​As we noted on February 5th, the South Korean government gave its approval of the sale of Samsung Display’s (pvt) Suzhou LCD fab to TCL (000100.CH).  As of the 29th of March, the TCL board gave final approval of the purchase and the transaction was completed.  The Suzhou fab is a gen 8.5 LCD line that has a stated capacity of 120,000 sheets/month, which translates to 360,000 65” TV units/month or 2.16m 32” TV panels (full utilization), along with a module production line that is able to process 3.5m units/month.  Along with the sale of a 100% share of the fab and a 60% share of the module plant, Samsung agreed to purchase a 12% stake in TCL’s display production affiliate, Chinastar (pvt), making it the company’s 2nd largest shareholder after TCL and adding considerably to the 5.02% stake it already had in Chinastar.

​Without question the semiconductor foundry business is under pressure, and while much of the consternation in the press had been over whether China was attempting to unseat the US as the primary semiconductor superpower in the next few years, those issues have now faded away and been replaced with questions concerning the near-term constraints that the industry faces.   As demand for digital products increased during COVID-19 foundries have been hard pressed to meet demand and have been allocating resources to large customers or those willing to pay a premium for capacity, but the fear that CE brands will not be able to capitalize on this ‘new demand cycle’ has caused buyers to anticipate potential semiconductor shortfalls or allocations from foundries, with the results being orders that overstate what is actually needed.
Underlying this issue remains the demand cycle, which remains in question as to its sustainability.  As the global (or at least the US population) becomes vaccinated and faces decreased workplace restrictions, does the demand for the ‘stay-at-home’ CE products that stimulated this supply crisis begin to ebb?  If so, where will it leave the semiconductor industry and the CE space generally, and how will the industry deal with such potential change?  As we have noted previously, we have looked carefully at the display pace and mapped out a number of scenarios that might be applicable over the next few months, at least on the demand side, but things are just beginning to change in the semiconductor space, which could potentially complicate things further over the next few years.
Taiwan Semiconductor (TSM) the world’s largest foundry, has indicated that not only will it spend between $25B and $28B to add capacity this year, against last year’s spend of $17.2B, but it has authorized a spend of $100B total over the next three years, including what potentially will become a GigaFab complex in Arizona.  This comes after Intel (INTC) has indicated that it will be spending $20B to build out its capacity, primarily two fabs in Arizona, and Samsung (005930.KS) also indicating that it will spend $116B over the next 10 years for the same purpose although .    UMC (UMC) and other smaller foundries have also increased spending plans for new capacity projects, but nothing compares to the new commitment from TSM.
We believe TSM’s largest customer is Apple (AAPL), with 25% of sales in 2020 from ‘Customer A’ and 23% in the previous year with Huawei’s (pvt) HiSilicon (pvt) a likely ‘Customer B’, the only two that are singled out as 10% or greater customers, but TSM provides foundry services for Qualcomm (QCOM), NVIDIA (NVDA), Broadcom (AVGO), AMD (AMD), and Mediatek (2454.TT), all of whom we believe represent 5%+ customers, and over 400 other smaller customers.  Samsung is a bit more limited in its customer base, given it uses ~60% of its semiconductor capacity internally, and has less 5nm/7nm capacity than TSM, who derived 41.2% of its revenue from just those two nodes last year, up from 26.9% in 2019.
Given the rapid rise in demand for 5nm/7nm nodes, and the initiation of the 3nm node by TSM next year, we expect much of the new capacity to be added will be under 10nm, however once the spending has been initiated for such large and complex fab projects, it would be difficult and quite expensive to change those plans, at least for the established projects.  It seems now that the mindset of foundry operators has changed to the point of becoming convinced that the demand seen over the last year is the ‘norm’ and will continue, and to serve that demand additional capacity must be built, rather than running at 100% utilization and raising prices (TSM has also indicated that it will not be offering typical discounts for maturing products to its customers in 2022 in order to help finance the increase in Capex).
So, it seems to us that we are entering a new ‘higher risk’ semiconductor cycle, that could play out very favorably over the next few years if demand remains consistent with the ‘new normal’ or quite unfavorably if CE demand returns to pre-pandemic levels and growth.  It’s a game that CE suppliers have to play, while we get to arm-chair quarterback, but whatever the outcome, much will depend on how the global COVID-19 pandemic plays out in China, the US, India, and much of Europe over the next 12 months and much of that will depend on the vaccination rate, and that is still in the early stages as the data in the table below shows.

​India is in a somewhat unique position in the smartphone space.  It is the world’s fastest growing market making it one of the more desirable places for smartphone brands to assemble smartphones.  Samsung has its largest manufacturing facility in Noida and Apple just recently announced a production shift from China to India for a number of products, but while those headlines are the ones most folks might see, the currents below the surface belie a different tale.
The COVID-19 pandemic was and is still a big issue in India, and over the last year has caused both factory shutdowns and economic challenges to both the smartphone supply chain in the country and the population itself.   That, coupled with an ongoing border ‘war’ with China, has changed the tone of the Indian smartphone market and affected buying patterns, but when it really comes down to what is weighing on the Indian smartphone supply chain, its none of those problems.
Once again, component shortages are now considered the single biggest impediment to smartphone production in India, particularly chip sets, which are the heart of smartphones, in some cases causing local brand factories to reduce staffing to 50% or less of previous numbers, and ODM production is similarly affected, as dedicated brand producers are at the top of the component hierarchy.  This comes at a time when the effects of Huawei’s substantial smartphone shipment reductions are leaving a gap in the mid to high-end tier in the country, pushing almost all brands to focus on just the area where the silicon shortages are the greatest.
Last April India also changed its foreign direct investment rules requiring that all countries that have a land border with the country must get government approval before investing in new projects or facilities.  This has made it far more difficult for Chinese companies to invest in India, given the border issues, and thus far new investment from China has been mired in government reviews and limitations of Chinese border crossings have left many factories with Indian workers but few Chinese managers.  That said, US tariffs on Chinese produced goods continue to push businesses to move production to India but the pace of such movement and investment has slowed and is worsened by component shortages.  While India is still a primary manufacturing location for high volume markets, and an alternative to China, it seems that the bloom is off the rose a bit.  It seems that it is still better to have demand and not be able to supply it than not having the demand at all, yet neither would be best.

​We have mentioned trade-in and broken phone discounts a number of times recently, as carriers and brands seem to be using such incentive more often to lure smartphone buyers into purchasing a new model.  Last October we noted that Samsung was offering generous discounts on the newly released Galaxy Z Flip foldable smartphone, including trade-ins that had broken screens, a good reason to be looking for a new phone.  The price of the Galaxy Z Flip was $1,299 and Samsung was offering up to a $650 discount for a Galaxy S20 Ultra (released in February of 2020) and a $400 discount for a cracked screen model.
 It seems that Verizon (VZ) has taken such discounting to heart and is offering up to a $1,000 off if a customer turns in an ‘old, cracked, or water damaged phone’ such as an iPhone 12 or a Samsung Galaxy S21, but there are a few ‘conditions’  that have to be met.  Obviously, the trade-in phone has to be in some type of condition other than on fire, so the actual value of even a relatively new phone is a bit subjective, although if just the screen is cracked and no other damage, it tends to reduce the trade-in value by ~$250 for high-end phones (typically larger OLED screens)., but you also have to either upgrade or add a new line, along with porting your number to one of Verizon’s Unlimited 5G plans.  If you are porting from another network you get a $300 e-gift card (for iPhone 12 category) or a $200 card for an Android phone, which comes within 8 weeks.  If you are adding a new line you get $700 in credits for your trade-in, but that gets credited to your monthly bill over 24 months. 
That said, if you are just upgrading your phone and it’s broken, you get in the neighborhood of $440 in purchase savings.  So what it comes down to is your trade-in, new account sign-up, upgrade to 5G, and/or new plan, cuts the price of your new phone by means of credits against your new account.  Technically, there seems to be no limit as to how many phones on a particular account can take advantage of the new offer, but we expect there are some limitations that have yet to be spelled out by Verizon.  In any case, as is typical, the cost of the new phone is spread out over time, taking the sting out of putting down nearly $1,000 for a new phone, and the monthly ‘credits’ take a bit of the sting out of your ‘new’ bill, so if you are buying a new phone and thinking of upgrading to a more robust data plan, look hard at the fine print before you buy.  There is no free lunch….  

​Earlier this month we indicated that Samsung Display (pvt) would likely be making a decision next month as to whether it would stick with QD/OLED technology or do more R&D on nano-rods, a substitute for the OLED portion of the new process.  It seems that SDC will be producing prototype QD/OLED panels for both TV and monitors in June, for testing by parent Samsung Electronics (005930.KS), Sony (SNE) and other potential set brands in China.  Based on a response after 90 to 120 days of testing, SDC will decide whether to put its Q1 fab into mass production.  SDC has already sent prototypes to Samsung Electronics, but those were open cell panels rather than the modules needed to produce a TV set.
Samsung Electronics had previously indicated that they did not intend to produce an OLED based TV product, which was a devastating blow to SDC, who was, at the time, planning to shutter or sell all large panel LCD production capacity at the end of last year.  Since then, SDC has reconsidered its plans as LCD large panel pricing increased markedly, and parent Samsung Electronics has warmed to the idea of using the new QD/OLED technology for a potential TV set product.  That increasing acceptance of the QD/OLED technology does come with some considerations, particularly increasing production capacity by improving yield, which is typically quite low during the early months (or even years) of producing a new display technology.
If Samsung commits to the technology SDC will have to not only increase its yield at its existing fab, but will likely have to commit to and build out another line, as the current fab, even at 100% utilization, would likely be capable of producing just over 1m units/year (65”), and realistically far less.  Such a commitment would entail considerable financial risk for SDC if the technology does not prove competitive with large panel OLED or mini-LED TVs in the future.  Further in order to make the 2022 TV season, such capacity would have to be in service in under 15 months, a daunting task, especially coupled with other improvements required by Samsung, such as an increase in luminance over earlier prototypes in order to compete with Samsung’s mini-LED quantum dot TV line.

​UK based ARM Holdings (9984.JP) has indicated that its new ARM V9 Chip architecture does not fall under US export regulations, allowing it to license the technology to Huawei, who has been severely affected by the US regulations, particularly in reference to semiconductor process.  ARM says it completed an extensive review of the US restrictions and the architecture, which is said to contain the most innovations that the company has made to its design in 10 years, and will now be able to license the technology without restrictions.
This will allow Huawei’s HiSilicon (pvt) fabless unit to use the new architecture in its Kirin chipsets that are used in its high-end smartphones.  Depending on the design however, as HiSilicon must depend on foundries to produce the chips, those foundries must also be convinced that they are not violating US trade rules, unless they are based in China.  As Chinese semiconductor fabs have yet to produce at 5nm, it might still be difficult for Huawei to get non-Mainland fabs to allocate 5nm resources, but it at least sets the stage for the possibility that Huawei might be able to regain some of its former stature in the smartphone business.

Mentions of semiconductor price increases are almost a daily occurrence in the trade press, but at least there is a bit of stability, albeit relatively short-term in one part of the semiconductor space.  DDR4, the higher speed and lower power consuming version of DDR3 that has been around since 2007, looks to have stabilized in price for what is now three months.  This keeps it in line with the linear trend line and a bit above the poly trend line at least for now and has been bucking the trend of increased demand from notebooks pushing up prices as it did last year. 
That said, expectations are that prices will rise in 2Q when peak-season quarterly server DRAM contracts are negotiated.  Since last year’s 1H was a bit on an anomaly there is little consensus on expected DRAM pricing in 2Q other than it will be above $3.  NAND Flash pricing continues to remain flat, although near-term expectations are for a price boost in April as seasonal demand increases, with current prices already a bit above both trend lines.

​Chip shortages are certainly an important topic, as they are the basic building blocks of many CE products, but perspectives on the situation are many and varied, making it a bit hard to discern what is at the root of the problem, especially when certain biases come into play.  Recent comments on the shortage by an industry professional leave us in a quandary as to what to believe and what not too, so we pass it on to see if others are equally perplexed.
According to the source there are three main factors for the chip shortage:

• The limitations put on chip production manufacturing by the COVID-19 pandemic, keeping some manufacturers from meeting schedules.
• Repeat (double) orders.  The US/China trade war has caused buyers to increase inventory levels at a number of points in the supply chain to make sure they have sufficient inventory to work through potential supply limitations.  Those brands looking to build share that was formerly owned by Huawei (pvt) have also increased inventory levels in anticipation of success.
• The COVID-19 pandemic and its limitations have accelerated the global trend toward digitalization.  That acceleration is ahead of industry plans for capacity expansion.

These all seem logical and innately correct but the follow-up solution to the issues above are a bit more telling.  The source (to be revealed below) indicated further that the solution to the problem will ‘depend on how China and the US negotiate and reach consensus in the future,’ also a logical conclusion, since both countries are vying for supremacy in the semiconductor space.  But the commentary gets a bit more specific going forward with the source stating, ‘It is understandable that countries want to put chips used for infrastructure or defense purposes in the country, but it is inefficient to bring the complete supply chain back to the country and try to adopt a self-reliant approach, and it may also bring difficult profits (non- profitable).’
So the source is now saying that a focus on self-reliance in the semiconductor space could lead to a lack of profitability, as semiconductor resources are built on a regional or country basis, rather than on global need, a very logical thesis, which unfortunately has been supported by those who fear that globalization leads to a lack of control by incumbents.   He added, ‘the chip shortage has nothing to do with the location of the fab.  These factors will be present no matter which country it is produced in’, again consistent with a global view of the semiconductor industry.
Given that China’s most recent 5 year plan has a focus to expand the country’s semiconductor industry to reduce dependence on foreign chip manufacturing, and the US government and US companies have begun to focus on building out US semiconductor manufacturing capacity, these comments represent an opinion that is shared by many across the semiconductor industry.  The source added that ‘We believe that the current total production capacity is still greater than the actual market demand,” furthering his apprehension toward a nationalistic expansion of the semiconductor industry as opposed to a globalized approach.
All noble thoughts and representing a less political and more industry oriented approach to current shortages, but we are just a bit concerned that there might be some bias here, as the source of the comments was Mark Liu, the just elected Chairman of the Taiwan Semiconductor Industry Association and the Chairman of Taiwan Semiconductor (TSM), the largest semiconductor foundry globally, with capabilities of ~13m 300mm wafers/year, production node capabilities down to the 5nm level, and the largest purchaser of semiconductor capacity and related equipment.  This taints his view that semiconductor expansion in China, the US, and Europe, would be ‘unrealistic’ a bit considering such would represent additional competition to TSM and could reduce TSM’s utilization and ‘ability to use their expertise to discern which customers are actually buying for need rather than buying for inventory stocking’, as he also noted in the speech.  Its hard to take advice from someone whose motives are a bit self-serving, even if they are correct, albeit likely for the wrong reasons…. JOHO

Corning (GLW) has indicated that it has raised prices ‘moderately’ for display glass substrates in the 2nd quarter.  According to the statement, “This price adjustment is a result of increased costs in logistics, energy, raw materials, and other operational expenses during the current glass shortage.  Additionally the cost of precious metals required for maintaining reliable glass substrate manufacturing have risen significantly since 2020. While Corning has sought to offset these added costs with productivity enhancements, it can no longer fully absorb them.”
We took a quick look at raw material prices used to make glass substrates, and while borosilicate glass is primarily silica which is highly refined or grown, other ingredients, most of which are closely guarded secrets, include Boron Oxide (made from Borax) and oxides of Sodium, Potassium, and Aluminum.  The price of Boron Oxide has risen by 9.5% over the last 12 months, enough to make a difference given it constitutes between 7% and 13% of borosilicate glass composition, so there is justification for a price adjustment, even at this basic level, and as we have noted, the price of rare earth materials has risen precipitously over the last year, also having an impact on the overall cost of display glass production, despite the small quantities used.
But when considering that glass production is one of the most energy intensive production processes, a quick look at the spot price of natural gas during the same period is an even bigger indicator that the cost of production is rising.  As seen in Fig. 2, the spot price of natural gas has risen 32.6% in what is the last 13 months, and if we go back just one month (Feb.), that increase would have been 67.4%.  With energy accounting for between 14% and 15% of the glass industry’s production costs, just the increased cost of energy would justify higher prices.
So if a glass substrate price increase is justified from a raw material and energy standpoint, are there any other issues that come into play here that makes this time different from others?  Before we answer that question, it is important to understand a bit of history concerning glass price declines.  If we go back to the ‘old days’, especially when panel prices were falling quickly, we note glass ASP declines at Corning of over 6% on a quarterly basis between 4Q and 1Q (2015), however in subsequent years that same 4Q/1Q decline began to moderate with company comments like “sequential price declines in 1Q were the best in 5 years” (2016), “sequential price declines were moderate – the best in 6 years” (2017), “…best in a decade…” (2018), “more moderate than expected” (2019), and continued in that vein, with estimates falling to low single digits and hints of ‘flat’ pricing late last year. 
As demand increased last year we expect q/q glass contract price adjustments got close to zero, and while the company does not reveal the actual contractual price reductions, we expect that large customers (top 4 represented ~74% of sales in 2020) were willing to hold glass prices steady to insure continued supply.  Then the ‘other issues’ came into play, a power outage at Corning competitor NEG’s (5214.JP) plant in Shizuoka, Japan, which shut down the plant for over 5 hours and an explosion at Ashai’s (5201.JP) Gumi glass plant (Gen 10.5.).  Given that glass production is a continuous process and that the rapid cooling of a plant’s furnaces can damage the refractory brick that lines the furnace, just the NEG shutdown is expected to reduce industry glass production by 2% to 3%.  While this seems to be a relatively small amount, when the industry is as tight as it is currently such a reduction in capacity can make a significant difference.  In order for panel producers to make sure they have enough glass substrate capacity to meet current demand, they will be willing to pay a higher price for production, especially those who are directly affected (We believe LG Display (LPL) is a key NEG customer),, which pushes up the overall price of glass.  This coupled with the increased cost of production makes Corning’s price increase, which we expect could be as much as 3% to 4%, a no-brainer, and panel producers will likely be happy to pay it despite its ‘unprecedentedness’, hence the flying pig and blue moon.