In order to reduce the effects of differentiated data sets, we tend to use averaged data from a number of sources and don’t draw conclusions until we have at least a few data points for each category.  That said, there are occasions when one data source is either early in their data collection or estimates, far out of line with others, or unusually different from what we might expect.  In those cases, unless we have empirical evidence that the outlier data is incorrect, we note that to our readers.  Much has been said, particularly by panel producers and CE brands about how the CE space will recover (usually with the ‘gradually’ caveat added), although there has been little, other than seasonality, to back up those predictions.  While seasonality typically does play into a better 2nd half, for any real sustainable recovery there has to be an underlying improvement in demand.
September is typically the strongest month (5 yr. avg.) for notebook panel sales, while March usually shows the biggest m/m sales gain, given that February typically records the lowest notebook panel sales month of the year.  That leaves April sales typically down 8.8% m/m, as CE ‘March Madness’ ends after the Chinese holiday in February, typically the worst m/m decline of the year.  What all of this is leading to is that one data source, Digitimes Research, is reporting that the top 5 notebook brands (excluding Apple) saw a 30% drop in m/m notebook sales in April, more than 3x the average and greater than any w/w April decline in notebook panel sales since at least 2011.  DT cited strong short-term orders in March for the large April decline, but also noted ‘a lack of confidence in end demand’ and relatively high inventories in the retail channel.
The DT data is only one source, and one that tends to be a bit on the aggressive side, but it was so far out of line with the tacit ‘gradual improvement’ scenario promoted by the industry, it is worthy of mention, although we are not surprised at the decline, only the magnitude as there has been little real change in demand after the category saw COVID pandemic demand peak in November of ‘2021.  While notebook panel sales do not always track against retail sales, the implication of a 30% decline in April’s notebook panel shipments would bring notebook panel shipments to a point slightly lower than January shipments, which were only slightly higher than panel shipments in February of 2020, the first month of the COVID pandemic, which would not be a good omen for the gradual recovery scenario, at least for notebooks., which last year represented 26.95% of panel shipment unit volume.
Before taking possible scenarios for the remainder of the year any further, we need to confirm that data with other sources, which tend to show up toward the end of the month, so we will wait to see if other sources confirm the data drop.  The top five notebook brands (excluding Apple, who would be #4 in 2022) are Lenovo (992.HK), Dell (DELL), HP (HPE), Acer (2353.TT), and Asus (2357.TT).
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At the end of last year notebook brands were saying that a weakening in consumer demand for notebooks would be offset by corporate notebook demand as workers returned to offices as COVID waned.  Based on the fact that demand during the pandemic was so far out of line with normal notebook shipment levels, we found it hard to imagine that like the TV set business, demand would return to pre-pandemic levels despite the location shift, especially as many workers had already upgraded during 2020 and 2021.
It turns out we were right as to general notebook demand while inflation pushed notebook shipments even further down than we had expected.  2Q aggregated notebook shipments were down 32.8% q/q and down 35.2% y/y, with shipments less than 1% above the low point seen when COVID became a global crisis and below pre-pandemic averages.  We expect a bit of a recovery during the holiday season but 3Q notebook shipments are typically up 8.7% q/q and 4Q up 6.4%.  If we plug in those numbers to the 2Q data, 2022 shipments would be 252.5m units, down 26.0% y/y and lower than either of the two years before the pandemic, and would be disastrous for notebook vendors and brands. 
This would lead us to make the assumption that 3Q will see a more substantial q/q shipment recovery although July and August were likely less than spectacular.  We expect inventory levels are being worked down, leading to lower cost inventory as panel prices decline, which should mean more substantial discounting.  However, since much of 3Q has already passed, we would see much of that potential discounting in 4Q rather than 3Q, which would help to boost the full year number a bit but still leads us to only a marginally better 3Q shipment number.  All in it is going to continue to be a very difficult year for notebook brands.

Fun with Data – PC Shipments
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It is no great revelation that PC brands were overly optimistic about prospects for shipments earlier this year, so there is little need to reiterate all the things that were assumed or misconstrued earlier this year, or the issues that might have made them worse thus far, but it is interesting to see how far off some of the brand estimates were and how current targets equate to last year’s shipment levels.  Before we go further, Apple (AAPL) investors take hope in that the only PC vendor who has not changed its 2022 targets or seen them changed for them with weak 1H performance, is Apple, a nob to their more realistic optimism and the value of their brand.  We note the data in the table comes from Digitimes and can differ greatly from other estimates, including ours, as some include tablets, chrome-books, and monitors while others do not, with the point being more that PC brands set targets with blinders on earlier this year and now have taken them off.

According to Taiwan-based Digitimes, global notebook shipments, which declined by 16% q/q and 24% y/y (our estimates differ at ↓15.0% q/q and ↓13.0% y/y in 2Q) will see shipments increase in both the 3rd and 4th quarters of this year.  The 3Q increase is expected to be 12% in 3Q and 3% in 4Q according to Digitimes as brands push volumes to meet targets, albeit targets that have been lowered recently.  Citing weakness in 2nd quarter and seasonality as the basis for the sequential increases, they see relatively little impact from the power issues in China.
As we have noted previously notebook panel shipments declined 12.2% in July as brans reduced orders to work down inventory, but we also saw little incentive for consumers to buy as prices on existing notebook inventory were high and brands seemed unwilling to offer steep discounts.  While that should change a bit this month as inventory is consumed, albeit at a relatively slow arte, it would take a strong September to meet the Digitimes goal.  We certainly don’t rule it out but look more to notebook panel shipments as early indicators of demand, even if that decline is a bit exaggerated.  We are expecting the notebook panel market to tighten a bit and panel price declines to be less than in the past few months, but until demand at the consumer level picks up, we are a bit less optimistic about seasonal growth for notebook shipments in 3Q.

Back on 05/07/2020 we noted that what was then a relatively new category of mobile device, Chromebooks, were seeing rapid increases in shipment expectations as the COVID-19 pandemic forced the public into isolation and the need for inexpensive mobile devices to remain connected became a necessary item for almost all and we noted the impact of various global government programs that tried to guarantee same to students who were unable to attend classes, particularly in Japan, where the trend had already begun due to smaller viral infections.  By 3Q last year Chromebook sales had seen reductions, although the brand mantra was that any slowdown in Chromebook sales to consumers would be offset by corporate sales, as employees returned to offices, although the chart we showed in our 10/25/21 note (chart reprint below) indicated that Chromebook shipments had already peaked (1Q ’21) and had begun to decline, and a number of follow-up notes this year followed that trend.

​Expectations have now reached new lows for Chromebooks this year with the latest estimates from Gartner (IT) being for the sub-segment to see a decline of 30% y/y, helping to brag down the broader PC category (PC, MAC, Chromebook) by 9.5% after last year’s 11% y/y gain.  With MACs flat and PC’s down 3%, the effect of the Chromebook decline is easily seen, especially against 2020’s ~300% y/y increase in Chromebook sales.  The obvious factors are the reduction or end of the student mobile device programs in a number of countries and the macro factors that are affecting consumers across the globe, but Chromebook brands are also dealing with the effects of the massive order pull-ins that fed the Chrome book cycle in 2020 and early 2021. 
While there are still those who might buy a Chromebook as an inexpensive substitute for a laptop, much of that demand has already been filled, which leaves only the demand of what would have been ‘new’ Chromebook customers before the pandemic, and just looking at last year’s shipment chart gives some understanding of what actual Chromebook demand might have been before COVID-19.  We do believe that Chromebooks are now a viable alternative for those that do not need the computing power and storage of a laptop, but we expect Chromebooks will have to create more differentiation between themselves and both tablets and laptops/notebooks in order to regain some market stature. 
We expect this will take the form of more cloud based Windows or iOS based applications that can run well in the Chrome environment, a process that needs developers to continue to support the idea of Chromebooks, with much of that in the hands of Google (GOOG) as the driving force behind the OS and offering less onerous fees and payment options goes a long way toward that end.  We have looked at Chromebooks a number of times as alternatives to more expensive Windows-based devices but, at least in our work, we need more of an ability to manage applications and storage locally, although a generation that has already lived and died by their smartphones will likely have less compulsion for that kind of control, giving Chromebooks a chance to grow again when the macro environment stabilizes.

​While we down note all of the changes in forecasts that have been occurring as a result of the inflationary macro environment and the lingering effects of COVID-19, especially in China, we do mention those we think are unusual and in the case of Asustek (2357.TT), a Taiwan based laptop producer among the top 10 globally.  Last month the company reported a 14% sequential decline in net profits last quarter and predicted a 10% drop in PC shipments this over last, but continued to affirm its target that its revenue would increase by 10% y/y, despite the industry slowdown and its quarterly weakness.
It seems that now, roughly six weeks later, the company is revising its target from up 10% y/y to flat y/y, although stating that it will, still outperform the industry by 10%, leaving its ‘cautious optimism’ about the 2nd half, where it was counting on back-to-school, holiday shopping, and pent-up demand to help it meet its former targets.  The company gets ~66% of its revenue from PCs with the remainder from components such as motherboards and graphics cards, which it expects to decline 10% to 15%,  against the 10% decline for PCs in 2Q.

Notebook panel pricing, while certainly down from its peak in September of last year (↓14.6%), has held up better than other panel categories, with aggregate notebook panel prices still up 14.5% from the lows seen in January 2020.  Notebook shipments have only recently begun to slow as both demand from remote education programs wanes and the effect of component shortages, COVID lockdowns in China, and inflationary malaise take their toll.  While notebook shipments themselves have been a bit lumpy it is easier to see a pattern when looking at notebook panel shipments, which peaked in 4Q last year and have begun to decline after fairly steady increases since the pandemic began.

We do note that over the last two years many notebook brands maintained higher than normal inventory levels of components in order to guarantee their ability to fill demand during shortages, and while demand was certain present, this added a bit of ‘anticipatory’ ordering to secure sufficient safety stock.  In the panel space it has been most recognizable, as shown in Figure 2, but is now showing signs of weakness, with 2Q notebook pricing already down 9.2% from the end of 1Q if our forecast for May holds true, and while panel production reductions might not follow immediately, panel prices are a direct reflection of demand, which would already be foreshadowing a reduction in demand.  It can be seen in Figure 1 that the mismatch between panel production and notebook sales narrowed considerably in 1Q ’22 as notebook brands began to lighten inventory levels, but given the component shortages and lockdowns seen recently, it would be hard for notebook brands to return to pre-COVID component and finished product levels.

All in, we do not expect notebook panel demand or pricing to see the same rapid downward spiral that occurred with TV panels, but we do expect the price declines to continue and could be sustained into the holiday build period in 3Q, which leads us to expect it will be difficult for both notebook brands and notebook panel suppliers to show anything but lower y/y returns this year.  1Q shipments for the top brands already reflect a 4.9% y/y decline in notebook shipments, with only Asus (2357.TT) and Apple (AAPL) up y/y, although combined they garner only a 16.1% share of the market, which is less than each of the top three brands, all of whom were down y/y.

Notebook brands have been a mostly happy lot for the last two years as the COVID-19 pandemic has kept many potential customers at home and desperate for ways to communicate with workmates, friends, and the outside world.  This has stimulated laptop sales as isolated workers need a way to communicate that does not lock them down to a particular location in their houses or apartments and has the potential to be taken to work when they might return.  Also a contributor to such demand are students, who through government mandates, were given tablets and laptops to continue their education from home.  This occurred in some countries on a mass scale, pushing demand far beyond norms as seen in Figure 1.
The result of this demand was notebook panel price increases as seen in Figure 2, which typically would slow demand at least to some degree.  However as prices for notebook panels began to increase in late 2020 buyers, fearful that they would not be able to meet customer demand, continued on their buying spree and pushed notebook panel prices higher.  Adding to this scenario were component shortages caused by similar factors, and notebook panel buyers began trying to build inventory by double ordering, although that did little since silicon capacity was essentially fixed.  Notebook panel pricing peaked out at the beginning of 3Q ’22, while notebook panel shipments continued to rise through November, as brands continued to buy to fulfill expected holiday purchases.
Distributors were inventory constrained throughout 2H ‘;20 and much of 2021, facing the same challenges as component buyers, and most were able to maintain only a few days or a week of inventory and contributed to the demand cycle by increasing orders, which made the situation worse by giving assemblers incentive to order more components and push prices higher, all part of an incestuous cycle that began to end at the beginning of this year, as the COVID-19 pandemic began to become so ingrained in global culture and the ennui of being in isolation pushed folks back to some sort of more normal existence.  As can be seen in Figure 3, the timing of those cultural changes might not have been well planned as seen by the case spike in late January, but many of the educational notebook mandates ended along with 2021 and we believe that the increased shipments seen throughout 2021, especially in 2H, got close to satisfying actual demand.
Notebook brands however remained optimistic about expected shipments for 2022, likely making the assumption that 2021 was the ‘new normal’ and demand would continue at those levels, however notebook panel prices have been on the decline since late last summer and notebook panel shipments have been declining since the November 2021 peak.  While these are both signs of a path to a more ‘normal’ notebook demand cycle, more telling metrics are that distributors are now stocking between 10 and 12 weeks of notebook inventory and brands are beginning to pull back assembly orders to more realistic targets.
Some of this has been reflected in our previous notes discussing IT panel prices, which are composed of notebooks, monitors and tablets, but target changes by brands are usually the last to go as the cycle returns to some semblance of normalcy.  We do not expect demand to diminish entirely but we would expect at least a move toward the averages seen before COVID-19, which, between 2013 and 2019 were 15.38m units/month, as opposed to the average of 21.5m seen between 2020 and 2021 (40% higher).  Component shortages will ease a bit but some will remain, while notebook prices themselves are slowly declining as inventory grows and notebook panel prices decline, but the specter of overall inflation will likely keep notebook prices from falling to previous levels which will slow any return to pre-COVID-19 levels, but the direction seems to be becoming more clear and slowly being acknowledged by the industry.

​Samsung (005930.KS) is having a Galaxy ‘Unpacked’ event of February 9 during which they are expected to release their new line of Galaxy tablets, which have been leaked ‘accidentally’ or otherwise to a number of locations.  What makes this tablet series different than previous models is the addition of an ‘expected’ 14.6” model that would further blur the lines between tablets and laptops.  While full specs have not been released officially price was posted for a short while on the Amazon (AMZN) site in France, which translated into $1,307 US for the Wi-Fi only model and $1,475 for the 5G model.  For reference the smaller (11”) Galaxy Tab S7 tab originally sold for $650 while the Galaxy S7+ (12.4”) originally sold for $849, so there is a fairly large price gap between the smaller versions, should they remain at the same price as last year’s models and the larger version this year, putting the new tablet model in the same price range as Samsung’s Galaxy Book Pro line, which has a 13.3” model and a 15.6” model selling for similar prices.  More to come next week…