​BYD Automotive (002594.CH) (“Build Your Dreams”) is a major producer of cars, trucks, and busses based in Xian. China where it has two production sites.  According to local news the sudden death of a 36 year old employee aroused public concern due to the fact that documents appeared implying that the worker had been ‘worked to death’, far exceeding working hour restrictions.  After the company refunded the workers social security and funding plan to the family, negotiations began over the company’s responsibility in the sudden death.
The employee, having been with the company since 2009, worked in logistics (which could mean almost anything) and tended to work the night shift, however it was soon discovered that between October 28 and November 3 he had taken 7 night shifts in a row, six of which lasted roughly 12 hours, and had 26 days of work in October that lasted 12 hours..  According to labor laws in China restrict workers to 8 hour shifts with extended hours only in special circumstances.  Such extended hours, which cannot exceed 11 consecutive hours, can only be applied for 12 working days per month, which was obviously exceeded. 
As the employee was in rental housing when he died and no autopsy was done to pinpoint the cause of death, the company claimed no responsibility, while the family tried unsuccessfully to negotiate a settlement based on the excessive working hours.  As negotiations failed, the family went to the press to bring the story to the public and suddenly the company negotiated a settlement of 200,000 yuan ($31,322) as compensation (likely no guilt admitted).  Without an autopsy it would be hard to liken the incident to being ‘worked to death’, but we hear so many incidents of ‘overworking’ in Chinese factories during the holiday period that it is hard to rule it out, but $31K? C’mon…

​Huawei, formerly China’s largest smartphone brand, has faced serious sales declines due to the restrictions placed on the global supply chain by the US government.  Originally limiting access to the Google (GOOG) Store, ending the company’s ability to provide Android OS updates, and then limiting any global supplier that used US components or software in their product development, essentially removing Huawei’s ability to access foundry capacity outside of China. 
Huawei not only struggles with the impact of these limitations in its smartphone business, but has faced strong US opposition to its telecommunications products, which the US government alleges such products allow for call surveillance by the Chinese government.  Huawei sold part of its smartphone business (Honor brand) last year, allowing it to survive outside of US restrictions, but is no longer associated financially with the brand.  While Huawei’s management remains optimistic about the company’s future and has been developing businesses that are not constrained by US trade issues, the mobile phone business continues to suffer, especially outside of China where the necessity for the Android OS is paramount, and despite a recent pep rally where the company predicted that “…the king will return in 2023…” unless something changes on the US trade front, they will remain constrained outside of the Mainland.
That said, there is some talk that Huawei is considering licensing its smartphone technology to PTAC (China Postal & Telecommunications Appliance Company), a state-owned distribution network, which will then produce an independent brand of smartphones based on Huawei’s design.  PTAC has sold Huawei product on its network in the past but under the Huawei brand.  While this would certainly help Huawei to regain at least some of the revenue it has lost in the smartphone business, it remains unclear whether such a step would remove Huawei far enough from the final product that it would not be part of the US restrictions, and while it might take some time for the US DOC to follow the path to such a transaction and maintain a lid on any Huawei ‘inspired’ product, it would likely catch the eye of those China Hawks that continue to maintain pressure on the current administration to keep Huawei from competing in the smartphone market.
While it is a tenuous concept that the Chinese government has, is, or will use intentional backdoors in Huawei’s telecommunication equipment, we believe the real basis for the secondary restrictions that limit Huawei’s smartphone business, were based in the egoistic machinations of individuals in the Trump administration, who wanted to make sure that China would not be able to ‘out 5G’ the US, nor gain traction in the semiconductor business, the shining star of the US technology effort.  Given that Huawei is now ‘the face of China’, we doubt any transaction that Huawei might accomplish to generate revenue will garner detailed inspection by the US and likely fall quickly under the current restrictions.  China is too easy a political target to let even a once or twice removed participant bypass restrictions, especially one that involves a state-owned entity.

​Samsung Electronics has been winding its way through negotiations as to where it wants to place its proposed $17b semiconductor fab, with sites in Texas, New York, and Arizona in contention.  Samsung’s Vice-Chairman is in the US, assumedly to finalize those plans which have been ongoing since May.  It seems that one of the three sites in Texas, the Manor School District, has bowed out, leaving a site near Taylor, Texas and Austin, where it already has a fab, as the final contenders in Texas.  Samsung is expected to begin construction of the fab, wherever it winds up in 1Q 2022, with production slated for late 2024.  A decision (announced or not) is expected this week.

​Samsung Electronics (005930.KS) has been a leader in the 5G smartphone race, releasing the 1st 5G smartphone, the Galaxy S10 5G in April of 2019, but has been lagging behind Chinese brands, who have pushed the technology given the aggressive 5G base station buildout that has taken place across the country.  Samsung has lost share in China, not only because of 5G, although that is seen as a contributing factor.  Based on Samsung’s current 2021 smartphone lineup (there are at least two more models slated for release this year), 5G capabilities are available in all flagship models (Z Series & S Series), but only in 33% of Samsung’s mid-tier (A Series) models, 27.3% of its lower-priced models (M Series), and 33% of its lowest tier models (F Series).
Samsung is expected to push 5G into all of its 2022 A series models next year in order to attract more users in both China and Europe, where EU members have a ‘unified’ plan for 5G buildout through 2027, have implemented 5G in at least 24 of the 27 EU countries, and are expected to have almost 36m subscribers by the end of this year (Western Europe).  Samsung will continue to provide 4G LTE versions of such new models for those areas where 5G has yet to be implemented.  While 5G is a bit of a different animal from other smartphone features, this is in keeping with Samsung’s plan to push down features that might have appeared only in flagship phones in the past, to lower priced models and will likely push down high pixel cameras, larger batteries, and IP67 (water/dustproof rating) to all or many of the A series phones. 
Samsung will also be pushing the connectivity aspect of the company’s smartphones, expanding their ability to share information with other Samsung products, from Smart Tags™ to appliances, and given the broad Samsung CE ecosystem, using the smartphone platform as a control point for many of those products, is an advantage few of its competitors have.   Moving such connectivity from flagship phones down to mid-tier phones will be a viable way for Samsung to counter Chinese smartphone brands, most of whom do not have more than a few CE products outside of smartphones.  The trend with Chinese CE companies is to use a ‘smart screen’ (aka a connected TV) to control and monitor CE products, but this limits consumer reach.  Given that smartphones are rarely out of reach to consumers, a phone that offers connectivity to a wide selection of CE products become more indispensable to consumers, and bringing that down to phones under $500 should help Samsung to regain some share in 2022.  LG Electronics (066570.KS) has a similar connectivity system (ThinQ) but will no longer be producing smartphones.

Apple (AAPL) has been a staunch defender of its limitations on who is allowed to fix Apple products.  With reasons ranging from “we don’t want consumers to hurt themselves” to “We only want the best components to be used in Apple products”, the company only allows its products to be repaired through its authorized repair centers, which have access to both tools and the components needed for such repairs, all supplied by Apple.  While this is certainly a way in which Apple can maintain quality for repairs under warranty or service agreements, when devices no longer have such coverage, it gets almost impossible to make repairs, with Apple keeping service manuals, some specialized tools, and necessary software away from non-Apple repairers.  In fact, if one were to try to replace a broken screen on some iPhones, the phone will no longer allow the ID verification system to work, leaving the phone open to identity theft.
Apple is certainly not alone in their despotic control over product repair as a company such as Deere (DE), allows farmers to replace the most common parts on their tractors but does not allow them access to the electronics that are the heart of such machinery, unless the repair and parts are supplied by the company.   iFixit (pvt), a company known for its device teardowns, has been lobbying for years to force consumer electronics companies to allow outside repair and to force them to make replacement parts available to both users and ‘un-authorized’ repair centers, countered by the almost endless resources of those who want to keep what is a profitable repair business under company control., but it seems that the tide is turning as the Biden administration has taken up the cause, working toward what would be a ‘repair bill of rights’ for consumers.
Reading the tea leaves, it seems Apple is taking the initiative and beginning to loosen the strings on product repair, likely looking to present a more customer friendly face before congressional committees call for industry representatives to be grilled on the senate floor as to why consumers should not be allowed to fix their own devices.  We doubt it will make much difference to the average consumer, who doesn’t have the slightest idea what is inside an iPhone, and it will open up consumers to a vast group of mini-mall repair shops that will now have the tools to better understand that they can also charge outrageous prices to fix minor issues, but for the very, very few that are willing to pry open an iPhone and pull away gobs of adhesive, they will have the satisfaction that they were allowed to try to fix their phones, even if they can’t get it back together again.
That said, it might also help the environment in that the life cycle of Apple products could be extended by repairs, which could become a bit less expensive as more repair possibilities are open to consumers.  Rather than throwing an older iPhone in the trash and buying a new one, you might be able to get a new battery or have another issue repaired, keeping a few toxic materials from leaching back into the soil,a small bonus.
Here’s what Apple announced today:
Apple today announced Self Service Repair, which will allow customers who are comfortable with completing their own repairs access to Apple genuine parts and tools. Available first for the iPhone 12 and iPhone 13 lineups, and soon to be followed by Mac computers featuring M1 chips, Self Service Repair will be available early next year in the US and expand to additional countries throughout 2022. Customers join more than 5,000 Apple Authorized Service Providers (AASPs) and 2,800 Independent Repair Providers who have access to these parts, tools, and manuals.
The initial phase of the program will focus on the most commonly serviced modules, such as the iPhone display, battery, and camera. The ability for additional repairs will be available later next year.
“Creating greater access to Apple genuine parts gives our customers even more choice if a repair is needed,” said Jeff Williams, Apple’s chief operating officer. “In the past three years, Apple has nearly doubled the number of service locations with access to Apple genuine parts, tools, and training, and now we’re providing an option for those who wish to complete their own repairs.”
Apple builds durable products designed to endure the rigors of everyday use. When an Apple product requires repair, it can be serviced by trained technicians using Apple genuine parts at thousands of locations, including Apple (in-store or by mail), AASPs, Independent Repair Providers, and now product owners who are capable of performing repairs themselves.
To ensure a customer can safely perform a repair, it’s important they first review the Repair Manual. Then a customer will place an order for the Apple genuine parts and tools using the Apple Self Service Repair Online Store. Following the repair, customers who return their used part for recycling will receive credit toward their purchase.
The new store will offer more than 200 individual parts and tools, enabling customers to complete the most common repairs on iPhone 12 and iPhone 13.
Self Service Repair is intended for individual technicians with the knowledge and experience to repair electronic devices. For the vast majority of customers, visiting a professional repair provider with certified technicians who use genuine Apple parts is the safest and most reliable way to get a repair.
 
Expanded Access to Apple Repairs
In the past three years, Apple has nearly doubled the number of service locations with access to Apple genuine parts, tools, and training, including more than 2,800 Independent Repair Providers. The rapidly expanding Independent Repair Provider program originally launched in the US in 2019 and has since grown to more than 200 countries, enabling independent repair shops to access the same training, parts, and tools as other Apple Authorized Service Providers.
In addition, Apple continues to offer convenient repair options for customers through its global network of over 5,000 AASPs that help millions of people with both in- and out-of-warranty service for all Apple products.
 
By designing products for durability, longevity, and increased repairability, customers enjoy a long-lasting product that holds its value for years. Apple also offers years of software updates to introduce new features and functionality.
​

While we are on the subject of Samsung, as the company has manufacturing facilities in almost all regions across the globe, but like other large corporations, is constantly looking for production sites that are both relatively close to large population centers and economically viable as to wages and incentives provided by local or state governments.  Smartphone production is particularly sensitive to such factors as competition from Chinese brands squeezes premiums so shifting production from higher cost locations, such as South Korea, has been a focus for Samsung for a number of years.  The focus a few years back was Chine, with a very ample workforce and low wages, but as China’s growth increased salaries and trade issues developed, Samsung found other locations for smartphone production that offered better margins.
Vietnam became a valuable production location over the last two years as companies, including Samsung, migrated away from China, and Samsung’s two Vietnam assembly plants produce over 60% of Samsung’s global smartphone output, however both COVID-19 outbreaks, which led to factory closings and severe travel restrictions, along with increased wage requirements, have led Samsung to consider moving some of that production to other locations.  It is expected that Samsung will reduce its Vietnam smartphone production exposure by ~10% in 2022, from ~182m units this year to ~163m units next year and will split the shifted production between facilities in India and Indonesia.
Samsung is expected to spend $90m to increase its production capabilities in India from 60m units to 93m units and will spend $50 to expand production in Indonesia from 10m units this year to 18m next year.  This will raise production share in India from 20% this year to 29% next year, and will increase production share in Indonesia from 4% currently to 6% next year. 
As the global smartphone market is struggling for growth, positioning production becomes more of a regional issue, while balancing labor costs and incentives to regional demand.  Over the last few years (2018 – 2021 (f)) only three regions have shown positive CAGR, with Emerging APC the largest by just under 3x.  This pushes smartphone producers to build out those regions, especially if labor costs are reasonable.  Average salaries in India, Indonesia, and the Philippines are equal to or less than those in Vietnam and far below those in China, so while it might be expensive to play this game of musical chairs, it pays off in terms of production costs  and country-wide tax incentives can compensate for some of the costs.  COVID-19 is still a wild card that can become a factor, as it has in Vietnam, but over the next year it should become less of a factor as vaccines become available on a global basis.
 

​Yesterday Chinastar (pvt), a subsidiary of TCL (000100.CH) ‘released’ two inkjet printed OLED displays, a 65” 8K and a 14” (4K?), a presage of what it hopes its most recent expansion plans will be part of.  On 11/2/21 we noted that Chinastar had petitioned the Shenzhen government to acquire land adjacent to its T6/T7 production fab in order to scale production, some of which would be for OLED.  With the release of these two IJP panels, it sets the tone for Chinastar to build at least one dedicated Gen 8 ink-jet printing line as part of that project, which would be China’s first IJP mass production line.  TCL has been working with Japan’s JOLED (pvt), in which it took a 10.76% stake last year, to develop the technology for mass production.  We target mass production for late 2023 to early 2024, but leave considerable room for delays, both from a process and a customer standpoint.
Chinastar is promoting IJP for OLED based on its belief that the process will allow for a cost/unit that is lower than that of the more typical OLED deposition process, with the expectation that OLED material utilization can be improved from ~60% to 90% using IJP and that the complexity of the process can be reduced, particularly not having to deposit materials in a vacuum.  While the theoretical metrics for IJP deposition are certainly promising, moving from a pilot line to a high volume mass production environment has proven more difficult and time consuming than originally thought, and while IJP is used for OLED encapsulation, it is still being developed for material deposition.  Samsung Display (pvt) is using IJP for process steps in its push toward mass production of QD/OLED displays and much work is being done on the deposition of quantum dots for a number of applications, but even Chinastar says it is studying the customer and product introduction schedules to determine the details of what IJP large panel mass production would look like.
JOLED itself does produce OLED displays ranging from 12.3” to 32” including some IJP models, although they tend to be for specialized applications.  JOLED does run an IJP line, using IJP technology from Panasonic (6752.JP), one of the two (Sony (SNE)) was the other) companies whose OLED divisions were merged to form JOLED in 2015, however we expect Chinastar’s and TCL’s plans are to bring IJP OLED production to a more massive scale in order to compete with LG Display’s OLED TV domination.  Again, in theory it makes sense, but the practical application of the technology on a more massive scale has taken years longer than originally expected, not only because of the hardware, but also due to the modification of materials necessary for IJP itself.  In order to compete with vacuum OLED deposition processes, such soluble materials must exhibit the same characteristics as their evaporative counterparts, which has also proved challenging. 

The big guessing game in the CE space is whether the break in TV panel prices will give TV brands the ability to offer substantial discounts during the holidays and stimulate TV set sales, which have been and are expected to be lackluster.  Component shortages, inventory prices, transportation bottlenecks, and TV panel prices all play into such calculations, and while each brand has their own issues, we took a look at the US CPI (un-seasonally adjusted TV index) and how that relates to actual aggregate TV panel prices to get some understanding of where we are in the cycle, and the possibility for a better than expected holiday season.
The simplest comparison was the CPI TV Index vs. the aggregated price of TV panels since January 2020, as shown in Fig. 1.  As can be seen, the TV CPI index lags the index by about a month, with TV panel prices peaking in July and the TV CPI peaking in August, however the TV CPI did not follow the rising TV panel prices seen in the latter half of 2020.  It was not until the beginning of 2021 that the TV CPI began to track TV panel price increases and while the more recent TV CPI data better reflects the change in TV panel prices that began in September, we expect the TV CPI will take longer to readjust to lower panel prices.   TV panel prices have declined 35.3% from their peak while the TV CPI has declined less than a percent, and while this is not a real comparison as the bases are so far apart, at least from a visual point of view, they seem to be tracking more closely over the last three months than in the last 18 months.
But when it comes to consumers, TV panel prices and the TV CPI are far less relevant than what they see when walking into Best Buy (BBY) or are checking TV prices on Amazon (AMZN).  While underneath the loose budgets that consumers will try to hold to when viewing possible TV or other CE choices lies wage inflation/deflation, a smattering of knowledge, much brand hype, and a desire not to buy something that is overpriced, if something looks like a good bargain, it attracts attention.  In order to see whether TV panel price reductions and TV CPI decreases have made an impact on ‘real’ TV prices, we took a simple survey.  We traced the pricing for the 10 top selling TVs at Best Buy to measure where they currently stand relative to their high and low points.  Since Best Buy does not provide historic data, we used pricing on Amazon to trace pricing, and while this was more often 3rd party pricing, rather than Amazon’s, it does give a reasonable representation of the pricing cycles of these TVs.
Just to clarify the data set, the top ten ‘Best Sellers’ at Best Buy consisted of five Samsung (005930.KS) TVs, two LG (066570.KS) TVs, and three Insignia TVs, which are Best Buy’s house brand.  Of the 10, three were 2021 models, five were 2020 models, and two were 2018 (!) models, with one of the LG models being an OLED TV.  In terms of TV size, there were two 75” and two 65” TVs, with the rest with one each (75”, 58”, 55”, 40”, 32”, 24”), with only two being 4K TVs, five being UHD resolution, and the remaining ones HD.  The average price for the ten models was $585 on Best Buy, although leaving out the OLED TV brings that average down to $450.   Prices on Amazon were typically equal to or higher relative to Best Buy, with the average on Amazon 8.9% above Best Buy, but much of the differences came from the two 70” models, which were 29.2% and 66.3% higher on Amazon, likely because they are in relatively short supply.  
What was most interesting was that while the Amazon prices were down 22.5% from their high points on average and up 17.8% on average from their low points, the current prices of the ten sets on Amazon were 8.9% higher than the current Best Buy prices and the current Best Buy prices were only 0.2% higher than the average lowest price point (historically) on Amazon.  If nothing else, it points to the fact that the ‘best sellers’ at Best Buy are better deals than even the lowest historic prices on Amazon.  While the data proves the point that it is certainly better to shop for bargains on-line, particularly among Best Buy’s ‘top sellers’, than to walk into a store and wander through aisles of TVs with a salesman, it does not give any indication as to how much discounting is being done across the broad spectrum of TV sets sold in the US, despite the ‘previous price’ listed for each set at Best Buy.  We believe those ‘previous prices’ should be ignored, considering some of those sets were over two years old and have seen many short pricing peaks and valleys that had little to do with actual consumer prices. 
We also looked at the 10 most and least expensive models offered at Best Buy, however, most were not available on Amazon and price tracking data was therefore not available but just in passing, the average price of the 10 most expensive TVs at Best Buy was $17,155, with the top of the range set by a Samsung 98” 8K set at $60,000 and the least expensive a Samsung 85” 4K TV at $5,500.  At the other end of the spectrum the 10 lowest priced TV sets at Best Buy averaged $121.30, with the most expensive being a $160 Toshiba 32” TV and the least expensive being an Insignia 19” TV at $80.
All in, it will take a much wider sample to see whether the impact of TV panel price decreases will be able to work their way to consumers by the end of the year.  As set producers built inventory against a fear of continuing component shortages, they built in months of higher cost inventory that still has to be worked through or written off at the end of the year.  With three months of lower cost TV panel inventory, the cost average will come down, but given the multitude of other factors, particularly raw materials, semiconductors, and logistics, we expect much of the effects of TV panel price reductions will be seen in 1Q, making the post-holiday period a more likely place to be looking for real TV bargains.  TV panel producers are already seeing the effects of the price declines and have begun to lower utilization rates, which will continue to pressure y/y comparisons, but the bigger question is whether TV set brands will keep any margin they gain, or pass it on to consumers to move units.  Given the margin issues that have faced TV set brands for much of this year, we expect the former but hope for the latter.

​Chinese brands are not known for their advertising subtlety, adding adjectives such as glorious, triumphant, and industry-leading to announcements of accomplishments or industry metrics.  With the end of the Chinese 11/11 shopping holiday now upon us, a number of Chinese brands have begun to offer up results.  In a ‘super-burning’ report, Chinese brand TCL (000100.CH) has indicated that it exceeded 2.187b yuan ($342.7m US), a 36.7% increase over 2020 sales, a new record high, although it does not qualify whether this was for an extended period or for a single day total. 
That said, TCL notes that an outstanding product this year was its Mini-LED QD TVs, for which it describes itself as the QD/Mini-LED product leader, Mini-LED backlight leader, the world’s leader in QLED technology, and the top ‘comprehend the AI chip’, which we take to mean the use of AI in Mini-LED displays.  They go further in noting that they have annual production capacity for 10m units, 470 related patents, and are the sales leader (QD/Mini-LED) in North America, Europe, and China.  They also specify that their Mini-LED backlights are not PCB based but are deposited directly on glass, a distinct cost advantage, and are actively driven, rather than the passive drivers used by some.  Not leaving out that 9 out of every 10 Mini-LED TVs that have been sold (goes back to 2018) have been TCL’s, the company rarely misses an opportunity to mention that it has been researching and producing Mini-LED TVs for considerably longer than both Samsung and LG (066570.KS), who are both new entrants to the product line and have relatively weak Mini-LED manufacturing capabilities, citing 2020 statistics, but do not cite 2021 metrics, given both TV giant’s entry into the Mini-LED/QD market earlier this year.
We certainly give TCL credit for moving ahead with Mini-LED TVs years before others were in production and also give them credit for being the price leaders, as we have noted previously, but 2018 through 2020 were the easy years, where the only competition was from other TV technologies.  While both Samsung and LG, along with Sony (SNE), are new to the market this year, we expect the competition to increase as all three build out their supply chains and ramp production.  This is the right year for TCL to celebrate its success with Mini-LED/QD TV as next year there will be new players and lots of marketing from TV brands.  Take the victory lap.