​In 2015 two violent extremists attacked the San Bernardino Inland Regional Center killing 14 and injuring another 22.  The attackers were killed during a later police shootout and the phone of one was recovered.  The FBI requested that Apple (AAPL) create a software program that would enable the agency to unlock the iPhone 5C it recovered and other devices operating under iOS 7 and recover information under the ‘All Writs Act’, a piece of legislation that originated in 1789, after the FBI found that the phone had been rigged to delete all of its information after ten attempts to discover the password.  Apple declined the request but the day before the hearing the FBI said it found a 3rd party who was able to unlock the phone correctly.  Apple has faced a number of similar situations in terrorist or drug related cases but has been able to avoid tainting its staunch privacy mandate, one that its users find quite attractive.
Last week Apple announced that it would roll out a system called neuralMatch that will be an update to iOS 15 later this year.  The simple part of the system would watch for searches relating to child sexual abuse through Siri and the Apple search application and would direct the user toward ways to report such abuse or how to get help with such a problem.  The second part of the system is a bit more invasive, essentially giving parental control to the messaging application that would blur sexually explicit images for any user under 18 and would notify parents if a child under 12 years old is trying to view or send such pictures.  But the third part of the system is where much of the controversy lies as it scans the images in the iCloud Photos folder, and if it finds such material reports it to Apple moderators who have the option to pass it on the National Center for Missing & Exploited Children.
The messaging portion of the system gives parents the choice whether to opt in and if so, an image processor that has been designed to focus on pornography will look for sexually explicit images in the app, obscures the picture, and asks the user if they really want to view or send the image.  In the update family account systems will also check to see if the user clicks through the warnings and is under 13 years old, at which point they will receive a warning that their parents will receive a warning, although the actual image will not be seen by the users parents.  Parents will be notified if the user continues through the process, either viewing or sending such content, although they will not if the user only receives the images but goes no further.  We note that this system actually checks images on the user’s phone rather than in the cloud, which some privacy groups look at a violation of the very privacy rules that have been cited in court cases.
The Apple system does scan images in iCloud accounts, so if you sync to same, all of your images reside on iCloud servers, which are then scanned against a list of ‘known CSAM’ and if enough matches are found the account is sent to a moderator who can confirm, close the account and notify the authorities.  Apple is certainly not alone here as many social media companies use a Microsoft (MSFT) tool to scan servers for CSAM but until now Apple has resisted, scanning only iCloud Mail.  If the new system is implemented it will differ in that it will check images directly on the user’s iPhone rather than on servers, which brings the privacy question a bit closer to home.    Interestingly, the software that actually does the ‘checking’ is not really ‘looking’ at photos as would a facial recognition system, but breaks the images into a hash, or digital signature (a big list of numbers) that represents the key features of the image.  That hash value is compared against a list of millions of image hashes provided by the NCMEC and if a match is found an alert is placed on the account.
Apple is want to point out that it is only looking at photos that are synced with an iCloud account, meaning by turning off a user’s iCloud sync will disable the system completely and no image hash generation will occur, but while the system will certainly work toward outing those that traffic in CSAM to a larger degree, others say that upping the game by adding surveillance directly to a user’s iPhone opens a pathway to a way to break end-to-end encryption[1] and disable the privacy and lack of a backdoor that Apple has worked so hard for in the past.  There is some nuance here as end-to-end encryption does exist in Apple’s messaging application which means Apple will have no access to the messages themselves, nor will parents, but that is not the case on iCloud servers (not only Apple) which makes it possible for companies to run such CSAM searches. 
This difference is Apple’s defense against criticism of the new system, along with the claim that only 1 in 1 trillion accounts will be incorrectly tagged, but there is great fear that other countries will use the Apple precedent as a way to disengage encryption in the name of fighting terrorism or misinformation, and that Apple itself has the power to modify the safeguards it has put into the system.   Apple responds as follows:
Apple’s CSAM detection capability is built solely to detect known CSAM images stored in iCloud Photos that have been identified by experts at NCMEC and other child safety groups. We have faced demands to build and deploy government-mandated changes that degrade the privacy of users before, and have steadfastly refused those demands. We will continue to refuse them in the future. Let us be clear, this technology is limited to detecting CSAM stored in iCloud and we will not accede to any government’s request to expand it.
This is a very complicated issue that almost all admit is misunderstood by most and has the potential to become highly politicized.  It is a very important question that we could not even begin to feel we understand or answer, but when change is underway, we thought it important for our readers to be aware of. 
For further reading:
https://www.missingkids.org/HOME; https://www.apple.com/privacy/docs/Building_a_Trusted_Ecosystem_for_Millions_of_Apps.pdf;
https://www.apple.com/child-safety/pdf/CSAM_Detection_Technical_Summary.pdf;
https://appleprivacyletter.com/


[1] End-to-end encryption is a process by which there is no ‘key’ to decrypt the date being sent between two parties.  Lesser systems encrypt in the same way but a company holds a key that would allow encryption.

​Apple’s  Air Tags are typically used to monitor the location of personal devices, such as cell phones, tablets, laptops, keys, or even luggage, but a Portland lawyer put them to use in an unusual way, and made an unusual discovery.  Michael Fuller, a lawyer who fought for the homeless in and around Portland, had a notion that city contactors who were charged with clearing the tents of the homeless camps in the area, were violating the law by throwing away such items.  Under local law,  on unsanitary items and those with no apparent use could be thrown away, while all others must be stored in a warehouse for at least 30 days.
Getting a bit of advanced information about a potential site clearing, he attached Air Tags to 16 items and tracked their locations after the site was cleared.  As it turned out a number of the items would up in a recycling transfer station rather than the warehouse.    What makes this unusual is that based on the Air Tag system, those workers who had been  carrying their iPhones during the process were likely the one’s who helped track the items as the system identifies tagged items when any iPhone gets nearby.  Since this is done anonymously, the city contractors did not know they were revealing their own shortcomings and validating the claims of the homeless, who had seen personal items leave the tents but not appear in the warehouse.  While turning off your iPhone will keep it from identifying any of your own nefarious deeds, but all it will take is someone wandering near the tag to reveal its location to the network, so turning off your iPhone when stealing packages from neighbor’s porches could lead to a day in court.

Late last year we noted that Taiwan based Fittech (6706.TT) had been added to Apple’s (AAPL) supplier list and was expanding their capacity by 3x – 4x, with the expectations that they would complete the expansion early this year.  The company, which provides Mini-LED testing tools indicated in April that it had order visibility through September of this year, and now has noted it has orders for delivery through 1H ’22.  In April FitTech stated that it has received ‘significant’ orders for equipment for probing, testing, and sorting mini-LEDs, which we assumed were from Apple or Apple’s OEMs, which for some of Apple’s expected Mini-LED products are Heesung Electronics (pvt), as the assembler, GIS (6456.TT) as the touch provider, and LG Display (LPL) as the display provider.  While there has been no absolute confirmation of same, much of the talk in the Taiwan trade press seems to indicate that such is the case.
Fittech had indicated that it expected sales of LED sorting, probing, and testing equipment to increase from 20% - 30% of revenue last year to 40% - 50% this year, and is now expecting more than 50% from same, with Mini-LED orders from OEMs at least doubling this year.  While the overall share of LED test, sort, and probe revenue will decrease from almost 80% last year to between 70% and 75% this year as tools for measuring 5G laser and optical functions for 5G and sensing are also growing, monthly revenue through 1H is up 55.9% y/y and set a new company record in 2Q, growing 16.6% q/q and 84.3% y/y.  While we expect not all of the incremental Mini-LED revenue is from Apple, it certainly does not hurt to have become a key equipment supplier to a company at the beginning of a new display modality cycle.
 

Zhengzhou is the capital of Henan Province and has a population of ~10m, over twice the population of LA, and receives an average of over 11” of rain during July and August, so the population is used to a bit of flooding now and then.  That said, a few extra days of rain have led to devastating flash floods that caused 12 deaths and led to over 500 people being trapped in subway tunnels in and around the city after flood defenses were overwhelmed and water filled the tunnels.  24” of rain fell on Tuesday, with almost 8” in one hour, causing roads to close, airport traffic to end, and more permanent damage to roads in some areas.
 
Foxconn (2354.TT) has three factories in Zhengzhou, and while the company insists that there is no flooding in those locations, they do admit that some of the areas surrounding the factories have become impassable and emergency measures have been taken to maintain the safety of employees.  That said, the three factories account for roughly half of the assembly of iPhones, and while the factories themselves remain in operation, the ability to move materials and goods in and out of the plants is quite limited according to local press, increasing fears that there could be some delays in the iPhone 13 announcement or availability.  Some flights have been able to leave the Zhengzhou airport but most have been cancelled and some feeder roads have been damaged, but given the fact that it is still a bit early in the iPhone build cycle, unless the rain continues for many days, we expect the Apple iPhone release schedule will remain intact.

​Spain’s Organizacion de Consumidores y Usuarios has contacted Apple (AAPL) concerning claims that Apple is slowing down performance of the iPhone 12 to encourage users to upgrade to the yet-to-be-released iPhone 13.  While this is not the first time Apple has been accused of slowing down older phones, it seems the organization is asking for compensation for iPhone 12, iPhone 11, iPhone 8, and iPhone XS users that have allegedly seem slower operation and poor battery life since upgrading to iOS 14.5.  The OCU claims that iOS 14.5, 14.51 and 14.6 updates have “significantly damaged consumer devices”, slowing down performance, and causing the battery to run out faster, and cited class action suits in Belgium, Spain, Italy, and Portugal in reference to the iPhone 6 as a point to Apple’s obsolescence practices.
A number of other European organizations have joined the OCU chorus, some of which are the parties in the earlier iPhone 6 lawsuit, which came after three years of waiting for Apple to respond to its request for consumer compensation, but it is hard to ‘prove’ that Apple has intentionally caused its older devices to perform more poorly when most software updates, which  usually add functionality to newer phones, can cause older phones, with older hardware, to perform at less than original speeds.  Smartphone batteries also degrade over time, reducing their ability to provide the higher power spikes needed for newer functions, making it hard to isolate whether an OS upgrade has intentional negative connotations for older iPhone models.
That said, Apple did a bad thing in 2017 when it neglected to mention to consumers that a small app called ‘Powerd’ it downloaded to existing iPhones, to act as a fail-safe for older lithium-ion batteries that could cause the phones to randomly shut down in order to protect components.  The app did as it was intended by slowing the processor to compensate for the weaker battery, but once it was discovered, it lit a fire under those who had suspected that Apple had been building in ‘planned obsolescence’ for many years.   While Apple’s intent was to end complaints that older iPhones had been randomly shutting down with considerable battery power still showing, they neglected telling their user base about the app and suffered the poor marketing experience of ‘batterygate’. 
Apple wound up paying $140m in fines and settlements in the US, $5m in France and Italy, and $500m in Canada, although none of the lawsuits resulted in the conclusion that Apple had intentionally harmed consumers, just that it did not tell them it was doing something that might affect performance.  Again, the burden of proof will be on the accusers, who believe Apple has already begun its plan to push older model iPhone users to the next generation of iPhones due out later this year., and while thus far these consumer organizations have only contacted Apple with their demands, the objective will likely be to bring action against the company if it does not respond to such demands for compensation.  It’s a hard case to prove, and a complex one to explain to a judge and jury, but we know the real winners in a conflict like this, the lawyers, who took a $93m chunk of that $500m settlement back in the day.

​Apple (AAPL) is slow in making transitions.  Whether a function of a cautious attitude toward new technology or a desire to put its own stamp on what might already be available, they take their time, where others tend to jump as quickly as possible.  Of course it helps to have 1.66b active Apple users, creating a very ‘sticky’ base that is typically willing to wait for Apple to move forward, so Apple has, at the least, the luxury of exploring new technologies for a while before pushing them out to their customer base.  What does make a big difference however is when Apple does adopt a new technology, whether it is early or late, it means significant unit volumes and a blessing for the Apple supply chain.
That said, Apple was a slow starter with OLED, adopting the technology in late 2017 with the iPhone X, while leaving the other iPhone models with LCD displays.  In 2018 two iPhone models had OLED displays, and by last year all iPhones sported OLED displays, and while Apple sells lots of smartphones, they also have other products that could easily adopt OLED displays going forward (The Apple Watch also uses OLED).  For much of this year rumors have been circulating that Apple will be offering its first iPad with an OLED display next year and would continue to spread the technology across the iPad line in 2023, likely to all but the iPad Mini, which is a smaller and lower priced offering.
Those rumors have surfaced again, with current expectations that Apple will offer a 10.86” iPad version next year with an OLED screen, albeit based on relatively mundane OLED technology.  The OLED display is expected to be based on a rigid substrate (glass) but instead of being encapsulated with glass (typical for rigid OLED), it would use the same thin-film encapsulation used on most flexible OLED displays.  The TFT structure is expected to be typical LTPS, the most common form of OLED backplane, with the displays being made exclusively for Apple by Samsung Display (pvt). 
The reason this rumor is gaining strength comes from Samsung’s push to commercialize its IT OLED panel business, which has been exclusive to parent Samsung Electronics, and given Samsung’s goal of shipping 1m OLED notebook displays this year, we expect they have plans to increment that number again in 2022 and 2023.  While we expect SDC is actively seeking a broad customer base, a deal with Apple for the iPad, even for one of four Apple iPad models, would go a long way toward both filling existing OLED capacity and justifying the expansion of same.  Apple has financed such capacity expansions in the past, particularly for LG Display (LPL) and Japan Display (6740.JP), and while we expect Samsung is not in a position to need or accept financing for small panel OLED capacity, Apple would likely contract dedicated capacity, which they have done with SDC in the past, and such contracts, being as close to ‘take-or-pay’ as possible in  the CE space, are a guarantee that SDC could maintain profitability for that new capacity, without significant market risk. 
We note also that the surface area of a 10.86” iPad display (4:3 aspect ratio) would be equal to the surface area of four iPhone 12s (9:19.5 aspect ratio), and the relatively simplistic structure of the supposed OLED iPad would likely allow Samsung to maintain high yields and profitability, so there is some logic to the expectations.  In 2023 however the rumor suggests that Apple will expand its iPad offerings to 11” and 12.9” (iPad Pro current sizes) offerings using flexible OLED and an LTPO backplane structure, which should be able to maintain profitable yields at that time, and in order to offset any criticism of the OLED iPads being less bright than their former LCD brethren, the OLED emitting structure itself is said to be a double RGB stack, a process that is being adopted by both SDC and LG Display for ‘certain’ customers. 
Such a dual stack process can be used in near-eye displays that must be both high resolution and high brightness, but research has been focused on photolithography techniques for such a process that would require a significant process change and cost for high volume production.  Both OLED producers have been working toward being able to run the substrate through the deposition process a 2nd time to create the double stack, without compromising the first layer rather than using a more complex approach, which is why that process is scheduled for 2023 rather than next year, giving SDC and LGD time to perfect the process.
All in, the current rumor does carry some weight in terms of meshing with expansion plans for SDC and LGD, and on a more general basis, Apple’s desire to continually improve their displays, but while this track toward an OLED iPad line is being developed, so is the work toward Mini-LEDs, which are based on LCD architecture.  This gives Apple some leverage with OLED display producers as adapting mini-LEDs to notebook sized LCD panels is a relatively easy task that can be accomplished using existing technology.  OLED producers must push hard to further develop OLED technology knowing they have competition from the ranks of LCD producers who are eager to keep their investment active and competitive against OLED and can do so with relatively little investment and new infrastructure.  That said, as always, time lines are developed to be changed, so rumors need verification that is hard to come by when dealing with companies that are obsessive about project security, but at least the current Apple/iPad/OLED rumors have some basis on which to be made, albeit one that could change daily..

​Back in January (see our notes 1/14/21 and 1/25/21) we noted that Apple (AAPL) had added a ‘caution’ to its devices that instituted its MagSafe magnetic charging system, including the iPhone 12 family.  At issue were the increased number and strength of the ring of magnets that were responsible for holding the device in the correct location during charging, with the warning that anyone using an implanted devices, such as a defibrillator or pacemaker should keep any device or accessory using MagSafe more than 6 inches from the implanted item.
This means not keeping an iPhone 12 in a breast pocket or putting the phone next to you when you are sleeping.  The FDA agreed with Apple’s warning, and at the time of the study was unaware of any adverse reactions between the iPhone 12 and any implantable devices.  A recent study by the American Heart Association however, disagrees with that conclusion.  The AHA study found that the iPhone Pro Max resulted in ‘identifiable magnetic interference in 3 out of 3 tests where the phone was place directly over an implanted device and 8 out of 11 (72.7%) of ex-vivo tests, meaning those where the phone was placed next to an implantable device that was not implanted.  The conclusion was, “As a result of these tests, the researchers concluded that Apple’s iPhone 12 Pro Max MagSafe technology can cause magnet interference on CIEDs and has the potential to inhibit lifesaving therapy.”
As noted, the tests were done by placing the phone directly over the device on the patient’s skin, although it was found that with some models the effect was seen at 1.5cm (0.6”), so in more practical terms, the risk would be more from the possibility of an accidental contact, however the AHA did go on to compare the results for the iPhone 12, which Apple insists does not carry any greater risk than older generation iPhones (non-MagSafe), against a study done that found no cases of magnetic issues in the 148 patients that were tested. 
All in, even if the implants are affected by the iPhone 12, the interference will not cause a heart attack or any other symptoms that might be dangerous to the patient.  During the interference, the implant would however be in backup mode and would not be able to provide the patient with the necessary assistance during tachycardia or other arrhythmias, which could have serious consequences.  The bottom line is if you have an implanted device, keep your iPhone (or other similarly charging device) in your pants pocket or handbag.

Leakers are a big part of the CE sub-culture and social media has made that practice one that can transform a CE geek into an influencer almost overnight.  By revealing a tidbit about a global product, whether right or wrong, a leaker can generate hundreds of thousands of followers and generate substantial income.  In some cases this can help the leaker to gain more contacts at low or mid-level suppliers who are willing to drop more hints under the cloak of unnamed ‘industry sources.’  Since there is no way to fact check a leak until the product is actually released, leakers can self-perpetuate themselves for long periods, and quickly reinvent themselves with new leaks when products are actually released, regardless of whether they were correct.
Some companies use this channel for their own ends, either planting information that will generate positive enthusiasm for an upcoming product or to show how well the new product will compare with the competition, while others are particularly secretive, and do not intentionally ‘pre-release’ information about their products.  Of course, given the vast numbers of companies in the CE supply chain, there are always little bits of information that slip out, but a number of large CR product firms require NDAs to be signed  and can inflict penalties on those companies when violated.
Apple is one of those companies that tends to insist on compliance with its rules on secrecy as it is very focused on keeping it product development plans under wraps.  NDAs are a way of life for Apple suppliers and comments by supplier staff or officials about any product plans that Apple might have are met with legal representation, however the internet is the Wild West as to 1st Amendment rights and there is little that can be done to keep leakers from dropping hints or making claims as to product plans or features.
That said, Apple is pissed and is looking to put it finger in the leaky dike that is the internet, with a number of Apple leakers leaking the fact that they have received ‘notice’ from Apple’s legal counsel cautioning them  about disclosing information about unreleased Apple products.  While the notice did not portend legal action, it did note that such information may be from competitors and inaccurate, therefore hurting both the company and its customers, with screenshots of leaker blogs and comments.  As the leakers become more bold, with some purporting to know “exactly what Apple is working on, to the tee” (Kang) and showing track records for correct leaks, Apple seems to be a bit more aggressive in trying to protect its product security, and rumors that Apple itself conducted a ‘sting’ in March by planting misinformation to see who leaked it and track back the sources.  A number of prominent leakers were identified by that sting (unverified).
Whether this represents a new normal for Apple or just an attempt to periodically reduce leaks, Apple will have to walk a fine line here as the influence that leakers have over the masses of fans that are the ultimate buyers of CE products is obvious, and the fact that free speech relative to the internet is still a bit of a gray area, may make this a difficult line to walk for Apple and any others who might be concerned about such security issues.  Its not as easy to scare someone with a lawyer’s letter when they have 500,000 followers and can move them away from a product with a short Tweet.

​As we noted last week smartphone shipments in China were weak during the Labor Day holiday and generally in May, and if June sales are up ~10%, which would be the average of the previous two months, 2Q in China would see shipments fall 22.7% from the 1st quarter and be down 30.6% y/y. While we do expect smartphone sales to be up m/m in June, Chinese smartphone brands have remained overly optimistic this year, and after weaker than expected holiday sales, even with June being up over 10% m/m, most Chinese smartphone brands will likely see sales decline at least 10% to 15% and possibly more if June does not live up to expectations.  We expect Chinese smartphone brands to lower full year targets again in July if that is the case.
As Chinese smartphone brands face a weaker 1H, they have less of a need for components, many of which have been in short supply, and while this could help to reduce some of the shortages, demand related issues reducing shortages are far less positive for the industry than if supply was increased.  Unfortunately capacity increases are more of a long-term process, and with some component suppliers seeing less demand from China in 2Q, they might be a bit more cautious as to how fast and by how much to expand, especially given the time it takes to build out capacity.  To illustrate the point, Taiyo Yuden (6976.JP), a major producer of MLCCs (Multi-layer Ceramic Capacitors), a component that has been in short supply, recently announced that it is committing $45m US (construction only) to build a new MLCC plant, with construction set to start in September.  While this will add to capacity the new plant will not be ready for production until the end of 2023, doing little to alleviate near-term shortages.  MLCC demand has been growing as they are necessary for electric vehicles, but demand has also been spurred by their increased use in 5G smartphones, and that demand is quite volatile. .
That said, the same suppliers that are seeing lower component orders from Chinese smartphone brands are also expecting production for the iPhone 13 to begin in July, hopefully offsetting any slowdowns, so there has been little change in component pricing thus far.  Given the lead time for new component capacity and the even longer lead time for semiconductor capacity expansion, it will likely take more than a slowdown in Chinese smartphone sales to loosen the component shortage deadlock and slow upward pricing momentum or actually bring down component prices, but in the CE space that theory is only good until the day when buyers postpone orders expecting a lower price the next day.. 
One material where we have seen some relaxation of pricing momentum is copper, and while the commodity is still up over 35% this year, it is down over 13% from its high about a month ago.  While there are many factors that drive copper prices, it is a key material for electronics with its inclusion in everything from wire to PCB boards, and almost any material related to electronics, particularly those that have automotive applications, pushed prices higher up until recently.  While copper for wire is the material’s biggest application, which is likely more related to housing and construction than electronics, we expect overall demand to flatten a bit and then pick up at the end of the summer as new products for the holidays begin production, and while off its peak, we expect the raw material to remain in demand, at least from the electronics sector. 

​Apple (AAPL) has incorporated its “Mag Safe” technology in the iPhone 12 family, a system that makes sure your wireless charger is aligned with the phone when charging.   The issue of concern is the addition of the 18 magnets that are part of the Mag Safe assembly in each of the iPhone 12 models, which have not been in earlier versions used in MacBooks.  These magnets which look like strands of DNA, keep the charger in position while still allowing it to be separated from the phone quickly and easily.  Mag Safe is a welcome addition to the world of charging and an improvement on similar magnetic charging systems that have a tendency to slip away from the charger or do not charge due to mis-location.
Unfortunately the addition of the magnets does have a downside to the 800,000+ folks in the US that have ICDs (Implantable Cardioverter Defibrillator) to treat a variety of high risk cardiac conditions.  While much of the population that has these devices is over 65, there is an increasing number of conditions in younger patients, such as SDS (sudden Death Syndrome, VTAC, VFIB, that have little to do with age.  While pacemakers keep the heart’s rhythm consistent, defibrillators only jolt the heart when they sense an irregular pattern that could cause blood flow to be reduced or halted.  Early models delivered the charge through a lead that was implanted directly in the heart, while newer version leads are only subcutaneous, reducing the chance of inflammation.  With batteries lasting years and device size getting progressively smaller, these devices can save lives within seconds, while sitting dormant (hopefully) for most of their useful lives.
So where does the problem come in?  A January 4, 2021 article published in HeartyRhythm, the journal of the Heart Rhythm Society, a non-profit organization that promotes education and advocacy for cardiac arrhythmia professionals and patients (over 5,000 members), that indicated a iPhone 12 (all models) placed near the chest of an ICD user, would disrupt the ICD at distances up to 1”.   This would mean that carrying an iPhone 12 in an upper shirt pocket or suit/sport coat jacket would deactivate the defibrillator and leave the patient open to potential cardiac issues.  While not limited to the iPhone 12 specifically, devices that charge magnetically or the chargers themselves, could cause the same issue depending on the strength of the magnets, so patients with ICDs should be suspect concerning any device that charges wirelessly..