The early release of the Galaxy S21 series was a boon to 4Q results for many in the Samsung smartphone supply chain, but the early release and shortages both at Samsung and its suppliers have slowed growth for many and delayed new releases from other brands in 1Q.  As noted above there are many that believe the issues seen currently will be alleviated in 3Q and 4Q, but it is a slippery slope to start climbing, especially given that Samsung’s overall 2Q smartphone shipments are expected to decline q/q as component shortages affect shipments further.  Only three companies saw growth in both sales and operating profit in 1Q this year. Below is a table that lists a number of Samsung’s key smartphone component suppliers and their results in 1Q.

​In March of 2020 the then President signed the ‘Secure & Trusted Communications Networks Act of 2019’ that prohibited the use of federal funds to obtain communications equipment or services from companies that ‘pose a national security risk to US communications networks.’  This requires that the FCC publish and maintain a list of all such equipment and services and each provider must submit an annual report to the FCC specifying whether it has ‘purchased, rented, leased, or otherwise obtained any prohibited equipment, and if so, provide a detailed justification for such actions.’  The bill also provides for a reimbursement program for providers with 2m or less customers to offset the cost of removing the equipment, which is being developed by the FCC, however the funding, while approved, seems to be delayed until 2022.
Small operators are required to use their own capital if they would like to start the removal and replacement of equipment from Huawei (pvt) and ZTE (000063.CH) the two main suppliers that are on the list, which will be untenable for many small operators, although the FCC is expected to finalize the plan by this summer.  The global semiconductor shortage has made the competition for components that much more difficult for small carriers as large carriers have the leverage to negotiate with foundries for fab time.  Even those suppliers who benefit from the replacement have indicated their support for an extension of the deadlines associated with the bill and funding.  The Rural Wireless Association, a representative organization for small carriers, while relieved that $1.9b in funding for the replacement plan was approved, is also requesting the same, although with small operators in the forefront, stating that “This is a national security issue that has been brewing for more than three years.  It should be more urgent to replace insecure equipment and services in the network of small operators, and put the needs of these operators ahead of the needs of large operators, which will help the equipment replacement plan and is in the public interest.”
It seems that every faction hear has a soapbox and a reason to believe that they are the most important faction in this meld of government and industry.  What it really comes down to is the necessity of the replacement during a period when replacement equipment is both scare and costly.   We expect much of the industry to rally around the potential for delaying implementation, not only for small carriers but for the entire industry as raw material and component prices increase the cost of the replacement cycle.  If the equipment suppliers are on the side of an extension, they know that it is in their best interests to slow the process down, and while they might tread a bit more lightly than those that are required to spend, they can see that while pushing out the program might spread sales over an extended period, not being able to obtain components means no sale at all.

​Last month we noted that China’s largest foundry, SMIC (688981.CH), had given its CEO, a former R&D Director at Taiwan Semiconductor (TSM) a bit of a raise, more than quadrupling his salary  from 2019’s $341,000 to $1.53m, along with a ‘gift’ of $3.4m in SMIC stock, making him the company’s highest paid employee.  This was in keeping with the company’s and the country’s desire to not only hire foreign talent with high salaries, but to provide ‘incentives’ to make sure other potential hires note that such bonuses are available.  SMIC is taking that philosophy a bit further with the approval of an incentive plan that will offer ~23% of its employees (~4,000) shares in a restricted stock offering as a reward for service.
The plan share price is set at 20 yuan ($3.11 US), a roughly 36% discount to the current average price of the trading shares and includes grants of 400,000 shares each to the company’s Chairman, CEO, and two top executives (one previously mentioned).  The company has a tendency to give the highest employee awards to those that were hired from firms off the Mainland, particularly Taiwan, where recruitment agencies have been told to remove all listings for jobs on Mainland China, particularly those in the semiconductor space.

Being optimistic is part of the consumer electronics industry mindset, and it carries through to almost every aspect of the business, but an industry that combines both the vagaries of complex electronics and consumer whims, tend to bring some of that optimism back to reality when the realities of a cyclical industry show through.  Foldables are a perfect example, as they have been touted by panel producers as the next generation of products that will become so commonplace that the word foldables would not even enter into a discussion.  That said, they are, in the display timeline, new, and as such open to all sorts of speculation, estimates and expectations, which are then colored by the hard reality of actual sales, the ultimate metric in CE.
Samsung Electronics (005930.KS) and its affiliate Samsung Display (pvt) have been the biggest proponents of foldable devices, and while not technically the first to release a commercial product, have been the most active in foldable product releases and sales.  However, the company has been less than accurate in predicting sales of its foldable offerings and there is a good chance they will miss their target for this year, as they have done in the past.  In 2019 Samsung wound up selling only half of the number of foldables it had targeted and last year missed its target by more than 50%.  Of course there are specific reasons for each miss, but targets should take into account the potential for any number of possible issues, most of which are similar to issues the industry has faced in the past.
This year’s targets for Samsung foldables are between 6m and 7m units, with much dependent on sales of the company’s ‘3rd’ version of its Galaxy Z Fold and its Galaxy Z Flip expected in August.  There are also rumors that Samsung might add a scrollable model at some point this year, but that remains speculation for the near-term as it is not expected to be released with the other two foldables.   Targets for this year have even more granularity with the Z-Fold 3 the more important of the two as Samsung believes it has more room for unit volume expansion than the Z Flip, which has less differentiating features to set it apart form others.  Thus far Samsung, Huawei (pvt), Motorola () and Xiaomi (1810.HK) have released commercial foldable smartphones.

Quantum Dots are a very significant display technology, are at the core of large panel displays and TV sets developed by the world’s largest manufacturers and California based Nanosys (pvt.) is the leader in the space, providing QD materials and IP to the industry.  So why would such a company buy a Swedish company, Glo AB (pvt) a VC backed developer of micro-LEDs, a technology that some say will obviate the need for quantum dots in the future?  In order to understand why this acquisition makes sense and why it is significant to the display and CE space, it is necessary to understand some of the basic technology that surround both companies.
First, Nanosys is a pioneer in commercializing the use of quantum dots as materials that act as color shifters, converting light of one color into another.  In typical usage the quantum dots are incorporated in a film (QDEF or Quantum Dot Enhancement Film) that replaces the diffuser, a translucent sheet that sits between the LED backlight and the liquid crystal, and spreads the light evenly across an LCD display.  These embedded quantum dots, particularly ones that generate red and green light, are ‘stimulated’ by the blue light of the LED backlight and give off their respective colors, and when you mix red, green, and blue light, it turns white.  This is important as the color purity of non-QD LCD systems is considerably lower than its competitor, OLED, a factor that limits the longer-term viability of LCD technology.  However, not only do the quantum dots take a single color blue light and convert it to a white light, but are very precise in how they actually convert the light, giving LCD displays a shot at competing with self-emissive displays such as OLED that have a high level of color purity.  Sustaining the life of the massive LCD infrastructure that the industry has built and paid for is of utmost importance to all LCD producers and underlies their adoption of quantum dots.

As quantum dot materials become more commonplace, their role changes.  In some cases they can be used to replace the colored phosphors in LCD or WOLED color filters, which are sheets of red, green, and blue dots that create full color images out of the white dots of an LCD display.  By replacing the phosphors with quantum dots, the color purity can again be enhanced, but the ultimate goal for quantum dots is to be self-emissive.  That is, to directly generate color by electrical stimulation rather than by converting other light into another color.  Similar to the way in which OLED materials are stimulated, quantum dots could provide an alternative to OLED materials that require a rather complex production process, but using quantum dots commercially as self-emissive emitters is still a few years away, and in the interim quantum dot companies like Nanosys are looking for better ways to help a vast LCD infrastructure compete against new technologies.

One of those competitive new technologies are micro-LEDs, essentially very small LEDs that would become the red, green, and blue sub-pixels of such displays.  As LED production technology (MOCVD) is well commercialized, it seems a logical progression that would not require building an entire new display infrastructure, something that would take many years, but there are some issues that surround micro-LEDs, and that is where the acquisition of Glo AB begins to make sense for Nanosys.
LEDs are produced on wafers, typically made of sapphire, silicon, or compound semiconductor materials, and are formed by depositing materials on that wafer primarily through the use of MOCVD (Metal Oxide Chemical Vapor Deposition) tools that vaporize the materials and deposit them on the substrate.  The LEDs themselves are stacks of materials with a space between them called a quantum well, where electrical energy is converted to light.  Once the LEDs are produced they are removed from the wafer and placed on what becomes the display substrate.  But all LEDs are not made of the same material, with green and blue LEDs based on InGaN (Indium Gallium Nitride) while red LEDs are based on AlGaInP (Aluminum Gallium Indium Phosphide), which means they must be produced on separate wafers and then transferred to the display substrate, creating a pixel made up of red, green, and blue LEDs.  Of course, if they were all made of the same material, and therefore could be produced simultaneously on one wafer, the process would be far simpler and less costly and time consuming, particularly as LED sizes go from normal to mini to micro.

Another problem facing the idea of using LEDs as display light sources is efficiency.  Normal LEDs are very efficient at converting energy to light, which makes them ‘bright’, but as they get smaller, they become less efficient and produce less light per mm2.  In large displays this is less of a problem because a 4K TV typically has ~68 pixels/in2, while a 4K AR/VR display (0.1”) would require a pixel density of ~10,000/in2, which means the individual red, green, and blue LEDs would need to be considerably smaller and therefore less efficient (‘bright’).  To overcome this problem some companies have developed LEDs that are based on nano-wires (think of them as LED ‘crayons’ in a box), which have the peculiar characteristic of increasing their efficiency as they get smaller, and, because there are many nano-wires in each micro-LED, if one is damaged, it does not generate a need for the entire LED to be replaced, which is the case with standard micro-LEDs.  One of the key companies developing nano-wire micro-LED technology is Glo AB, the company that Nanosys purchased.

Did Nanosys buy Glo AB to put the technology in a closet and try to eliminate potential competition to quantum dots? No, but understanding why the combination of the two makes sense, it is also necessary to understand that even if Glo AB were to commercialize a micro-LED process that could grow all three LED colors on a single wafer, it would be a slow process involving many steps to keep the particular material deposition for each color LED in the proper place, a very challenging task. So until the technology that could make single wafer multi-LED color growth commercially viable is developed, there is an interim solution.  By growing only one color micro-LED on a wafer, the process complexity can be significantly reduced, but that brings us back to creating a wafer for each of the three colors, again an expensive process.  However, say the one color is blue, by depositing red and green quantum dots on 2/3 of the blue micro-LEDs, a full color RGB micro-LED display is created.
As noted, this is an interim solution toward the ultimate goal of a self-emissive quantum dot display, but it presents itself as a way that the current limitations facing micro-LED technology can be ‘eliminated’ and commercial development can occur far sooner, but there is still one problem that remains, how do you move 24.88m micro-LEDs from a wafer to a display substrate for a 4K resolution device, especially when they are less than 20um each?  Typical pick and place tools, even if they could be adapted to such small structures, would take days to place that many LEDs, which is obviously not cost effective, and we have noted a variety of other micro-LED transfer techniques being developed in previous notes, but according to Glo AB, they have also developed a transfer process that is cost effective for moving such large numbers of small LEDs.  We believe the process is a laser based system that moves the micro-LEDs directly from the wafer and bonds them to the substrate without any interim steps, which are the bane of other techniques, but details have not been revealed, although we expect Nanosys will share some of that information at a later date.
All in, while the acquisition of Glo AB by Nanosys might seem antithetical on the surface, the acquisition gives Nanosys the ability to more closely develop quantum dot solutions for micro-LEDs and broadens its patent portfolio to 1077 world-wide grants or applications with the additional 298 from Glo AB.  While Glo was a spin-off of Lund University in Sweden and has its headquarters there, the company has a pilot production line in Sunnyvale, less than 20 minutes from Nanosys, and has partnered with a number of display and CE companies over the last few years in the development of backplanes and optical elements, all of which will be maintained by Nanosys.  We expect that the path toward commercialization of a combined quantum dot/micro-LED solution will be shortened by the acquisition.[1]


[1] Please note we have no financial relationship with any of the parties mentioned in this note nor do we have any obligation to or reason for mentioning this transaction, other than our understanding of its effect on the consumer electronics space. 

​Way back in late June, 2018 there was a groundbreaking ceremony in Mount Pleasant, Wisconsin where then President Trump pushed a golden shovel into the farmland soil, later calling the project the ‘8th Wonder of the World’.  As was typical, he noted at the groundbreaking that ‘This is one of the great deals ever’ and was evidence that he was bringing manufacturing back to the US and restoring America’s industrial might.  The project was initially to be a Foxconn (2354.TT) Gen 10.5 LCD panel factory, the only one of its kind in the US and was to employ 13,000 Wisconsin workers, enhanced by $4.5b in subsidies from the state and local governments., but even before the groundbreaking, questions as to the possibility of such a fab were already circulating, with much dependent on the supply of Gen 10.5 glass, which supplier Corning (GLW) would either have to ship from other production locations (too expensive and unwieldy), or build a co-located production line, which is what is typically done for glass of that size.  Corning was either unwilling to commit to such a capital intensive project or was not convinced of its success, which caused Foxconn to trim back its factory expectations to a Gen 6 fab where substrate glass could be sourced from existing Corning production locations.
Foxconn originally denied the potential change and then confirmed, indicating that it had always planned on a ‘phased’ production timeline (companyspeak) and would still employ 13,000 people.  Foxconn did outfit a few ‘innovation centers’ in Wisconsin, but most remained empty and still do.  As the year progressed Foxconn indicated (likely accidentally) that the factory would be highly automated, with 90% of the potential hires being ‘knowledge workers’ rather than factory workers although their goal was still to hire 2,000 employees by the end of 2019 and 13,000 by the end of 2023, and in January 2019, the Foxconn representative indicated that building a TV panel factory ‘would not be competitive’ at that location.  Over the next 18 months the company indicated that it would be building a plastic molding factory and packaging plant in Mount Pleasant, but after a discussion between President Trump and Foxconn CEO, the plans for a Gen 6 LCD fab reemerged with a target date of late 2020, and road work and site leveling began, only to grind to a halt as Foxconn missed its hiring goals and Scott Walker, the Republican governor at the time, lost his re-election campaign to Democrat Tony Evers.
While the project foundered, the new state administration began to reevaluate the initial agreement with Foxconn, especially after they missed their 2nd year hiring goal, leaving them with no subsidy relief and questions as to whether they would continue with the project.  Fast forward to the end of April of this year when Wisconsin governor Tony Evers renegotiated the Foxconn contract on slightly better terms.  The new contract made Foxconn eligible for $80m in performance-based tax credits over 6 years, a bit less than the original 2017 contract which allocated $2.35b in credits (with state and local  infrastructure improvements it was closer to $4b), but now only if Foxconn hires 1,454 qualified workers at an average wage of $53,875 and invests $672m by 2026.  The contract no longer specifies what Foxconn will be building on the site (the Gen 10.5 fab was specified in the original) as long as it meets the new goals, and the new contract also changes the contract length from 15 years (original) to 6 years, and allows the state to recover 100% of the incentives paid each year in case of a default.
While the renegotiation is certainly the key here, as it saves the state and its taxpayers an enormous amount of money over the next few years, we do take a victory bow, having been extremely doubtful that the project would ever live up to even the reduced expectations.  This did not come because we had great insight into the project itself but because Foxconn has done this before, reducing or defaulting on major projects in a number of other countries.  While the project was noteworthy in its scope and ability to generate headlines, the cost of display production in the US is relatively high, and even with the higher panel prices seen over the last year, the long-term price of LCD panels follows a downward trend.  All in, Foxconn’s own history predicted the outcome.

Samsung (005930.KS) officially launched its NEO QLED TV line which includes both 8K and 4K models and a combination of mini-LED backlit and quantum dot enhanced sets, while also three lines of quantum dot enhanced sets with traditional backlights. Items in red are currently unavailable.  While each series has slightly different feature sets, it is easy to see that Samsung is looking to both promote 8K and mini-LED backlighting in these series, while appealing to almost every price point between $9,000 and $600.  While continues to broaden the use of quantum dots, but the use of mini-LEDs gives Samsung TVs better spec comparisons against LG Electronics’ (066570.KS) OLED line, which is of major importance in the premium TV set category.

OLED display panels tend to be more expensive than LCD panels, although with the unusually large price increases seen in LCD panels over the last year, the gap is narrowing.  That said, we get questions about the relative price of OLED displays and why there is such a variance in OLED laptop prices, with most references being toward the price of the OLED display itself rather than what the actual cost of an OLED based consumer device.   While there are many OLED smartphones, the differences in feature sets is enormous, making comparisons between equivalent OLED and LCD smartphones almost impossible, however as OLED displays in laptops are relatively new, we look to that device segment for more realistic comparisons.
It seems logical that the best comparisons would be those for the lowest priced laptops, given that they have the least number of features, so we looked for relatively new and inexpensive brand that offered both.  We made a simple comparison of two relatively inexpensive models released by ASUS (2357.TT) that were as close in features as we could find, and added a 3rd model (higher-end) to give an idea of what other features might be added to boost the price.  There are other OLED notebooks we could have chosen for comparison, with prices up to ~$4,000 but the ASUS OLED laptop is one of, if not the lowest priced OLED laptop we could find.
The two ASUS models we compared were the VivoBook and the ZenBook, both of which have 13.3” displays with 1920 x 1080 resolution (Full HD).  The OLED based ZenBook is slightly larger (3.6 in2), slightly (0.1”) thinner, and 3.2 oz. lighter than the LCD based VivoBook, has a larger battery (67W vs. 50W), and fewer USB connectors, along with a smaller SSD (256GB vs. 512GB for the LCD laptop).  They both run off of the same Windows 10 Home version and have the same Intel processor, GPU and RAM configuration, although the ZenBook (OLED) has a slightly better camera, which leads to the price.  The VivoBook sells for $699, while the ZenBook (OLED) sells for $799, which is an unusually low price for an OLED notebook and indicates how OLED displays are moving down the price curve not only in smartphones but also in laptops.
Taking the comparison one step further, the difference in price between the solid state drives in both models averages out to be ~$21 at the retail level (~48% higher), which would likely be lower at the higher volume levels associated with such products, so we estimate that the difference in drive capacity for the ZenBook would save ~$18.  The battery comparison is more difficult given that there are fewer direct battery replacements for these specific models, although we could trace it down to an estimated supply chain difference of $22, which would net the two dissimilarities to ~$4 higher for the OLED model..  Taking out the USB 2.0 ports on the ZenBook probably saves $1, so the net higher cost of the OLED model comes to ~$3, although we expect the cost of the OLED driver could add another dollar to the difference.  All in, a roughly $5 higher cost for the OLED model.  We have added a high-end ASUS OLED notebook for comparison.
We estimate an all-in price difference between the 13.3” LCD and OLED display is between $55 and $70 given the relatively low volumes of this OLED display size relative to LCD, which would give ASUS a $46 to $66 premium for the ZenBook, although a more realistic estimate would be $39 to $59 if promotional costs are included.  We expect ASUS allows retailers to garner a slightly higher margin on the OLED product to help with promotion, so when it comes down to the actual premium that the OLED model generates is ~6%.  Given that this is or at least is currently the lowest price 13.3” OLED laptop that sets a base for laptop OLED premium generation, with the expectation that higher priced OLED laptops generate a higher premium for the brand, given the ability to bury that premium in a greater number of features.  As the production of notebook sized OLED displays continues to ramp, we expect penetration to ramp accordingly as it did with OLED smartphone displays, and without the necessity to convince customers that OLED was a legitimate and higher quality display than LCD, which was the case when OLED smartphone displays were first introduced..

​Earlier this month we noted that Scramoge Technlogy (pvt), an Irish NPE run by Magnetar Capital (pvt), an Illinois-based hedge fund, purchased 128 (3 Korean and 123 US) patents from LG Innotek (011070.KS) for $4.4m last February as part of the company’s exit from the wireless charging business, and has filed suit for patent infringement against Samsung Electronics () in the Western District Court of Texas.  It seems that LG Innotek has added another 78 patents relating to wireless charging to the list, and given the low price for such assets, it could indicate a possible agreement that encompasses similar filings in other countries, a possible sharing of litigation profits, and potential lawsuit exclusions for LG Electronics () affiliates, according to speculation in the Korean press.  Regardless of the agreement, the continuing IP sales would assume a higher level of litigation over the charging patent family.
 

​Mini-LED TVs have not been around for long.  TCL (000100.CH) released the first mini-LED TVs in late 2019 and continues to push the technology to lower priced models in this year’s 3rd iteration, while others are just beginning to push the technology into what are usually high-end or premium TV lines.  That said, the price competition between the few TV brands that are offering commercial mini-LED sets has already begun, with each trying to offer mini-LED, along with other features at a price just a bit lower than the competition.
Samsung (005930.KS) has taken the high road with mini-LED TVs, offering its NEO QLED (released in March in some areas) for ~$2,599 (65” 4K model), while LG Electronics (066570.KS) is about to release its mini-LED line of what it says will be 10 models before the end of June.  The 65” 4K model is expected to sell for ~$2,200, with models between $200 and $400 less than the Samsung equivalents.  First mover TCL  is also expected to release its next mini-LED line before the end of this quarter, with a 65” 4K model selling for $1,698, and maintaining at least a $100 to $300 lower price point than LG across the line.  A typical ‘generic’ 65” 4K TV sells for between $333 and $1,400.
HiSense (600060.CH) is also expected to release something similar to a mini-LED TV in the 1st half of the year, but we have not seen pricing other than ~$3,500 for a 75” model.  The Hisense sets differ in that instead of using mini-LEDs as a backlight source, they use a 2K black and white LCD display to light the main 4K display.  This would be the equivalent of over 2.2m mini/micro LEDs in a backlight and should give the highest level of backlight control and therefore contrast of all systems other than micro-LEDs.  Since the cost of displays has been rising this two display system might not prove as feasible as it was when LCD panel prices were declining, but HiSense has not abandon the technology yet.
With pressure to contain costs squarely on the TV brands in the mini-LED realm, the competition between brands has already begun, with TCL making sure that the two South Korean brands are relatively limited in the premiums they can charge for mini-LED TVs.  Likely working at lower margin levels than LG or Samsung, TCL has been at the mini-LED game longer than both from a commercial perspective, and while both Korean competitors are developing their own mini-LED supply chains, likely including affiliated companies, TCL also has access to China’s vast LED industry and will no doubt keep up the price pressure regardless of other features offered by Samsung and LG.  While LCD based TV (which mini-LED TVs are) prices continue to rise, the premium TV segment is becoming more valuable to TV brands, which implies an expansion of mini-LED TV set offerings, but pressure from TCL, and eventually other Chinese TV brands, will favor consumers, who will see mini-LED models continue to decline in price relative to generic LCD TVs.