​Starting a war has consequences and Russia has been feeling the impact of severe economic sanctions from the US and those from US allies since they invaded Ukraine, particularly when it comes to Russia’s energy and oil businesses.  While the absolute impact of these restrictions on the Russian citizenry is shielded from view by state media, it is hard to assume that the impact is not being felt across the country.  Russia has protested such sanctions and threatened to take its own actions in order to protect its interests, but has had little recourse other than the secondary impact on gas and energy prices.  While sanctions against Russia in the electronics space continue, the Russian semiconductor industry is only a small (0.1% of industry total) buyer of semiconductor products and has a relatively unsophisticated semiconductor production base.  Current Russian government plans are to upgrade to 90nm fab production this year and is targeting 28nm production by 2030, while Taiwan and South Korea are targeting sub-5nm levels. 
As we have mentioned in our 3/24/22 note 70% of the neon gas currently produced globally is used in the semiconductor industry, specifically for excimer lasers used in DUV (Deep Ultraviolet) stepper photolithography down to the 7nm node, and the Ukraine has been the supplier of ~50% of the world’s supply of the inert gas.  Both major neon producers in Ukraine shut down[1], in March and a Russia gains territory in the country, they are exerting greater control over the production of that gas and have just instituted restrictions on the exportation of noble gases (Helium, Neon, Argon, Krypton, Xenon, and Radon).  In a typically un-subtle way, the Russian Deputy Tarde Minister indicated that the move would provide an opportunity to “realign the now broken supply chains and create new ones”, while the read on the statement has been that Russia intends to trade the gases for semiconductor imports.
While Russia is a relatively small exporter of Helium, which is used extensively as a cooling material in the semiconductor fabrication process, the US Federal Helium Reserve System, created back in the 1960’s is scheduled to be closed later this year, making the US more dependent on countries like Qatar (2nd largest producer/2020) and Algeria (3rd largest), with Russia’s Gazprom (GAZP.RM) ramping production over the last two years.  Earlier this year global semiconductor associations indicated that they had ample supply of inert gases, although that was based on a short timeframe war in the Ukraine, which has now extended to over three months. 
While we expect the US to continue to maintain strict sanctions on Russia, Taiwan[2] and South Korea together produce ~83% of the world’s semiconductors (foundry) and are highly dependent on maintaining that production as inert gas sourcing become more difficult.  While we expect these countries to maintain the restrictions placed on Russia, the impact on the global semiconductor industry will likely increase, especially as China’s unrestricted trade policies toward Russia give it an advantage in securing supplies.  Further tightening of the semiconductor market could extend the time it takes for a global economic recovery and extend the downturn in the CE space into next year if sufficient supply deals with alternative sources are not able to be made.


[1] Ingas is in Mariupol and Cryoin is in Odessa.

[2] Taiwan has just banned the sale of high capacity/high speed processor and ICs to Russia and Belarus.

While we spend a great deal of time on the design, production and sale of CE products, moving CE products from point A to point B has become an important factor in the cost of such products.  In most situations CE products and components are shipped by maritime transport, which accounts for more than 90% of transnational trade, with land and air making up the difference, although by weight, air transport accounts for only 0.21%.  While air transport is usually used for CE products when delivery schedules become critical because of the high cost, air transport accounts for ~26% of global trade value. 
As can be seen in Figure 1, container rates have risen 55.9% y/y in April, despite a 16.5% drop since the end of 2021, and viewed against April 2020 those rates have increased by 437.2% y/y, and with 7 of the top 10 ports worldwide (End of 1H ’21) being in China and 9 of 10 in Asia, where much CE traffic is originated.  After the onset of COVID-19 in 2020 set back shipping volumes, container shipping volumes rebounded last year despite the higher container rates, but the war in Ukraine and inflation have maintained unnatural shipping rates which continue to affect CE device pricing, at best offsetting any manufacturing efficiencies, and at worst contributing to continued overall CE product price increases. 
We expect that shipping costs, along with rising silicon and overall component costs, will push CE device prices up by between 5% and 7% this year, even with the 16% reduction in average shipping rates, as many suppliers have been absorbing increased costs to keep product flow from stalling.  With 2022 representing a year with more difficult y/y comparisons we expect suppliers will be under more pressure to recover lost margin, and will have little choice but to build in those costs.  If the global economy slows enough in 2H, there is a chance that CE prices will stabilize in 2023, at least from a cost perspective, while demand is still a bit of a wildcard given the ‘global government’s’ push toward returning to a more normal lifestyle, despite COVID-19.  From a CE perspective deflation never looked so good…

​We have noted that a number of popular TV brands have released relatively extensive Mini-LED TV lines this year as the technology becomes more widespread, but we have also seen a number of monitors also entering the market, with the most recent entry from China’s HKC (248.HK).  The HKC entry is a rather small (27”) UHD (2560x1440) display that has a typical brightbess of 550 nits and a 165Hz refresh rate, but sells for ~$600, quite a bit above non-Mini-LED monitors with simialr specifications that sell between $200 - $275.  HKC has not given much more detail as to the number of zones or other specifications that would help to compare it to other monitors, but considering this is their first entry into the Mini-LED monitor market, our expectations are low.
Samsung has also added to its Mini-LED montor line with a 32” model that will be available in early June.  This model has 1,196 zones, 4K resolution, a 240 Hz refresh rate, and a 2,000 nit peak brightness (1000R curve), but will sell for ~$1,500, above the $300 to $800 prices for similar non-Mini-LED monitors (although there are a number of non-Mini-Led gaming monitors that sell for more).  The new Samsung Mini-LED monitor is a step down from the company’s original 49” Mini-Led monitor previously released which has 2,048 zones and similar specifications, but sells for $2,500.  While Mini-LED backlights are still more expensive to produce than tradional full array backlight systems, the premiums for such monitors remain high, but we expect the number of potential brands entering both the Mini-LED monitor and TV market this year and next to increase rapidly and for the number of Mini-LED backlight suppliers to increase even more quickly.  We expect major brands will still collect premiums for Mini-LED TVs and monitors this year, but we expect the competition to increase substantially next year, which means Mini-Led BLU prices will fall and such premiums will get harder to justify.  Since Mini-LED backlights give a short in the arm to LCD panel manufactuers, we expect much of the promotion for same will come from Chinese panel producers and OEMs in 2023 as they will need to add alue to commodity panels during another year of oversupply.

While inflation is a given for anyone who drives a car or buys groceries, the effect of rising costs on CE businesses can be enormous, particularly for those that sell hardware.   A quick look at Samsung Electronics (005630.KS), the 2nd largest CE company by sales, and LG Electronics (066570.KS), the 6th largest, shows how much costs have risen over the last two years, particularly last year.  Transportation costs in 1Q 2022 are up 40.9% y/y for Samsung and up 47.9% for LG and that increases to 102.3% for Samsung and 139.7% for LG when comparing 1Q this year against 1Q 2020.  For the full year Samsung saw its 2021 spend on logistics increase by 25.8% y/y while LG saw its full year 2021 logistics expenses rise by 62.2%
In past years, transportation costs for CE products were usually a function of demand, with higher cost air freight being used when demand was high and container shipping when delivery time was less critical.  While those factors still exist to a degree, Figure 2 shows the China/Shanghai Container Freight Index, which hit an all-time high early this year, and that has caused both companies to have already spent  about 1/3 of what they spent for the entire last year just in 1Q of this year on transportation & logistics.

​Raw materials have also been a major burden on CE companies, with Samsung seeing an increase of 24.3% y/y in 1Q of this year, and LG seeing an increase of 15.4% in the same period and this includes a 42% decline in LCD panel prices y/y.  But other components, such as application processors (up 41%), flexible PCBs (up 19%) and camera modules (up 8%) and more basic materials such as copper (up 36.4%), steel (20.4%) and silicon wafers (up 4%) all added to the sharp increase in material costs and reduced profitability.  We have seen some component prices begin to level off but it is hard to predict whether these are changes that indicate a more normalized CE demand environment, seasonality, or the result of a year of pull-ins from CE brands.  China is still pursuing its stringent COVID policies and the war in Ukraine is pressuring global energy and commodity markets, so there is certainly no clear picture as to where CE costs and profitability will wind up for the year.  That said, as we have previously noted, we expect 3Q to be better than 2Q as inventories are built for the holidays, but expect 2H to be only marginally better than 1H.  All in, it is going to be a tough year for most CE companies, especially on a y/y basis so we pay special, attention to costs this year.

Digital twins, no not Mario & Luigi or the Property Brothers, although both could be considered digital twins if they are viewed on any digital media, but ‘real’ digital twins, meaning digital constructs that are used in analytics and predictive analysis.  Since 2002, when Michael Grieves introduced the concept[1] at an engineering conference.  NASA began using the idea in 2010 when it created simulations of space capsules and vehicles for testing, and has since been cited as one of the top 10 technology trends of the last few years. 
So what is a digital twin?  Simply a digital twin is a mathematical model of an object.  Static mathematical models (aka Monte Carlo simulation) represent an object at a given point in time and have been around for centuries, but dynamic mathematical models are time dependent and therefore change as parameters change over time, and while external observational changes could be made to dynamic models, only recently has technology been available to make those changes without human intervention.  The data for such models can be as simple as the mathematical description of the physical characteristics of a golf ball or as complex as the entire workings of a manufacturing plant, but the most important characteristic of a digital twin is that it is dynamic and can be used to simulate or mimic the actual object or objects on which it is based, without affecting the object itself.
Digital twins have innumerable uses in a wide variety of applications, ranging from stress testing to workflow, and can be used both before a product is developed, during that development for product scenario simulation, and after a product is developed for testing and modifications to extend the product’s abilities, with data from sensors that monitor the product in actual use feeding back information to the twin.  This also includes real-world historical data that can be added to the twin, all of which can be used to predict how the product will work and in what ways it can be improved, without the myriad prototypes and static models that are usually needed during product development and improvement.
There are many technologies on which the digital twin concept relies.  AI, analytics, and machine learning, and advances in these areas can certainly go toward increasing the value of digital twins across a broad number of applications and industries, but while IoT and sensor technology is usually given short shrift relative to flashier technology, the ability to feed real-time information from working products to digital twins is a major step forward that will add considerably to their value, and that data will allow faster product development and more responsive products as the digital twins gather more information. 
Of course, we can’t have wires running from sensors on equipment running across the country to product development or testing labs, so how will all of that real-time information get to digital twins? 5G would be the ideal mechanism for moving the data as close to real-time as possible and the highest transport speeds in 5G are those using mmWave spectrum.  While the necessity for mmWave speed and low latency are less for the typical mobile user, the bandwidth of mmWave does allow for lots of data to be sent without congestion or bottlenecks, which bolsters the case for mmWave private networks in industrial or business settings, particularly where digital twin applications are more commonplace. 
By mimicking physical assets, process operations, and frameworks, digital twins paired with 5G IoT transport can allow employees to view equipment in remote locations in real-time to solve production or maintenance issues without travel, such as in oil refineries, and can help to improve automotive design for vehicles from trucks to Formula racecars, and can solve some of the more recent global supply chain issues by creating and defining more efficient logistic networks.  Building maintenance and space optimization can be simplified using a digital twin and in retail, sensor information can be fed to a digital twin to predict customer behavior and the financial impact of a wide variety of scenarios, so while technologies like AR/VR get much of the headlines, digital twin software is the more practical side of the digital world and with growth estimates between 25% and 35% over the next few years, the opportunities for the expanding use of digital twins seems obvious, especially as IoT sensor and data transport technologies improve.


[1] The actual digital twin concept came from “Mirror Worlds” by David Gelerner in 1991.

​While we highlighted April results for Taiwan’s display producers last week, which were decidedly poor, we take a quick look at some of those in the Taiwan display supply chain to see how the Chinese lockdowns have affected April results.  Not all suppliers in the list below saw reduced April sales in keeping with the poor results see by display suppliers, as polarizer suppliers BenQ 8215.TT) and ChengMei (4960.TT) are booked through the end of June, although BenQ indicated that it is wary of 3Q prospects as price competition has increased considerably in recent weeks.  In most cases the reasoning given for the drop in April sales were the lockdowns in China, which limited availability of components and complicated logistics. 
The general feeling (our read) is that in the best case scenario is for a somewhat better 3Q as inventory levels are brought down this month and next, and while the build for the holiday season will be lower than originally expected, it will begin in July and help boost m/m sales results.  That said, it seems that those suppliers that were able to secure longer-term contracts and held higher component inventory levels have been able to sustain results through April, but will face weak y/y results in 3Q if the lockdowns continue.  We expect while China will continue to publicize its ‘No-COVID’ lockdown policy it will ease up on transportation restrictions for key industries going forward.   Lockdowns are certainly beneficial toward keeping COVID from becoming a country-wide epidemic in China but they also limit growth, especially in the areas where China is trying to maintain a competitive edge over Vietnam, Indonesia, and India..
Radiant Opto (6176.TT) – Backlight Supplier – Sales ↓51.3% m/m, ↓43.3% y/y
Global Lighting Technologies (4935.TT) – Display Light guide supplier – Sales ↓54.7% m/m, ↓55.1% y/y
BenQ Materials – Polarizer supplier – Sales ↑1.3% m/m, ↑3.6% y/y
ChengMei Materials – polarizer supplier – Sales ↑15.1% m/m, ↑21.7% y/y
Lite-On Opto (2301.TT) – LED supplier – Sales ↓9% m/m, ↑1% y/y

​The US government has made it extremely difficult for Chinese semiconductor companies to develop advanced process nodes by banning the sale of such equipment if it contains any US software, components, or hardware, but it has allowed equipment used in more mature nodes to bypass those restrictions, with the idea that Chinese semiconductor fabs will only be able to produce the more ‘common’ parts that are needed around the globe, including in the US.  Without the equipment for advanced nodes, China’s semiconductor producers are unable to compete with semiconductor technology leaders such as Samsung and Taiwan Semiconductor (TSM), with ASML (ASML) the only source for the EUV tools needed for such advanced nodes, honoring the US ban.
It seems that the US Department of Commerce is evaluating the impact of even more stringent rules that would ban the sale of equipment used for the mature nodes that have previously been excepted, as a way to push China toward acknowledging sanctions against Russia for its invasion of Ukraine.  While the Chinese government has been making a concerted effort to aid the development of a homegrown semiconductor equipment industry that would not rely on the US for any parts or equipment, no matter how much money is thrown at the development of such tools, much depends on the experience and expertise of the engineers who design those tools, and it has proven to be a slow process for Chinese engineers to develop such expertise.
While we expect there would be the usual hue and cry from the Chinese government should the US expand the existing semiconductor trade restrictions, it will have a devastating effect on the Chinese semiconductor industry and stagnate China’s advancement as a global semiconductor supplier, and even a domestic one.  It would be difficult for the Chinese government to publicly censure Russia or reverse its existing stance, but if the US tightens the semiconductor noose further, China will have to find a way to satisfy the US while not seeming to acquiesce to it demands or face even slower growth from it semiconductor fabs during a period when the profitability of same should be at its peak.
If the US decides to go further with trade sanctions against China, it will also have to contend with US equipment suppliers, particularly Applied Materials (AMAT), LAM Research (LRCX), and KLA (KLAC), all of whom have significant sales in China.  While political pressure continues to push the administration toward tighter rules, US companies will bear the brunt of those restrictions, along with Japan’s Tokyo Electron (8035.JP).  Finding a path that will not penalize the US and Japanese semiconductor equipment business yet will exert additional pressure on China toward the US agenda with Russia is an almost impossible task and even if a solution is found, that does not guarantee that all countries will honor it  despite the political pressure the US might exert, and if it is successful politically will the outcome, both financially and technologically worth the price?

​42years ago a JV between IDG Communications (BX) and the Chinese Ministry of Industry & Information Technology created China Computerworld to educate the Chinese population about computer science and eventually became one of the top 10 newspapers on the Mainland, which is unusual in that it was always oriented toward the computer and information technology markets.  Due to COVID-19, the print version ended in June of 2021 but the JV maintained its website, social media accounts, and associated employees.  Unfortunately the staff has not been paid since February, with a number of employees filing labor arbitration cases against the JV, but it seems that the company has been sustaining large losses and has now declared that it will cease operations after borrowing capital to pay employee’s housing costs and medical insurance.  Whether the end of such a long-standing publication and the last ‘official’ US/China JV magazine is a function of COVID-19 or a sign of the times, it is sad to see it go after that many years of publication.

​China’s ‘zero-tolerance’ COVID-19 policy has created a situation that has caused sporadic lockdowns across the country.  In many cases those lockdowns have shuttered or limited production at semiconductor and display factories that are key to the global CE supply chain and add to the risk of device or component shortages that already plague the sector.  While there has been considerable criticism of the policy and of China’s overall COVID-19 transparency, at least on the surface, China has limited the outbreaks of the virus in most cases.  That said, there is increasing pressure from the global supply chain to rationalize these lockdowns and as they continue to affect both non-Chinese and Chinese consumers, it seems the Chinese government is making some concessions albeit without admitting to a change in policy.
The government of Shanghai, a city of ~28m (more than the entire population of Australia and a bit less than the population of Texas) with a GDP greater than that of Sweden, and home to the country’s biggest port, issued “Guidelines for the Preservation and Control of the Epidemic of Shanghai Industrial Enterprises Resuming Work & Production”.  As part of that report, 666 key enterprises were specified, including 62 IC related companies, including ASML (ASML), Applied Materials (AMAT) and Amkor (AMKR), and a number of display companies, including Merck (MRK), Toppan (7911.JP), and others.  At the same time the report specified a number of ‘responsibilities’ that enterprises must adhere to, with specific reference to the ‘owner’ of the enterprise as the party held responsible for implementation.
Many of the rules are similar to more commonplace corporate level COVID-19 education and management planning for outbreaks, but the report also called for further delineation of ‘designated areas’, meaning separating the work zones and staff dormitories, but implementing strict rules as to entry and exit in the dormitories, similar to areas on the factory floor and limit entry for all non-employees unless they have had a negative COVID test within the last 48 hours.  While these seem logical in light of the restrictions many of us have faced over the last two years, China is trying to limit exposure to those infected further as the recent outbreaks have slowed China’s growth and are beginning to eat away at the 30-day supply of raw materials that most factories have on hand.  That said, these industries and companies will remain open during subsequent lockdowns in order to keep production from stalling.
Transportation to and from suppliers has been the real issue as many factories have been able to continue production, given the on-site dormitories for workers, but without regular restocking the Chinese government is beginning to understand that companies on the Mainland will slowly abandon the county if such strict lockdowns are continually implemented.  China is already dealing with the increasing cost of worker salaries, which has pushed a number of companies to shift production to Vietnam and other Southeast Asian countries, and in the short-term will be feeling the impact of the current lockdowns if they continue into May.  While China has a similar population density to Denmark or Thailand, with 64% of the population of China living in cities (up from ~36% 20 years ago), the risk of widespread outbreaks is a serious one, but also has to be measured against the economic result of such severe lockdowns.  As the end of April approaches and raw material supplies are wearing thin, it seems China is trying to balance the COVID risk against both the short-term and long-term impact to its economy in a more realistic way, with concessions to key businesses and few, if any to the population, but transportation is based on people moving goods and that is the real issue.  If there are no raw materials being moved there will be no reason to keep the factories open. 

There are some materials that are key to the CE space, with the most visible being Copper.  It is used in hundreds of CE applications but copper laminated PCB boards are of primary importance to almost every CE device.  As we have been hearing complaints from suppliers as to the price and availability of materials, we checked on a few to see how the price of key metals has changed recently.  Copper prices continue to rise and board manufacturers have been complaining about rising prices for copper clad boards since 3Q ’20, but it seems that many more necessary metals have also been rising, with some quite a bit faster than expected.  We also checked the price of Iridium, a key heavy metal that is the basis for many phosphorescent OLED emitters, with that chart looking far more alarming than copper, almost doubling in price over the last few weeks.   After viewing those two charts we went a bit further and checked a number of other metals that are key to the CE space and created the table below.