​According to comments by a Foxconn (2354.TT) manager, the company plant in Zhengzhou, known as “iPhone City” has worked its way back to ~90% of its peak capacity, or so says local state media.  As we have previous noted, the factory was faced with both worker protests and a rapid loss of workers as the country’s leadership remained steadfast in its COVID-19 lockdown policies last year.  Foxconn has been offering pay and bonus incentives to draw back workers or hire new ones, but until the government loosened lockdown policies, the factory remained underutilized and large customers, particularly Apple (AAPL), faced shortages as production slowed.
 
November sales for Foxconn were down 11%, with the Zhengzhou plant and while that is important to the company, the production numbers from that plant contributed ~60% of the import/export flow for the entire Henan province and ~80% of the same for the capital city of Zhengzhou, with half of the province’s import/export value being from mobile phones during the 1st three quarters of 2022.  That said, the December number from Foxconn will prove out whether the return to near full production rings true, as state media tends to paint a rosy picture, but the Chairman of Foxconn did tell employees in his New Year address that 2022 was a challenging year but warned that 2023 “…may see a more difficult and challenging path…”

The Australian Retailers Association and Westpac (WBC.ASX) have indicated that the holiday period down under was a success and was the biggest holiday season on record and certainly above expectations, and while Australia represents less than 1% of the global retail market, we are encouraged to find any countries where retail spending is seeing an upturn.  Unfortunately the Australian statistics do not break out consumer electronics, but perhaps we at the least be somewhat encouraged that 2023 will not be another disastrous year for the CE space.  Not that we want to take anything away from positive statistics, but we have to also note that Australia has seen its CPI increase by 6.9% over the 12 months ending in October, so the retail sales do get a boost from that, but the estimates for the holiday season (11/1 – 12/26) were for $64b, which would have been down~6.8% y/y.
 

​Senator Marco Rubio (R-FL) has introduced bi-partisan legislation to ban TikTok (pvt) from operating in the US.  The bill titled “Averting the National Threat of Internet Surveillance, Oppressive Censorship and Influence, and Algorithmic Learning by the Chinese Communist Party Act”, has a stated purpose to “protect Americans from the threat posed by certain foreign adversaries using current or potential future social media companies that those foreign adversaries control to surveil Americans, learn sensitive data about Americans, or spread influence campaigns, propaganda, and censorship”, using the presidential powers of the International Emergency Economic Powers Act.   The bill proposes that all transactions of Bytedance (pvt) and TikTok be blocked, preventing commercial operation in the US or with a US person (intelligence activities are excluded) and covers potentially similar threats from Hong Kong, Macau, Russia, Iran, North Korea, Cuba and Venezuela that would qualify as social media companies.
There has been talk of such proposals a number of times over the last few years, with little support, and certainly continued resistance from the ~80m active TikTok users in the US, and with the controversial takeover of Twitter (pvt) by E. Musk, such a ban would garner even more focus from users, who are obviously not concerned about their personal data being harvested by nefarious governments.  If you need any reinforcement of idea that TikTok users are certainly not afraid to reveal their innermost secrets or reveal their knowledge level (or lack thereof), the video below from TikTok user SSSniperWolf, a 30-year-old actress (aka Alia Marie Shelesh) who has posted over 3,000 videos and has over 33 million subscribers and over 20 billion (billion!) views.  A few minutes will reveal the ‘sensitive data’ that is of concern to the esteemed senator from Florida.
https://youtu.be/FJXD5zMRUhM
 

​A recently proposed amendment to the US National Defense Authorization Act, that would have prohibited Federal agencies from purchasing semiconductors from three Chinese companies, has been scaled back after protests from trade groups and the US Chamber of Commerce shed light on the difficulties and costs associated with the increased restrictions.  The bill would have implemented almost immediate prohibitions of agencies purchasing semiconductors from Semiconductor Manufacturing International, aka SMIC (688981.CH), Changxin Memory Technologies (pvt), and Yangtze Memory Technologies, aka YMTC (state), with two of the three having been named by US officials as linked to the Chinese military.
The trade groups indicated that the cost of dissecting every device purchased by US government agencies to see if they contained semiconductors from the three target companies, would be enormous and incredibly time-consuming, while being virtually impossible within the timeframes originally suggested in the amendment.  This seems to have helped to change the legislation from almost immediate implementation to a 5 year phase-in plan, in keeping with the funding plan of the CHIPS & Science Act.  Th revised bill also calls for an initiative with the private sector to identify and replace Chinese semiconductors across the federal supply chain, rather than leaving that burden solely on federal agencies, with the goal of replacing all Chinese-made semiconductor products with American made semiconductors to avoid global chip shortages.
All in, we have never been fans of trying to eliminate a competitor through trade sanctions that are politically based, but there is certainly some merit to using those sanctions to avoid funding adversaries that are producing devices or electronics for an aggressive military power.  That said, it is a very fine line to walk without hurting the overall global effort toward developing more sophisticated semiconductors, of which China is a part, so there is a balance to be found on a global scale.  On a country-wide basis, the US is certainly capable of building the infrastructure needed to become independent of China’s manufacturing prowess, but it does have a cost, as became apparent when the US government began forcing carriers to remove telecom equipment made by Huawei (pvt), which has yet to be completed and is considerably over original cost expectations. 
The bill promotes the idea that US jobs will be created by the expanded semiconductor ban, which is likely correct, but those gains must be balanced against the cost of implementation, the higher price of non-Chinese semiconductors, and the risk that the US and its allies will take on more of the cost burdens during the nadir of such a cyclical industry.  Its easy for politicians to use anti-China sentiment to stir up potential voters but such actions have deeper and longer lasting implications than can be expressed in a two page bill summary, and we expect that the political world will quickly move on to another issue and leave the global semiconductor industry to deal with this new disruption.

We have mentioned previously that the Indian government has been investigating a number of Chinese smartphone companies that operate on the sub-continent, with Xiaomi (1810.HK), Vivo (pvt) and Oppo (pvt) seemingly in the governmental crosshairs.  While financials and business practices are certainly the focus of these investigations and a number of discrepancies have already been found, border conflicts between China and India have raised the level of tension between the two for the last 2+ years and have politicized the fact that Chinese companies are the dominant suppliers of smartphones to the Indian market with a 62.3% share in 3Q.
Things have taken a turn for the worse this week when Indian authorities halted the exportation of some 27,000 Vivo smartphones (value of ~$15m) from be shipped out of India to other countries.  The Vivo phones were produced in India at Vivo’s Noida facility, which the company built in 2015 and has increased production from 50m units last year to 60m this year, with a target of 120m units in the future.  Vivo can meet all of its smartphone demand for India itself currently and has just begun shipping the excess to nearby countries, such as Saudi Arabia and Thailand.  The phones in question are being held at the New Delhi airport over questionable export declarations, particularly their value.  India’s own cellular and electronics lobbying association wrote a letter to the government, asking for a quick release of the devices and how the incident is a negative toward the encouragement of manufacturing for export in the country, but the government has refused to comment on the investigation.
All in, the conflicts between China’s smartphone vendors and the Indian government will do little to encourage companies to establish or increase their manufacturing bases in India, but at the same time, Chinese smartphone brands have been playing fast and loose with import and export rules and have been extremely ‘creative’ when it comes to financials, finding many ways to show losses that allow for tax incentives and subsidies on a local basis, and profits for the parent companies in China.  As India is relatively new to the global manufacturing world, and is somewhat unused to the ‘Chinese way’ of doing business under a totalitarian government that hides considerable graft and subterfuge, they seem to have decided to show that they will not stand for such double-dealing recently, and while that will counter some of their “Made in India” momentum, it does set the tone for a more rational approach to manufacturers from other countries, particularly semiconductor companies that might be looking to diversify away from China while still feeding a large and growing market. 
As the two counties now have populations that are almost the same (China is the larger by 2.76%) and India is a Democracy while China is a single-party dictatorship, India’s show of strength toward Chinese companies, despite their dependance on, puts them in stead with the US and its allies, who are key to developing the infrastructure necessary to build India’s electronics and semiconductor business.  Hopefully these skirmishes do not move Chinese smartphone vendors out of the country before others, such as Samsung (005930.KS), can fill the gap, although a key executive at Xiaomi’s India division resigned yesterday as the case against the company, whose assets have been seized, winds through governmental channels. 

​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)
​

​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.