Basic electrical components are often ignored in lieu of silicon based devices such as microprocessors, memory, and LEDs, but resistor, capacitors, inductors, and similar basic devices such as circuit boards and wiring are such an integral part of consumer electronics that the sum total value of such components can be a substantial part of the BOM of CE devices.  That said, looking at a typical PC would reveal that ~50% of such a device, including components, would be made up of various metals, some of which have been in high demand and seen unusually large price increases in 2021.

​As to the components themselves, our focus has been on MLCCs (Multi-layer Ceramic Capacitors),a physically small component that is essential to a number of CE devices, particularly 5G smartphones and electric vehicles.  Growth rates for MLCCs vary from ~5% to ~8% over a 5 year period and the extended lead times seen in 2021 seem to be continuing into 2022, although as those MLCC producers that have such expertise have shifted production away from large size MLCC that are used in heavier equipment, such as MRIs or industrial power supplies, to smaller sizes used in smartphones or similar mobile devices.  While the market remains tight and lead times long, this has kept the industry from falling into a more severe shortage, although prices have risen as those with low inventory levels are forced to pay up and order higher levels to gain traction with producers.  While the char below shows PPI for a number of basic passive components through mid-2020, the trend has changed little since then.

[1] Prices are based on OTC and CFD financial instruments and are for reference only

In consumer electronics remote controls have been essential devices since the late 1930’s but wires connecting them to TVs made them a bit less attractive to TV or radio owners until 1939 when Philco came out with the “Mystery Remote Radio Control”, the first wireless device for operating CE devices without wires.  The Philco device was a wooden box with a few components (including a vacuum tube) a battery, an antenna, and a dial that could ‘dial up’ your favorite radio station without you having to get up or trip over wires.  The rather large device enabled the user to raise and lower the volume of the radio, mute the sound entirely, or choose one of a few programmed stations to listen to, along with being able to switch to the radio’s built-in phonograph if the radio stations were not playing something to the user’s liking, all through a telephone-like dialing mechanism. 
TV remotes became more popular with the “Lazy Bones” remote control developed by Zenith (066570.KS) in the early 1050’s, but was still connected to the TV with a wire, and was replaced in 1956 with the Zenith “Space Command”, a device that used ultrasonics to change channels and volume.  As when the unit’s buttons were pushed, they created a clicking sound which the TV receiver’s microphone could identify,, giving rise to the term ‘clicker’ for older remote controls.  However, with the cost of transistors decreasing in the 1960’s remote controls began operating at frequencies above the range of human hearing, although dogs could still hear them and metal banging against glass could also change the channel.
By the 1980’s companies like Jerrold Electronics (COMM) were producing more sophisticated ultrasonic remotes, but most were designed to work with a particular brand of TV or CE device, so in 1985, Steve Wozniak of Apple (AAPL) fame, started a short-lived company CL9, whose objective was to develop a universal remote control.  The CL9 product was a well-designed but expensive device that faced competition from other ‘learning’ remotes that were less sophisticated but simpler.  Unfortunately, while ‘learning’ remotes solved the problem of not having to buy an second remote for every device, they are still difficult to program and complicated to use, so we still wind up with a few remotes that are needed to tell the TV to switch to streaming services that are not included in the TV itself or similar functions. 
All of these devices require making sure the batteries in the remote are up to snuff and replacing batteries is a chore, so last year Samsung (005930.KS) came up with the idea of putting solar cells on its TV remotes, allowing them to charge when in a sunny location, in theory a good idea, but not that practical.  This year Samsung is trying something else.  While leaving the solar cells available to the remote during the day, Samsung has included circuitry that can ‘harvest’ the RF signals coming from devices that produce radio waves, such as your router.  Such micro-harvesting is an area of interest in the IoT world, as many of such devices require only small amounts of power to operate and are located in places that would make battery replacement difficult or dangerous.  By collecting the RF energy that is all around us and converting it to electrical energy, such devices are able to power themselves to a large degree.
4G and 5G spectrum have been shown to be near the efficiency of other forms of energy harvesting, such as temperature gradients or vibrations, which means that cities that are blanketed with such RF signals are a fertile ground for energy harvesting, with a study done almost 10 years ago showing that a broadcasting tower located ~4mi from a collector generated enough energy to power a standard microcontroller.  While the amounts of energy gathered are small, usually measured in micro-watts, they are available 24/7 and are free, so the development of RF energy harvesting antennae and conversion components will allow the harvesting to become more efficient and will be applied to devices that don’t require large amounts of power for operation.  Samsung seems to be trying to present itself in an ‘eco-friendly’ light with their remotes, with the idea of both solar cells and RF energy harvesting being one of the few times where in the short run being eco-friendly is also something that is both convenient and ecologically sound.

​Jahwa Electronics (033240.KS) is expected to be the producer of optical image stabilizers for the iPhone 14 due out in 2022, the first time the company has become part of the Apple supply chain.  Optical image stabilizers are used to keep small device movements by the user from disrupting the image as it moves through the lens system to the image sensor and blurring the picture.  This is done by making small counter-movements to the lens or the camera module itself as the picture is being taken.  The company has expanded its OIS operation through the purchase of an idle factory in Gumi, South Korea, the location where LG Innotek (011070.KS), the primary supplier of camera modules for the iPhone has a number of factories. Apple management visited the Jahwa factory in Cheogju in June of this year, leading to the qualification.  We expect the new Jahwa plant will be dedicated to Apple exclusively, who was instrumental in choosing the location of the new plant.
As the sophistication and cost of camera modules used in the iPhone have increased over the last few years, Apple has begun to change the way it procures camera modules.  In previous years the company purchased double and triple camera modules from LG Innotek, Sharp (6753.JP), and O-Film (002456.CH), with O-Film having been eliminated from the Apple supply chain for ethical violations this year.  Going forward, it is expected that Apple will procure camera module components individually, with LG Innotek and Sharp now supplying the cameras themselves to Foxconn (2354.TT), who will now do the module assembly for Apple. 
While we believe the motivation for the change is cost based, higher resolution image sensors in new cameras make the necessity for OIS considerably greater, requiring Apple to have more control over both the components and the assembly process, which includes an alignment step that is critical for the modules to function properly.  Hyvision (126700.KS), a producer of camera module inspection equipment is supplying such equipment to Foxconn and to LG Innotek for both optical camera and TOF production.  As Apple is expected to increase 2022 iPhone unit volume by up to 30%, Jawah’s commitment to the new plant is testament to Apple’s supply chain strength.

Driver ICs are an integral part of all displays and are the interface between signals generated by a computer, smartphone or other device and the display as they translate that data into a visual image.  Display driver sales typically track closely to display unit volumes, but over the last year, display driver IC prices have increased rapidly as utilization rates at silicon foundries has been running at close to 100%.  As these foundries allocate tight capacity to device types a number of segments in the CE space have seen shortages, including driver ICs.
We noticed that the Taiwan trade press had indicated that November, while down for Taiwan’s driver IC companies, wasn’t ‘as bad as expected’, so we dug into the data to see if this was just a headline or a real change.  The commentary in the press was that TV set sales had been improving as TV panel prices declined, buffering display driver companies from declining sales, but we were suspect in that it takes time for both lower priced panel inventory to move through the supply chain, and for real TV set prices to see significant declines.  IT device drivers, which include those used in monitors, notebooks, and tablets, are the segment that is likely going to be the most volatile, with panel producers having shifted production away from TV panels and toward IT panels, where prices have declined only recently.  That said, we compared both TV and IT panel industry sales to a number of driver IC companies in Taiwan, who report sales on a monthly basis.
The chart shows the sales of Novatek (3034.TT), Raydium (3592.TT), Focaltech (3545.TT) and Fitipower (4961.TT) over the last 23 months against panel industry sales broken out into IT and TV segments.  We have scaled the monthly results of the driver IC vendors and the panel sales so they can be compared, so there are no y axis amounts, but the disconnect between driver IC sales and panel industry sales is quite easy to see.  As driver IC scarcity became an increasing issue late last year, the price of drivers ICs increased, boosting sales, while panel unit volumes remained relatively flat, constrained by component shortages and raising prices.  All in, it is hard to look at driver IC sales and not expect at least some ‘normalization’ to closer tracking to panel volumes.  As with panel producers, driver IC companies have been shifting capacity toward drivers for the IT segment, which puts more pressure on IT product sales going forward, an area that has seen demand weaken over the last few months.  While not perfect pure plays in the IC driver space, Taiwan’s driver companies are a good indicator of the sensitivity the CE supply chain has to relatively small changes in demand and provide monthly rather than quarter sales.

Ceramic Capacitor) fabrication facility that will be completed in March of 2023.  As one of the few volume producers of MLCCs in an industry that remains conservative about capacity growth, the expansion project, which is expected to cost ~$150m marks the first major capacity expansion project for the company in many years.  With competitors Yageo (2327.TT) and Murata (6981.JP) adding capacity (production dates) in 2020 and 2019 respectively, the industry has been relatively careful about adding capacity despite the increasing demand for MLCCs.  We believe this is a function of problems associated with a demand cycle back in 2016 – 2017, when the industry added capacity quickly and additional demand was slow to materialize, leading to a significant drop in MLCC prices.
However MLCCs, which as small and hard to produce capacitors that appear in many CE, automotive, industrial, and defense products, continue to see strong demand despite supply chain issues that have slowed orders for some CE products.  While the automotive industry has had its issues during the COVID-19 pandemic, demand for MLCCs continues to grow and has offset the slower demand from CE.  As hybrid and fully electric cars become more entrenched, MLCC content in that space will continue to grow and we expect the industry to remain tight on a long-term basis, especially as entry into the production side of MLCCs is quite difficult for those that do not have the considerable expertise to make these small components. 
Inventory levels for MLCCs have been declining this year, and while this would not be considered a ‘shortage’ situation, lead times have been extended as automotive and 5G demand has picked up, despite the silicon supply chain issues that have limited broader CE demand late this year.  We are less concerned with what are relatively short-term movements in MLCC lead times, inventory levels, and pricing, as we are in longer-term demand, and industry leader Murata has provided internal research that gives a picture of current MLCC usage in a number of products, giving some indication of the volumes needed for this component.
5G is a driver for increasing MLCC content in smartphones and the growth in Hybrid and EV is the driver for the automotive segments.  While we believe some of the growth estimates for MLCC demand in 2022 are quite aggressive (25% is the highest we’ve seen), EV unit growth alone in just the first half of the year, has been averaging over 170% y/y for light vehicles on a global basis, and Fig. 2 shows the historic sales growth of Hybrid and EV vehicles in the US, the 3rd largest market for plug-ins behind China and Germany last year.  

The Wi-Fi Alliance is a global group of companies that are allied in developing, promoting, and standardizing Wi-Fi to create a common ground that allows consumers to have to pay little attention to device compatibility.  Sponsoring members are the biggest CE companies (Apple, Microsoft (MSFT), Samsung (005930.KS), Qualcomm (QCOM), etc.) and contributing members number in the hundreds, with over 50,000 products having the Wi-Fi Alliance certification.

The IEEE (Institute of Electrical & Electronics Engineers) is the organization that produces the technical standards that Wi-Fi is based on, while the Wi-Fi Alliance assures device compatibility, but the standards are always evolving, going back to 802.11a which was released in 1999 to the current 802.11ax standard, also known as Wi-Fi 6E, which was officially adopted last year.  With each new standard, the data stream rate has increased, from 6Mbs/54Mbs for 802.11a to 600Mbs/9600Mbs for the current 802.11ax (Wi-Fi 6E) standard and a number of other connection factors have also improved, particularly the ability to carry a higher number of streams in a given area, such as might take place in an office environment.  This prevents slow data rates and/or dropped connections, but with each new standard, the modems used, be it in a smartphone, laptop, or other device, must be upgraded to take advantage of the improvements.
Wi-Fi 7 will be the next iteration, and increasing requirements for data rates for streaming 4K or even 8K video, and the necessity for low latency required by AR/VR applications, will push the standard past the point where another ‘flavor’ of Wi-Fi 6 will suffice.  The new standard is expected around mid-year 2022 with full implementation in 2023, with a number of new features that will help to make Wi-Fi able to function under such more demanding scenarios. 

• Bandwidth will increase from the current 9.6Gbs to 30 Gbs and will utilize the 6 Ghz band to avoid latency issues.
• Wi-Fi 7 will allow data frames to be scheduled between different users, which is currently not allowed in Wi-Fi 6.  This means that rather than force all size data chunks to be scheduled with each user, data can be mixed to better fill the bandwidth, and then sorted back to individual users, increasing efficiency.
• Wi-Fi 7 will have a higher bit rate.  In the current Wi-Fi iteration, each signal carries 10 bits, Wi-Fi 7 will allow for 12 bits, a 20% increase.
• Wi-Fi 7 will allow the number of data streams to increase from 8 to 16.  While this means Wi-Fi 7 will have twice the number of data streams application processors will also need to be able to balance data loads and allocate resources to avoid interference.  Such protocols will also be included in Wi-Fi 7.

While the usual confusion will ensue when Wi-Fi 7 becomes a reality (“Is my current laptop able to use Wi-Fi 7?”), the standard will vastly improve the ability of local Wi-Fi systems, albeit after they are upgraded or replaced.  This will allow some of the more demanding bandwidth applications sufficient capacity to operate with the ‘loading’ or ‘buffering’ issues that plague many streaming or similar services, and will allow more realistic implementations of AR/VR when we delve into the soon-to-be invented Metaverse.  It would be sad if your personal Metaverse limited you to slow gaming or travel from one virtual location to another.  Wi-Fi 7 should help to keep you seamlessly able to remain on your couch for hours at a time, achieving the ultimate in instant gratification.

​MLCCs (Multi-layer Ceramic Capacitors) have been seeing increased use in hybrid and fully electric automotive applications and in 5G smartphones and similar devices.  As part of that demand cycle lead times for a variety of MLCCs have increased as car manufacturers built inventory levels to avoid the crippling shortages that they faced with semiconductor products.  The leading producer of MLCCs, Murata (6981.JP) (31% share) has indicated that orders for MLCCs have slowed and their book-to-bill has fallen to below 1.  With capacitors the company’s largest product segment, they tend to be a good indicator as to the state of the MLCC industry, which is limited to only a few players, with the top five accounting for almost 80% of the market.
Murata stated that orders from automotive and PC related customers decreased as inventory levels returned to normal and that the company’s backlog may be reduced over the next two quarters, after capacitor sales increased 34.8% y/y in the 1st half of this year and MLCC sales increased by 7% over the same period.  We expect this is as much a warning that demand from customers is being limited by material and component shortages and is expected to continue in calendar 4Q and beyond in both the automotive and PC markets, so we went back to the components themselves to see if lead times for MLCCs have been affected.
Of the 30 MLCC varieties we checked 10 had seen an increase in lead time while two had seen decreases, with the remainder stable.  This indicates little change in MLCC demand as yet, which leads us back to the caution from Murata..  With some automotive silicon production increasing, we expect that much of the slower automotive order rate stems from the aggressive inventory build that occurred over the last few months, but on a longer-term basis, demand for MLCCs continues to increase as usage increases.  Similarly, display drivers are also seeing a bit of production relief, and while we expect a similar inventory situation in that space, MLCC demand based on 5G continues to grow.
All in we expect tougher comparisons for MLCC providers as they lap the strong inventory build periods of earlier quarters and a more realistic growth outlook, based on real demand rather than panic inventory building.  Price weakness might occur if lead times fall quickly, so greater attention to lead time updates will be necessary going forward but the underlying demand picture for MLCCs continues to grow despite potential weakness in the near-term.

​Last year Apple decided to no longer ship new iPhones with a charger or earphones, citing the desire to reduce carbon emissions and the use of precious materials, under the assumption that consumers already had multiple adaptors and chargers.  Most consumers took the change in stride, although others looked at it as a typical move to reduce costs.  As some consumers have discovered, price increases are not the only way manufacturers can cut costs, with smaller product amounts in larger packaging a common way to keep consumers from noticing a technical price increase, but in the case of the iPhone, the difference was quite noticeable.
The Brazilian Consumer Protection Agency did not take kindly to the change and this year fined Apple $2m for making the change, considering such devices as ‘defective’, and the EU has proposed regulations that would force all smartphones to use the USB-C standard, which Apple does not use.  Taiwan has also taken up the cause with the country’s Consumer Foundation petitioning the government to begin an investigation into the new Apple practice and the government of France has forced Apple to include the earpods in the box with the iPhone 12, citing a law that says all smartphones must include a ‘handsfree kit’ to protect children under 14 from the effects of electromagnetic radiation on developing brains.
While Apple still cites the positive environmental impact of the removal of the charger and earphones, those claims are refuted in a new lawsuit against Apple instituted by a group of law students in China.  In a 2 hour on-line court appearance the students defended their lawsuit (which asks for compensation of $16 + legal fees) noting that 1) the Apple interface is not compatible with USB-C chargers, which are the de facto standard, forcing iPhone 12 users to buy a specific charger for the iPhone; 2) Apple’s contention that separate charger sales are common is untrue as before the iPhone 12 most mainstream smartphones were equipped with chargers 3) Apples claim that environmental factors were the basis for the change is false given that  Apple advertises the MagSafe wireless charger in the iPhone packaging, which uses the most inefficient charging method, putting the value of the charger ahead of environmental issues;, all of which add up to ‘fraudulent behavior’ by Apple.
The case, which was defended by a group of Apple lawyers, is in limbo as supplementary evidence and written materials are being submitted, but the plaintiffs “…hope to awaken consumers' awareness of protecting their legal rights through this case, with the courage of a single spark can start a prairie fire…” While no determination has been made, if these young ladies prevail, Apple could face further legal action pushing back on their charger/earphone decision, which was also followed by Samsung.  Many Chinese brands offer separate smartphone packages with or without chargers and earphones, allowing consumers to choose, and China has been rather aggressive toward big tech recently, so it might behoove Apple to find a solution that does not draw publicity, attracting increased focus by Chinese authorities.  In the long run however, the most important issue for Apple is the ‘forced’ standardization of USB-C adaptors in the EU, which could force Apple to either change adaptors for the region, an expensive proposition, or change across the board.  We expect Apple to spend millions on lobbying to prevent either result, but its hard to get the genie back in the bottle once it is out.

The OLED production equipment space is one that is dominated by a number of companies that produce a number of tolls that are the core of the OLED display production process.  The key tools are those that deposit OLED materials onto various substrate types.  With Chinese panel producers pushing hard to gain traction in the OLED space, they are willing to spend as much as is needed to challenge South Korea’s OLED dominance, but when it comes to deposition equipment, money is a secondary consideration.  The leader in the space is Canon-Tokki (7751.JP), who produces such deposition tools for Samsung Display, LG Display and a number of other OLED producers.  The problem is that these tools are extremely complex and take a considerable time to build, which means orders have to be placed far in advance of delivery schedules, and orders from principal customers, meaning Samsung Display, usually get both priority and considerable attention given SDC’s substantial OLED capacity.
 
Aside from the delivery times, which can range from 6 months to over a year, the cost of such machines for volume panel production runs between $100m and $150m each, so such commitments are not made lightly.  Even LG Display, the only supplier of OLED TV displays and a producer of small panel RGB OLED displays, has found itself unable to work its way into the queue for such tools at times, and has had to buy deposition systems from less popular suppliers.  Note also that most fab managers will try to keep tools common across a fab in order to keep maintenance costs low, so if a fab has already installed a Canon tool on a line, it will want to remain with the same supplier as it expands capacity.
 
Chinese OLED producers have access to considerable capital, particularly at the current stage of OLED development, but are just beginning to develop the volumes needed to compete with South Korean producers.  Government subsidies have allowed them to develop OLED fabs at a rapid rate, but even with the easy access to capital, they still have to deal with the production schedules for deposition tool producers, and given the well-known Chinese gift for bringing in construction ahead of schedule, this can lead to bottlenecks in OLED fab start-ups.
 
The obvious solution, and one that China has been working toward in a number of related fields is that of deposition tool self-development, a task that is formidable even for those that currently produce other tools for the OLED production process.  South Korean equipment companies have had some success in the deposition space, with Sunic Systems (171090.KS) having placed a number of tools over the last few years.  That said, most of the deposition tools developed by equipment manufacturers are for R&D or pilot line systems, and are not able to scale to the multi-chamber deposition systems that are necessary for cost efficient OLED display production.  Chinese tool vendors have produced some of these smaller systems but until recently have been unable to overcome the challenges of developing a multi-chamber deposition tool that can handle high volume production.
 
We say recently because a Chinese tool vendor, Hefei Xinihua (603656.CH) has developed what it says is the first Mainland developed OLED Evaporation tool for mass production.  The company itself has divisions that produce OLED and LCD materials, other display production equipment, and a recently released a high speed “Large Panel Mini-LED Transfer Tool” (Die Bonder) that it has provided to a number of BLU developers on the Mainland, but information is scarce, other than a few pictures shown below, most of which are R&D systems
 
If a Chinese company were able to enter the mass production OLED deposition tool, it would give Chinese OLED panel producers an alternative to the Korean dominated deposition tool queue, and given China’s desire to develop its own supply chain, would provide easier access to scarce production tools.  That said, a few pictures and a press release are a far cry from creating a product that can compete with established production tools on a realistic basis.  We would expect that the tools are being tested by OLED panel producers, although we have heard little other than a shipment to a Chinese OLD lighting manufacturer.  While we don’t have high hopes that such a tool will gain real traction, one can always be surprised.

​Displays are not smart devices.  They need information presented to them in a very specific format in order to be displayed properly, and this is true regardless of the type of display, LCD, OLED, CRT, etc., but the image information produced at the CPU or GPU level would make no sense to a display if it were transmitted directly.  Between these essential components sits the display driver, a semiconductor based interface that translates the information coming from the aforementioned sources into voltage, current, and timing information that becomes a visual image on the display itself. 
While the complexity of display drivers is such that they do not have to be produced on 7nm or 5nm nodes, they do have to contend with other products that are produced in large process formats and for much of 2H ’20 and 1H ’21 display drivers for a variety of display products were in short supply.  This limited some display producers, particularly the ones that sold display modules, but most panel producers provide “open cell” displays, that is displays with no backlight, bezel or drivers, which gave them the opportunity to claim that a shortage of display drivers had ‘no direct effect’ on their business.  That said, those companies that packaged those open cell displays into modules, many of which are subsidiaries of display producers, found that such shortages either pushed out delivery dates or limited certain models.
The semiconductor space continues to see tight conditions, with wafer shortages, mask shortages, and a variety of issues that have extended delivery schedules and put semiconductor applications in contention for fab production time.  But there is some good news; Display drivers are no longer seeing allocation issues and have become more widely available.  How has this happened?  Has the semiconductor industry put display drivers ahead of other critical components, putting aside automotive silicon, 5G RF, or even microprocessor production for the lowly display driver? No, but something has changed. 
That change is demand, and as the price of displays, particularly TV displays rose to a point where consumers began to slow purchases, the price of TV panels fell and TV brands began to reevaluate their targets for this year.  As demand declined, which has happened over a relatively short period of 2+ months, panel producers began to cut back on TV panel production, and ipso facto, demand for display drivers also weakened, although demand for IT products kept the driver market from deteriorating rapidly.  Now it seems that the display driver market is more in balance with demand, and driver demand is returning to segment imbalances rather than total market issues. 
Demand for OLED drivers remains strong as Apple (AAPL) is in full production mode for the iPhone line and notebook and monitor demand is still a bit above production, but a more reasonable balance for drivers has been the result of the production cutbacks in the TV space.  It is always surprising to see how quickly a change such as has been seen in the panel space can affect other components, but while shortages are part of such a cyclical industry, they can disappear in a very short time as the balance between supply and demand swings from one side to another, or even moves away from peak by just a bit.  While we know that change is an integral part of the CE space and likely keeps CEOs up at night, even small changes filter through the supply chain quickly and can change to course of component suppliers almost overnight.