[1] In September we noted that glass substrates for semiconductor packaging was not only showing signs of moving forward, but were seeing a more practical view of the technology, as opposed to a more R&D approach that had been the case in previous years, as AI drives High Performance Computing.  We highlighted Absolics (pvt), a spin of off Korea’s SKC (011790.KS), (Applied Materials (AMAT) also owns ~30%) who seems to be among the first to offer commercial glass substrate product for advanced semiconductor packaging.
Critical Capacity-Adoption Challenge for Glass Substrates
While Absolics is small compared to major glass producers they have been particularly focused on glass substrates for semis and already have a 12,000 m2 production facility and has been planning its expansion to 72,000 m2 with a 60,000 m2 addition.  At an  expected  cost of almost $350 million over the next two years, with ~$140 million in 2026 alone, the company and parent are a bit concerned that this might be a bit more capacity than the market can currently bear. 
The Capacity-Adoption "Chicken and Egg" for Advanced Packaging
On the positive side, Absolics is expected to have passed qualification procedures for AMD (AMD), while some believe (unconfirmed) that Amazon (AMZN) Web Services has postponed glass substrate qualification until there is enough capacity to justify adoption. So we wind up in a chicken and egg situation where SKC and Absolics are concerned about expanding capacity before the market develops and potential customers are concerned about adopting the technology before there is enough capacity to support commercialization..  SKC has also been considering moving its copper foil business, another capital intensive project that is vying for SKC’s capex in 2026 and 2027 and as SKC recently found itself with a new CEO, the question as to where Absolics sits in the new regime remains open.
Competition in the Glass Substrate Market: Why SKC Must Act Now
That said, even at 12,000 m2/year Absolics is the leader in the space and seems to be further along on qualification than others, including larger glass suppliers, most of whom we believe are working on small (1,000/2,000 m2/yr. lines).  While SKC might be cautious about expanding capacity before the market takes off, we expect such a view would be considered short-sighted a few years down the road.  Glass substrates for semiconductor packaging does face some challenges, but it is expected to be the impetus for another round of semiconductor growth at it allows for higher component density in packaging and can also be used to relieve density issues for high-end PCBs.  As Absolics is being challenged by large glass producers like Corning (GLW), AGC (5201.JP), Schott (pvt), Hoya (7741.JP) and NEG (5214.JP), they need to strike while the iron is hot.


[1] Mandalorian Image Source: https://starwars.fandom.com/wiki/Cryo-furnace
 

We give Corning (GLW) credit for being in the right place at the right time in terms of their optical business, catching the AI data center wave with ultra-high density connectors and fiber.  While we hope that this leverage continues, we are still on the fence as to whether data center growth will continue at this rate for the foreseeable future.  That said, we go back to the two businesses that are the reasons we follow Corning, their display glass business and their specialty materials business.  The display business has survived a number of precarious moments, such as the fear that flexible OLED would cut into the company’s LCD glass substrate business, or the end of LCD display production by the two major panel producers in South Korea, Samsung Display (pvt) and LG Display (LPL), so we spend some time looking at these segments, letting AI play out a bit more before jumping on or off the data center bandwagon.
Figure 1, Figure 2, and Figure 3 show Corning’s display division sales on a long-term basis, and segment margins on both a long-term and 5-year basis.  The charts show that 2022 was a correction year for much of the CE space after the surge in demand during the COVID pandemic and the inventory build that fed such demand, Corning’s display segment recovered in 2023 and continues to follow a positive trendline.  During 2023 the company announced a substrate glass price increase (~20%), the first since mid-2021, helping to bring prices in-line with rising production costs due to inflation.  This has helped to bring display segment margins back to more normal levels after hitting 5-year lows in 3Q 2022.  Since then display sales have been relatively steady as the price increase held and inventory levels remain normal.
Display margins have also recovered, to the mid 20’s and more recently the upper 20’s, with every quarter this year at least 2% higher than the 5-year average quarterly margin.  We expect margins to remain under 30%, but as Corning’s highest margin business, it is critical that display margins remain in the mid to upper 20% range.  The company projects that display margins will be at least 25% for the full year on between $900m and $950m in sales but indicated that they expect sales to come in at the high end of that range, likely pushing margins above 26% once again. 
On a longer-term basis we see the display segment maintaining sales in the $3.7 to $3.9b range and margins between 26% and 27%.  While we expect substantial growth will be difficult as the display space itself remains in stasis, as long as Corning is able to maintain consistent volumes the display business should continue to generate substantial margins.  We note that Corning management also noted that as the only US display glass supplier, those panel producers looking to increase their US ‘content’ to offset trade restrictions have only Corning as an alternative.
The Specialty materials segment at Corning saw a strong quarter with sales setting a new company record, which we suspect might include some additional Apple (AAPL) business, apropos of the announcement made in August in which Apple committed $2.5 billion to Corning’s Harrodsburg production plant, making it the exclusive supplier of cover glass for all iPhone and Apple Watch products, part of Apple’s commitment to invest $600 billion in US manufacturing over the next four years.  That said, as OEM Gorilla Glass is refined outside of Corning[1] sales of Gorilla Glass do not always correlate to smartphone sales.
Corning’s Specialty Materials segment saw the same sales and margin contraction that affected the display space in 2022, but about a year later as smartphone shipments continued while other CE products slowed.  Specialty materials’ margins have been improving since, currently reaching 18.2% on record sales, which we believe would typically be at or near the high end of the long-term range.  However we expect that the Apple deal might give some room for margin expansion as Corning not only supplies cover glass for the iPhone and Apple Watch but is also the finisher  for Apple.  This should lead to some margin improvement over time as Apple moves all of its cover glass production to Harrodsburg and that facility no longer produces any raw glass for OEMs.
While we are certainly cognizant of the effect AI and data center build outs are having and will have on Corning’s sales and profitability, we are less sure about the long-term sustainability of that growth and look to Corning’s other CE related businesses for steady sales and profitability.  While growth might be a struggle for the display segment, it is a reliable source of sales and income for the company, and as the Trump administration will likely continue to hammer on CE brands to source from US companies, Corning has the competitive upper hand for the next three+ years.  Specialty materials carries a bit more risk in that it is focused primarily on the smartphone segment, but the concept of using more glass per device seems to be keeping demand growing despite the ups and downs of the smartphone market.


[1] The ion exchange strengthening process is done at the OED level

What do PCBs and glass have in common?  PCBs have glass fiber in them, but the commonality stops there, at least for now.  In this note we take a quick look at the use of glass as a core ingredient in future PCBs and as a key material for advanced semiconductor packing in the future.  The unique characteristics of glass allow it to solve a number of current and future issues with semiconductors and board level products that suddenly have become high priority issues as AI creates demand for servers and high-speed silicon devices at a rapid pace.  Before going further it is important to understand the basics about PCBs.
What is a PCB?

PCBs (Printed Circuit Boards) are typically made of FR-4[1], a widely used laminate consisting of a glass fiber reinforced epoxy, and copper foil, layered with an adhesive.  They can be single or multi-layer (up to over 30 layers).  FR-4 is inexpensive, has been standardized since the 1960’s and provides a rigid and stable framework for components, along with the ability to provide a structure for intricate traces (the equivalent of wires on a PCB) for component connections and power sources in most environments.  However as the number of layers and components increases so does crosstalk (the bleed of a signal from one part of the board to another) as does the amount of heat generated, and that heat reduces the life of board components.
While PCBs have been used for many years, the demands of modern servers, especially high powered GPUs used for AI training and inference have pushed the limits of this medium and research is being done on using glass as a substrate for a number of reasons.

• As board density increases, trace line widths decrease, making the lithography that produces these lines more difficult.  While PCB boards are rigid to a degree they have inherent flexibility and not necessarily perfectly flat and when it comes to lithography, even a small change in any direction, such as a slight bend in the substrate, can cause a defect that can lead to later issues or an outright board rejection.  Glass is over 1,000 times flatter than a typical FR-4 PCB.
• Thermal Expansion (CTE) occurs as the temperature rises in a material.  Glass has a CTE that is similar to that of silicon, which means it expands and contracts at roughly the same rate[2], while standard PCB CTE is 2 to 3 times higher, meaning it can expand and contract at a greater rate than the components.  This mismatched expansion can lead to solder joint fatigue or more serious warpage issues.
• In typical server operation, both the copper traces and the FR-4 absorb some of the signal.  As boards get larger that loss increases.  It also increases as the frequency of the signal increases, which becomes a significant factor with HBM (High Bandwidth Memory and High speed GPUs. Dielectric loss for glass is half to ¼ that of FR-4, and specialty glasses can reduce that loss by another order of magnitude.

 
Unfortunately, there are drawbacks with using glass as a PCB substrate or in advanced semiconductor packaging.  While FR-4 has been used for over 50 years and is well ingrained in the electronics production ecosystem, glass is a new material for these uses and has some unique manufacturing challenges.

• Glass is brittle and fragile and can be damaged during handling and processing, lowering yield and requiring more expensive handling equipment.
• Vias, copper clad tunnels that connect layers and vent heat, are more difficult to produce than with FR-4.  Lasers or ion etch is used to create vias in glass substrates, a slower and certainly more expensive process than the drilling used with FR-4 PCBs.
• The cost of substrate quality glass is considerably higher than FR-4 and the number of suppliers is extremely limited currently.
• The thermal characteristics of glass are such that it is a poor heat conductor, and as such, thermal management, already an issue with high-speed servers, becomes more so.

When Intel (INTC) first announced that it intended to develop and use glass substrates (9/2023) the timeline for commercialization was ‘in the second half of the decade’ or at least before 2030, and many expressed the opinion that it would take longer, if ever.  Since then the rapid expansion of AI and its concomitant need for greater server capacity and performance, have attracted a number of others to the glass substrate fold and the ecosystem needed to move this concept to commercialization continues to build.  We see four major categories for the glass substrate ecosystem:

• Specialty Glass Manufacturers
• Equipment Suppliers
• Fabricators
• Assembly & Test

 
Specialty Glass Manufacturers

This category is divided into two segments.  Those large commercial glass producers that are developing specialty glass for substrates and advanced semiconductor packaging, and those suppliers who are singly focused on this particular application.  While the most noise will come from the first category, it will take years for glass substrates to become meaningful in light of the other income streams these manufacturers have.  That is not to say it won’t become meaningful, only that it will take years to grow the application and the ecosystem.  Smaller suppliers, particularly Absolics, have been laying the groundwork for the industry, along with Intel.

Large Commercial Suppliers:
All of the companies listed under ‘large commercial suppliers’ are currently producing specialty glass products for advanced semiconductor packing R&D.  Most are at the qualification level as full scale packaging using glass substrates is just beginning to materialize.
Corning (GLW)
AGC (5201.JP)
Schott (pvt)
Hoya (7741.JP)
Nippon Electric Glass (5214.JP)

Small Focused Suppliers
These companies are more focused on the substrate glass market without the distraction of much larger other businesses and have a better chance to come up with specific solutions, as long as they are amply funded.
Absolics (011790.KS)
Plan Optik (P40.XE)
JNTC (204270.KS)

Equipment Suppliers
These companies are modifying existing tools and developing new ones that allow both glass producers and fabricators to utilize glass substrates.  As the technology is changing rapidly, there is no standardization on new tools at this time
LPKF Laser AG (LPK.XE)
Canon (7751.JP)
Yield Engineering Systems (pvt)
Applied Materials (AMAT)

Fabricators
These companies take th raw materials and create glass substrates to specification.  This is custom work and will likely remain so for the near future, which leaves open the expansion of the list to include a much larger base.
Samsung Electro-Mechanics (009150.KS)
Intel

Assembly & Test
Component placement (assembly) will be shared between fabricators and outsourced assemblers, while we expect test (other than at the line level) to be entirely outsourced to guarantee independence and impartiality.
ASE Group (ASX)
Amkor Technology (AMKR)
Powertech technology (6239.TT)
Toray Engineering (3402.JP)
​
A Deeper Look - Absolics
Absolics was created as an affiliate of SKC Ltd (011790.KS) in late 2021, with SKC being one of dozens of recognizable companies in Korea under the SK Group[3] umbrella.  Absolics was created to focus specifically on glass core substrates and to eventually become the world’s first large scale commercial manufacturer of glass core substrates.  By exploiting the characteristics of the company’s specialty glass formulations the company expects to solve many of the issues that limit chip-level progress.  The company has indicated that the use of its materials can provide up to a 50% power reduction and a 30% improvement in signal performance, which are two big issues for server farms.
The company began constructing on a $600m ~10,000 ft2 facility (Phase 1) at SKC’s campus in Covington, GA in November of 2022.  The first phase of the construction was a $240m small volume glass manufacturing facility, followed by a $360m high volume line.  The company received approval for up to $75m[4] in CHIPS Act funding for the phase 2 (120,000 ft2 total) facility in May of last year and up to $100m for R&D from the federal government’s National Advanced Packaging Manufacturing Program.  The government weighed the cost of building a glass substrate manufacturing facility from scratch and the administrative delays associated with such a project and made the investment with a highly experience manufacturer instead.  The company has targeted mass production by the end of this year with phase 1 production of 12,000 m2/year and 72,000 m2/year when phase 2 is completed,
The core of Absolics technology is its TGV (Through Glass Via) technology.  These ‘tunnels’ through the glass substrate provide inter-layer communication and further reduces signal loss by reducing the overall length of the signal path through layer stacking.  As chip production becomes more complex with multi-layer boards and interconnected chiplets the necessity to reduce signal interference and loss through vias and low loss materials becomes essential. This is particularly important in relation to power, which has to be delivered both horizontally across each layer and vertically to all layers and to passive components that can be embedded into the glass substrate itself. 


[1] FR stands for Fire Retardant while the 4 is a designation for the grade of the epoxy-glass laminate.

[2] Silicon ~2.6 ppm/°C; Glass – 3.2 to 7.5 (adjustable)

[3] Sk Telecom – the #1 telecom company in Korea; Sk Hynix the 3rd largest semiconductor company world-wide; SK Silton the only silicon wafer manufacturer in Korea to name a few

[4] NIST indicates that Absolics has been approved for $100m in CHIPS funding, which we believe is for R&D.

The research grant mentioned above is specifically targeted to TGV development in order to reduce the challenges associated with TGVs and to develop the specialized equipment to facilitate their production.  This is also an extension of the company’s collaboration with the DOD under their SHIP Program (State-of-the-Art Heterogeneous Integrated Packaging) which requires ultra-low loss package designs.  The company also benefits from a 12% investment SKC has made in Chipletz (pvt), a fabless substrate start-up in Texas.
The company is positioning itself as a neutral supplier to both major foundries and to design houses that do not want to purchase glass from competitors.  There are others who are developing similar technology and products with internally developed expertise, such as Samsung (005930.KS) and LG Innotek (011070.KS) so it will not be without risk for Absolics, but they have partnered with over 30 suppliers and external resources in order to compete more effectively, and continue to have the backing of SK Group, the 2nd largest manufacturing company in South Korea (Samsung is 1st).   There are still a number of major challenges that need to be reduced or eliminated, particularly low TGV yield and reliance on AI demand, but if glass substrates perform as well as expected in real world use, Absolics will directly benefit.
As Absolics is more focused on chip level and packaging glass substrates than board level products, we compare the parameters of using glass core substrates in advanced packaging against typical ABF and silicon interposers.

As with all new technologies, estimates vary considerably, with estimates for market size ranging from $4.3b to $7.8b in 2024 and $8.3b to $12.3b in 2032, with CAGR ranging from 3.6% to 7.8%.  That said we expect there is little commonality between these estimates as the term ‘Glass Substrates’ is far to general to mean only high purity glass substrates for PCB cores and advanced semiconductor packaging.  Therefore we reserve judgement on market size until we see some substantive numbers out of any of the glass suppliers listed above, although we don’t expect that soon as the technology and the products have to be rigorously tested before being adopted by any of the major foundries and put into production. When that happens others will follow and the market will grow quickly, especially if Ai demand continues to grow.
Glass substrates for PCBs and advanced semiconductor packaging solves a number of problems that put limitations on semiconductor growth.  We expect if the technology lives up to expectations it will become a necessary part of the advanced packaging space and find its way into the high-end of PCB board design.  It might be hard to tell who the winners will be this early in the game, but we will continue to update as the development progresses and mass production begins both at the glass level and at the application level.
​
Sources:
Absolicsinc.com
Eng.sk.som
PCBmake.com
Albanyceo.com
Kedglobal.com
Nist.gov
Yolegroup.com
Circuitinsight.com
Inbusinessphx.xom
Craft.com
Imasource.org
Electronicsforyou.biz
UnityPCB.com
Technews.tw
 

Normally our focus with Corning (GLW) is on two of the company’s 6 broad product categories, display and specialty materials, the segments that supply substrate and cover glass to many CE products.  However, the world is now focused on AI and anything that smacks of AI gets all the attention.  Such is the case at Corning, and rightly so as the company’s optical products are in the sweet spot of the race to build out AI training and inference capacity.  At the same time carriers, who have been working down inventory for many quarters (more than everyone, including Corning thought) have finally returned to ordering in line with actual expansion, releasing the pressure that has contained carrier optical sales.  Other than display, which saw sales down 0.8% q/q/ and down 11.4% y/y all Corning divisions beat consensus sales  estimates.
Here are the sales and net income metrics for 2Q by division:

​We will have more on Corning as we get more complete data.

Corning (GLW) reported 4Q results of $3.41b, down 2.4% q/q and down 7.3% y/y and below consensus of $3.55b.  EPS was a reported $-0.04 but core results of $3.63b and $0.47 saw sales slightly ahead of consensus and toward the high end of previous guidance, while core EPS was $0.02 above consensus.   The company took a $150m restructuring/impairment charge in the quarter, primarily related to inventory.  Corning was able to institute price increases in both optical and life sciences, which, along with inventory reductions and “productivity improvements”, which seem to be rationalizing capacity to lower levels more in keeping with current demand, helped profitability and should help to increase margins in subsequent quarters this year.  That said, guidance was for $3.2b to $3.4b, below consensus of $3.58b and (core) $0.35 to $0.42, also below consensus of $0.46.
 
Key Points:
 
Weak Sales Guidance - Corning expects sales to decline between 6% and 11% against a company norm of -5% as a number of business segments see slower than expected demand.  While it is hard to call the return to pre-pandemic demand levels for most CE products a surprise, the rapid change in COVID restriction attitude in China was unexpected, with that event another rain cloud in what Corning was predicting would be a more sunny 1Q and we fault few managements for not anticipating such a radical change in philosophy.  That said, the direction in the display space was obvious by 3Q last year, and while the mantra of serving the customer at all cost was necessary in 2020 and 2021, most managements were slow to respond to what was an overheated CE environment last year.  Corning seemed to be half in and half out as to its expectations for direction in 3Q and 4Q last year, but now seems to have accepted a return to pre-pandemic levels and the uncertainty of China’s recent COVID ‘transition’.  That said, it is easy to be fooled by seasonality and we hope that the company is careful about responding to short-term changes in demand, especially if they are related to building seasonal inventory, as we expect consumers will be a bit more careful about how they spend on CE products this year.
 
Display recovery delayed – Management sees a recovery in the display space now pushed out by at least one quarter.  During the 3rd quarter call, management indicated it felt that the display industry had reached a low point toward fab utilization, and while they were cautious about calling for a quick recovery, their expectation seemed to be toward improving demand and higher utilization rates.  Both October and November did see utilization improvement, but China’s abrupt about-face toward COVID lockdowns, and the resulting rapid spread in December, pushed utilization back to previous low levels.  January has seen little change, which pushes out Corning’s expectations for a display recovery by 1 quarter.  More to the point however is what kind of recovery might be seen as the year progresses, and we expect more of a grinding recovery than a steep one, with only a few industry events or new products to push the space into the consumer spotlight..
 
Incremental improvement each quarter – Management expects sales improvement in 2Q and the 2nd half, although they were less clear about the momentum of such a recovery.  Citing the concept that they were primarily interested in serving their customers during the pandemic, inflation and supply chain issues caused less of a focus on productivity and profitability.   Corning’s focus has changed, and after both price increases and capacity rationalization, the necessity to ‘feed the beast’ is a bit less important than remaining profitable and able to return capital to investors.  While there is a bit more stability in raw material prices, albeit still at higher than pre-pandemic levels, we applaud that return back to maintaining a higher level of profitability by matching current capacity and costs to current demand.  It’s a harder balance to maintain, but given the uncertainty ahead, it is an absolute mandate.
 
While Corning has taken steps to realign itself with the current demand picture, even as we finish January, they were still unclear as to how the quarter would play out, and the cautious guidance reflects that.  The company admitted that it had been surprised by rapidly changing events during 2022 more than once and was certainly less certain about the momentum behind a recovery in a number of their business segments.  With display and specialty materials reaching just south of 50% of total company sales in 2Q 2020, their combined share of company sales has declined to 37.8% (4 year low of 34.5% reached in 3Q), and a return to those heady days seems a difficult case to make, and therefore less dependency on product and glass volume growth from these segments puts considerable pressure on Optical to carry that weight, making Corning more sensitive to the optical space than either display or specialty materials.  While the company hinted as to new products for AR/VR and its close ties to foldable display production, we expect glass volume growth will be modest this year, although we expect pricing will remain stable.
 
We do expect at least some seasonality in the display and specialty materials segments throughout the year, although from a sales perspective 1H comparisons will be difficult, but more will depend on the company’s ability to bring margins up in both segments as optical remains a wild card early this year.  Hopefully a more realistic outlook will hold display and specialty materials inventory and capacity to more reasonable levels, as we expect any bounce back in demand will be a bit more gradual this year, giving a bit more time to relight glass capacity when needed.  While there is no escape from the weakness in the CE space for Corning, at least they have enough business balance to continue to generate positive cash flow and maintain a solid balance sheet, which is more than we can say about many others in the CE space.
 

​Speaking at a conference yesterday Corning (GLW) management indicated that while all other segments are operating in line with 3Q guidance, the display business is not and is expected to come in at or below the previous guidance.  In order to put that in perspective, here are some notes on 2Q Display segment performance and 3Q guidance:
2Q Display Performance

• Display Sales $878m – Down 8.4% q/q – Down 6.5% y/y
• Display Segment represents 24.3% of reported sales & 23.3% of core sales
• Display Net Income $228m Down 3.4% q/q – Down 8.1% y/y
• Glass Pricing – Up slightly

 
3Q Display Guidance
 

• Overall company sales (full year) slightly above $15b which implies (reported) sales of ~$7.715b in 2H, up 5.7% h/h or up 3.7% h/h on core sales.
• Expect 3Q sales flat q/q and up y/y, implies $3.65 to $3.85b
• Expect Glass volume to be down ~15% q/q across industry & company
• Expect flat glass pricing q/q
• Expect TV units to be flat to down y/y

 
3Q Updated Display Guidance
 

• Lower than anticipated glass volume brings overall guidance 3Q guidance to low-end ($3.65b) or below original range, taking at least $100m (single point) from full year unless 4Q is stronger than expected overall.
• 3Q will be the low in quarterly display glass demand
• TV units still flat to down
• Too early for 2023 TV shipment estimate but likely to return to ‘normal’ range of 225m to 235m

 
A 15% volume reduction (already anticipated) would result in 3Q display sales of $746m.  As it seems glass volumes have deteriorated further and pricing expected to be flat, that would imply display sales ~$700m, down roughly 26% y/y for 3Q (down 20% q/q) or about $50m lower than guidance which leaves us with the possibility that either a 20% reduction in glass volume is not enough or there are other segments that are weaker than expected.  We would assume the former, although it could be a bit of both given the macro environment.  Corning indicated that the incremental display glass volume shortfall was a result of the COVID lockdowns in China, despite the insistence of affected Chinese panel producers that there would be little effect on production, with Corning being a far more credible source.
 
Corning did say that on a long term basis they believe the prospects for the display business remain ‘good’ and acknowledged that the pandemic caused ‘advanced purchases’ to be made in the TV space which pushed TV units above the normal range, but while not giving an estimate for 2023 they indicated that TV units in 2023 would likely be back to that ‘normal’ range.  If one looks at the display industry from a capacity perspective, production capacity for fabs above Gen 6, which would be used primarily for TV panel production, make up ~73.2% of overall LCD capacity (100% yield), so the TV space is of great importance to Corning, especially in China where Chinese display glass producers supply primarily Gen 6 and smaller glass substrates and Corning is the share leader in large size substrates.
 
One point that is critical to the glass substrate market is glass prices, which have been stable to positive for the last few years as glass demand has either outstripped or been equal to supply.  While overall available capacity has not changed significantly, given the high cost and technical knowhow needed for new entrants, with the very weak demand seen this quarter, low panel producer utilization rates, and panel prices at or below cash costs, panel producers will be under pressure to reduce costs further.  While they are always looking to bring down material costs, glass is so essential to making LCD panels that sustainable availability has taken preference over price, leading to stable or rising glass prices.  Corning believes that glass substrate pricing has only a small effect on the overall profitability of the TV industry and that rational behavior by the small number of substrate glass competitors, meaning balancing production capacity against demand, is responsible for the stable glass pricing seen in recent years, but we are always concerned that a sustained period of weak panel production, and/or weak consumer demand will push panel producers to negotiate pricing with a bit more emphasis on absolute price. 
 
With the weaker demand seen currently, display glass producers are taking tanks off-line to do maintenance tasks that have been postponed over the last few quarters or years in order to meet demand.  While fewer tanks will keep capacity tight, once relining or other tasks are completed, a decision as to restarting the furnace must be made, with the cost of maintaining a non-producing furnace line a major consideration.  If display demand returns, all will be right in the glass substrate world, but sustained weak demand could put pressure on glass producers to restart idle tanks and to fill those tanks some price concessions could be offered.  We are always concerned about material costs in the display space, but since 2020 the industry has seen what we call ‘artificial’ demand change some of the rules.  Without that demand, do we return to the old normal where glass prices decline a bit each quarter or has the glass substrate industry learned that profitability is more important than share, a lesson not everyone in the display space pays attention to.  If the next two or three quarters do not show signs of improving demand, we would expect glass prices to flatten or go negative later next year.  We give that scenario relatively low odds but given the recent environment they have to be considered.

​Corning (GLW) reported sales of $3.615B down 1.8% q/q but up 3.3% y/y and core sales of $3.762b up 2.2% q/q and up 7.4% y/y but slightly below consensus of $3.78b, while EPS was $0.57 against expectations of $0.56.  Broadly the display segment was weak, along with automotive and specialty materials, although specialty materials performed better than the weak smartphone market it serves.  Optical was strong and is expected to continue to be so and display, which was affected by the utilization cuts in June, is expected to continue to be weak through the 3rd quarter.  Corning continues to see the uncertainty coming from Chinese COVID-19 lockdowns as a key point toward how the full year will play out, with all three weak segments being held captive to the region’s policies.
Given our focus on CE, we note that display sales were down 8.4% q/q and down 6.5% y/y as utilization rates were cut by panel makers in June to give the industry time to absorb excess inventory and (hopefully) stem large panel price declines.  Glass pricing was up slightly in 2Q but Corning expects display glass pricing to remain flat in 3Q despite the lower volumes as a seemingly rational approach by the major display glass producers to take capacity off line is the basis for those expectations.  We do note that until recently display glass producers have been running capacity near full utilization and tank cleaning, repair, and modernization has been postponed.  Now that demand has slowed such work can be done as warranted, but the question of whether that capacity will be returned to production or held in reserve is still an unknown.
We expect the three major display glass producers, Corning, AGC (5201.JP) and NEG (5214.JP) to maintain reduced capacity through 3Q and likely into 4Q, but our concern is more from Chinese glass producers who have yet to prove themselves as other than price competitors.  Given the opportunity to capture share, particularly on the Mainland, price is their leverage as they are subsidized by the government.  As the year will likely generate losses for Chinese glass producers, share gains would serve to bolster their standing with the local and provincial governments so there is a chance that pricing pressure could be seen before the end of the year however we believe that the more rational behavior of the majors will be able to maintain relatively stable glass pricing through the end of this year, with early 2023 being a more opaque pricing environment.
With optical growth offsetting the weakness in display and the specialty materials end market (smartphones), we would expect to focus more on how carrier build-outs are being affected by the current inflationary environment in 3Q and 4Q to gauge how long optical growth will be able to offset display weakness.  While TV set shipments typically improve in 2H, we expect this year will see a weaker 2H than 1H unless prices deteriorate so quickly that consumers feel obligated to take advantage of such discounted pricing.  However, as we have previously noted, there is still high-cost TV panel, component and set inventory to be worked down before the impact of lower panel prices can be felt at the consumer level and while we have seen some component and raw material price declines, they will take some time to work through the supply chain.  Price elasticity remains but the effect of inflation on consumer buying power coupled with IT demand pull-ins earlier this year make for a teeter-totter situation that shows no clear cut direction yet and Corning’s full year grow is quite dependent on the balance between its product categories.  A shift in one direction or another could be the swing factor between the 6% to 8% predicted for the year or adjusted guidance in 3Q.  

​Given the relatively small number of major display panel producers that supply the CE market, it seems surprising that the number of display glass suppliers that feed such businesses is even smaller, however the cost of building and maintaining the facilities needed to produce this high quality specialized glass is extremely high and limits those who have the financial strength to build and sustain those facilities, and to compete financially in that market.  Dominant players, such as Corning (GLW), AGC (5201.JP), and NEG (5214.JP) have built relationships with display producers, with some glass production lines built alongside display production fabs to facilitate the rapid transport of such large and fragile glass substrates without the need for the extensive packaging needed for long-distance shipments.  As the largest substrate (Gen 11) can run to over 11.5 m2 (118.6 ft2 or eight 65” TV panels) and can be less than a millimeter thick, they are extremely difficult to move and even more difficult to transport to other locations.
Given that the production of LCD TVs is based on glass substrates and that a relatively small (15,000 sheet/month) Gen 8 fab line can produce up to 120,000 65” TVs/month, there is a very significant need for fabs to have both substrate inventory and short-term access to supply as a shortage of glass mass production stops, which not only leads to missed display delivery deadlines but can require equipment resets and recalibration of tools remain idle for an extended period, adding to delays.  Therefore it is incumbent on panel producers to maintain strong relationships with the few glass producers that are able to produce the quality and quantity needed, with those relationships being based on contracts that can specify area, unit volume, or percentage of production requirements, which can create an imbalance in glass supply for smaller panel producers.
In addition to the above, the dominance of Chinese LCD panel producers has intensified the desire of the Chinese government to extricate itself as much as possible from the display supply chain, with a long-term focus on display glass given it underlying importance to the industry.  Over the years the Chinese government, along with provincial and city governments have financed and subsidized an number of projects to build a display glass infrastructure on the Mainland, however it has proven more difficult than expected, both from a technological and from a financial perspective.  Chinese display glass substrate companies have made headway over the years and supply smaller glass sizes to a number of Chinese LCD display fabs, but have note been able to reach the quality and quantity levels needed for larger panel sizes where margins are higher and demand is still growing.
Companies like IRICO (600707.CH) and Dongxu Optroelectronics (000413.CH) have either been funded by the government or partnered with foreign glass producers to develop their own more advanced display glass production facilities in China to less the country’s dependence on foreign glass imports, but not all of those projects have turned out to be as easy as expected, even when paired with Chinese panel producers.  Recently Dongxu Optoelectronics gave guidance of another loss for the 1st six months of this year, and while the loss range was slightly less than last year’s 6 month loss, the company has yet to show a profit after years in the business, indicating that even with tax incentives and operating subsidies, the profitable production of display glass requires much production experience and process knowhow.  Dongxu stated that the reason for the loss was the company’s investment in R&D for the development of display materials, production line costs, and the amortization of intangible and fixed assets during the early stage of expansion, but it also includes interest payments on bank loans and lower sales as the display business contracts.
Further, the company tried to diversify a few years back, expanding into LED based products and glass related automotive products and we believe is one of the automotive glass suppliers to LG Display (LPL), but the company side businesses generated even larger company losses and helped to produce quarterly losses for the company for the last three years.  In 2020 the company refocused on developing a glass product line for OLED displays and lessened its focus on non-glass products but this has done little to stem the losses. In fact Dongxu failed to repay principal and interest on bonds it issued in 2016, which amounts to a bit over $605m in the aggregate and while the company, as part of its expansion, created its own finance company, the company it limited in what it can withdraw from the financing unit.  Dongxu itself has a capital book balance of 9.4b yuan ($1.39b US) but 91.5% of that capital are restricted funds and the book balance of interest bearing liabilities is 24.87b yuan ($3.681b US) of which 8.1b yuan (~$1.2b US) remains unpaid, making it difficult to see how the company can extricate itself from its financial issues.
While the company’s parent Tunghsu Group (pvt) has agreed to buy ‘up to 1.5b yuan worth of shares within six months and the company is working toward extending its debt maturities despite the plan’s initial rejection by shareholders, this all goes to point that throwing money at an industry does not always guarantee dominance or even success, especially in an industry where some of the participants have been suppliers since the industry began  We expect Dongxu to survive in some form given the potential support of Tunghsu Group and potentially the local government given that the company has over 4,000 employees, but the desire for a localized supply chain in a global market is not always the answer to the natural or political conflicts that occur in the course of doing business on an international basis, and while China has been successful in a number of instances in the CE space, nothing is guaranteed.

​AGC (5201.JP), aka Asahi Glass, a competitor to Corning (GLW) and NEG (5214.JP), has raised their 1H sales and operating profit guidance.  Sales, which were original forecasted to be ¥870b yen, have moved up by 11.5% to ¥970b and raised its 1H operating profit forecast by 21%.  The new sales forecast is 7.2% above last year’s 1H, while the new Op Profit forecast is up 20.8% over the same period last year.  The original forecast was made by the company on 2/8/22.  While we were hoping that the increase might have been associated with the company’s display glass business, Asahi indicated that the company’s caustic soda (Sodium Hydroxide – NaOH – aka lye) business was positively affected by price increases in the chemical, which is used in paper processing, soap manufacturing, and in the refining of aluminum, along with a number of food preparation processes.   The company also indicated that its PVC (polyvinyl chloride) business, among the top 3 synthetic polymer plastics produced globally, saw higher than expected prices in Southeast Asia during the 1st half.  The company was also able to pass on the higher cost of raw materials and fuel prices to customers in its architectural glass business in Europe.  No mention of the display glass business.  We will likely have to wait until the call next month.

There are those that walk around and use smartphones that have cracked screens.  While Corning’s (GLW) Gorilla Glass™ and Asahi’s (5201.JP) Dragontrail™ and their predecessors have gone a long way to keep smartphone screens intact, along with the hundreds of protective cases available for almost any smartphone brand, there are times when phones fall on bathroom floors or concrete train platforms with the result a cracked screen.  Getting a screen fixed if you do not have a repair plan attached to your phone can be an expensive and time consuming task that leaves you without a phone for some indeterminate period.
For a short time, if you happen to have a particular Samsung (005930.KS) smartphone, you can get your phone’s screen repaired for the bargain basement price of only $50, and this is a bargain for anyone who needs a screen repair when compared to the cost of replacing a damaged screen at other times.  Looking at Samsung’s entire line of smartphones, the top of the line Galaxy Z Fold 3 ($1,799), the cost of an inner screen replacement for that phone is $479, which is 26.6% of the initial price of the phone and for a screen replacement for any of the three fold models (Fold, Z Fold 2, Z Fold 3), the average cost to repair the inner screen is 28.1$ of the initial cost of the phone and the cost for the lower priced Galaxy Flip line runs to 35.6% of the initial price of the phone..
Of course, foldable screens are going to be more expensive than most, so we take it a bit further and calculate the cost of replacing the rest of the Samsung Galaxy line  back a few years to see the cost for other more ‘normal’ display replacements.  The average cost to replace a screen on a Galaxy S series (Flagship) smartphone runs between 19.9% and 30.4%, while the cost for the now defunct Note line ranged between 20.7% and 25.7% of the initial cost, but what turns out to be the most expensive replacements are those for Samsung’s mid-to-low tier line, the A series, where the cost of replacing screens for these budget phones ran from 25.9% to 61.2% of the initial price.
There are some rules during the promotion however:

• You must be a resident of the US (50 sates & DC)
• You must mail-in your phone (No walk-ins)
• Does not apply to frame or back glass
• No Samsung partners are participating (including Best Buy (BBY))
• You have to open a Samsung account
• The promotion runs from 6/13 to 6/27
• Eligible phones –
  • Any Galaxy S phone from the S9 and new series except the S21 FE & S20 FE
  • Any Galaxy Note 9 or newer phone
  • Any Galaxy A phone (No ‘J’ series phones)

We have not seem many of these promotions so if you have a cracked screen on any of the above Samsung smartphones you should take advantage of the offer.  Perhaps Samsung is trying to reduce replacement screen inventory, but whatever the reason such offers should be taken when they are present and this one will only last another two weeks.  Unfortunately you will be without your phone for some period of time (no timeframe given) but burner phones at Walmart (WMT) are as low as $20.00 and you can always justify a back-up phone for those times when yours slips under the couch cushions for a few days.