The China Academy for Information & Communications (CAICT) has released China’s smartphone shipments for September which came in at 20.922m units, a bit above our 19.79m unit estimate, putting the month up 10.22% and down only 2.2% y/y.  While the slight outperformance is a positive, September 2021 was a particularly weak month, followed by stronger showings during the next three months.  This will make y/y comparisons considerably more difficult for the remainder of the year and into January unless there is a meaningful upswell in Chinese smartphone demand.  Discounting could be a factor in such a scenario, and there is likely a bit of pent-up demand to be released as the country eases it COVID stance, but we see those as relatively small factors rather than creating significant momentum.
5G shipments were 15.104m units, up 5.9% m/m and essentially flat y/y, while representing 72.2% of all phones shipped on the Mainland in September, a bit lower than in past months this year.  It is difficult to attribute the lower 5G share to a singular factor, but we would expect the overall macro situation might attract consumers to lower tier phones, where 5G is less penetrated.  We would become concerned if the 5G share fell below 70% for more than a month or so, but our expectation is for a range between 70% and 80% for 2023, and our overall expectations for full year smartphone shipments in China remains at 252m units.

​As we have noted previously, Foxconn’s (2354.TT) Zhengzhou factory, a primary source of assembly for Apple’s (AAPL) current iPhone 14 line, has faced both COVID lockdown issues and worker unrest, severely reducing output.  Foxconn released November results today, along with some statements concerning the factory status and expectations.  The November results (company-wide) were NT$551,092, ($18.053b US), down 29.0% m/m and down 11.4% y/y, against a typical (3 year average) November being up 8.4%.  This comes after the previous two months being up 41.0% and 40.4% y/y respectively, and while the company indicated that these results were “roughly in-line with company expectations”, we expect those expectations have been changing almost daily.  Also noted was that production was ‘gradually entering the off-peak seasonality”, with ‘Smart Consumer Electronics Products’ impacted by the Zhengzhou issues.
Foxconn’s outlook for 4Q included the statement “At present, the overall epidemic situation has been brought under control with November being the most affected period by the epidemic. In addition to reallocating production capacity of different factories, we have also started to recruit new employees, and are gradually moving toward the direction of restoring production capacity to normal. The outlook for the fourth quarter is expected to be roughly in line with market consensus.”  That said, the Zhengzhou plant still requires additional staffing, and after the disruptions by workers over recruitment promises made by the company during the recent lockdown, that might take some time.  Unofficial statements by management indicated that ‘if the recruitment goes smoothly…” the plants could resume full production in late December or early January, but those ‘ifs” remain and workers could be hesitant to believe Foxconn’s enticement promises.
While Foxconn, and the Zhengzhou site represent the majority of iPhone assembly share, the plants also assembles networking and computing products, so there is at least an offset to the smartphone shortfall at Foxconn itself, however the impact on Apple remains, and our 11.4m unit shortfall is now becoming the middle of shortfall estimates.  While we keep to our estimate, even with the easing of Chinese government COVID policy, it will take quite a bit of assembly supply chain machinations to make up much of that shortfall before year-end.  

Many consumer electronics companies have developed or purchased dedicated production facilities for key components, who can both guarantee supply and use excess capacity to produce for external brands, especially display panels that are the basis for many CE products.  Typical examples would be Samsung Electronics (005930.KS) affiliate Samsung Display (pvt), LG Electronics’ (066570.KS) subsidiary LG Display (LPL), China’s TCL (000100.CH), that owns Chinastar (pvt) and Foxconn’s (2354.TT) ownership of Innolux (3481.TT).  These panel producing subsidiaries run quasi-independently in most cases, and while they are typically the primary display supplier to the parent company, they are not necessarily the only supplier, with parent TV, IT, and mobile divisions purchasing displays from a variety of sources, with many of those decisions based on supplier panel pricing and expertise.  Further, most large CE brands farm out design and assembly of a portion of their lines to OEM/ODMs, who are not necessarily bound to the brand’s supplier list, allowing them to source display panels from suppliers with whom they have relationships.
 
This leads to an ever-changing complex web of interconnections that not only can influence company results but play a significant part in ‘display’ politics, and recently a conflict between LG Electronics and Chinese panel supplier BOE (200725.CH) has made those connections and conflicts quite obvious, and exposes the struggle that such purchaser/supplier relationships can incite. 
 
BOE is the largest LCD panel producer in China and the largest producer of LCD panels globally.  While the company has been growing both capacity and sales over the last few years, BOE faces stiff competition from both Samsung Display and LG Display as BOE tends to be the less expensive supplier.  That said, BOE has been so aggressive toward building its large panel LCD display business that it became apparent to both competitors that they could not compete with BOE on a price basis, which led to SDC’s complete withdrawal from the large panel LCD production market, and LGD’s large reduction in large panel LCD capacity. 
 
Both competitors however have developed OLED capacity as they have decreased LCD capacity, with SDC dominating the small panel OLED market and LGD dominating the large panel OLED market and remain closely tied to parent organizations due to those display products.  BOE, while putting billions to work toward building out its own OLED capacity, does not have the OLED experience that its South Korean competitors have, and has faced challenges as it has entered the OLED display market.  One of the bellwethers for the OLED market is being added to Apple’s (AAPL) display supplier list given Apple’s stringent requirements for its displays, and as BOE has been qualified as an Apple OLED supplier, after an arduous and frustrating path to that goal, BOE has shown itself to continue to be a strong competitor.
 
In fact, due to BOE’s large scale LCD production capacity, the company supplies displays to both Samsung Electronics and LG Electronics, and is the largest outside display supplier to LGE, supplying over 40% of their large panel LCD displays, which would make one assume that they have a somewhat ‘protected’ status with the parent organizations, but that is not the case.  Samsung Electronics recently omitted BOE from its supplier list, likely over a conflict between the companies over an advertising fee that Samsung required from BOE,, and Samsung Display has issued a warning to BOE and its customers over allegations that the company tweaked its pixel structure slightly to avoid paying SDC a license fee for the underlying IP.  Included in that warning to BOE’s customers was Apple, SDC’s largest outside customer which makes the conflict all the more sensitive to SDC where a misstep could damage that key relationship (Samsung Display is expected to have captured between 70% and 80% of the display business for the Apple iPhone 14).
 
If that is not enough of a conflict, a subsidiary of LG Display known as Global OLED Technology LLC (pvt)[1], that maintains and licenses the OLED IP that is owned by LG Group (pvt), the entity that controls all LG companies, has also recently warned BOE that it is infringing on OLED patents owned by LGD.  However, thus far they have limited the conflict to just a warning and have yet to file any court documents, the typical next step toward forcing BOE to pay due royalties.  Given the large role that BOE plays in the TV business of LG Electronics, there are multiple factions involved in the pursuit of IP license dollars from BOE, bringing such conflicts to the highest levels of corporate hierarchy.
 
Such IP battles have always been a part of the display space and the CE space overall, but we expect to see more aggressive behavior, not only due to the competitive nature of the players, but as a result of the display cycle.  Since 2020 panel producers have been focused on being able to supply COVID related increased demand and with that goal, have paid less attention to costs.  With demand slowing and costs still high profitability has waned, which we believe will focus more attention on cost containment going forward.  Along with costs we expect and increased focus on exploiting existing revenue sources that are not display production oriented, and there is nothing better than a high margin royalty in that regard.  We expect a renewed focus by display IP holders to capture IP dollars in 2023, and while this might rile feathers a bit, we expect to see a bit of a shift in corporate sentiment toward enforcement rather than appeasement as a result.
 


[1] Global OLED Technology LLC is 32.7% owned by Idemitsu Kosan, a Japanese chemical supplier, with the rest divided between LG Display, LG Chem, and LG Electronics. 

​We have mentioned that Samsung Display has been developing a vertically oriented OLED Gen 8 deposition tool with Ulvac (6728.JP) on which it hopes to produce IT OLED displays.  The concept of a vertical deposition tool is one that has been suggested as a way to avoid the issues surrounding the use of fine metal masks that create sub-pixel patterns as OLED materials are deposited on substrates.  While the metals used for the masks are extremely rigid, as the masks get larger they tend to sag which disrupts the deposition process and causes low yields.  The industry is currently limited to Gen 6 substrates and processes only a half or a quarter of the sheet at a time to avoid the sagging issue, which increases costs and process time.  The idea of a larger (Gen 8+) deposition tool that operated vertically instead of horizontally, would keep gravity from working toward sagging the larger mask.
 
Given that this development was being done in order to improve the yield of larger OLED displays, rather than the relatively small displays of smartphones, SDC’s goal is to satisfy the requirements of customers for OLED IT products while being able to remain profitable while dominating the space.  SDC is not doing such work only for itself, but with the potential for garnering what most believe will be Apple’s further dive into OLED displays for additional products, with those being of larger sizes.  If they are able to produce those panels using a Gen 8+ deposition system, without the mask issues mentioned above, they will lead the industry and expand their domination of the OLED display space.
 
That said, this is new technology that is unproven in mass production, and while we expect SDC has spent time and money on the project, given it potential for repeat tool sales if successful, Ulvac has probably taken much of the financial risk,  However there seems to be some talk that Samsung Display has decided not to go with the Ulvac vertical system and has chosen a horizontal Gen 8+ deposition system from Canon-Tokki (7751.JP), the leading supplier of OLED deposition tools worldwide.  The Canon tool is said to be half-cut, meaning the Gen 8+ substrate is processed in two pieces, but little has been said about how the system would combat the ‘sagging mask syndrome’.  Further, the cost of the Canon tool is said to be 33% more expensive than the Ulvac tool, making such a potential decision even more unusual.  It seems that Apple was involved with the decision, opting for Canon’s experience in mass production OLED deposition over the untested Ulvac tool, and at least according to some sources, is choosing the Canon tool on Apple’s request.
 
While there has been no verification of any decision by SDC, if the company is privy to Apple’s timeline for adding more OLED displays to its IT product line, a decision needs to be made soon, as such equipment is complex, tends to be customized by the customer, and in this case, has yet to be used in a mass production setting.  We would expect the lead time for such a tool to be between 9 and 12 months, during which Samsung Display would be refitting an exiting LCD fab to accommodate this new OLED line.  If such an order were placed today, we would expect product to begin to be available in mid-2024 and real volume production by the end of 3Q in that year.  That said, until SDC, Ulvac, Canon or a sub-vendor confirms the order, it remains speculation.
 

​As we have mentioned recently, India wants to become a global powerhouse in the semiconductor space and has implemented several programs to attract fabs to the country.  But the real issue for India if it is to become a haven for the electronics industry is that it is necessary to create a vibrant infrastructure of suppliers and downstream businesses to help justify the risk of developing semiconductor infrastructure outside of areas where technology infrastructure id relatively new.  Tata Group (pvt), India’s largest conglomerate is trying to establish a foothold for itself in its home country that will both give it a base on which to build a larger electronics infrastructure in India, and ‘nationalize’ some of the already established downstream capacity that India needs to bring in semiconductor manufacturing.
 
Tata is said to be in negotiations with Wistron (3231.TT) one of the three major assemblers that work with Apple on the sub-continent (the others being Foxconn and Pegatron (4938.TT)), with the intention of purchasing Wistron’s manufacturing facility in Bengaluru for ~$612m US.  The facility, the first in India to assemble iPhones, was the scene of violent protests in late 2020 when workers protested over missed wage payments as the factory rapidly hired workers.  Apple suspended the facility for over two months as new managers were trained to handle the increasingly large staff of ~15,000 workers.  Tata is said to also be considering a JV if Wistron does not accept its offer, as it has done in other industries, where it retains control but shares ownership with the other JV member.  Tata does have a relationship with Apple as a supplier of components through subsidiary Tata Electronics (pvt), with that relationship developed through India’s “Made in India” incentive program.
 
Apple currently produces a number of iPhone models in India, primarily the iPhone SE, the iPhone 12, the iPhone 13, and the basic version of the iPhone 14, with the iPhone 14 higher-end models being imported, although India has moved from producing iPhone that were from past generations only a year ago, to the current generation iPhone 14, albeit the basic model only, with India’s share of iPhone production increasing from 1.3% in 2020 to 3.1% last year and 5% this year.
 
Such a move by Tata, sometimes referred to as the ‘Samsung of India’, as the population is always within reach of a Tata product, from birth to the grave, would help to legitimize India’s ‘in-house’ electronics manufacturing, as opposed to those facilities owned and run by Taiwanese or Chinese management, and further India’s prospects for its plans to become a global electronics powerhouse, especially given the increasing differential between average monthly wages in India versus its Chinese rivals, which is 95.5% higher in China. 
 
Of course there is considerable trash talk  over the potential deal in the Chinese trade press, extolling the virtues of the 259 Chinese Apple component supplier factories (out of 610) in China, the fact that despite a population size similar to China, India has more than 100 ethnic groups using different dialects (not sure why that is such a problem), and is a Democratic society that has ‘advanced labor protection’ , all of which make it risky to invest in India, while 90% of the Chinese population is of one ethnic group and the Chinese form of government does not allow workers to strike or compensate them for ‘protest’ time.  Obviously, such talk is a bit biased and disregards a repressive Chinese governmental system that does little to offer rights to workers and indicates the increasing fear that CE companies will continue to shift production out of China.  While India is still developing the necessary infrastructure to support more sophisticated electronics production, one way or the other Tata seems determined to be a local participant and the government will likely continue to be supportive.

Display panel pricing is a singular piece of incremental data in the CE space.  Given that almost every CE device has a display of some sort, display attachment rates are near 100% and with displays typically the most cost single component of a device, their price is integral to the overall BOM.  While the price of displays does not immediately track to CE device retail prices as display inventory can reside at many points in the CE supply chain, the trend in display panel pricing  can signal both changes to consumer CE prices on a forward basis, and the profitability of a number of participants in the CE supply chain. 
First in line would be the panel producers themselves, a relatively limited number of players that can be categorized by their size and/or their product line-up, but as the supply chain for the display industry itself is a complex one, each sub-group, while they certainly have their own characteristics, is affected by display panel pricing, some of which are industry groups created specifically for the display industry.  Display glass is one such industry, and while a subset of the overall glass industry, there are only a few players that produce commercial quantities of glass for displays.  In a real sense there are only a few major players, Corning (GLW), Asahi Glass (5201.JP), Nippon Electric Glass (5214.JP), Avanstrate (500295.IN), Schott (pvt), and Rainbow (438.HK).  Given that glass is the substrate or working production platform for almost every display, display prices, while not directly affecting display glass prices, can be a harbinger of demand for this particular ~$6b market.
LCD displays are driven by LED backlights, which are a subset of the overall LED manufacturing industry that includes LED lighting as its largest application (~33% in 2021).  but if you add signage, consumer products, large displays, mobile displays, and Mini/Micro-LED displays, display applications are 38% of the LED market (sales), larger than lighting, making display pricing a key function of that ~$16b market.  Display production equipment, another highly specialized industry, is a ~$10b industry that is closely tied to panel demand as reflected in panel pricing, and the causality of display price changes has a great influence on the electronics assembly business, where companies like Foxconn (2354.TT), Wistron (3231.TT), Pegatron (4938.TT) and Quanta (2382.TT), acting as assemblers or as ODM/OEMs, can see their business change radically as display pricing trends change.
Outside of the display supply chain, there is a litany of CE companies who must compete against each other to provide the most value to consumers, who have relatively little loyalty to brands and see CE products as ones that should always come down in price.  Display choices by such brands are significantly affected by display panel prices as a major contributor to product BOM and margins, so there are few in the CE space that are not directly or indirectly influenced by display prices, the reason we have been collecting such data since 2009 and are a bit obsessive about tracking such data.
OK, enough self-justification…   November display pricing was positive (m/m) for the first time this year, which many will take as a sign of a pricing recovery, however the overall increase was entirely the result of TV panel prices, which increased by 4.3% in the aggregate, while all other panel categories declined.  TV panel prices, which began their climb during the early days of the COVID pandemic, started falling sharply last July as consumers began to venture from COVID confinement.  IT panel (monitor, notebook, tablet) prices lagged as component shortages kept supply constrained, but peaked just two months after TV panel price peaks, and despite the industry’s insistence that we were experiencing a ‘new normal’, IT panel prices have continued to decline since.
TV panel prices not only retraced their pre-COVID lows but fell to levels that put them below cash costs for many panel producers, with the eventual result being lower panel fab utilization and in some cases panel producers went as far as to refuse orders that they believed would price out at a loss.  In October TV panel producers saw an opportunity, in that lower TV panel production had seemed to tighten the market a bit, and used that opportunity to raise TV panel prices for the first time this year.  TV brand panel buyers, with the understanding that TV panel prices were at historic lows, accepted the increase in October, however, panel producers saw that increase as a chance to salvage 4Q sales and profitability and pushed for more increases in November, as noted above.   That said, the global macro environment continued to deteriorate in November and Chinese and US holiday results were lackluster, which brings us to December where we expect that TV panel prices will be relatively flat, while IT panel prices continue to decline on continued demand weakness and panel producers will meet with resistance from buyers toward further TV panel price increases, given the uninspiring demand environment.

 
Based on or estimates for panel prices in December, assuming our scenario plays out, this was not a good year for panel prices from a y/y perspective, and while some might say that a y/y comparison is not an accurate portrayal of the cycle given the COVID pandemic’s influence, we also calculated current panel prices (December) relative to the lowest point over a 3 year period.  Current TV panel prices are the only ones that are appreciably above those lows, with the aggregate total (all categories) up less than 1% from the 3-year low set in September of this year.
Panel costs are difficult to estimate given that each model run or order are different, but the basic components and materials used in the panel production process typically allow a panel producer to reduce its costs by between 4% and 7% each year as products mature and production efficiency increases, especially as new capacity ramps up to mass production levels, but since early 2020 we have seen a considerable number of material and production costs rise rapidly, particular some of the basic materials used in displays.  Copper was among the worst, with price increases over 25% in both 2020 and 2021, , while substrate glass saw incremental price increases in almost every quarter during the same period, along with energy and labor costs.  Copper however has declined in price this year, and while down ~15% y/y, it is still up ~37% from its base price at the end of 2019.  This makes the typical cost reductions panel producers typically used to allow them to lower panel prices impossible over the last three years, and while the higher volumes and higher panel prices seen during 2020 and the 1st half of 2022 allowed panel producers to generate record profits, the battle ground has changed considerably.
Costs will continue to be an issue for panel producers heading into 2023, although the weakness seen in certain segments of the semiconductor space could give panel producers a bit of help toward cost reductions that come close to price declines, so we are a bit more optimistic about the display space in 2023, looking at it from a cost/price perspective, but we still struggle for a demand driver that could push the display space back toward profitability.  We expect less volatility toward panel pricing in 2023, and more rational behavior toward capacity expansion, particularly in China, both positives that could lead to a more stable and predictable display industry, but the display space is not noted for its stability, and we have come to expect irrational behavior from display producers as a matter of course and expect 2023 will have similar instances which could throw off our less frenetic feeling about display in 2023.
On a short-term basis, we look to the following to plan our 2023 display scenarios:

• December TV panel pricing – Do buyers walk away from panel price increase requests in December?
• Year-end inventory levels – The CE space has been plagued with excess supply this year, as it was slow to respond to a return to more ‘pre-COVID’ buying patterns.
• Results from holiday buying, particularly in North America and China.
• Results during Chinese New Year – Unless China relaxes COVID restrictions, it could be a poor Chinese New Year (1-22-23).
• CE brand forecasts for 2023 – While these are typically made in October, we expect CE brands will postpone 2023 targets as long as possible heading into the holidays.  Hopefully those targets will be more reasonable for 2023 than they were this year, as they had to be revised 2 or 3 times, leading to rapid changes in production levels at suppliers.

On a longer-term basis we look to the following:

• Do panel producers stick to new capacity postponements and cancellations, or do they return to the competitive over-building that is characteristic of the display space?
• Does the Chinese government, particularly at the local level, slow display project funding?
• Does Apple (AAPL) push into new product categories in 2023 (AR/VR) or is 2023 a ‘more of the same’ year for major CE brands?
• Do consumers completely abandon the ‘COVID lifestyle’ and return to typical CE buying patterns or have we migrated into a ‘modified-normal’ buying pattern, with a continuation of an increased focus on mobile, or does the populous get off the couch in 2023?
• Is inflation brought under control, giving consumers a bit of spending incentive?

All in, we expect the display space to bump along near the current cyclical bottom for the early part of the 2023 year, with some potential for a gradual rise into 3Q and 4Q, but a lot of factors (see above) need to fall into place to make that scenario work.  Do we think 2023 is going to see a cyclical upswing for the display space and CE in general?  Not likely, but difficult 2023 1H comparisons aside, we see the potential for a transition year that does not age those who follow the CE space closely more than the clock would suggest, and that would be a good thing, but we still have a way to go this year and lots of potential hiccups next, so we are applying litmus to everything we hear to maintain an unbiased position and hoping we are reading the tea leaves correctly…