​In July we noted that Samsung Display had been having difficulty with it’s ink-jet printing tools on its QD/OLED line and had reconsidered replacing those tools, which had been supplied by Samsung Electronics (005930.KS) affiliate, SEMES (pvt), after a bake-off with US based IJP supplier Kateeva (pvt), despite the better results from the Kateeva tools, which SDC already uses to encapsulate OLED displays.  We were surprised when the SEMES decision was made, as Kateeva had considerable experience with SDC and was the performance leader, but we expect there were other criteria, likely price, that could have influenced the decision at that time.
Since then it has become known that SDC is either replacing or adding IJP capacity to its QD/OLD line using Kateeva IJP to deposit quantum dot materials, with South Korea’s HB Solutions (297890.KS) as the provider of software that sits on the Kateeva tool, and delivery of the combined tool set is expected this month under a $10.2m contract with HBS.  SDC was said to have already purchased the Kateeva tool late last year and provided it to HBS for the software modification.  As HB Solutions made a $13.5m investment in Kateeva earlier this year and also purchased rights to additional Kateeva patents in the US, there was a point at which, if the deal between Kateeva and SDC did not go through, HB Solutions would become the owner of some of Kateeva’s collateralized patents, but it seems that any recent delays had little to do with Kateeva.
While it will take some time to bring the Kateeva tool into full production, we expect that the addition of this new IJP tool is part of the increased capacity SDC has been touting in relation to its QD/OLED fab.  Earlier yield issues are now assumed to be at least in part, related to the SEMES IJP tools, and the use of the Kateeva/HBS tool should allow SDC to bring QD/OLED yields even higher than the recent 85% rate that has been estimated.  The battle over who should supply IJP to the QD/OLED project has been going on since early 2020 (likely even before that date), and now seems finally resolved with Kateeva the winner after Kateeva had spent considerable capital developing the tool for SDC.  While SDC’’s original choice of the SEMES IJP tool almost cost Kateeva its existence, it seems SDC has had enough sense to admit they were wrong and make the change, something a bit less common than one might think in the display space.  All in, it is a positive for HBS and Kateeva, but more so for SDC, who needs to expand QD/OLED capacity with as little capital as possible. 

Theoretically tablets have been around for almost 30 years, although we look at the tablet ‘era’ as starting with the Apple (AAPL) iPad, which sold 2x predictions in the first 3 quarters after its release in April 2010.  Since then tablets have had their ups and downs, originally focused on  the workplace, and accused of potentially destroying the notebook market, tablets remain a functional part of the CE landscape.  On a long-term basis (see Figure 2), the category has been in decline in unit volume terms, since 2015 but saw a resurgence in 2020, the result of COVID-19, as have a number of CE categories.

As the effects of the pandemic have eased over the last few quarters, tablet shipments began declining q/q in 2Q of last year and on a y/y basis in 3Q ’21.  That has continued with only the 2nd quarter of this year seeing a q/q increase, only to be followed by a q/q decline in this year’s 3rd quarter.  Comparing the first three quarters of this year to 2021 (same period) shows shipments down 17.5%, while 2021’s first three quarters were up 25.1% over 2020, and the first three quarters of 2020, when the pandemic started, were up 58.3% over the pre-pandemic first three quarters of 2019.  This brings us to the conclusion that while tablet shipments have been on the decline, they have not yet returned to pre-pandemic levels.
Does this mean tablets have found a new ‘normal’ level, or are they just returning to pre-pandemic levels more slowly than other CE categories?  Unfortunately we believe the later based on Figure 3 & Figure 4.  Figure 3 shows quarterly tablets shipped by brand and the quarterly number of panel produced.  We note that we zeroed the panel production numbers to shipment numbers in 1Q ’17 to show the difference between tablet shipments and tablet panel production, so there are no panel units shown in Figure 3.  However in Figure 4 we show cumulative tablet shipments and cumulative tablet panel shipments, along with the spread between the two. 
Figure 4 indicates that tablet panel shipments were relatively closely matched to tablet device shipments until the 4th quarter of 2018, when increasing tablet shipments more than offset tablet panels produced, leaving tablet brand buyers unable to meet quotas.  Given that this was an untenable situation for tablet brands, panel producers began to step up production, building to both their own and brand inventory.  This increasing level of tablet panel production continued through much of the pandemic, with the spread leveling off between ~22% and 23% as tablet sales began to slow last year.
This would suppose that in order for tablets to return to a more steady growth pattern, brands need to reduce inventory levels, reducing the spread between shipments and panel production, while panel producers could lower tablet panel production further, with both parties working toward a more JIT supply chain that will reduce the spread and carrying costs.  But this is a lot to ask an industry that has relatively little visibility and is quite sensitive to macro events, which leads us to believe that the slow return to pre-pandemic levels for tablet shipments will continue into 2023, with the typical positive bumps from yearly new model iPad launches that occur in the 4th quarter.  Hopefully the long-term trend line curve seen in Figure 2 will pan out to be a harbinger of a more rational tablet market, but we expect more of the same for the next few quarters.

​Taiwan based Foxconn (2354.TT) is a massive employer in China with 12 factory complexes, the largest of which is located in Longhua Town in the city of Shenzhen, which has come to be named “Foxconn City” and covers 1.2 mi2 within its walls.  Many workers live in the dormitories and walk to the 15 factories within the ‘city’, which has its own stores, restaurants, banks, and hospital, and while numbers vary considerably, the lowest worker count we have seen is ~200,000.  Foxconn also has a similar ‘city’ in Zhengzhou, said to also employ ~200,000 workers, which is also known as “iPhone City”, as much of Apple’s (AAPL) iPhone line is assembled at the Zhengzhou complex.
Late last week the local government informed the management of the Zhengzhou complex that the city would be placed on lockdown due to an outbreak of COVID-19, limiting travel.  This forces workers to stay ‘on campus’ in the dormitories, as the factories are allowed to continue production under a ‘closed loop’ system, meaning no one leaves the complex.  As this was a situation that developed rapidly, it seems Foxconn was caught off guard and did not have the resources needed to feed and house the entire staff of workers.  Under lockdown rules workers were not allowed to eat communally in the company cafeteria, and were forced to eat in the dorms, which caused conditions to be difficult early on. 
There have been a number of news stories and videos about workers jumping over fences in order to leave the plants for fear of being caught in a COVID outbreak or unhappy about the poor living conditions, so Foxconn began to increase weekly bonuses to workers from ~$14/wk. to ~$55/wk., and for those that worked for more than 25 days, the bonus was increased from ~$205 to ~$685.  Those that put in “full effort”, meaning remained on campus for the entire period, could earn a potential ~$2,054 bonus, against a typical worker salary of between $410 and $550/month.
Over the last two days there have been videos circulating social media saying that there have been 8 deaths at the Foxconn Zhangzhou plant during the lockdown, which Foxconn denies under the premise that the videos were ‘doctored’, but the real question is how much the issues at Foxconn will affect iPhone 14 family production.  Recent estimates indicate that the plant’s output could be reduced by as much as 30%, due to staff shortages caused by workers leaving, but some of that shortfall can be transferred to the Shenzhen facility, which faced two closings this year in March and July but is currently not under lockdown. 
Quick math based on historic Apple iPhone shipments would indicate that Apple would typically ship 85.97m iPhone units in the 4th calendar quarter, as each quarter this year has been up between 2.5% and 3.2% y/y.  Taking the mid-point of that spread generates the 85.97m units for 4Q (cal.).  As a check, 4Q shipments for the iPhone typically represent 36.5% of the full year’s shipments, and the number above would represent a slightly more conservative 35.6% of full year, so it is certainly within reason.  As Foxconn assembles ~70% of iPhones, that would represent 60.17m units in 4Q, or 20.06m units/month.  Assuming the lockdown lasts for one month and that Foxconn’s production rate is reduced by 30%, that would represent a shortfall of 14.04m units for the quarter, or 16.3% of 4Q (cal.) unit volume.  Again this assumes a one month lockdown, a 30% volume reduction, and no shift to another Foxconn plant, all of which would likely be the worst case scenario. 
We would expect that with the unusually large ‘incentive’ payments Foxconn is offering, the volume reduction will be less than 30%, and while the lockdown could last a month, we expect it will last 2 to 3 weeks, as the company and the city are testing virtually everybody on a regular basis.  We expect Foxconn can offload ~10% of the ‘missed’ volume to the Shenzhen plant, and, in worst case, Apple could shift another 10% to other assemblers, bringing the shortfall to ~11.2m units spread across the globe.  While this is still a substantial shortfall, iPhone buyers have faced order fulfillment delays before, with two weeks not being uncommon during periods of high demand.  As Apple has been the only smartphone brand to see shipment growth last quarter, iPhone 14 family customers could see longer than usual delivery delays, but good logistics could shorten that time a bit by pulling inventory from slower sales regions.  All in the worst case scenario for iPhone 14 shipments and delivery is likely less of an issue than the news stories seem to hint at, and even our quick calculations assume a positive y/y iPhone shipment number, which is certainly not a guarantee given the macro environment, so unless the lockdown is sustained or spreads to Shenzhen, we expect it will do little to hinder Apple sales for the 4th calendar quarter, and in worst case push some shipments into 1Q ‘23