​Harvey Norman (HVN.ASX) is a medium sized retailer and franchisor based in Australia that generated ~$6.43b in sales for the (June) 2022 year, putting it about the same size as Staples (pvt) in the US, and sells computers, furniture, and other CE products.  The company has 739 franchised stores and complexes in Australia and additional stores in New Zealand, Singapore, Slovenia, Ireland, Malaysia, and Croatia.  Harvey Norma closed the 6/22 year with a net debt to equity ratio of 10.3%, up from 7.4% in 2021 but down from 19.4% in fiscal 2019, so this is not an over-leveraged company, but after a ‘good’ Black Friday, one franchisee was shocked to receive a notice that forbid franchisees from ordering new stock, indicating that the company was significantly overstocked heading into the holiday season.
Suppliers, who had been expecting to offer discounts on stock they wanted to move out during the holiday, are now offering even steeper discounts to other retailers given the situation at Harvey Norman, after receiving a similar letter from management, and some franchisees have indicated that November was a ‘shocker’ as to revenue for the month overall, with the expression typically used in Australia to describe a particularly bad game of rugby or soccer.  We take that to mean that November sales dropped off very quickly, leaving the company committee that determines the company’s range of products to halt new purchases.
Contacts in Australia have noted that the Harvey Norman ordering system lacks a central buying process, leaving sourcing to individual franchisees who must operate under the committee’s guidelines, but no matter what the system, it seems that November put the fear of God into the minds of committee members, which has now been passed on to franchisees, and finally to their suppliers.  This is a single datapoint in the vast CE supply chain but indicates how quickly things change and how those changes are carried down the supply chain.  We don’t make the implication that this is happening to other retailers in Australia or other countries, but it certainly does little to set a positive tone for the remaining holiday season.

Each holiday season we are inundated with on-line and brick & mortar ads pointing to ‘gifts for less’, ‘guaranteed lowest prices’, and ‘Save Up to XXX%’ to lure consumers into at least looking at adds that seem to offer ridiculously low prices for an almost infinite range of items.  As our focus is consumer electronics, a narrower but even more intense slice of the holiday advertising onslaught, we check to see if random samples of those advertisements are able to stand a bit of fact checking.  Our most recent dive into holiday CE ads are those from Wal-Mart (WMT), known for its vast assortment of goods at prices lower than most local retailers.  As a CE retailer, Wal-Mart is in the top 5, but not quite known for the quality of its offerings or its concentration in CE when compared to Best Buy (BBY), Crutchfield (pvt), or more local retailers, but in terms of volume, they are certainly prominent,  so we looked to their latest ad to see how things stack up.
The most current ad for TV deals features a 24” HD Roku (ROKU)-based TV for $88 (yes, $88) made by ONN, Wal-Mart’s CE house brand produced by a company known as Durabrand (pvt), which is really a tradename owned by Wal-Mart.  The TVs sold under the ONN label are actually produced by Lenoxx (pvt), ALCO Electronics (328.HK), and Funai Electronics (pvt), with Funai typically the leading producer.  This set has HD resolution and little else other than Roku built-in (subscription needed), so for anything more than basic viewing, such a set would not suffice, and we expect such a deal is a loss leader (shipping is free), so the number of sets sold at this price will be relatively limited and will likely revert back to its ‘real’ price of $130, and is available on Amazon (AMZN) from a 3rd party seller only for $194.
Following the ONN deal mentioned above were a number of Hisense TVs ranging in price from $178 for a 40” FHD LCD TV to a 58” UHD 4K model for $298.  The problem is when the model numbers are checked, it appears that these TVs are models produced in 2018, which is a sign that they have been languishing in a warehouse until some manager said to get them out at any price to create space for new inventory.  We did find a few ‘deals’ at Wal-Mart that were from more identifiable brands.

• Vizio (VZIO) 4K UHD LED Smart TV (V505-J09) – A 50” 2021 model selling for $298 at Wal-Mart.  The same set was available on Amazon for the same price and sold in April of this year for $296, its lowest price (sold for $400 on Amazon in October of 2021), so the ‘deal’ at Wal-Mart (on-line only) was the same as what was available on Amazon.
• Samsung (005930.KS) 65” 4K UHD HDR LED TV – A 65”LCD TV (UN65TU7000FXZA) 2022 model selling for $478 at Wal-Mart.  The same set is currently $448 on Amazon, its lowest historical price, with the high being $550 seen in July.
• LG (066570.KS) 4K UHD OLED Web OS TV – A 55” 4K OLED TV selling for $997 at Wal-Mart.  Amazon has the same price currently but sold the set for $977 back in October of this year$1,400 at the end of May.

There were many more, although most were selling at or above the comparable Amazon price (when available), so the only real ‘deals’ were on Wal-Mart house brands.  This is similar to the typical discounting scenarios seen at Best Buy, whose Insignia (pvt) in-house brand is also produced primarily by Funai, also a TV set producer for Vizio, one of the top 5 global TV brands, whose major shareholders include Foxconn (2354.TT) AmTran (2389.TT), and Innolux (3481.TT).   All in, unless you have a very specific need for a relatively low-grade TV, don’t be pulled in by ‘holiday deals’  unless you check specifics about the actual sets being offered.  TV set companies do not make it easy for consumers to decipher the model codes (each brand is different), so it is easy to wind up buying older models, which could lack current features.  To illustrate, here’s how the model numbers of LG sets can be broken down, with the single letter ‘Q’ indicating the model year… 

The US DOC has preliminarily completed an investigation into the bypassing of Chinese Anti-dumping tariffs on solar panels and components.  The investigation ruled on eight companies, four of which were found guilty of bypass tariffs by sending panels to Cambodia, Malaysia, Thailand and Vietnam for minor modifications, and then shipping them to the US to avoid the ‘direct from China’ tariffs.    Under the ruling those four countries were now designated as having potential for such illegal activities and companies operating in those countries can now attest to the fact that they are not circumventing US law as to the import and export of solar panels, as a way to exclude them from potential future liability.
The ruling did find that four companies (listed below) were circumventing tariffs in the manner noted above and could face continued import suspension, potential back tariffs, and possible ‘deposits’, if the final determination agrees with the preliminary findings, which are expected by May 1, 2023.  In the interim the DOC is expecting suppliers to make sure they have discovered whether the products they are importing are not circumventing tariff on PRC products or find other sources.
BYD Hong Kong (1211.HK)–
Canadian Solar (CSIQ)
Vina Solar (601012.CH)
Trina (688599.CH)
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​As we have noted previously, Foxconn’s (2354.TT) Zhengzhou factory, a primary source of assembly for Apple’s (AAPL) current iPhone 14 line, has faced both COVID lockdown issues and worker unrest, severely reducing output.  Foxconn released November results today, along with some statements concerning the factory status and expectations.  The November results (company-wide) were NT$551,092, ($18.053b US), down 29.0% m/m and down 11.4% y/y, against a typical (3 year average) November being up 8.4%.  This comes after the previous two months being up 41.0% and 40.4% y/y respectively, and while the company indicated that these results were “roughly in-line with company expectations”, we expect those expectations have been changing almost daily.  Also noted was that production was ‘gradually entering the off-peak seasonality”, with ‘Smart Consumer Electronics Products’ impacted by the Zhengzhou issues.
Foxconn’s outlook for 4Q included the statement “At present, the overall epidemic situation has been brought under control with November being the most affected period by the epidemic. In addition to reallocating production capacity of different factories, we have also started to recruit new employees, and are gradually moving toward the direction of restoring production capacity to normal. The outlook for the fourth quarter is expected to be roughly in line with market consensus.”  That said, the Zhengzhou plant still requires additional staffing, and after the disruptions by workers over recruitment promises made by the company during the recent lockdown, that might take some time.  Unofficial statements by management indicated that ‘if the recruitment goes smoothly…” the plants could resume full production in late December or early January, but those ‘ifs” remain and workers could be hesitant to believe Foxconn’s enticement promises.
While Foxconn, and the Zhengzhou site represent the majority of iPhone assembly share, the plants also assembles networking and computing products, so there is at least an offset to the smartphone shortfall at Foxconn itself, however the impact on Apple remains, and our 11.4m unit shortfall is now becoming the middle of shortfall estimates.  While we keep to our estimate, even with the easing of Chinese government COVID policy, it will take quite a bit of assembly supply chain machinations to make up much of that shortfall before year-end.  

​As we have mentioned recently, India wants to become a global powerhouse in the semiconductor space and has implemented several programs to attract fabs to the country.  But the real issue for India if it is to become a haven for the electronics industry is that it is necessary to create a vibrant infrastructure of suppliers and downstream businesses to help justify the risk of developing semiconductor infrastructure outside of areas where technology infrastructure id relatively new.  Tata Group (pvt), India’s largest conglomerate is trying to establish a foothold for itself in its home country that will both give it a base on which to build a larger electronics infrastructure in India, and ‘nationalize’ some of the already established downstream capacity that India needs to bring in semiconductor manufacturing.
 
Tata is said to be in negotiations with Wistron (3231.TT) one of the three major assemblers that work with Apple on the sub-continent (the others being Foxconn and Pegatron (4938.TT)), with the intention of purchasing Wistron’s manufacturing facility in Bengaluru for ~$612m US.  The facility, the first in India to assemble iPhones, was the scene of violent protests in late 2020 when workers protested over missed wage payments as the factory rapidly hired workers.  Apple suspended the facility for over two months as new managers were trained to handle the increasingly large staff of ~15,000 workers.  Tata is said to also be considering a JV if Wistron does not accept its offer, as it has done in other industries, where it retains control but shares ownership with the other JV member.  Tata does have a relationship with Apple as a supplier of components through subsidiary Tata Electronics (pvt), with that relationship developed through India’s “Made in India” incentive program.
 
Apple currently produces a number of iPhone models in India, primarily the iPhone SE, the iPhone 12, the iPhone 13, and the basic version of the iPhone 14, with the iPhone 14 higher-end models being imported, although India has moved from producing iPhone that were from past generations only a year ago, to the current generation iPhone 14, albeit the basic model only, with India’s share of iPhone production increasing from 1.3% in 2020 to 3.1% last year and 5% this year.
 
Such a move by Tata, sometimes referred to as the ‘Samsung of India’, as the population is always within reach of a Tata product, from birth to the grave, would help to legitimize India’s ‘in-house’ electronics manufacturing, as opposed to those facilities owned and run by Taiwanese or Chinese management, and further India’s prospects for its plans to become a global electronics powerhouse, especially given the increasing differential between average monthly wages in India versus its Chinese rivals, which is 95.5% higher in China. 
 
Of course there is considerable trash talk  over the potential deal in the Chinese trade press, extolling the virtues of the 259 Chinese Apple component supplier factories (out of 610) in China, the fact that despite a population size similar to China, India has more than 100 ethnic groups using different dialects (not sure why that is such a problem), and is a Democratic society that has ‘advanced labor protection’ , all of which make it risky to invest in India, while 90% of the Chinese population is of one ethnic group and the Chinese form of government does not allow workers to strike or compensate them for ‘protest’ time.  Obviously, such talk is a bit biased and disregards a repressive Chinese governmental system that does little to offer rights to workers and indicates the increasing fear that CE companies will continue to shift production out of China.  While India is still developing the necessary infrastructure to support more sophisticated electronics production, one way or the other Tata seems determined to be a local participant and the government will likely continue to be supportive.

Based on Adobe (ADBE) Analytics, Black Friday sales were $9.1b, up 2.3% y/y, which was up slightly from AA’s expectations of ~$9b (up ~1% y/y), while other sources were looking for a flat to slightly up Black Friday, despite the high inflation scenario this year.  With discounting having started early this year to move excess inventory, other than the one-day door-buster items, discounting seems to be relatively similar to what has already been in place pre-holiday.  Thanksgiving Day on-line sales were $5.3b, up 2.9% y/y, also slightly better than Adobe expectations, according to early data.   While data is not yet in for cyber Monday, Adobe’s expectations are for an increase of 5.1% y/y to $11.2b.
The US Census Bureau provides data concerning the share of annual revenue generated in the 4th quarter of the year for various types of retailers, with 27% of total retail sales occurring in the 4th quarter (2021).  Department stores saw 35.5% of sales in the 4th quarter last year (the highest percentage), while 30.1% of electronics store sales were generated during the same period last year, with sporting goods stores seeing the smallest share (27.6%) of yearly sales in 4Q.

Inflation has been the biggest problem for retailers this year, but the seasonal data suggests that November will see a seasonal drop, allowing retailers a chance to make up some lost ground in terms of profitability, which has been difficult to generate this year for many retailers.  That said, on a more specific basis CE retailers have a relatively long way to go in the CE space as based on the census data, we calculate that through October, electronics retailers have seen inflation increase by 9.67% this year[1], as shown in the table below, while computer retailers have seen a 13.44% increase, and while we include office supplies, not a real CE category, to give some perspective, (up 2.16% YTD), appliances are just about flat for the year, down less than a quarter of a percent.  As noted, we would expect November inflation data for the CE space to be down, but based on holiday numbers thus far, it will be difficult for CE retailers to make up ground lost to inflation.


[1] These calculations are based on setting December 2021 as a zero point and calculating the monthly inflation rate for each category of retailers through October.  This data differs from single month (October) data which is calculated on a y/y basis.

In September we noted that new regulations in the EU, would forbid the sale of 8K and micro-KED TVs.  The rules are not specifically targeting 8K or micro-LED TVs but set power consumption requirements that are based on the energy efficiency (EEI) of the device in order to improve the ecological and environmental impact of television usage in the EU.  Based on a 2016 study, the Eu concluded that the energy consumption from such devices was 3% of the region’s total energy consumption, and that would grow (including monitors and digital signage) to nearly 100 TWh per year by 2030, or roughly 5 times the output of the Grand Coulee Dam in Washington, that services over 8m people in Arizona, Southern California, and Southern Nevada.
The regulation excludes projectors, medical displays, white boards, digital signage, and VR, and set the EEI based on a compilation of the power requirements of HD and UHD (4K) sets available between 2012 and 2017.  They applied those findings to the higher resolution of 8K, however there is a problem with that logic.  The pixel density of an 8K set is 2X that of a 4X set, meaning twice as many pixels must take up the same space, forcing each pixel to be smaller.  Each sub-pixel is surrounded by a black mask that keeps light from reaching the driving electronic (which would cause transistors to stop functioning), however, the electronics that drive each sub-pixel (red, green, and blue) are basically the same size as those in 4K sets, as the same display backplane production infrastructure is used for both 4K and 8K sets.  This means that the black mask for 8K pixels takes up more of the pixel and reduces each pixels’s brightness.  In order to compensate, and make the 8K TV and bright as a 4K TV, the backlight must be brighter, which means it consumes more power.
No current 8K or micro-LED TV sets meet these requirements, and 8K proponents were hoping that the EU would meet again before the end of this year and revise the regulations.  Unfortunately such a meeting has not been scheduled, which leaves only a few months next year for such a meeting, which, if held, might come to the same decision.  As western Europe is only 16% smaller in terms of the sale of advanced (4K and 8K) TVs, even though the 8K market is still a small part of the overall advanced TV segment, it will have an impact on the plans of TV set brands until the issue is resolved.  Creating the infrastructure to reduce the size of the electronics for 8K sets is likely a non-starter for most brands, so there seems to be no near-term alternative unless 8K advocates are able to convince the EU commission to postpone or change the new rules, if they can even get a meeting, so if you live in the EU and you are desperate for an 8K set, you have util March 31 to grab one…

The Single’s Day celebration is the large shopping ‘festival’ on the globe, and Alibaba (BABA), the original sponsor of the ‘shopping holiday’ has seen Single’s Day sales grow each year since 2009, last year climbing to over $84b, but this year things might be a bit different.  There will still be growth at Alibaba, albeit likely relatively modest growth, especially as the competition has continued to increase over the last few years, but more so the ‘refocusing’ of the on-line retail industry as the Chinese government looks to present a less aggressive picture of the Chinese consumer.
Pre-sales for the ‘holiday’ (not a legal holiday) began on October 24, and ‘Phase One” of the holiday began on October 31 and ran through November 3rd, with the big push starting on 11/10 and continuing through 11/11, the ‘official’ Single’s Day.  Last year Chinese on-line retailers felt pressure from the government to rein in some of the massive promotional programs that are part of the holiday, with key influencers generating millions in a matter of minutes when they promote specific products, but this year, with government investigations into large Chinese on-line retailers intensifying, those promotional programs are toned down even further than last year. 
The theme seems to have changed from one of “buy, buy, buy” to one that looks to generate customer loyalty, and while there are still the “…spend 300 (RMB, ~$41.44) and get 50 off (~6.91)”, the Chairman’s mantra of “…moderate wealth for a common prosperity…” and away from “…promoting mindless consumption…” seems to have made an even greater impression on on-line retailers this year, while the weakening economic position of Chinese consumers has reduced the contribution from smaller cities, where much of the sales growth has come from in the past.
All in, expectations for the holiday are low this year, which we believe is being influenced by the more obvious slower growth In the Chinese economy and the continuing issue of the country’s strict COVID policies that have been limiting travel, manufacturing, and commerce in general.  We expect there will still be a positive spin put on results, but in a more subdued fashion, with more of a nod to rational behavior and less toward the “…we sold 100,000 lipsticks in the first 60 seconds…”  On-line retailers are certainly not going to miss a chance to hawk whatever they have to sell, but will be careful not to promote so aggressively that they fall further into the purview of government regulators, or worse, a statement from Chairman Xi.

Theoretically tablets have been around for almost 30 years, although we look at the tablet ‘era’ as starting with the Apple (AAPL) iPad, which sold 2x predictions in the first 3 quarters after its release in April 2010.  Since then tablets have had their ups and downs, originally focused on  the workplace, and accused of potentially destroying the notebook market, tablets remain a functional part of the CE landscape.  On a long-term basis (see Figure 2), the category has been in decline in unit volume terms, since 2015 but saw a resurgence in 2020, the result of COVID-19, as have a number of CE categories.

As the effects of the pandemic have eased over the last few quarters, tablet shipments began declining q/q in 2Q of last year and on a y/y basis in 3Q ’21.  That has continued with only the 2nd quarter of this year seeing a q/q increase, only to be followed by a q/q decline in this year’s 3rd quarter.  Comparing the first three quarters of this year to 2021 (same period) shows shipments down 17.5%, while 2021’s first three quarters were up 25.1% over 2020, and the first three quarters of 2020, when the pandemic started, were up 58.3% over the pre-pandemic first three quarters of 2019.  This brings us to the conclusion that while tablet shipments have been on the decline, they have not yet returned to pre-pandemic levels.
Does this mean tablets have found a new ‘normal’ level, or are they just returning to pre-pandemic levels more slowly than other CE categories?  Unfortunately we believe the later based on Figure 3 & Figure 4.  Figure 3 shows quarterly tablets shipped by brand and the quarterly number of panel produced.  We note that we zeroed the panel production numbers to shipment numbers in 1Q ’17 to show the difference between tablet shipments and tablet panel production, so there are no panel units shown in Figure 3.  However in Figure 4 we show cumulative tablet shipments and cumulative tablet panel shipments, along with the spread between the two. 
Figure 4 indicates that tablet panel shipments were relatively closely matched to tablet device shipments until the 4th quarter of 2018, when increasing tablet shipments more than offset tablet panels produced, leaving tablet brand buyers unable to meet quotas.  Given that this was an untenable situation for tablet brands, panel producers began to step up production, building to both their own and brand inventory.  This increasing level of tablet panel production continued through much of the pandemic, with the spread leveling off between ~22% and 23% as tablet sales began to slow last year.
This would suppose that in order for tablets to return to a more steady growth pattern, brands need to reduce inventory levels, reducing the spread between shipments and panel production, while panel producers could lower tablet panel production further, with both parties working toward a more JIT supply chain that will reduce the spread and carrying costs.  But this is a lot to ask an industry that has relatively little visibility and is quite sensitive to macro events, which leads us to believe that the slow return to pre-pandemic levels for tablet shipments will continue into 2023, with the typical positive bumps from yearly new model iPad launches that occur in the 4th quarter.  Hopefully the long-term trend line curve seen in Figure 2 will pan out to be a harbinger of a more rational tablet market, but we expect more of the same for the next few quarters.

​National Day (October 1) was the beginning of Golden Week in China, a week-long holiday known for high travel volumes and commerce saw reduced travel this year due to COVID restrictions, leading to a drop of 18.2% y/y in the number of tourists traveling, and a 39.3% drop y/y relative to pre-pandemic levels (2019).  Consequently domestic tourism revenue also dropped by 26.2% y/y and by 55.8% vs 2019 levels, with ~75% of A-Level tourist attractions open this year.  Chinese cultural centers sponsored 13,940 activities with 59.27m Chinese citizens participating, with the government sponsoring 9,100 “Cultural & Tourism Consumption Promotional Activities in 85 cities, funded by $39.6m in subsidies.
We expect much of the weak showing was a result of the specific restrictions on travel in a number of cities and regions due to the country’s stringent COVID rules, and a general malaise over the weakness in housing prices and the general economy in the country.  While one might expect that restrictions might be eased a bit as the Chinese Communist Party Congress meets later this week, but it seems that local officials see the restrictions as a sign of loyalty to the party and will do almost anything to prevent an outbreak in the near-term, regardless of the economic consequences.  The above travel numbers were the lowest since 2014.