​While we down note all of the changes in forecasts that have been occurring as a result of the inflationary macro environment and the lingering effects of COVID-19, especially in China, we do mention those we think are unusual and in the case of Asustek (2357.TT), a Taiwan based laptop producer among the top 10 globally.  Last month the company reported a 14% sequential decline in net profits last quarter and predicted a 10% drop in PC shipments this over last, but continued to affirm its target that its revenue would increase by 10% y/y, despite the industry slowdown and its quarterly weakness.
It seems that now, roughly six weeks later, the company is revising its target from up 10% y/y to flat y/y, although stating that it will, still outperform the industry by 10%, leaving its ‘cautious optimism’ about the 2nd half, where it was counting on back-to-school, holiday shopping, and pent-up demand to help it meet its former targets.  The company gets ~66% of its revenue from PCs with the remainder from components such as motherboards and graphics cards, which it expects to decline 10% to 15%,  against the 10% decline for PCs in 2Q.

​According to local Taiwan media, an earthquake of 6.0 on the Richter scale occurred at 9:50am local time in Taiwan.  The epicenter was 37.7 km south by southwest of the Hualien County Government headquarters in Guangfu Township.  Thus far both Taiwan Semiconductor (TSM) and United Micro (UMC) have stated that production at the fabs continues and was not affected by the quake and panel producer Innolux (3481.TT) stated that while equipment was automatically shut down by the quake, there was no damage and the lines are operating normally.  AU Optronics (2409.TT) has yet to make a comment on the effects of the quake, but likely only saw a 2.0 at that distance.

​China’s internet watchdog, the Cyberspace Administration of China, issued a document that proposes to modify the rules currently in effect concerning the public use of social media.  The proposed rules tighten the censorship that already limits Chinese social media platforms as to the type of commentary that users are allowed to post.  Under the new rules, social media platforms would be the responsible party for reviewing all comments and messages posted during live streaming, regardless of whether they have been tagged by censors, and such reviews would have to be done before they are posted, which would include far more posts than are currently reviewed by such platform moderators.  This would force platforms to vastly increase staff in order to review all posts, comments, and discussions.
The rules would also force social media platforms to establish a system that ‘protects each user’s personal information’, essentially a list of actual user names and information that would identify all on-line posters, which would be used by the platform to report any ‘unlawful and negative information’ to the government, and in many cases be able to delete or modify posts or a user account based on existing rules.  User’s would be required to sign an agreement that holds them responsible for not only their own comments, but those of others that respond to their posts, both text and video. 
While the new rules are still in a proposal form, and no date was given for their implementation, it is expected that they will be instituted this year, putting even more of a burden on social media platforms and instilling fear of government retribution at the user level.  That said, much will depend on how strictly those rules are enforced, despite the threat of spot checks and examinations of how the social media platforms will be reviewing such a massive amount of information on a real-time basis.  It is hard to imagine how social media platforms will respond to these potential mandates given the cost of building out the necessary infrastructure needed to make such changes, but it will certainly have a dampening effect on what gets posted on Chinese social media regardless of what the platforms do.

Just weeks ago, the sentiment in the CE space was positive, with headlines about a better 2H or 3Q and an optimistic view of the massive 6/18 shopping holiday in China, the 2nd largest behind Single’s Day (11/11).  However little has been said about the holiday, which ended last week, even though sales were up 10.3% y/y at JD.com (JD), the originator of the shopping holiday, as since 2018, the JD.com 6/18 holiday sales gains on a y/y basis have consistently been between 25% and 35%, which puts this year’s results well below typical.  Recent easing of travel restrictions in Beijing have already triggered a new outbreak with restrictions expected to be reinstated, while the country is facing Nucleic Acid COVID testing within 48 hours for all entering public spaces, offices and schools, so there is much to be said about the effect of those and other COVID restrictions on in-store purchases. 
That said, ~24.5% of total retail sales in China in 2021 were made on-line, down only a bit from the 24.9% in 2020, so on an overall basis COVID this year seems to have had roughly the same effect on brick and mortar sales as in 2021.  This leaves the effects of inflation as the major cause of the weakness, yet INF data suggests that China’s inflation rate will be 2.08%, only slightly above the 5 year average of 1.96%.  Of course, there is the possibility that the Chinese government is not reporting accurate inflation data to the IMF, but at least the data for this year has been fairly consistent, rising from 0.9% in January and February, to 1.5% in March, and 2.1% in both April and May.
While the data suggests that macro issues in China have been relatively minor, especially when compared to the annual rate in the US in May of 8.6%, so we have trouble understanding the weakness from a consumer perspective, but the malaise seems to be a general depressive state that has settled over many of China’s largest cities, a result of the on-again-off-again lockdowns that have kept the population in lockdown on and off for months, but we also see that the aggressive discounting normally done in the weeks before the official holiday being less than during last year.  We expect this is a function of both the increasing cost of raw materials and components that have not been fully passed on to consumers by CE manufacturers, leaving little room for aggressive pricing, and the fact that a portion of the demand seen in 2021 included demand not sated in 2020.
In some CE products it is easy to see, such as notebooks, where government sponsored purchases drove outsized demand that ended as early COVID restrictions ended globally, while TV set sales where consumers stuck at home wanted to upgrade relatively early in the COVID pandemic cycle,  saw only a modest change from the norm.  But while here in the US and in Europe, where we faced the most severe restrictions earlier in the COVID pandemic, the Chinese population, at least in its big cities, is facing the prospects of the how the restrictive policies of the Chinese government, good or bad, will make normal life almost impossible, and that seems to have paled thoughts of spending especially without massive discounting to attract on-line flow and created a weariness toward spending on consumer electronics that seems to have taken hold on the Mainland.
We expect this will continue until China’s COVID-19 policies become more amenable to the population and the economy, which we would expect (in a tacit way) at the end of Q3 or in early 4Q, at which point much of the excess CE inventory will have been worked down and the holiday season is upon us.  That said, we expect Chinese consumers will still need to see some incentives by way of loss-leaders or discounts, which will be a bit tricky for brands still carrying high-cost product, and much will depend on how long CE companies continue to hold back orders, a problem for those companies whose CE brands are considered leaders in China and want to continue to show profitable results.  But growth is the key for the Chinese government and while the mandates associated with COVID are one way to protect the Chinese economy from the scourge of a massive COVID outbreak across the country, the Chinese government must still find a way to break the lassitude that we believe has gripped the Chinese population. 

Companion robots are said to be the wave of the future and a cure for older adults that are socially isolated, along with helping to alleviate caregiver shortages in aging populations.  “Aging in Place” support continues to grow but social isolation can be the result of such programs, and the COVID-19 pandemic has pushed the need for companionship in later life to the forefront.  Typically pets are suggested in such situations but can also add health risks and an owner’s inability to perform necessary pet feeding and care, which has led to the development of companion robots that can provide the companionship needed but are less burdensome to the older population.
In theory, companion robots are a good idea, providing at least some of the social interaction needed in such situations, and also providing some of the physical assistance needed for an aging population, however acceptance has been minimal, with cost, the need for technology updates, and a reticence for non-human interaction being the most cited reasons for the lack of acceptance.  Studies that compare choices from older adult samples with various types of companion robots indicate that there was little consistency in results, not surprising given the diverse attitudes that participants defined about themselves early in the study.  Some were ‘loners’ who liked robots that did not speak but were ‘cuddly’, while others, who considered themselves more social, liked those robots that were more chatty and could follow them around or would wait for them at the front door, although others complained that they did not like being told what to do, even if it was to their benefit.
While many cited being able to turn off the robot as an important feature, those robots that spoke were prone to be criticized more, with comments like ‘Too pushy’, or ‘I didn’t like the voice’, which leads developers to try to sense the situation and mood of the companion robot’s ‘owner’ in order to tailor the robot’s attitude, either vocally or physically, to the short-term situation.  Parsing language and the subtleties of emotion are complex and require considerable processing power, likely beyond the capabilities of a Teddy Bear type robot, but tactile sensations are a way for robots to gain some understanding of their owner’s state of mind.  A hug or even a slap can give input to a companion robot that it could not get from verbal context, but is lacking with most companion robots.
We step forward to a group of researchers at the Korea Advanced Institute of Science & Technology (KAIST) who have developed an ‘elastomeric robotic skin’ that has the ability to sense tactile sensations and can be applied to an entire robot, with the result a human skin-like covering that allows for the interaction needed to maintain effective social contact and responsiveness.  While many ‘robotic skins’ have been developed over the years, most are either fragile, too complex for effective production, or not scalable.  By using elastomers[1], hydrogels[2], and tomographic imaging[3] researchers have created a layered artificial skin that contains electrodes or microphones that measure changes in resistance and vibrations due to touch, while conforming to the touch but returning to normal shape.  The material can be easily repaired if torn or cut and remains operative regardless of it need for repair.
The complexity of the algorithms used to compute the characteristics of the touch on the skin are complex but the construction of the skin involves relatively simple known process steps, including 3D printing, and while the measurement electronics are still cumbersome, they were designed to collect far more data than would be necessary in a commercial product.  The movies (snapshots below), which are available for download at https://www.science.org/doi/10.1126/scirobotics.abm7187 give an idea of how the robotic skin reacts to stimuli, particularly more subtle types and how the system is able to perceive what type of stimuli they are, and an example of how easily the skin is repaired.  Unfortunately the entire article, which was published in Science Robotics is not available to the public (unless you pay $30), but the concept of providing tactile sensation in a cost effective manner to robotics is an important one in creating companion robots that are responsive enough to conquer both an innate fear of a mechanical object and the more personal need for responsive communication.  It will be years before companion robots can be designed that will fulfill the needs of an aging population but such a skin is certainly a step in the right direction.


[1] Usually polymer long-chain coiled molecules  that can be stretched but return to their original shape

[2] Polymers that are absorbent but remain structurally defined and do not dissolve in water.

[3] A process by which waves can be concentrated on a horizontal or vertical ‘slice’ of an object.  When the wave is scanned, a 3D image of the area can be produced as in a CAT scan.
 
Park, K. P., Yuk, H. Y., Cho, J. C., Lee, H. L., & Kim, J. K. (2022). A biomimetic elastomeric robot skin using electrical impedance and acoustic tomography for tactile sensing. Science Robotics, 7(67). https://doi.org/10.1126/scirobotics.abm7187
 

​Nokia (NOK) has been around the telecommunications business since the mid 1800’s and as such the company is among the world’s largest telecom patent holders, with such well-known subsidiaries as Bell Labs (pvt), Alcatel (), and Lucent (pvt).  Nokia’s patent portfolio includes SEPs (Standard-essential patents) concerning 5G, some of which are under the scrutiny of the Chinese government, who is pushing to enforce its antitrust laws.  Whether in response to potential litigation in China, Nokia has instituted a large number of lawsuits against Chinese smartphone brands for patent infringement, asking for injunctions to force the companies to stop selling those products which Nokia claims are infringing their patents.
Simply put, Nokia is asking for a license fee of 3€ ($3.16 currenty) per device, a not unreasonable amount, but we see that some in China are calling this fee excessive based on the fact that China is ranked first globally in patent applications in the digital communications technology field, and Nokia’s share of 5G patents is only 7.6%.  By using 5G IP share to calculate the supposed ‘real’ cost of the fee based on an average smartphone price of ~$261, the cost of paying the 3€ fee for each Chinese phone produced would amount to 17% of the price of a typical Chinese Android phone, and that does not include 4G and 3G license fees.  The theoetical calculations go further in that they note that Huawei’s (pvt) profit (formerly China’s largest brand) on a smartphone is between $6 and $19 (US), which the propose would mean that all profits and more would be taken up by the proposed Nokia 5G license fee.
We are a bit confused by this math, which puts the number of patents issued over the intrinsic value of each patent and goes further in that it suggests that China’s ‘domination’ of the telecom IP world and Nokia’s lack of filings should influence the rate that Nokia charges for its 5G IP license and faults Nokia for filing infringement suits in multiple countries using different judicial systems that could view SEP liotigation differently and allow what China calls ‘patent hijacking’.  Our question is if China is the leader in 5G development why have they not been able to find a way to avoid the necessity for licensing what they call weaker 5G IP?  In reality it is an odd position for China, known to be rather lax on acknowledging foreign IP in locally made products, and one where it will be hard to make such math work.  Nokia has every right to sue if they are not being compensated for IP being used in Chinese phones and Chinese smartphone engineers have every right to find alternative ways to bypass Nokia’s IP if they find the fes onerous, but basing a defense on such math is going to be a difficult one to justify in courts around the world.

In our note of 9/23/21, we spoke about the proposal made by the European Commission to address the problems for consumers related to the presence of three different connectors (charging and data transfer) on the market.  The problem, a lack of charging interoperability and the environmental impact associated with the problem pushed the EU Commission to propose measures that would reduce ‘charger fragmentation’ and ‘performance interoperability’, and allow consumers to decide whether or not to acquire a charger when buying a new device.  Simply, the EU wants one charger standard so consumers do not have to buy a new charger with each new device.
As part of the review process the EU put forth a matrix of six options for consideration, with the “F” option the preferred choice by the commission.  We have added which options are supported by various organizations, although they seem rather obvious, at least in the working document proposal.  The final agreement could be a single option or a blend.  

​[1] Including tablets, digital cameras, headphones, portable speakers, and handheld video game consoles.

This week EU countries agreed to implement the proposed rules that would limit mobile phones, tablets, and cameras to a single charging port type, which would in theory, allow users to use one charger for all of their mobile devices.  The port specified is what is known as a USB-C, which is commonly used for charging, transferring data, and mimicking your phone on a larger display, and most Android phones have USB-C charging ports currently (77.9% of all phone models available in 2021 and 2022 by our count), but the remainder, mostly iPhones and other Apple (AAPL) products, have a proprietary connector which Apple licenses to cable manufacturers.  With 420m portable electronic devices sold in Europe last year the EU says it would be able to avoid disposing of the 12,000 tons of chargers that are thrown away each year, saving 861,000 tons of copper, zinc, and tin in the process, and reducing the cost to consumers of standalone chargers, which is estimated to be about $2.8b each year.

​The agreement, which would be implemented two years after its final approval is a problem for Apple who has opposed the idea on the grounds that it would stifle innovation, although the company uses USB-C connectors on much of the MacBook line due to its higher power handling capabilities.  Apple will have time to make the changes as the rule implementation does not begin for two years after final approval for smartphones and tablets and two years later for laptops, and Apple’s MagSafe, which is a wireless charger could offer a solution that is less costly than reworking all Apple mobile products to USB-C if the company feels that consumers would accept it, although we believe the new rules as they stand would need to be modified for that option. 
Citing environmental concerns has been the company speak concerning Apple and Samsung’s (005930.KS) elimination of chargers and power cords in new device packaging last year, but it is hard to imagine that the environmental concerns were more than an add-on to justify cost cutting measures for both companies.  As the cost of producing separate Apple products tailored to EU rules would likely be cost prohibitive, we expect Apple will comply globally, especially given the momentum behind such rules in other countries, but will likely petition to have the process modified over the next two years.  We believe Apple has been prepared for such an event and will make the required transition in the iPhone 15 (2023) or the iPhone 16 (2024), but will not see license revenue for the Lightening connector from cable manufacturers trail off until 2024/2025.

​Apple’s (AAPL) yearly World Wide Developers Conference began yesterday, and while reviewers were sufficiently upbeat enough to likely satisfy company management, there was little to get very excited about.  As a software developers conference, there was considerable focus in the release of iOS16, which is now available to developers and is expected to be released alongside the iPhone 14 series in September, at least in consumer beta.  While we will not go into the details of the new iOS and its variants in detail, there were two aspects that we thought noteworthy.
The first was Apple’s move into the BNPL (Buy now, pay later) genre for the iPhone, which allows iPhone users to split payments into 4 installments spread over 6 weeks, with no interest or fees (if you pay on time), and strangely for Apple, the option is not restricted to only Apple products and you don’t need an Apple Card.  Goldman Sachs (GS) is the attached bank, but details as to who might be absorbing the interest costs were not revealed.  The concept is similar to PayPal’s (PYPL) BNPL, which limits the service to transactions between $300 and $1,500, while Apple has yet to specify limitations.
We have noted some of the security issues facing those using Apple’s Air Pod tracking devices, with boy/girlfriends or spouses using them to track or stalk former partners, going as far as to hide them in cars or personal items.  Apple has taken this seriously, going as far as to include the features, known as “Rapid Security Response” in the developer version and making the update automatic, rather than forcing the iOS 16 user to reboot to have the changes take effect and institute further protection against cyberattacks and potential software vulnerabilities, but also adds “Safety Check” which implements a number of features that would help to protect those being tracked or harassed.

1. The system can disable sharing of location data.
2. All application permissions are reset, which means no outsider (many couples share permissions to make sure the other person has not been in an accident or hurt in some way) can access the camera, microphone, or any other application that might have access to same.
3. Removes outside access to messages.
4. Facetime is limited only to the user’s device.
5. All recently deleted or hidden photos are locked and cannot be accessed by others.
6. All device iCloud accounts on all devices can be signed out at once.

As these precautions will be automatically available with iOS16 users will have access to these functions as soon as the major iOS update is made and will also be included in iPadOS16, WatchOS 9, and MacOS Ventura in September.   We commend Apple for being proactive in making these security improvements quickly and easily implemented.
We note that while this was a software developer’s conference, there were some hardware changes announced, although we would consider them relatively minor.  To use of most significance was the lack of any AR/VR reference or teasers, as we suggested might be the possibility in our note yesterday, and while this is disappointing from a product perspective, we expect it will be a positive for Apple in the long-run, as they continue to further refine their AR/VR headset prototypes further.  There were some other upgrades, with the Mac Book Air and the Mac Book Pro 13 shifting to Apple’s M2 chip from the previous M1, which should noticeably improve performance, but the price of the Mac Book Air also increased from $999 to $1,199, which could push it near or to the budget limit of those looking for MacBook performance but at the lowest possible price.  The MacBook Pro 13 with the M2 chip sells for $1,299, with both expected to ship in July.  All in, a relatively uneventful event.

Social media influencers, despite the jokes and SNL skits, are gods to the retail world, and the phenomena is not just in the US but global, and even the slightest perturbation in the daily activities of influencers can cause ripples across products and light up social media sites across the globe.  Perhaps it does indicate an unwillingness of the younger generation to think on their own, but whatever the reason, influencers have influence and retailers pay them well for just a few positive words or a nod toward a new product.  Even more focused are live streaming events where influencers can generate millions in revenue by explaining what is hip and what is not, as is the case with Austin Li Jiaqi, aka the “Lipstick King”, and influencer in China who has over 64 million followers and was in the middle of a broadcast on Taobao Live, when he brought out a plate of Viennetta ice cream with Oreos and chocolate, which some say looked like a military tank.
Suddenly the broadcast went blank and his fans were left wondering what had happened, especially since the broadcast was during the big 6/18 shopping holiday.  While Austin noted in a post that there had been some technical issues as the reason for the broadcast shutdown, he did not appear for hjis next show two days later and has not been seen or heard from since the broadcast shutdown.  The speculation is that whether intentional or not, the cake looked like a tank to government censors, which could be assumed to be a reference to the 1989 Tiedemann Square massacre where government troops killed a number of students and civilians, with a famous picture of a protester standing in front of a tank, the symbol of the carnage.
So far there has been no indication as to Mr. Li Jiaqi’s whereabouts and holiday retailers that were part of his broadcast venue are scrambling to fill the gap and salvage sales, but the incident has also had another effect, and that is of educating a generation of young Chinese citizens who had never seen or heard of the Tiananmen Square incident.  As no mention or reference to the Tiananmen Square massacre is allowed there is a generation that had no reference point to understand what the tank cake might have been alluding to, but many seemed to have decided to look it up, likely using VPNs that can bypass Chinese internet restrictions, and now have an understanding of what Tiananmen Square represented.  While we have no idea if Austin Li Jiaqi’s intention was to subtly remind a country of how repressive the government has been in the past or just to hype an ice cream product, it is an odd confluence of events that seems to have had an effect different from what the government intended.  Given the lucrative financial compensation given to influencers we expect the actions of Mr. Li Jiaqi were likely unintentional, and he will eventually return after considerable interrogation, but the power of influencers has been reinforced, albeit not as intended by the censors.

2021 was a good year for most technology companies, especially large ones, with margins reaching record highs, many technology companies, large and small, were on a tear to hire new employees.  Of course there were many who struggled with staffing shortages, but with 5.7% of the US workforce employed by a (loosely defined) technology company, and ~80,000 new tech hires last year, technology companies seemed empowered with the desire and capital to broaden staffing, with the only industries having a greater hiring rate being finance, insurance, accounting, and healthcare.
This year has been different and the aggressive hiring of last year and the weaker economy this year have turned that hiring into layoffs at many technology companies, with more than 17,000 US technology workers be laid off so far this year.  Generally corporate speak blames COVID-19 while o few acknowledge that over-hiring last year might be a contributing factor, but hiring freezes or layoffs seem  to be accelerating as technology profits decline.  The good news is that the decline is far from the actual COVID-19 related layoffs seen in 2020 and on an overall basis (all industries) new jobs are being added, but technology companies have seen valuations decline precipitously and VC funding has also slowed (Figure 1). 
While likely not a complete list Crunchbase has provided a list of the most notable tech layoffs this year which includes a number of public companies amongst the vast array of private organizations.  The list, which includes company or sourced announcements since January 21 is considerably longer than what we show here (50 most recent).  The number of layoffs across the top 50 in the list is 7,227 with that representing 17.8% of the workforce on average, only including those where the number of layoffs is verified by source.