​The Russian invasion of Ukraine presents a difficult problem for many CE companies as the Russian market for CE products is big enough that companies don’t want to burn bridges but are under pressure both from the US government and from consumers to suspend or end operations in the country.  Most recently Samsung Electronics has announced it will suspend shipments to Russia but has not indicated whether it will close its stores and Apple (AAPL) has stopped all product sales to Russia, closed its stores, and limited Apple services, however Xiaomi (1810.HK) and a number of other Chinese CE firms have yet to make a decision as to whether to continue to serve Russian customers.  Dell (DELL), HP (HPE), Google (GOOG), Apple (AAPL), Intel (INTC), AMD (AMD), Oracle (ORCL), SAP (SAP.GR), Amazon (AMZN), Meta (FB), Netflix (NFLX), Roku (ROKU), Taiwan Semi (TSM) and Microsoft (MSFT) have all suspended operations or shipments to Russia and we expect many others to join the list this week.
While the Russian smartphone market is relatively small at ~31m units, with Samsung (#1 share) and Apple (#3 share) out of the way, Xiaomi could move into 1st place if they remain.  That said, is it worth the risk of being sanctioned by the US given they use parts made in the US or by US equipment.  Probably not but most Chinese companies do not seem to be rushing to make such decisions quickly and those that are already on US trade restrictions lists, such as Huawei (pvt), ZTE (000063.CH), and SMIC (688981.CH), will likely keep their Russian relationships intact.
The list of US and foreign CE companies that have suspended Russian operations continues to grow but there are many that are slow to take action and seem more concerned as to how any operational changes in Russia would affect their bottom line.  Japanese glass supplier Asahi (5201.JP) made the following statement: “AGC Inc. hereby expresses that we are deeply concerned about the situation in Ukraine and hope for peace to be restored as quickly as possible.  The impact of the situation on AGC Group and status of its business operations in Europe and Russia are as follows.  We will continue to monitor the situation closely and take appropriate actions.”  This all seems to be a ‘if things start to affect our business, we will let you know”, rather than a condemnation of Russia’s overt acts, surprising from a company whose glass appears in many CE devices shipped to the US, risking social backlash or violations of US trade policy.  That said, there are still many US and foreign CE companies that have yet to make a statement as to their stance on Russian relations, but the continuation of hostilities over the weekend will likely push many CE companies to limit, suspend, or end their relationships in Russia.

​The trade prohibitions that have been placed on Russia in light of its Ukrainian incursion are a burden for US companies that buy or sell in Russia, but they are even more of a conflict for Chinese companies that buy or sell with both the US and Russia.  Chinese companies face two problems with the US/Russian sanctions.  First, the Chinese government’s distaste for supporting such sanctions, which could lead to pressure from the Chinese government to maintain trade with Russia, and second, the potential for sanctions by the US for those Chinese companies that ignore the sanctions.
When the US placed sanctions on Huawei (pvt) for allegedly doing business with Iran, Canada held Huawei’s CFO under house arrest for 1,000 days once the US asked for extradition, and a multitude of foreign companies that supply tools, software, and production capabilities in other countries have joined with the US in its further sanctions against Chinese companies placed on the ‘entities list’ by the DOC.  We expect similar cooperation from foreign companies in reference to the Ukraine conflict, but those Chinese companies that routinely trade with Russia could face severe financial repercussions if they continue to do business in the Soviet Union, both as fines for US trade violations and the loss of business with US companies as a result of such violations.
Lenovo (992.HK), based in Hong Kong, quickly joined the US in halting sales to Russia but faced considerable backlash in country and has yet to confirm its official cooperation with the US, and China’s foreign ministry spokesman commented that ‘China is not in favor of using sanctions to solve problems and furthermore opposes unilateral sanctions that have no basis in international law’, making clear the Chinese government’s official position.  That said, while Russia’s semiconductor market is relatively small for Chinese manufacturers, there are many other products, such as high-end computers, automotive parts, and smartphones sold to Russia, amounting to ~$146.9b last year and many such items include parts made in the US, designed with US equipment or based on US IP, and on the other side, Russia is a supplier of a number of energy and agricultural products to China, so the conflict will not be an easy one to solve.   Much will depend on the Chinese government’s resolve in maintaining a strong stance against sanctions while looking at the possibility of serious (more serious than those already existing…) problems with the US that could further deflate the Chinese economy and expand the already growing number of companies on the US entities list.

​On Monday Toyota (TM) shut down all of its plants in Japan because of a cyber-attack on a supplier that was linked directly to Toyota’s parts management supply system.  While Toyota was able to bring the plants back up the next day, full restoration at the digital level will take more time.  This type of cyber-attack has become more commonplace both in Japan and in other regions and is based on a piece of malware called Emotet that is considered by the US Department of Homeland Security as one of the most costly and destructive forms of malware, costing ~$1m per incident to clean up.
This malware is a Trojan that in simpler forms has been around since 2014 and was intended to be used to steal information in banking systems, but has morphed into a more flexible Trojan that looks like an e-mail or similar clickable document.  Once the document is opened, Emoet can use a number of different methods to spread across computer systems, using contact and other lists to generate e-mails that look even more realistic than the original, indicating “Your Invoice”, “Payment Details”, or an upcoming shipment from a well-known company.
Emotet is smart however and can recognize when it is in a ‘sandbox’, essentially a security tool that allows the observation of malware without letting it loose on a computer system, and it also gives the attacker the ability to upgrade the malware while it is installed on a system, giving it the ability to stay a step ahead of security trackers, which is why an attack using Emotet on the city of Allentown, PA needed Microsoft’s (MSFT) response team to come in and  clean up the mess the program caused.
While Emotet is a sophisticated piece of malware and can also be used to deliver other viruses or Trojans while it collects information or executes a ransomware attack, it is identifiable, which should keep most sophisticated computer users from accidentally infecting systems, however once it has infected a system, it can use some of the data it has collected to product even more realistic looking e-mails that are harder to recognize and easy to mistake for legitimate communication from a friend or supplier  The answer is to keep all computers updated and patched, while being extremely careful about opening any e-mail that is not easily identifiable as legitimate.  Looking at the address of the sender is at least a start and any deviation from the norm like ‘[email protected]’ or ‘[email protected]’ should keep you from being tempted, even when the e-mail looks legitimate, and it is better to have missed an e-mail than to open one that sets off a chain reaction that could shut down the production of 13,000 cars for a day or two and possibly drain your bank account or cyber wallet.

In response to Russia’s invasion of Ukraine and its recognition of two independent states that are part of the country, the US Bureau of Industry & Security has issued a number of sanctions under the Export Administration Regulations that have been primarily reserved for individuals, institutions, and companies that the US government sees asa threat to US security.  The new measures impose a Commerce Control List for Russia, adds two ‘direct product’ rules specific to Russian military end users, other than food and medicine, and Russian government and state-owned end-users.  Further the rules impose export and transfer rules on the ‘so-called’ Donetsk People’s Republic and Luhansk People’s Republic regions of Ukraine and Crimea.  As with other entities on the list, all transactions with list members requires a license that would be granted by the DOC.
While the full text has not been released, what we have seen so far are restrictions including items that while are not sensitive technology components, tools, or software, but can be used to produce them by Russian end-users, similar to those placed on Huawei (pvt).  There are over 45 specific Russian government entities that are being added to the list, primarily research institutions, aircraft manufacturers, and similar companies, while two companies are being added after attempting to acquire US origin items in support of ‘nuclear explosive activities’.  The list of ‘new entries’ is below:
Admiralty Shipyard JSC; · Aleksandrov Scientific Research Technological Institute NITI; · Argut OOO; · Communication Center of the Ministry of Defence; · Federal Research Center Boreskov Institute of Catalysis; · Federal State Budgetary Enterprise of the Administration of the President of Russia; · Federal State Budgetary Enterprise Special Flight Unit Rossiya of the Administration of the President of Russia; · Federal State Unitary Enterprise Dukhov Automatics Research Institute (VNIIA); · Foreign Intelligence Service (SVR); · Forensic Center of Nizhniy Novgorod Region Main Directorate of the Ministry of Interior Affairs; · *International Center for Quantum Optics and Quantum Technologies LLC; · Irkut Corporation; · Irkut Research and Production Corporation Public Joint Stock Company; Joint Stock Company Scientific Research Institute of Computing Machinery; · JSC Central Research Institute of Machine Building (JSC TsNIIMash); · JSC Kazan Helicopter Plant Repair Service; · JSC Rocket and Space Centre – Progress; · Kamensk-Uralsky Metallurgical Works J.S. Co.; · Kazan Helicopter Plant PJSC; Komsomolsk-na-Amur Aviation Production Organization (KNAAPO); · Ministry of Defense of the Russian Federation including the national armed services (army, navy, marine, air force, or coast guard), as well as the national guard and national police, government intelligence or reconnaissance organizations of the Russian Federation; · Moscow Institute of Physics and Technology; NPO High Precision Systems JSC; · NPO Splav JSC; · Oboronprom OJSC; · PJSC Beriev Aircraft Company; · PJSC Irkut Corporation; · PJSC Kazan Helicopters; · POLYUS Research Institute of M.F. Stelmakh Joint Stock Company; · Promtech-Dubna, JSC; · Public Joint Stock Company United Aircraft Corporation; · Radiotechnical and Information Systems (RTI) Concern; · Rapart Services LLC; Rosoboronexport OJSC (ROE); · Rostec (Russian Technologies State Corporation); · Rostekh – Azimuth; · Russian Aircraft Corporation MiG; · Russian Helicopters JSC; · *SP Kvant; · Sukhoi Aviation JSC; · Sukhoi Civil Aircraft; · Tactical Missiles Corporation JSC; · Tupolev JSC; · UEC-Saturn; · United Aircraft Corporation; United Engine Corporation; and · United Instrument Manufacturing Corporation 
​

RCEP, or the Regional Comprehensive Economic Partnership, is a free-trade agreement that has been bandied about among Asian-Pacific nations for over 10 years, with over 30 sessions of negotiations during that time period.  The countries shown below have accepted the results of the negotiations and all but three (below) have submitted final ratification of the agreement, although the treaty took effect on 1/1/2022 for those who have fully endorsed the pact.  When all have signed, the agreement would cover ~30% of the global population and ~30% of global GDP, making it one of, if not the largest trade bloc in history, although India bowed out of the negotiations tacitly in 2019 and while still leaving the possibility open, is not part of the group.  The US was also a potential member but dropped out of the negotiations under the previous administration’s direction.
The objective of the plan is to specify a number of rules, procedures, standards, services, and remedies between the member countries by establishing a free trade area that will ‘progressively liberalize and facilitate trade in goods among the parties through progressive elimination of tariff and non-tariff barriers on substantially all trade goods among the parties,’ by creating a mutually beneficial economic partnership framework.  The agreement goes on for many pages, much of which is specifics about things like what constitutes the basis for a product’s origination location, details of payments and transfers, and the redress for subsidies that might create an unbalanced trade situation,
While it is difficult to anticipate what such an agreement could do for the Asian-Pacific economy, a Brooking’s note projected that the agreement could raise global national incomes by an annual $186b in 2030 and raise trade among members by $428b and non-members by $48b, with the greatest benefits likely falling to China, Japan, and South Korea.  RCEP overlaps with a number of other Asian-Pacific trade group agreements as shown in Figure 1.  We expect it will take quite some time for tariffs and other trade barriers to be reduced to zero, however having a framework and a system for redress will at least give process to a very complex but higher beneficial agreement for the members.

Global warming is a fact, despite what some say to the contrary, but heat has been a problem for the global population since time began, and only with the development of electricity could a way be found to reduce the temperature in homes and businesses to any significant degree.  In 1901 Willis Carrier built the first modern air conditioning system and by 1931 window-ledge AC units became a household want, despite their exorbitant cost ($416 then which is the equivalent of $8,295 today).  As the home air conditioning market developed, the refrigerant used to allow those units to cool everything from homes to food storage facilities, migrated from a number of toxic and/or flammable gases to the commonplace refrigerant known as R-22 or Freon. 
Little attention was given to the fact that the release of Freon, a hydrofluorocarbon, was detrimental to the ozone layer and some of the replacements that were touted as ‘non-ozone layer toxic’ turned out to be so but still had extremely high GWP (Global Warming Potential) with atmospheric lifetimes lasting for multiple decades.  As of 2020 Freon production was halted (mostly) and R-410A, known as Puron was the alternative refrigerant used in all residential A/C units produced however Puron also has a high GWP index and as of 2023, there will be another switch to R454B, known as Opteon, or R32 (No product name and today we noticed that LG Electronics (066570.KS) was advertising what it calls “Korea’s first eco-friendly refrigerant system air conditioner” starting next month
The new system, which uses R32 as a refrigerant, is cited as having a GWP that is only 30% of the previous refrigerants (meaning Puron) and uses 20% less overall refrigerant, all of which is true, but LG has been using R32 in Europe and India since 2018 as it was classified as a ‘weakly flammable material’ in Korean until the safety standard was changed in August of last year.  As of January 2023 Puron will be replaced with either R32 or R454B in many countries including the US so LG seems to be making a push to capture the ‘first mover’ share in Korea, but the rest of the world, or at least much of it has already made the soon-to-be-mandated change with many opting for R454B, such as Carrier (CARR) in the US.

​According to the Japanese Trade press, the South Korean government will create a database of both Korean nationals and foreign engineers that work in the country’s semiconductor industry, including those that work for local subsidiaries of foreign companies.  The list will be used to monitor movements of those personnel as they move across the South Korean border, to prevent key chip technology from falling into competitive hands.  Given the country’s expertise in semiconductors, battery technology, and OLED displays, the government has designated 12 national core technologies that it has made part of its 5 year IP protection plan including those mentioned above.
According to data from the government, over the last five years there have been 397 technology leaks that have been at the cost of South Korean technology companies, particularly Samsung Electronics, who maintains the county’s superiority in the OLED space and in semiconductors.  As part of the tracking program the government has also added stiffer penalties for such infractions, including a 3 year minimum prison sentence for violators and is expected to lower the threshold for close inspection of foreign companies that own a stake in South Korean companies that are in any of the ‘protected’ technology segments.  Previously such examinations were put into effect if foreign ownership was greater than 50%, with the new threshold said to be 30%.

Last week the Ninth Circuit Court of Appeals issued a ruling in reference to a case from the US District Court of the Eastern District of California.  That decision, which denied the plaintiff’s (American Cable Association, CTIA, NCTA, The Broadcast Association & the US Telecom Association) request for a preliminary injunction and upheld the lower court’s decision, was a step forward in California’s battle to reinstate the California Internet Consumer protection and Net Neutrality Act of 2018 (SB-822), a state regulation that would be restored after the FCC, under the Trump administration, decided to move broadband internet services from operating under common-carrier regulations (Title II), to ‘information services’ (Title I), which terminated  federal net neutrality rules.
The plaintiffs had sought an injunction to keep California’s attorney General from enforcing the state’s Net Neutrality rules, which codified the original FCC Net Neutrality Rules, under the conclusion that the FCC lacked the authority to preempt state rules because they had changed the classification of broadband services from Title II (regulated) to Title I (unregulated) which also caused them to lose the authority to regulate the states.  This was sort of a catch 22, as the deregulation of broadband services made in 2018 by the FCC actually took away their ability to supersede state broadband regulations, which leaves the state’s to decide on a state-by-state basis, whether they want to reestablish net neutrality rules.  Under the ruling, if it stands, the only way the FCC could force the states to abide by its 2018 ruling ending net neutrality would be to reinstate broadband to Title II, which would also reinstate federally mandated net neutrality, hence the Catch-22.
What the ruling does however, is to open the idea of reinstating net neutrality to state governments, who will likely face challenges from carrier associations that promote the idea that services such as speed or price should be applied based on the customer’s content, equipment, location or other factors.  This puts an end to carriers being able to ‘throttle’ certain customers who are using high bandwidth levels but paying lower fees and giving that bandwidth to its highest paying customers.  The battle is certainly not over, but the pathway toward net neutrality is once again unblocked for now.  The next step would be the Supreme Court, who will also look at the concept of net neutrality from a legal standpoint rather than a practical one, as opposed to the way the average user looks at internet services.  The general public has indicated in polls that it favors net neutrality but that will have little influence on the Supreme Court’s decision, if it makes it that far, as their decision will be based on precedent, or at least their interpretation of precedent, which means that a Catch 22 like the one above could set the tone for the internet for years to come, rather than viewing it as a public service.  Justice can be blind…

While we don’t often mention coal in our CE notes, it is the globe’s primary source of material for energy production and recent issues facing China and a number of other countries that have begun to limit the exportation of coal to prevent shortfalls at local power-generating facilities, have brought the material to the forefront in recent months.  In particular, Indonesia, the largest producer of thermal coal, issued a ban on coal exports, which began on January 1, when the country’s mines failed to meet a government requirement that 25% of their annual production must go to the state-owned electric company PT PLN at a maximum price of $70/ton.  While the Indonesian government indicated that it is also reviewing export restrictions on other mineral resources, with indications that copper and bauxite (85% of bauxite is converted to aluminum) are among the one being considered, no determination on these materials has been noted thus far, with Indonesia being the world’s 6th largest copper exporter in 2020 with a 4.2% share and the 5th largest bauxite exporter last year.
But the good news is that the country has started easing the coal restrictions for those local companies that have met their domestic market obligations, allowing 75 ships to load coal from complying companies while 12 more ships have been allowed to load under written assurances of compliance and penalties from others being closely monitored.  The coal stockpiles at Indonesian power generation plants has now reached 20 days, which the government finds is enough to maintain consistent operation.  The original ban pulled the mining licenses of over 2,000 producers, many of whom had been lax about meeting government imposed requirements, but the release of the ban, at least in part, is a welcome relief for a number of countries that are large coal importers and rely on Indonesia to supply same, such as the ones shown below.

Its Chinese New Year as it is February 1 in China, and that begins a 7 day public holiday celebrating the year of the tiger.  Also known as the Spring Festival, there are a number of do’s and don’ts that have developed over the 3,500 years the holiday has been celebrated.  As the New Year holiday can set the tone for the entire year, negative words are a no-no and breaking glass or similar items can break your connection to prosperity for the year as will sweeping, which should have been done before the holiday, but the gist of the holiday is for families to get together after being separated during the year for a feast to celebrate the new year, which usually means in excess of 1b people will be moving from one locations to another.  Chinese New Year in 2020 came right before the COVID-19 outbreak, with ~1.5b people traveling but this year traveling for factory workers would require approval  from a senior supervisory person or face a smaller year-end bonus, which will likely limit travel considerably, with the Chinese government being unusually careful about COVID-19 leading up to the Winter Olympics in Beijing. .