​Huawei (pvt) has begun arbitration proceedings against the Kingdom of Sweden after the country targeted Huawei specifically by excluding them as a supplier of 5G network products and services and further requiring the company to remove all of the company’s installed equipment by January 1, 2025.  The arbitration will take place in the World Bank Group’s International Center for Settlement of Investment Decisions after an appeal in the Swedish court confirmed the decision made in June of 2021 by Sweden’s Post & telecom Authority.  With Sweden the 2nd country in Europe (the UK was 1st) to officially ban the company, relations between China and Sweden have been strained with Ericsson (ERIC) expecting some retaliation from the Chinese government, especially as the suit begins.  While no damages were specified in the suit, public media says the initial compensation sought was over $500m but could go considerably higher if Huawei can make the case that Sweden has violated its international responsibilities toward Huawei’s international business.

Honor (pvt) is an unusual smartphone brand in that it is state-owned, having been sold to the Shenzhen government (98.6%) and a group of Honor’s former distributors and partners (1.4%) by its former parent, Huawei (pvt), in order to shield the company, formerly Huawei’s mid-range smartphone line, from US trade sanctions that have severely limited Huawei’s ability to compete in the smartphone market.  In making the split, which raised ~$15b for Huawei, Honor no longer had access to Huawei’s vast IP, huge R&D budget, or Huawei’s marketing, but at the same time is no longer burdened by the US trade restrictions that have cost Huawei much of its smartphone business.
The ~7,000 employees became responsible for their own product development and marketing in November 2020 and was able to release its first purely ‘Honor’ smartphone in early 2021 and has climbed to a ~4.8% share of the global smartphone market heading into 4Q 2021.  More to the point Honor has just released its first foldable smartphone, with a delivery date of January 18, which puts it in with the likes of Samsung, Huawei, Oppo (pvt), Xiaomi (1810.HK), and Motorola (MSI), all of whom have foldables which range in price from ~$925 to almost $2,200.  While the Honor Magic V does not have an official price, it is expected to sell for between $1,500 and $1,600, putting it in roughly the same price category as the Samsung Z Fold 3.
All in, there is nothing outstandingly different about the Honor Magic V relative to other foldables, but as a first entry for a relatively new company, without the resources of Huawei, it’s a good start.  While Honor does have a good following in China, they still face intense competition from other Chinese and outside brands, so their success in the foldables realm is not assured.  That said, they do have the Shanghai government as their primary funding source, which gives the local government a large vested interest in Honor’s success, which certainly will not hurt when it comes to allocating resources, particularly financial ones. 

​Huawe (pvt), whose smartphone business has been devastated by US trade sanctions, is still hoping to regain some ground in the global smartphone market and to that end is preparing to release their next foldable iteration, with a design similar to Samsung’s Z Flip line.  The new foldable, tentatively named the Mate V, would be the fourth foldable for the company after the Mate X (11/2019), the Mate Xs (3/2020) and the Mate X2 (2/2021), none of which have been ultimately successful.  As new leaks and renders are beginning to appear, it seems that Huawei has moved from the full-sized foldable to the pocket-size foldable that Samsung and Motorola (MSI) have championed.
A number of questions remain about the Huawei device however, and while some are excited about the new hinge system that Huawei has developed, we wonder how the company will attempt to convince those outside of China that such a phone can compete with Samsung’s Z-Flip, which runs a Qualcomm (QCOM) Snapdragon 888 5G Chipset produced on a 5nm node and runs on Android 11, while the Huawei phone is still expected to have no Google GOOG) Play services that limits its ability to be sold outside of China.  We also wonder what processor will be used in the Mate V, as Huawei has limited or no access to 5nm nodes, and while this might be an issue for gamers, who demand the highest performing CPU, it will be more of a marketing issue for Huawei, having to convince buyers that the device can perform as well as those produced at 5nm.
There is also a question as to the size of the secondary screen, which is still in question.  As this style foldable is a small device when closed, the secondary screen is more a message display than one that will be used for movies or other media.  The Samsung Z Flip 3 has a 1.9” secondary screen, so the Huawei device should have something close to that size, but questions remain as to whether it will have any secondary screen or a 1.35” display that Huawei has specified in patents.  As Samsung is selling the Z Flip 3 for $899 (128GB) and throwing in a pair of Galaxy Buds2 ($149 list), Huawei will need to be competitive just to stay in the ball game.  Hopefully they have been able to cut hinge costs and get a local OLED panel supplier to give them a good price for the foldable display, but it is going to be an uphill battle unless they have some featured ‘surprise’ built into the device.  We will have to wait until January (CES) or February (Mobile World Congress) to get full details, but we are keeping expectations low, especially with the Google Pixel Fold, the company’s first foldable, also expected around the same time.

Small panel OLED demand increased display shipments in 3Q by 26.6% (16.5% y/y), with flexible OLED displays driving almost all of the q/q shipment growth.  The biggest increase from the demand side came from Apple (AAPL), who more than doubled its small panel flexible OLED panel purchases in 3Q in preparation for the iPhone 13 rollout, and Samsung Electronics (005930.KS) whose purchases were up 50% q/q.  Chinese brand small panel flexible OLED purchases were mixed, with Huawei (pvt) and Oppo (pvt) declining, and Xiaomi (1810.HK), Vivo (pvt), and Honor (pvt) increasing, albeit at much lower volumes, as shown in Fig. 1 – 3[1].
On the supply side Samsung Display (pvt) saw a 101% q/q increase (+15.7% y/y)  in flexible panels shipped in 3Q while LG Display (LPL) saw a 43.0% increase q/q (+68.5% y/y) as they fed the Apple iPhone supply chain, while BOE (200725.CH) saw an 8.1% q/q increase (+58.4% y/y).  BOE has recently celebrated its official entry into Apple’s iPhone OLED display supply chain, which will likely lead to improving shipments in 4Q.  Samsung Display’s share of the small panel flexible OLED market returned to 62.2%, a more normalized level, after a weak 2Q (47.6% share), although down from last year’s 3Q share of 70.0%, and the combined South Korean suppliers garnered 74.8% of the small panel flexible OLED panel production market, with the remaining 25.2% belonging to combined Chinese small panel flexible OLED suppliers.  When looking at both the rigid and flexible small panel composite, Samsung Display holds a 71.5% share with Chinese suppliers at 21.0% vs. 17.0% in 3Q last year.
On an overall basis, small panel OLED production continues to grow despite weak overall smartphone sales as the overall share of small panel OLED continues to grow across the smartphone market, reaching over 50% in 3Q based on our composite small panel OLED shipment data and our composite smartphone shipment data.  This year the number of mobile devices other than smartphones that are using OLED displays continues to grow, particularly notebooks, and while this will not have a significant impact on unit volume, it will continue to increment area shipments, which set the tone for capacity expansion plans.  There are few OLED suppliers that are not expanding capacity, and while much of these plans are for IT based OLED products, we expect the small panel and large panel OLED markets to become more converged as Gen 6 OLED fabs, usually used for small panel OLED production, are still efficient up to 32” panel sizes, making them viable for many IT products which might be considered ‘large panel’.  All in, OLED growth continues based on share growth in more mature applications and to early stage penetration in new mobile device markets.


[1] Note:  Figs. 1 -3 are all drawn to the same scale to show the lower proportion of rigid OLED displays compared to flexible OLED displays.

​Huawei, formerly China’s largest smartphone brand, has faced serious sales declines due to the restrictions placed on the global supply chain by the US government.  Originally limiting access to the Google (GOOG) Store, ending the company’s ability to provide Android OS updates, and then limiting any global supplier that used US components or software in their product development, essentially removing Huawei’s ability to access foundry capacity outside of China. 
Huawei not only struggles with the impact of these limitations in its smartphone business, but has faced strong US opposition to its telecommunications products, which the US government alleges such products allow for call surveillance by the Chinese government.  Huawei sold part of its smartphone business (Honor brand) last year, allowing it to survive outside of US restrictions, but is no longer associated financially with the brand.  While Huawei’s management remains optimistic about the company’s future and has been developing businesses that are not constrained by US trade issues, the mobile phone business continues to suffer, especially outside of China where the necessity for the Android OS is paramount, and despite a recent pep rally where the company predicted that “…the king will return in 2023…” unless something changes on the US trade front, they will remain constrained outside of the Mainland.
That said, there is some talk that Huawei is considering licensing its smartphone technology to PTAC (China Postal & Telecommunications Appliance Company), a state-owned distribution network, which will then produce an independent brand of smartphones based on Huawei’s design.  PTAC has sold Huawei product on its network in the past but under the Huawei brand.  While this would certainly help Huawei to regain at least some of the revenue it has lost in the smartphone business, it remains unclear whether such a step would remove Huawei far enough from the final product that it would not be part of the US restrictions, and while it might take some time for the US DOC to follow the path to such a transaction and maintain a lid on any Huawei ‘inspired’ product, it would likely catch the eye of those China Hawks that continue to maintain pressure on the current administration to keep Huawei from competing in the smartphone market.
While it is a tenuous concept that the Chinese government has, is, or will use intentional backdoors in Huawei’s telecommunication equipment, we believe the real basis for the secondary restrictions that limit Huawei’s smartphone business, were based in the egoistic machinations of individuals in the Trump administration, who wanted to make sure that China would not be able to ‘out 5G’ the US, nor gain traction in the semiconductor business, the shining star of the US technology effort.  Given that Huawei is now ‘the face of China’, we doubt any transaction that Huawei might accomplish to generate revenue will garner detailed inspection by the US and likely fall quickly under the current restrictions.  China is too easy a political target to let even a once or twice removed participant bypass restrictions, especially one that involves a state-owned entity.

​When things get tough companies have two choices.  They can knuckle under and hope that a cycle will flip and things will eventually right themselves, not always the ideal choice, or they can reinvent themselves.  Many of those that took the first path are no longer with us or have managed just to stay above water, while a number of the ‘reinventers’ are among the most well-known brands.  An example of the former would be Timex (pvt) a well-known watch company that reinvented itself in 1982 by releasing the Sinclair Personal Computer, the first PC to sell for less than $100.  Unfortunately the Sinclair was so small that it could almost nothing, and within two years the company went back to exclusively selling watches. 
On the opposite side, there is Netflix (NFLX), who went from DVD rental to streaming and became the largest streaming service on the planet, or Amazon (AMZN), going from book-seller to selling everything as the world’s largest on-line retailer.  So the idea of company ‘reinvention’ is not a new one, but is also a risky business, and in some cases it is not a voluntary choice.  Take Huawei (pvt) formerly the world’s largest provider of communication equipment and at times, the largest smartphone brand.  US trade restrictions have caused Huawei to see its smartphone business, especially outside of China, almost disappear, and anti-China sentiment based on claims that Huawei’s telecommunications equipment allows calls to be monitored through intentional ‘backdoors’, has made it difficult for the company to sell such equipment to those closely allied to the US.
Ren Zhengfei, the company’s founder and largest shareholder recently issued a statement at its “No Retreat is the Road to Victory – Legion Formation Meeting” as a battle cry to workers and management.  "I think peace is achieved. We must use hard work and heroic sacrifices to create a peaceful environment for the next 30 years, so that no one will dare to bully us again. We are doing it for ourselves and also for the country. To die for the country, the sun and the moon shine; the phoenix nirvana, man and sky admire you. History will remember you, wait for the day when we drink the celebration wine together, listen to the thunder in the silent place." 
Whether this speech served as a rallying point for company workers or not remains to be seen, but the company has joined the ranks of the ‘reinventers’ this year by creating a number of new business units, such as the Customs & Port Corps, the Smart Highway Corps, the Data Center Energy Corps, and the Smart Photovoltaics Corps, and earlier this year set up the Coal Mine Corps, all of which are intended to diversify the company’s revenue base and create new income opportunities.   While the coal mining business in China has been a pointof focus recently, given China’s power reduction mandates, Huawei is not actually mining coal, but providing an IoT system based on its own Hongmeng operating system to the mining industry to make mines ‘intelligent’ through ‘digital transformation’.
As Huawei is still a large company, with $71.2b in sales for the 9 months (down from $104.94b last year) they have a better than average chance that over time some of the new businesses can begin to generate sales to offset the smartphone and com business shrinkage, but Huawei does have one advantage in that it is private and does not have the same accountability to shareholders that public companies in the US would have.  That said, while all of said new businesses are based on the company’s move into IoT, developing substantial customer bases in these new markets will take time.  The US has allowed some business between Huawei and US suppliers, but such usually stirs up negative sentiment from China hawks in Congress.  Huawei’s IoT business is not based on leading edge semiconductor processes, which gives them the ability to produce much of the needed silicon on the Mainland, avoiding US restrictions, but we expect there will have to be many more ‘rally’ meetings and speeches before the company is able to see a return to its previous glory.  Reinvention takes time.

​A recent reveal of licenses granted to suppliers to Huawei (pvt) and SMIC (688981.CH), both of whom are on the US ‘entities’ list, has indicated that between November 2020 and April of this year 113 export licenses were granted to Huawei suppliers, worth ~$61b, and an additional 188 licenses worth $42b were granted to suppliers of SMIC, China’s largest semiconductor producer.  The data goes further in that it shows that while only 69% of requested licenses from Huawei suppliers were granted, more than 90% of requests by SMIC suppliers were allowed.  Partisan politics took the data for a ride with China hawks stating that the President is not taking the economic and security threat from China seriously and that transparency and public scrutiny on how the nation transfers it technology to adversaries is in our national interest.
The Commerce Department did note that the data was an ‘arbitrary snapshot’ of approvals and risks misrepresenting the national security determinations made by the government.  Even former Trump officials chimed in stating that the document is not an accurate window into the licensing process for companies on the entity list, especially when it was found that 80 of the 113 Huawei supplier licenses and 121 of the 188 SMIC licenses were for non-sensitive items that only required a license because the companies were on the list, and that $87b worth of Huawei licenses were approved after its inclusion on the entities list during the Trump administration.
A recent Chinese document concerning a potential new semiconductor fab to be built by SMIC has indicated that the company is focused on more mature nodes, rather than trying to compete with Taiwan Semi (TSM) or Samsung (005730.KS) at 7nm or less.  We expect while there is certainly demand for those nodes on the Mainland, there would be much difficulty in obtaining the wide variety of design and production tools that would be needed to build a leading edge semiconductor fab in China, and while the current administration might be a bit more inclined to authorize trade exceptions, it doesn’t seem that the US is giving away any leading-edge technology, nor is it allowing those suppliers outside of the US much leeway in bypassing US trade restrictions. 
Given the potential for an extended semiconductor shortage over the next few years, it might be in the best interests of the US to keep some of those trade channels open with Huawei and SMIC rather than focusing on the political outrage that has followed the data.  Semiconductor price inflation and shortages can take a nasty toll on the global (and US) economy and while we don’t have to hand over anything of consequence to get some reciprocal trade, a few licenses are not going to tip the balance of ‘technology power’ to the Chinese.

​Florida Senator Marco Rubio and a number of other Republican senators called on President Biden to add Honor (pvt), the independent spin-off of Huawei’s (pvt) smartphone business, to the ‘entities’ list that would keep company’s in the US or those using US developed equipment from sourcing product to the Chinese company.    Rubio described Honor as an ‘arm’ of the Chinese government that is now able to access US technology that has been denied to Huawei.  With the spin-off of the Honor business, Huawei has stated that they have no financial or management influence over Honor, which has given the company the ability to access the Google App store and associated products, which opens the company’s products up to the world market, while Huawei remains unable to do so, which has severely limited its smartphone business.
Rubio’s letter goes further, stating that the Chinese government has been able to dodge a ‘critical American export control’, and by failing to act the US Department of Commerce is setting a dangerous precedent, ‘and communicating to adversaries that we lack the capacity or willpower to punish blatant financial engineering by an authoritarian regime.’  Last August a group of Republican Congressmen also called on the DoC to add Honor to the list, under the assumption that keeping Honor ‘unlisted’ would allow Huawei access to semiconductor foundries and equipment that has been restricted by the listing, although no proof of Huawei’s alleged access to the Honor supply chain has been given in either instance.
Honor might have caused this latest political diatribe by mentioning earlier this week that it had ‘succeeded in confirming cooperation with a number of supplier partners in the early stage” and that upcoming Honor 50 smartphones would include Google Mobile Services, the most onerous part of the Huawei ban.  This seemed to have attracted the attention of China hawks and put Honor back in their field of vision.  While Honor might find it necessary to announce its current independence from the Huawei ban, it might have served them better to wait until they were able to both secure substantial component inventory from foundries and to release at least one major product using Google services and letting the ‘chips’ fall where they may after that.  Now the increasing pressure to focus on China as an adversary will likely pull in any decision by the current administration and could end Honor’s elation over being able to release its first truly global smartphone.

​China Mobile (601728.CH) is the world’s largest telco by subscribers (945.5m as of 6/2021).  As such, they let some of the biggest telecom projects globally, all of which are within China or Hong Kong.   Earlier this year China Mobile let an equipment contract for its 5G 700MHz network project worth a maximum of 7.5b yuan (~$1.16b US), which was won by Huawei (pvt), and strangely enough China Mobile has just awarded the service part of contract to, you guessed it, Huawei, which would total out the project at ~$2.32b US.  Huawei does have to share both contracts with local competitor ZTE (000063.CH) at a 50/50 split, but the totals are large enough that even 50% of the deal is a significant amount.
While the equipment part of the contract was open to competitive bidding, the service segment was only open to two bidders, Huawei and ZTE in order to maintain brand support service for the equipment, but there was likely a bit of a bias toward using Huawei and ZTE as they both remain on the US trade sanctions list and have seen their global telecom business severely limited by US pressure.  While open bidding procedures were used for the equipment part, it seems that unless Huawei and ZTE were going to low-ball bids, they were going to get the contracts, as while China Telecom has publicly trading shares, the company is actually state owned, and therefore directed by the government toward serving the good of the people, which in this case means keeping Huawei’s and ZTE’s telecom businesses strong despite US intervention.  It’s nice to have a population of 1.45b behind you, even if they don’t know they are.

​The FCC announced that it will begin accepting petitions for the “Secure & Trusted Communications Network Reimbursement Program” that is designed to reimburse “Advance Communications Service Providers”  who have been using Huawei (pvt), ZTE (000063.CH), Hytera (002583.CH), Hikvision (002415.CH) or Dahua (002236.CH) equipment that was purchased on or before June 30, 2020.  The later names include security cameras.  This part of the program is for those carriers that have 10 million or fewer customers.  The filing window opens on October 29 and closes on January 14, 2022 with the FCC releasing a public notice on those applications that have been accepted before March 31, 2022, although that date can be extended for an additional 45 days.  In 2Q 2022 the FCC will issue funding allocations and will begin accepting invoices for actual cost claims later in 2Q ’22.
The program requires considerable verification of the equipment to be replaced and all removal work must be done by 3rd party providers so verification can be made, but the FCC will only consider replacement costs to be reasonable if they compare to what the provider incurred to install the original equipment., although the substitution of new 5G equipment for replaced 4G equipment is considered valid.  The FCC provides a cost estimate ‘guide’, although individual applicants can document expected costs more specifically if they vary from the guidelines, however the total funding allocation for the program is capped at $1.9b currently.