​The US ‘Entities’ list, a subset of the US Export Administration Regulations (EAR), has been a thorn in the side of Chinese semiconductor manufacturing since it gained public notoriety during the Trump administration as a way to focus attention on China’s competitive aspirations in the semiconductor space.  The concept of the list, which is maintained by the US Bureau of Industry & Security, a part of the US Department of Commerce, was to regulate US companies that might be providing product or services to foreign entities that might be used for military applications.  By listing those militarily sensitive areas, the list forced US companies to undergo a review of the products and the foreign end-user in order to obtain a license for the transaction.
As the US Department of State began to play a larger role in the DOC’s day to day operations, the list became a vehicle that the government could use to limit trade with parties it believed had connection with “activities contrary to US national security and/or foreign policy interests”, and the list became a way for the US government to withhold technology from certain entities by naming them to the list.  We don’t imply that the government uses the list arbitrarily, but as there is little public discourse as to what might put a person or entity on the list, other than a connection with a military organization, the effect is essentially blocking US technology from being sold to certain foreign companies, which can limit the overall growth of that technology segment in the target country.
Such has been the case with China, who has been targeted, rightly or wrongly, by the DOC, with the list being used to selectively limit US semiconductor technology from sale to a number of key Chinese companies that limits China’s ability to compete with the US and its allies in the semiconductor space.  Over the last few years the list and the target segments have been expanded, including the concept that not only would US companies fall under these licensing restrictions, but any company outside of the US that used any US equipment (hardware, software, services, etc.) would fall under the same guidelines, and while the US government technically has no control over foreign corporations, the pressure the US can exert on those companies and governments is considerable.
The list has long included Huawei (pvt), China’s largest telecom company and at one time the largest globally, with its equipment being used by carriers everywhere, including the US, but by inclusion on the list, semiconductor foundries were unable to supply Huawei with chips that were produced using advanced nodes and Huawei’s ability to compete, particularly in the smartphone space was severely limited.  More directly the inclusion of SMIC (688981.CH) and a number of other Chinese semiconductor design and production entities has put even greater limitations on the Chinese semiconductor industry, particularly a restriction on the sale of EUV (Extreme Ultraviolet) semiconductor process tools, which are necessary for process nodes below 7nm and sold only by ASML (ASML).
The restrictions do not cover DUV (Deep Ultraviolet) tools, which are used in more mature nodes and produced by ASML, Canon (CAJ), and Nikon (7731.JP), but it seems the US is not happy just to cut the legs off of the Chinese semiconductor industry but is examining the idea of adding DUV tools to the list of restricted tools, which would cut the heart out of any expansion hopes for Chinese semiconductor manufacturers, but would present a major challenge to ASML’s tool business, which was heavily weighted toward DUV last quarter.. 
One point that has been irking the US government is the fact that Chinese companies are still able to buy chip design software made by US companies that allows them to design some of the more advanced types of semiconductors, such as GAA (Gate-all-around), and advanced process that Samsung (005930.KS) is using to produce 3nm node chips, and while Chinese foundries are unable to produce at such mature nodes, the thought is that a ban on such design software will push China’s semiconductor development further into the future.  With three companies occupying ~80% of the EDA market, and both Synopsys (SNPS) and Cadence (CDNS) being US companies[1], inclusion would further limit China’s hopes for maintaining any chance of competing at such advanced product levels.
While the US has not instituted these additional bans, discussions seem to be ongoing, including those with the government of the Netherlands, where ASML is located and the government is even considering tightening export rules on equipment used to produce advance memory, an area that has faced less restrictions than foundry processes, as a recent announcement that Shanghai PanSic Semi (pvt), a crypto mining chip design company is to be Samsung’s first 3nm GAA customer seems to have alerted officials to China’s potential in the memory space.  But it seems that Chinese semiconductor manufacturers have been anticipating a tightening of US restrictions for some time and have been purchasing as much US sourced semiconductor process equipment as possible during the 1st half of 2022, with $36.5b of semiconductor equipment purchased from US companies, second only to Japan’s $48.8b, and while that was down 4% y/y because of more specific restrictions, it seems Chinese semiconductor producers are trying to get as much equipment delivered as possible before any new constraints are added.
We note that the passage of the Chip Act is certainly a step toward the US expanding its direct semiconductor production involvement over the next few years, but the analogy we most subscribe to is whether you decide to win a race by running faster than your opponents or by tripping them before they finish.  We prefer the former and while the entities list does limit US technology access to companies, entities and individuals who have direct and indirect links to military and subversive organizations, using it to ‘trip’ China’s semiconductor industry seems to be a bit of an ethical misstep.  Perhaps the Chips Act will help to focus the government more on encouraging the development of the US semiconductor and less on limiting development in other countries as the semiconductor industry has proven itself to be a global one, needing the resources of many countries to maintain balanced growth, ample supply, and reasonable pricing.


[1] The 3rd is Siemens EDA, formerly Mentor, is based in the US but owned by Siemens

Silver tooth filings are either a sign of poor dental health or street cred, but those filings have between 22% and 32% silver, mixed with tin, and zinc, with the largest component being mercury (~50%).  But wait, isn’t mercury dangerous and absorbed through the skin and haven’t there been concerns about eating tuna because it contains high levels of toxic mercury? The answer is yes and the use of mercury has been regulated since 2013 and its use restricted in a variety of consumer products.  Mercury batteries, once used in walkie-talkies and transistor radios, are gone due to concerns over mercury leaking into the environment and while that silver amalgam is still used in dentistry mercury is considered a highly toxic substance and has been removed from almost all consumer products except one big one, fluorescent lights.
Mercury vapor fills those endless rows of lighting tubes that are the stalwart of grocery, big box retail, and warehouse lighting, as they are between 3 and 5 times more efficient at producing light as incandescent light bulbs, and cheap hotels still have those ugly compact fluorescent bulbs in bathrooms because they lowered operating costs, but soon that will all be a thing of the past, at least in Vermont, as a new law passed this month makes it the first state to phase out the sale of linear fluorescent lighting in favor of LEDs, with Rhode Island and California to follow.
Based on an 80 page report by the American Council for an Energy Efficient Economy, a non-profit research group that develops policy and standards on energy waste and climate change for appliances, equipment, and lighting, Vermont has decided that starting on January 1, 2024, the sale of those mercury-based fluorescent tubes will be prohibited, particularly the 4 foot types that are the most common.  Earlier legislation passed in 2011 mandated that lighting manufacturers must arrange for the collection of expired/used fluorescent lamps at various sites and safely dispose of them, although we expect many never make it to such collection sites.  That law contained a provision that said the bulbs should be banned completely once a superior alternative was found and various groups petitioned the Vermont Department of Conservation citing LED based tubes as an alternative.
The study provided the table below as a comparison between fluorescent and LED T8 bulbs:

​[1] Lumens/watt

A full transition from fluorescent lamps to LEDs would provide large mercury and CO2 emissions reductions according to the study, which stated that by 2050 the ban would:

• Reduce the amount of mercury shipped in lamps by 16,000 lbs.
• Reduce Carbon Dioxide emissions by 18 million tons, which is equal to the annual emissions of 4 million typical passenger cars.
• A typical school with 980 fluorescent lights would save about $3,700/year in electricity cost by switching to LEDs, which would amount to over $24,000 over the expected life of the replacements.
• A full transition to LEDs would yield $44 billion in national NPV savings.

However as the EU has already eliminated all general purpose fluorescent lighting exemptions for RoHS rules, which will phase them out by next year, there are concerns that the US will become a dumping ground for fluorescents that have been eliminated or restricted in other countries unless other states join Vermont in passing such legislation or there is a federal mandate.  There have been industry associations that have lobbied against the ban  citing cost  and availability, but it is a hard case to make when considering the toxicity of mercury and the energy savings, especially after the heat wave that much of the US has been experiencing recently.

​As far back as April 2021 we noted our thoughts on a mindset change regarding CE component inventory in China.  “Over the last two years, we believe such trade restrictions have changed the way Chinese CE managements look at inventory.  When sourcing was unrestricted, many Chinese CE companies operated under JIT inventory rules, maintaining low inventory levels to keep costs low and avoid end-of-year write-offs.  Once it became apparent that the US trade restrictions would have a real effect on sourcing, Chinese buyers became more aggressive and began building inventory in components that were specified in the US restrictions.  After early January, when it became apparent that the new administration was in no rush to change the government’s stance on such restrictions, Chinese CE companies and OEM/ODMs stepped up ordering to build inventories further, unbalancing the supply chain even further than it already was.”
Later in 2021 we noted that certain components needed for display modules, such as drivers and TCONs (Timing controllers), that had been part of the aggressive inventory building mentioned above, still had not seen the effects of a slowdown in TV panel and set demand, as Chinese OEMs and assemblers were still stockpiling the parts as they assumed IT displays, such as monitors and notebooks would not be part of the slower demand seen for TVs, and prices for those components continued to rise against what was reduced demand. 
Early this year the weakening demand for CE products caught up to CE IT products and prices for IT panels began to fall, considerably faster than most had expected, and suddenly the aggressive inventory accumulation, which had helped OEMs last year during silicon shortages, seemed less necessary, although buyers were relatively slow to adjust purchases and inventories for driver ICs remained relatively high into 2Q.  Now that CE brands have made cuts in orders, pushing panel producers to curtail production, there is now an oversupply in the driver IC sector, with recent expectations of a 3Q price decline of between 8% and 10% and the potential for that to continue through 4Q.  Foundries who had allocated resources away from drivers toward higher margin products last year are now looking to fill potential utilization gaps by filling driver IC contracts while driver buyers are trying to renegotiate those contracts toward lower unit and price levels.
We see these cycles are part of the natural order of things in the CE space but the overstocking seen last year was more than we might have expected.  What was a reaction to the global COVID-19 pandemic in 2020 and the first half of 2021 was seem as the ‘new normal’ by many in the CE space, with a concomitant change in risk assessment, especially regarding inventory, and now, as the ‘new normal’ returns to the old normal, the question is whether the next demand stimulus, whatever it happens to be, will cause the same psychological blind spots across the CE space.  Will lessons be learned or will be bounce right back into another up cycle that will suddenly become an abyss of inventory that buyers were willing to pay anything for months before?  Perhaps the understanding that the politics of trade sanctions and tariffs don’t always work the way intended or have deleterious side effects might make some difference in the next cycle and that striving for market share is not always the way to go might have an impact, but more likely is the endorphin producing mantra that the new normal has finally arrived and the CE space can once again charge into the fray with a willingness to do or pay whatever it takes to squeeze out an extra 0.5% market share.
 

While Prime Day is not considered in the same league as Alibaba’s (BABA) ‘Singles Day’, it does tend to be a significant selling day (actually 2 days) and generates roughly the same in sales for Amazon (AMZN) as does ‘Cyber Monday’ for a large group of retailers and CE companies.  There are many tricks that retailers use when reporting numbers for such shopping holidays, so we take most of the numbers with a grain of salt, but no matter how much the numbers vary from source to source, they are significant, although dwarfed by Singles Day, which is based on live streaming (sort of an internet QVC) and generates 6 to 8 times more revenue, depending on whose data you use.
Since we have been tracking Samsung’s (005930.KS) Mini-LED/QD TVs since they appeared last year, we took another look at the 2021 and 2022 Samsung ‘Neo’ and ‘QD’ TV lines to see if Prime Day had any significant effect on prices.  That said, the TV industry is currently in an odd position in that TV panel prices have fallen to near pre-pandemic levels, which should translate into much lower TV prices than seen last year, but at the same time other components remain at peak or near peak levels and the cost of transportation has become another cost that has had significant negative impact on the TV supply chain.  Coupled with inflation, and 2020/2021 consumer pull-in purchases, the prospects for a robust pre-holiday season are less than ideal.
As Samsung has both 2021 and 2022 Mini-LED/QD models, we break down the data into yearly segments with the 2021 line seeing a 1% increase in price since the last check (18 days ago), while the 2022 line saw a drop of 4.7% during the same period.  One unusual factor that appeared in both 2021 and 2022 lines was the fact that for the first time the two 98” Mini-LED/QD TVs in both lines, which had been priced at $15,000 each, saw the first discount this week since they have been offered.  The new price of $13,000 was a 13.3% discount, without which the 2021 line would have seen a 1.7% overall price increase (rather than a 1% increase) and the 2022 line would have seen a 4.0% decline rather than a 4.7% decline.
Notwithstanding the 98” TV discounts, the 2021 line had 13 of 36 models (36.1%) at their lowest ever price and 1 (2.7%) at its highest ever price, with 7 models up and 6 down since the last check.  The 2022 line had 30 (85.7%) at their lowest prices and 4 (11.4%) at their highest since release, with 3 up and 21 down.  We took the comparison a bit further in the table below which shows the following:

• The Model, Resolution (8K/4K), Features, and display size
• The Initial Price of the 2021 and 2022 sets and the difference if any
• The Current Price of the 2021 and 2022 sets and the difference between that price gap
• The discount between current price and initial price for both years
• A timeline check where we match the current (2022) model prices with the 2021 model prices at the same point in time, which in this case is 90 days from the 2022 release date.  This indicates whether the discounting is occurring more or less aggressively than last year.

 
Here are our conclusions:
 

• The initial offering price of the 2022 Mini-LED/.QD and QD only line, excluding those models that were not offered in 2022, was 4.3% lower than the equivalent sets offered in 2021. 
• Currently the 2022 models are 19.1% higher in price than the 2021 models in aggregate.  The 2021 models, which have been out for 418 days are priced 29.3% below their initial price while the 2022 models, which have been out for 90 days, are priced 12.6% below their initial price. 
• If we look at the 2021 line 90 days  after their release, there are 14  (45.2%) 2022 models that are discounted more heavily than  at the same point last year, 15 (48.4%) that are  discounted less than last year, and 2 (6.5%) that are discounted at the same level as last year’s models.  This leads us to conclude that other than the initially lower price of the 2022 models, Samsung has not been any more aggressive in discounting the 2022 models this year than last, despite the competition in the Mini-LED/QD TV space.

We believe that while Mini-LED arrays have come down in price over the last 400+ days, along with LCD panel prices, the price of other components has increased, along with transportation costs, but given that an LCD display open cell is ~25% of the total manufacturing cost of a TV, the overall   cost of the ‘other’ manufacturing components and processes remains an offset to the panel price reductions.  That said, there are certainly margin considerations here, and with Mini-LED/QD TVs being considered ‘premium’ TVs, they will likely carry higher margins for Samsung than more generic LCD TVs, which means Samsung needs them to preserve overall TV margin. 
While TCL (000100.CH) is a serious price competitor in the Mini-LED/QD TV space, LG Display’s (LPL) Mini-LED/QD line is less so as it is more closely priced to the Samsung line, with much depending on the particular market and whether TCL is a presence.  In the US we believe Samsung  offers 3x the number of overall TV models than TCL and ~30% more than LG, and while this does not equate to unit volume or sales directly, it does give some indication as to the  choice between price reductions or marketing dollars for Samsung.  With Samsung holding a 20%+ share of the TV market and TCL under 10%, the decision to hold price seems one that Samsung has made years ago, especially on its premium products, so we expect, while there will be additional discounting on the 2022 line going forward, just as there was on the 2021 line last year, Prime Day is not the inflection point one might expect for the Mini-LED/D TV world.

​There is a war going on that rarely makes it into the press as the battlefield is not on the ground, in the air, or in space, but inside the guts of massive processing nodes that are used to understand the nuance of language.  The algorithms that direct these processor are based on a subset of Ai that deals directly with syntax, expression, and a host of other language variables that make understanding other languages a challenge for humans and a monumental task for digital entities.  The opponents here are companies rather than political entities, and well-known ones at that, with Microsoft (MSFT), Google (GOOG) and Meta (FB) all pitted against each other with the focus of being the dominant force in the digital translation market.
There are no casualties or battle lines in this war, as it is fought with processing metrics and advertising, and that makes it hard to know who is winning, but the participants seem to have taken on a particular metric to make the public aware of who might be in the lead.  That metric is the number of languages a system can translate, which seems to be used a s a gauge toward whose system is the most advanced.  While the number of languages that a system can translate is certainly important, especially to those languages that might be considered secondary, but by far the most important metric for translation services is accuracy. 
Recently Meta indicated that its NLLB-200 Ai model has increased the number of languages it can translate to 200, which it accomplished in two years, while Google Translate is only able to work with 133 languages and Microsoft’s system translates only 111 languages, although that includes two Klingon dialects, and is clearly staking a claim as the world’s most advanced translation tool.  While the number of languages a system is able to detect is certainly easily understood by the general public, the quality of the translation, which is based on the algorithm and the sample base, is far more important and there are two ways in which that can be evaluated, by humans or by machines.  Using humans to evaluate translation quality throws subjectivity into the mix, while automated machine evaluation does not, but a machine evaluates a translation by averaging words and sentences against a human evaluation, with the idea that the closer the machine score is to a human score, the better the translation is.
With all of this being beyond the scope or desire of the general population, translation giants will continue to use the simplest metrics to give credence to their systems, but will have little correlation to real world results, as the ability of the AI to understand nuance and what to do with that understanding is really the key.  All three companies mentioned here have access to vast stores of speech, which certainly goes toward the ability of an AI to learn, but the algorithm is the key and that is something that not only grows with more resources but must change as humans better learn how to convert those subjective views into language that a machine can understand.  So the question is, does the AI need more language to read or does it need more human evaluations in order to take the subjectivity out of their evaluation?  The only way to know is…
E ninau i ka Mīkini - Hawaiian
Spurðu vélina - Icelandic
Faighnich dhan Inneal – Scottish Gaelic
quaeritur machina – Latin
Ask the Machine - English
 
 
 
 
 
 
 

Back in the ‘old days’ (September 1962) we thought of the future as one where we flew around in saucers, had robots as servants, and lived in towers far above the ground, although the average Joe still had to commute to work and take the dog for a walk when he got home.  We (at least some) do live in towers far above the street, but the robot servants are still a bit further out, and the flying saucers, well, they might be a bit closer than you think., as a Swedish company (Jetson Aero (pvt)) has developed a battery operated ultralight plane designed to give commuters the ability to fly to work.  Whether this ushers in skies full of commuters heading to and from work or is just another mid-life crisis item for men in their 40’s remains to be seen, but Jetson’s ultra-light seems to have filled the dream of those wishing to avoid the stress and struggle of driving to and from work.
The company developed a proof of concept system in 2018 and has been developing what the company calls a ‘consumer friendly’ version of the Jetson ONE, with the intention of ‘making everyone a pilot,” a somewhat scary thought considering the lack of driving acumen seen on the roads today, but a noble idea from the standpoint of easing roadway congestion and reducing the use of fossil fuels.  In that same vein, the company’s primary focus (other than selling aircraft) is safety and the aircraft features a triple redundant flight computer, has a ballistic parachute (a ballistic parachute is one that is made to open rapidly like an ejection seat), can fly with the loss of one (of eight) engines, has hands free hover and emergency functions, and has LIDAR based terrain tracking and obstacle avoidance features.

​As the aircraft is designed for vertical take-off, it does not require a runway and weighs 190 lbs., is made of aluminum and carbon fiber and can fold up to just under 3 feet wide when not in use, so it fits in less space than a car, and while it can only carry one person (210 lbs. maximum weight), you can charge it in 2 hours using a regular 110v outlet (1 hour on 220v).  While not official safety features, the maximum speed is limited by software to 63 mph (see FAA rules below), a maximum of 1,500 feet in altitude (also scary), with a flight time of 20 minutes, which means you need to be less than 20 miles from work.
Of course there are a few questions one might ask before delving further into the purchase of the Jetson One, particularly cost and how difficult is it to get a license to fly one?  Both questions are actually easy to answer.  The cost to reserve a Jetson ONE is $22,000, with another $70,000 due on delivery, but don’t count on getting one this year as the company has sold out all chassis for 2022 and is now only taking orders for delivery in 2023, although actual 2022 deliveries will begin toward the end of 3Q or early 4Q.  Current orders would start at #187, so there might be a bit of a wait.
The second question is a bit harder to answer, but for folks in the US the FAA says under Title 14 – Part 103 (Ultralight Vehicles) of the Code of Federal Regulations, you do not need to be a pilot to fly an ultra-light aircraft as long as it meets the following qualifications:
(a) Is used or intended to be used for manned operation in the air by a single occupant; (yes)
(b) Is used or intended to be used for recreation or sport purposes only; (no dogs, cats or other passengers)
(c) Does not have any U.S. or foreign airworthiness certificate; and
(d) If unpowered, weighs less than 155 pounds; or
(e) If powered:
(1) Weighs less than 254 pounds empty weight (yes) , excluding floats and safety devices which are intended for deployment in a potentially catastrophic situation;
(2) Has a fuel capacity not exceeding 5 U.S. gallons (no fuel other than batteries);
(3) Is not capable of more than 55 knots[1] (yes) calibrated airspeed at full power in level flight; and
(4) Has a power-off stall speed which does not exceed 24 knots calibrated airspeed (yes).
 
Since the Jetson ONE meets all of these requirements, it does not require the pilot to be licensed or carry a certificate of airworthiness, nor does it require the pilot to have any ‘aeronautical knowledge, age, experience or medical certificate’ to operate such a vehicle, although flight is limited to the hours between sunrise and sunset and flights over ‘congested areas’ is forbidden.  We note that these rules are for the US only, with other countries defining ultra-lights differently, requiring permits, insurance and medical exams, including Canada, where an ultra-light pilot permit is required, so no flying over the border…
 
The company has received one outside investment from a former Google (GOOG) veteran and angel investor who is now an advisor to the company and is looking toward raising additional capital to fund the expansion Jetson needs to fill the over 186 Jetson ONE’s it sold since its release in October last year (12 to be delivered this year) and the 174 it has already sold for 2023.  The launch video below has had over 14m views.  The GIFs below are of the co-founder’s flight from his home in Tuscany to his office 3 miles away, and the 2nd of a typical landing. Please note we have no connection to the company, any involved personnel, funding sources, or have ever flown in an ultralight.  We just thought it an interesting and unusual application of battery technology…
 
https://www.jetsonaero.com/static/jetson_one_background_desktop-ddb6a861fa42c1cc72e6f48d754cc9d7.mp4
 
https://img.etnews.com/news/article/2022/07/05/cms_temp_article_05163347350806.gif
 
https://img.etnews.com/news/article/2022/07/05/cms_temp_article_05163759593137.gif
Figure 1 - Aerial View of Seattle at 1,500 feet - Source: 123RF
Figure 2- The Jetsons (1962) - Source: Hanna-Barbera Productions
Figure 3 Central Park Tower - World's Tallest Residential Building - Source: Extel Development


[1] 55 knots = 63 mph

Financial transparency is not quite the watchword of Chinese companies, at least in the consumer electronics space, and even more so in the display space.  There is considerable pressure on Chinese display companies to grow and increase market share given the construction and infrastructure grants and operating subsidies given to Chinese display producers.  Along with these subsidies and the share ownership of local or state-owned organizations, Chinese panel producers also have a cultural desire to show that they have the production and business savvy to compete and/or dominate in the global markets, and sometimes the optimism necessary to maintain an enthusiastic view of what is a highly competitive and cyclical business, becomes more important than the details and that can be reflected in company financials by a lack of explanations for items that might not paint the more perfect picture Chinese display companies would like to project.
The Shenzhen Stock Exchange does question certain aspects of the financials for companies listed on the exchange when there is little detail to explain particularly unusual or aberrant financial data through a letter sent to the company by the exchange asking for the detail that might help investors to better understand the data, and one such letter was sent to OLED producer Visionox (002387.CH) by the exchange in reference to the 2021 annual report.  The letters are not accusations, but a request for a better explanation of specific financial entries, and after the company’s response the data is either accepted as explained or suggestions are made on how to better report the data.
In the Visionox letter there were a number of points that the exchange needed clarified, the first of which was the gross margin, which was -2.93% for the 2021 year.  In itself a single year with negative gross margins for an OLED producer would not be unusual, but the letter indicted that a negative gross margin had been the case for the last four consecutive years, a bit more troubling for a company that has been operating OLED fabs since 2015 and has a ~5% share of the small panel OLED market. 
 
The company’s response was as follows[1]: “The company's net profit after non-deduction and the gross profit margin of OLED products have been negative for several consecutive years, mainly due to the company's 5.5th generation AMOLED production line projects [that] have been completed successively since 2019, and the 6th generation AMOLED panel production line project, 6th generation AMOLED module production line project in 2021. Before the production line reaches the predetermined usable [state, the company is still in a] ramp-up period of yield rate and utilization rate. In 2021, the company's OLED product gross profit margin [will increase][increased] year-on-year by 6.60 percentage points, gross profit margin was negative mainly because the company continued to import in response to customer needs.  New products, and the production of new products needs to go through a certain climbing period to reach a higher level of good quality [which affects yield] rate and utilization rate, so the initial product cost is relatively high.” 
 
Another issue brought up by the exchange was the high proportion of inventory reserves taken by the company, which were 21.43% of book for the year. The company cited long cycles, ‘heavy’ capital and technology costs, and the fact that the company’s main production line (Gen 6) did not open until June 2021 and had a low utilization rate which raised the fixed cost allocated to products produced on that line, causing negative gross margins leading to impairment of inventory.  That said, Visionox also gave a comparison of the year-end depreciation reserve levels for other comparable companies ((BOE – 200725.CH), Tianma (002387.CH), and TCL (000050.CH)) to point out that while the rate was high, it was not out of line with comparable companies, although from our perspective it gave little help to their cause (see table below).

[1] We paraphrased and added missing text due to translation errors and inaccuracies

The letter questioned a number of other entries, particularly the movement of assets allocated to projects under construction, but we also noticed a question about the company’s top five customers which gave some insight into how the company negotiated contracts with its major customers, although the questions from the exchange were related to AR entries.  While the company’s largest customer grew 18.8% y/y in 2021 and accounted for 20.08% of total sales, Customer A’s share of receivables in 2021 was 56.6%, far in excess of that of Customer B (12.8% receivable share), who generated only 5.6% less sales during 2021.  The company explained this discrepancy as a function of credit policies, which for that customer (A) were for payment within 90 days after the end of the month in which shipped, while Customer B’s credit policy was for payment within 50 days, also noting that Customer A was the leading smartphone brand, which we assume allows Visionox to give them some slack on payments.

​While there were other less relevant questions in the letter, the exchange signed off on all of Visionox’s responses, offering only a few points on ways the company could make future reports more transparent.  We expect the reason for the letter was due to requests for clarification from investors, either directly to the exchange or through the Q&A forum that allows investors to pose questions directly to company managements.  As we have noted in the past, some companies actively answer questions, while others give only pat answers that seem to rankle investors who have likely lost money on the stock or are just trying to understand what amounts to somewhat foggy financials for certain companies.  Again we note that most Chinese panel producers are beholden to funding sources and less to the smaller public shareholders, especially during periods when growth or profitability is under pressure, so there seems to be a distinctly optimistic picture of financials presented, whether through emphasis or de-emphasis.  This makes examining the detail even more important than might be the case with other foreign companies, though while we single out Chinese companies and display producers more specifically, we do see similar biases coming from companies in other countries, particularly those with a need to prove their worth in the global markets, making it necessary for governing bodies and local exchanges to ask questions when details are not specified.

​On 6/21 we indicated that little data had been reported about the 6/18 shopping holiday in China, other than that sales at JD.com (JD), the originator of the holiday, saw sales increase by 10.3% y/y.  While this sounds like a successful holiday shopping period, typically sales are up between 25% and 35% y/y, which makes this a rather weak holiday, although the reasons for such weakness, COVID-19 lockdowns and inflation, are obvious.  We have gathered a bit more data to put the 2022 6/18 holiday in better perspective, albeit a product category that has been problematic for China over the last few quarters.
Data fro  Strategy Analytics indicates that smartphone sales during the holiday were 14m units, down 25% y/y, after a small gain in 2021 (~1%) and a large gain (~41%) in 2020.  The good news is that on-line sales were up 13% y/y based on value, as the relatively high priced iPhone sold well, but overall sales revenue fell 16% y/y to ~$9.5b US.  Roughly 49% of smartphones sold went through JD.com, with Tmall (BABA) and Taobao (BABA) representing another 30% (combined), although live streaming platforms, grew to 14%, up from 5% last year.  All in, while expectations for the holiday are always optimistic in the Chinese press, there has been little said this year, and we expect the weakness to continue until China’s COVID-19 policies become more amenable to the population and the economy, which we had expected (in a tacit way) by the end of Q3 or in early 4Q.  While we still believe that inventory levels remain high in China, we have seen some indications that the Chinese government is a bit more willing to relax its heavy-handed lockdown stance going forward.  It could just be a reaction to the weakening economic situation in China, or a better understanding of the county’s ability to control the virus through such lockdowns, but it’s a bit too early to tell if it is just for show or a real change in stance. 

​With many major CE companies no longer selling product in Russia, the Russian government is trying a scheme that it hopes will allow those Russian citizens who still want those CE products that are no longer sold in the country.  This week the Russian government published a detailed list of products from a variety of companies that the government now includes in its ‘parallel import’ plan that it instituted in March in response to US and other country sanctions.  The parallel import plan allows Russia to purchase the listed goods from any company outside of Russia regardless of where they were produced, but no longer needs the permission of the trademark or copyright holders to do so.
The Russian Trade Ministry stated that “Parallel import does not mean permission to import and circulate counterfeit goods in Russia - the products must be legally put into circulation from the country of import”, and added that customs services will be paid, although while the Russian government will consider such purchases to be legal, we expect the copyright and trademark holders will not see it the same way, and we expect that anyone selling such items into the Russian market will be tacking on some fairly hefty fees that will push prices up considerably. 
The bigger question would be how closely CE companies will monitor the shipments of goods that have already been shipped to other countries that remain on friendly terms with Russia, and that would depend on each company and how much control they have over their own foreign subsidiaries and how respectful those subs are to corporate mandates.  It is still going to be very difficult and likely expensive for Russian citizens to buy CE products from companies that have banned sales in Russia, but we expect a few iPhones and Samsung (005930.KS) TVs to make it across the Russian border for now.  There are only so many Russians who will settle for a 2017 Yota phone.
 

​Back in January of this year, a time when most CE companies had an optimistic view of the prospects for the 2022 year, Taiwan based Foxconn (2354.TT), the largest assembler of the Apple (AAPL) iPhone, began offering large sign-on bonuses to entice workers to its assembly plant in Zhengzhou, China.  The bonuses, then worth ~$1,470, were 36% above the standard average monthly salary being earned by workers at the time, and were necessary to attract workers back to the factory during increased COVID-19 outbreaks, despite the fact that Foxconn’s plants in Zhengzhou were in what were considered extremely ‘safe’ zones in relation to COVID-19 risk. 
This was the 2nd time Foxconn had offered such incentives, as it had faced the same issue back in June of last year in order to keep up with iPhone 13 production, then offering a $1,235 sign-on bonus to former employees, also far above the then typical sign-on bonus of $773 offered to new workers, who are only paid the bonus if they work at least 4 months and remain working through the peak season, earning between $772 and $926 for a new hire.  It seems that Foxconn is playing the bonus card again, as production for the iPhone14 to be released by Apple later this year begins.  This follows a suspension of recruitment in May when the government of Zhengzhou locked down the city for seven days, right after Foxconn went on another hiring spree.  As the Zhengzhou complex assembles between 75% and 80% of iPhone units, it is essential that Foxconn brings staff up to needed levels in or to keep release and delivery dates on schedule.