it doesn’t cost much more than they are used to paying for pre-Mini-LED technology. 

As far as smartphone sales go, China is the most important global market, with a share of 26.7% last year, and while CAGR for the period of 2018 and 2020 is -4.5%, that is only slightly above the total market CAGR of -4.0%.  This makes the Chinese smartphone market one to be carefully studied, looking for indications as to how trends are playing out, both monthly and quarterly, as a potential precursor to global market results.  September was a bit of a disappointment in the Chinese smartphone market as shipment were 21.4m units, down 12.0% m/m and down 8.2% y/y with September typically up 6.2% m/m (5 year average).  Given that the number of new models released in China in September was 58, similar to August’s 57, it would seem that Chinese consumers were not particularly impressed with the new batch of smartphones from local vendors, which gives us pause as to how the remainder of the year will play out in the Chinese market.
Based on September’s performance, we lower our expectations for China’s full year 2021 smartphone shipments from 332.9m units to 313.6m units, a reduction of 5.8%, which would put the year up 1.8%, rather than our previous estimate of 8.1%, and the 2nd half being considerably weaker than the first half of the year.  5G smartphones shipments were 15.1m units, down 16.6% m/m but up 7.9% y/y.  This marks the 2nd month in a row of negative monthly 5G shipment growth in China, with both declining faster than the overall market on a m/m basis.  While this is something to be closely watched, as 5G smartphones have been a source of growth in the Chinese market, we believe the slowdown in 5G shipments is a function more of an overall slowdown in the Chinese market than a function of 5G itself, especially as China continues to build out 5G networks. 5G smartphone share of total shipments in the Chinese market has been above 70% since March of this year and while it could drop below 70% in 4Q, the average for the first 9 months of this year (73.8%) is considerably higher than last year’s 46.8% for the same period.
While we believe the Chinese smartphone market is maturing, smartphone penetration rates are still estimated to be below 60%, and while penetration rate increases will become harder to come by going forward, the 5G conversion  replacement cycle will likely support at least some growth again next year.  That said, 6G is a few years off and it will be difficult for the Chinese market to see much unit growth in 2023 and beyond until that cycle becomes a reality, which will make the Chinese smartphone market even more competitive than it is currently.  While this does not bode well for Chinese smartphone brands, it will likely lead to more feature rich and potentially less expensive models for Chinese consumers over the next few years, and while this is a plus for potential Chinese smartphone buyers, it will continue to put pressure on non-Chinese brands, who are faced with further share loss in China and more global competition as Chinese brands look to grow outside of the Mainland.
 

​According to China, China is the leader in 5G based on the number of 5G base stations implemented across the country, and most would agree that China has been very aggressive building out its 5G infrastructure since it began carrying out its plan toward commercialization of 5G in June 2019.  But according to Japanese press, China has slowed down its build out due to the fact that Huawei (pvt) and ZTE (000063.CH), China’s largest 5G base station suppliers, have run out of components due to US trade sanctions placed on both companies that limit global suppliers from selling any product made in the US or produced using US software or hardware. 
The Nikkei Asian Review has stated that “China’s efforts to build 5th generation wireless communications infrastructure have lost momentum because equipment manufacturers have used up American-made parts and components, forcing relevant merchant suppliers to turn to the US and European markets.”  The article quoted Murata (6981.JP) chairman saying that Chinese companies’ demand for parts to prevent network interruptions has declined and another communications component manufacturer stating that since the summer of 2020 it is no longer supplying parts to Huawei.
According to the Chinese Ministry of Industry Information Technology the current number of 5G base stations in China (10/19/21) is 1.159m but the joint resolution of 10 departments focused on 5G development have set a goal of 18 base stations per 10,000 people by 2023, which would target the number of base stations at that time to be 2.52m based on a 1.4b population estimate.  In the first year of implementation (actually ½ year) 130,000 base stations were put into service.  Last year 600,000 were added, at a speed that was about 2x the 2019 rate and this year’s target for new 5G base station adds is 1m, however based on the MIIT numbers, the total installations for this year will be ~500,000 for a total of 1.23m units at year end..  This would imply 645,000 new 5G base station adds in both 2022 and 2023 to meet China’s goal, but does prove out that construction of new base stations has slowed from 2020 levels.
The bigger question is why has the rate of new 5G base station installation slowed?  Is it because Huawei and ZTE have run out of chip inventory and are unable to procure new silicon from suppliers who fear producing same would put them in the sights of US trade officials?  More than likely this is not the case, and while Huawei and ZTE have certainly been affected by the US trade sanctions in their smartphone businesses, early on Huawei stated that their biggest priority (this is all before the final portion of the trade sanctions were put in place) was making sure it had a stockpile of the silicon needed for its 5G base station products and began building such inventory through massive purchases from Taiwan Semiconductor (TSM) as far back as 4Q 2019.  Estimates that Huawei’s orders from TSM before the final sanctions were more than 2m units and Huawei has stated that its base station component inventory was sufficient to cover construction through this year and beyond and had eliminated other US components from their base station products early in 2020.
It all comes down to who you believe.  Japan (mostly Nikkei Asian Review) continues to tout the idea that Hauwei and ZTE are out of components, causing a slowdown in 5G roll-outs, while China says 2020 was the ‘big push’ year and is still on track to meet its goal.  Huawei does have the option of using locally produced communication silicon from SMIC (688981.CH) or other Chinese suppliers, which would be based on the same chip design developed by Huawei affiliate HiSilicon (pvt), although NAR says this could be inferior to TSM components.  Given that there is little chance we would be able to see and identify BOM sources for Huawei base stations placed on the Mainland, we have no way of confirming that Huawei is still using TSM silicon, nor do we take NAR’s view that blanket statements by Japanese suppliers hold weight, so it seems we will have to wait until the end of 2Q 2022 to see if MITT’s data indicates that China is still on track to meet its goal.  In the interim we watch peripheral data sources for any clues as to where Huawei’s base station inventory lies and whether the implementation slowdown is forced or in line with plan.
  

In our note of 9/30/21 entitled “One Small Step for Mini-kind” we noted the progress made by Kulicke & Soffa (KLIC) as the first shipment of their LED transfer tool Luminex™ reduced the time needed to transfer Mini-LED die from wafer to substrate using a laser based system that increased throughput by over 12 times over the company’s previous tool.  This reduces one of the bottlenecks that keeps the cost of Mini-LED backlight products high and will serve to expand the use of Mini-LEDs across a wider swath of display devices.  But the challenge of transferring Mini-LED LED die is miniscule compared to that of transferring Micro-LED die, which can be as small as 5um, with Mini-LEDs in the 100um or greater range. 
Size is an issue for any tool that must move such small devices from one location to another without damage however we also noted that Mini-LED backlights generate light to allow an LCD display stack to generate images while Micro-LEDs are self-emitting, meaning they produce the colored light that would make up an RGB display without a liquid crystal layer and a color filter.  This is a huge difference that puts Micro-LEDs in a class far above LCD technology, however as self-emitters, three LED die (RGB) are needed for each pixel, which means that instead of what might be 10,000 or 20,000 singe color LEDs in a Mini-LED backlight, a 4K Micro-LED display would contain 24,883,200 individual LEDs, increasing the number of potential die transfers by over 1,000 times. 
The die transfer time (moving die from wafer to substrate, even using the faster Luminex™ tool, would increase from 20 seconds (20,000 Mini-LEDs) to 6.9 hours for a 4K micro-LED display, making it infinitely more costly.  But it doesn’t end there, as not only are there more LED die to transfer but as noted above they are much smaller, making the accuracy of placement on the substrate a much bigger challenge for Micro-LEDs than for Mini-LEDs, yet that is not the biggest problem that Micro-LEDs face.  In order to create a Micro-LED pixel, one red, one green, and one blue Micro-LED would be needed. 
Conveniently, blue and green LEDs can be grown on a substrate made of GaN (Gallium Nitride) by creating structures of InGaN (Indium Gallium Nitride) between substrate layers, however red LEDs are produced by using AlGaN (Aluminum Gallium Nitride) between the GaN layers.  This means that red LEDs must be produced on a separate wafer while, in theory, blue and green LEDs can be produced on the same wafer.  If all three structures could be produced on a single wafer, the complexity of transferring such vast numbers of small die could be greatly improved, but as it stands that has not been possible or practical.  Not only do red LEDs cause this problem for Micro-LED developers, but unlike blue and green LEDs that maintain performance and their size decreases, red LED performance degrades rapidly as they are made smaller.  This makes bringing down the size of an RGB pixel to what is necessary for Micro-LED applications problematic, as the performance of the red sub-pixel would be far less than that of the blue and green.
But all is not lost as a small start-up, actually a spin-off from the University of Cambridge, Porotech (pvt), says they have a solution that would allow red LEDs to be created on a GaN substrate using the same InGaN material structures as the blue and green LEDs, meaning all three could theoretically be produced on a single wafer, simplifying the transfer process and improving the characteristics of the red LEDs at the same time.  This is done by changing the structure of the GaN substrate, creating a porous layer in the substrate that greatly improves the material’s optical characteristics while keeping its electrical characteristics unchanged.  The company, which has only been in existence since last year, has raised ~$10m through a number of UK and Austrian VCs and has signed an agreement to work with Chinese micro-display producers Jade Bird (pvt), who will be using the Porotech substrate material to produce Micro-LED AR/VR displays. 
While the technology is still a bit in the early stages, if it holds true that all three Micro-LED structures could be produced on the same wafer with similar characteristics, it would go a long way toward improving the prospects for the commercialization of Micro-LEDs and would eliminate all of the ways in which Micro-LED display designers now currently try to compensate for the technology’s shortcomings.  There will still be many issues that engineers will have to face before Micro-LEDs become a competitive technology but when we see something that seems to be a big step toward putting a new technology on the path to commercialization, we like to make note.

​Google (GOOG) is expected to release its latest Pixel smartphone, the Pixel 6 and Pixel 6 Pro at the end of this month, and has said to have placed orders for 7m units from suppliers.  While these are small numbers compared to smartphone giants like Samsung and Apple (AAPL), the tally for last year’s Pixel series sales were 3.7m units, putting the current order rate over 89% higher than last year.  Google’s optimism extends further in that they have been said to have placed orders for ~5m Pixel 5 series phones, which were released last year around this time.  The pixel line i(prices are expected to be $600 and $900)  is considered to be a  competitor to high-end flagship brand models at a lower price, but has yet to capture significant share of the smartphone market.  While pre-ordering has begun, we doubt initial order rates have had anything to do with pre-delivery orders and reflects Google’s optimism about its ability to gain share this year.  While they risk ~$1b to $1.5b with such a high order rate, it seems a bit small in perspective given their $182b sales base last year.  

Each year the lead-in to Black Friday gets extended, with deal ads starting in October and the actual Black Friday (11/26) day itself starting for many retailers on Wednesday, November 25.  Last year many brick & mortar retailers gave workers Black Friday off and closed stores to avoid crowds during the height of the COVID-19 pandemic and relied on increased on-line sales to make up the in-store selling day loss.  While we expect there might still be some store closings, on-line shopping has already become so ingrained in our culture, especially in the 25 – 34 year old bracket, that missing the overnight camp-outs in front of Wal-Mart (WMT) will likely not be missed by many.  In fact, a recent survey of 1,000 consumers who plan to shop between September and Cyber-Monday indicated that only 30% of respondents thought that stores should still remain open and have door buster sales, with 39% preferred the stores to stay open but have no door buster sales, while 31% stated that they would prefer the stores to remain closed on Black Friday. 
On a more general basis, an Offers.com (ZD) survey indicated that 20% of shoppers expected to increase spending during the holidays this year while 21% expected to reduce spending, so the overall consumer spending pattern will likely remain on track with recent years.  That said, now that the press has taken up the story on supply chain issues that might affect holiday deliveries, Black Friday early discounting serves the purpose of lengthening the time when orders might be placed, which gives retailers more wiggle room on delivery schedules, so said supply chain issues do lend some legitimacy to an extended holiday season, but at the same time consumers have also become used to those last minute ‘Super Savings Discounts’ that pop-up on peak buying days, which might not look as attractive if discounting has been in place for over a month.  That, coupled with consumer electronics’ inflationary characteristics this year could make it a bit more difficult for consumers to find the bargains they have become used to, especially if there are delays in delivery times.

While it is impossible to get an accurate picture of holiday CE deals across a large swath of products, we look back at one area where we have hard data, Samsung’s (005930.KS) Mini-LED/QD TV line, which we have been tracking since the products were announced in May.  As a reminder, this was the first year Samsung has offered a TV line that was based on Mini-LEDs, which gives us the opportunity to see how effectively Samsung priced the models at the onset, and how those prices have been trending to date, especially as we head into the holiday season.  We check Samsung’s Mini-LED/QD TV prices roughly every two weeks, although when we are contacted by Samsung as to ‘price drops on products you have viewed’, we check to see if there are any unusual pricing movements.
Based on our data, it seems that Samsung has already begun its holiday discounting program, at least for its Mini-LED/QD TV line, as the most recent tally has indicated that prices for much of the line have again reached their lowest point since release in late May.  In fact of the 33 models we track, 29 are at their lowest point since release, while 2 are at their highest (actually unchanged from the initial price) and the top of the Mini-LED/QD line (8K) is now 36.7% below the initial price, dropping over 10% over the last week, while the 4K Mini-LED/QD are down less, but also saw price drops between 2.8% and 8.2%.  Samsung’s quantum dot only sets fared a bit better, down between 0.0% (low-end QD only line) and 4.4% (hi-end QD only). 
While these prices, especially at the high-end of the line are significantly discounted from initial list price, they are also competing with Mini-LED TV price leader TCL (000100.CH), who is on their 3rd Mini-LED/QD iteration, and LG Electronics (066570.KS), who has pricing more comparable to Samsung.  TCL has far less name recognition in the US than either Samsung or LG, but has gained much recognition as a low-cost alternative to premium sets from other major TV brands at retailer Best Buy (BBY).  While feature-to-feature comparisons are difficult, TCL’s Series 6 Mini-LED/QD line directly competes with Samsung’s 4K Mini-LED/QD line and while TCL offers a limited number of comparative models, they are priced far below even Samsung’s lowest tier Mini-LED/QD sets.  TCL has already discounted their Mini-LED TV sets from list, so we would expect less discounting going forward, but with models between 46.2% and 51.9% below Samsung’s comparative pricing, the difference to consumers is obvious and continues to keep Samsung Mini-LED/QD prices under pressure.

​Back in April we noted that Taiwan based AU Optronics (AUOTY) was planning to both buy out its joint venture partners and add capacity to its Gen 6 LCD fab in Kunshan, China.  The deal had been waiting for approval from the Taiwan Investment Commission, which has been reviewing the transaction.  According to local press, the Commission has approved the deal, allowing AU Optronics to purchase the 49% stake held by the Jiangsu Kunshan Development Zone Construction Group for $617m, making the fab a wholly owned subsidiary.  This will allow AUO to add what we believe will be ~9,000 sheets/month of capacity to the existing 36,000 sheet/month layout, with a planned timeline of 3Q 2022 as the opening of the new line. 
AU Optronics has been quite conservative toward expanding capacity over the last few years and has spent more time and capital upgrading its LCD production processes and shifting production toward higher margin products, so this transaction, and the capacity expansion, albeit small by industry standards, are a change for AUO and are indicative of the more optimistic view panel producers have of the current panel cycle.  That said, we expect AUO is looking past current prospects and is looking to broaden it capabilities on a more general basis, with emphasis on the IT and automotive display spaces.  Given AUO’s conservative nature, we see relatively little risk in the expansion regardless of the prospects for the next few quarters.

​In a Q&A with investors, Chinese panel producer BOE (200725.CH) was posed the question below:
“The recent continuous decline in panel prices has fallen by more than 30%.  What is the impact of the panel price reduction on the company?  How does the company face the decline in panel prices?”
The answer is about as close to pure ‘company speak’ as is possible, with little direct information as to the impact of the panel price declines on the company’s financials.  Most entertaining was “structural adjustments” as a euphemism for panel price reductions, and the phrase, “The company maintains its judgement on the weakening of the panel cycle…” which gives little indication as to any adjustments to production, product development, etc. that the company might be making, falling back on the typical platitudes of ‘good products, customer structure, etc.’ and emphasizing that the company “still maintains a good level of profitability.”  In a follow-up question that phrase changes a bit to “believes that BOE can still maintain good profitability and strong elastic recovery even in a weak market.”
While BOE tends to be a bit more ‘talkative’ than most Chinese panel producers, when things get a bit more difficult, they rely on the same carefully worded corporate answer evasions that most companies fall into.  Here is the company’s answer to the question above:
“Hello!  After the semiconductor display has experienced a long period of prosperity, there have been some fluctuations in the current structure, which is mainly reflected in the TV field.  Entering the third quarter, due to congestion in shipping and rising logistics costs, which affected the willingness of downstream customers to stock up, the prices of TV products have undergone structural adjustments;  IT products have remained relatively stable thanks to better demand and supply concentration.  The company maintains its judgement on the weakening of the panel cycle, relying on good products, customer structure, and leading technology and product capabilities, and still maintains a good level of profitability. Thanks!”
Our point here is that during the upcycle in the display business the virtues of Chinese display companies were constantly extolled with adjectives like ‘glorious’, ‘wondrous’, and ‘triumphant’, essentially taking credit for what was by any measure, a singular set of circumstances that bailed out a cyclical industry that was doing little to plan for the future other than domination of an industry that more experienced participants were looking to move away from.  While the Chinese display industry might seem to have a coherent plan shaped by a government that is interested in promoting long-term growth and sustainability after spending many billions to grow capacity, in reality there is considerable competition between Chinese display producers, as well as provincial and local governments, with financial carrots held out to display producers who are looking for both a home for capacity and a reliable source of funding.  With the motivation of growth, usually led by increasing capacity, the driver for the industry, we wonder if China’s display industry is able to respond to changing conditions as easily as it responded to an increase in demand last year.
Rumors that BOE has cut large panel LCD production have surfaced, with what we calculate as an 11.1% capacity reduction against maximum stated production capacity in October, and while the company will not confirm or deny such production changes, when queried about such production cuts, BOE’s response was as indicated below, which seems to be a tacit confirmation, or at the least an indication that some response to the decline in panel prices has been made.:
“With the increase in new technologies of the company’s production lines, investment in new product research and development, and product structure adjustments, it will lead to changes in the volume of production (to) enhance competitiveness to ensure that the company’s overall profitability is maximized.”
We admire Chinese panel producers for their drive and focus, but once the projects have been completed, factories built and local workers employed, there seems to be little planning as to how companies would deal with anything other than an ever increasing demand cycle, and only when things are near collapse does the state government step in with plans for absorbing weak entities into state monoliths.  The constant push to be the biggest, produce the most units, and unseat whoever is the dominant player is a worthy goal if it is based on building a profitable business that can remain profitable in all or most parts of typical cycles, but we see little in the way of anticipating the possibility that demand might not always be growing and while we do not expect companies such as BOE to readily reveal how they might be dealing with a reduction in demand for a substantial portion of their business, we hope that somewhere there is a playbook for how the company (and others) will deal with the down-cycle.