​Samsung likes India.   The brand is 2nd only to Xiaomi (1810.HK) in share across the sub-continent, and Samsung has been doing at least some mobile phone component production in India since 1996.  In 2018 the company completed the 1st iteration of the world’s largest mobile phone assembly plant, which was completed in 2020, doubling its capacity.  However Samsung also like Vietnam, where it will be adding $920m to expand its production capacity there, where it produces ~60% of its ~300+m smartphones[1] that it ships each year, a larger share than in India, after shifting all of its smartphone assembly out of China over the last year.
However last year Samsung moved two smartphone production lines back to its factory in Gumi, South Korea, where it has testing facilities and production capabilities for the domestic Korean market.  This ‘reshoring’, as the company calls it, was in response to some of the stringent lockdowns implemented in Vietnam and India due to COVID-19 outbreaks, and was a way to make sure that such lockdowns do not affect the company’s overall smartphone assembly capacity, although it would seem to be creating at least some capacity that might be underutilized at times.
With the recently announced increase in spending in Vietnam, it seems that Samsung is indicating that it is now prepared for any COVID-19 or other potential production problems on a global basis, with additional capacity, albeit relatively small in Brazil and Indonesia and is still focused on using Vietnam’s assembly capabilities, cost structure, and tax incentives as its Southeast Asian manufacturing hub.  Samsung has no smartphone assembly facilities in the US, despite the size of the market and Samsung’s share, with most smartphone product for the US shipped from Vietnam.  Chinese brand Vivo (pvt) also announced a $467m US investment toward expanding its production capabilities in India, where with its sister brand Oppo (pvt) they hold a combined 32.3% share, which will allow it to both better serve the India market and export to nearby regions.


[1] Estimates vary considerably as to the unit volume from both the Vietnam and Indian plants, however they are the bulk of Samsung’s smartphone assembly capacity.

​On December 23, the Chinese government locked down the city of Xian, limiting its 13m population to only one resident per home allowed to go out for necessities each day.  The lock down came in response to a round of testing revealed 127 new COVID-19 cases across 14 districts in the city, triggering the biggest lock down in China since the original Wuhan incident.  The delta variant is still responsible for most of the new infections but such precautions are being taken to make sure that the Omicron variant does not take hold.  All domestic flights in and out of the city were cancelled and all transportation routes have been closed.
Samsung’s (005930.KS) semiconductor fab in Xian has been affected and while shut down, the company did indicate that it was making ‘flexible adjustments’ to its production lines as it is now working with limited personnel.  The plant, which produces ~40% of the company’s NAND flash is expected to continue to operate under limited conditions, but an extended lockdown could begin to affect NAND pricing into January, and a full line stop would take weeks to restart.  Since the Chinese government has left the lock down timing as indeterminate, the effect on Samsung’s production and global supply has yet to be determined.

​For the first time since 2013 Samsung employees were given a special bonus for the holidays.  Roughly 100,000 employees at 20 Samsung Group (pvt) companies were given a special bonus on top of their Christmas Eve year-end bonus, including Samsung Electronics (005930.KS), Samsung C&T (028260.KS) and Samsung Life (032830.KS) which could be as much as double their monthly wages.  Samsung employees also are able to earn TAI (Target Achievement Incentives), usually given in July and December if the division has met half year and full year goals, and OPI’s (Overall Performance Incentives) at the end of January if the company exceeds its profit target.  OPI’s are typically derived from a pool of 20% of the excess profits and can be as high as 50% of the employee’s annual wages.  Samsung’s Device Solutions business employees (semiconductors and Display), which generated operating margins not seen since 2018 (9 mos.), are expected to see a 100% TAI and likely at 100% OPI in January.
In past years, automobile dealers would gather near the Samsung facilities and offer 2% discounts for Samsung employees who would had just received bonuses, as long as they could show an official copy of their certificate of employment, but this year it seems that employees receiving bonuses are less likely to buy a new vehicle and more likely to pay down mortgages for homes they purchased over the last as hosing prices in South Korea spiked ~12% during the first three quarters of this year, pushing many residents to buy before they were priced out of the market.  While local businesses always see some traditional Hoesik (“eating together”) from Samsung employees, they have muted expectations this year despite the large bonuses.  

The governor of Texas and Samsung Electronics (005930.KS) announced yesterday that the company would be building its next semiconductor fab deep in the heart of Texas, just a bit south of the town of Taylor and a ~30min. ride from Samsung’s Austin fab.   Now that the decision has been made, we were curious to see what were the details of the offer that enticed Samsung to the Lone Star State (Fun Facts: State Slogan: The Friendly State; State Bird: Northern Mockingbird; State Large Mammal: Texas Longhorn; State Small Mammal: Nine Banded Armadillo; State Flower: Bluebonnet; State Plant: Prickly Pear Cactus; State Gem: Blue Topaz; State Soil: Houston Black; State Colors: Red, white, and blue; State Dish: Chili; State Snack: Chips & Salsa; State Sport: Rodeo; Most Important Texans [our choices] Janis Joplin & Beyonce).
In order to bring Samsung to their fair city, the government of Taylor created what they called an ‘extraterritorial jurisdiction’ as a tax increment investment zone to ‘facilitate development or redevelopment by financing the costs of public works’, ’for the public purpose of developing and diversifying the economy of the zone, eliminating unemployment and underemployment in the zone.’ Essentially the city is saying that the area is undeveloped and Samsung Austin Semiconductor intends to purchase the property and build a 300mm semiconductor plant, the size of which will be no less than 6m ft2, plus ancillary buildings, and the city would like to facilitate the purchase and help to assist the $17b project.
In order to make the sale work, Samsung has to deposit $500,000 with the city during the 1st six months to cover the city’s ‘Development Review Costs’ and thereafter, up to a maximum of $5m, which the city will pay back yearly at a rate of 1% of the zone’s collected taxes for 16 years.  If it is not fully paid at that point, it comes from the city’s general revenue.  But the real kicker is the ‘Economic Development Incentive Agreement’, which says that the city will provide ‘tax grants’ of 92.5% of the assessed property tax for the first 10 years, 90% for the next 10 years, and 85% for an additional 10 years, which are estimated to total $467.8m, with the total expected tax revenue of $522.6m, leaving ~$52.2m for the city in actual tax revenue after costs over the life of the agreement, or about $1.7m/year.  Samsung’s restrictions as to what it does with the $11.7m (current assessed value) of land are few, other than a maximum building height of 250 ft, only one 6’ x 10’ sign at the entrance to the site, and being limited to two helicopter landing sites on the property.  The ~1,074 acres has little on it now, a few houses, storage facilities, and a baseball diamond, with most of the land devoted to agriculture, and the agreement states that ‘no persons will be displaced and in need of relocation’ from the plan’s implementation. 
All in, we expect the local and state government will take a hand in facilitating whatever larger scale improvements need to be made, such as widening access roads and providing power and water to such an operation.  Texas runs its own power grid, separate from much of the country-wide systems, so the ~100 Megawatts/hr. of power needed (enough to power ~20,000 homes) would be ERCOT’s responsibility, although we wonder where the 2m – 4m gallons of water needed for the fab each day will come from, as there was no mention of such in the proposal.  As we discovered during the Foxconn (2354.TT) Wisconsin fiasco, the devil is in the details, and while we have considerably more faith in Samsung’s commitment than that of Foxconn, politics plays a large part in such decisions.  Hopefully this project will move past the planning stage some time before the semiconductor space heads into over-capacity.

​Later today, the governor of Texas is expected to make an announcement concerning the location of the next Samsung (005930.KS) Semiconductor fab, whose location has been in contention for a number of months.  The odds-on favorite is Taylor, Texas, about a half hour from Samsung’s Austin fab, a town of ~17,000 residents, where the overnight hotel rates run about $100 and every Thursday is ‘Ladies Night’ at the Red Cap Cigar Lounge on Main Street.  The town seems to have topped the list of offered tax incentives, at $292m, bringing the $17b fab to the 1.87 mi2 plot outside of town, which is expected to be completed in 2024, the same year in which competitor Taiwan Semiconductor (TSM) is expected to complete its new fab in Phoenix.

Note:  We are only looking at Samsung’s display, TV, and mobile businesses in this note.
Samsung Electronics (005930.KS) reported 3Q sales of 73.98t won ($63.24b US), up 17.4% q/q and up 10.5% y/y and operating profit of 15.82t won ($13.52b US), up 25.9% q/q and up 28.1% y/y.  The company generated gross margins of 42.0%, the best since 3Q ’18 and operating margins of 21.4%, also the best since 3Q ’18.  On a comparative basis 3Q is typically up 8.9% (5 year avg.) q/q and up 6.1% y/y.

Samsung’s display business, which represented 12.0% of sales, was up 29.0% q/q and up 21.0% y/y, and saw a decline in operating margins from 18.6% in 2Q to 16.8%, as costs increased. TV panel prices declined in the quarter, continuing to generate losses in Samsung Display’s (pvt) large panel display business, but small panel sales were strong as Apple (AAPL) and other customers built inventory toward recent model releases.  Samsung did mention strength in foldables but gave little detail on their contribution to total display results.  Samsung guided for continued growth in the display business in 4Q, again led by small panel OLED displays offsetting losses in the large panel TV business.  There was mention that OLED devices, other than smartphones, would begin to play a bigger part in total OLED sales, although are expectations for real growth in that space are oriented toward 2022 and there was also mention of Samsung’s program to begin production of its new QD/OLED TV product as an offset to its (intentionally) declining TV display business.  There was also mention of component costs and shortages, neither of which are specific to Samsung, as points of concern for both 4Q and 2022. 
On an overall basis Samsung’s display business, which is greatly tilted toward small panel OLED, is better positioned than most, although that was not the case for much of last year and earlier this year.  Samsung Display had been the most aggressive of display producers in reducing its exposure to the large panel TV production space in 2019 and closed or sold much of its large panel production capacity.  As large panel prices rose during 2020, SDC held off closing remaining large panel LCD production at the request of Samsung Electronics, its large customer in that market, but SDC’s overall outlook on generic large panel LCD production has likely changed little, especially with the large panel price reductions seen recently.  SDC hopes to replace the generic large panel LCD business with its soon-to-be-released/announced quantum dot/OLED displays, which will become an integral part of the company’s large panel display business if successful. 
As we have noted in the past, there is significant risk associated with developing a new commercial technology in the display space, but if the product passes muster, it will leverage Samsung’s TV business into a ‘premium’ panel category, something Samsung Display has been missing and will give SDC a display product with which it can use to compete against LG Display’s (LPL) OLED TV panel business.  That said, such a product would generate losses for some time, so we expect no profit contribution from that business until 2024.  While we expect SDC to be successful with QD/OLED, we put more emphasis on SDC’s push to expand its OLED display business into the notebook and monitor space, which began in earnest this year, and see continued expansion in that business as SDC improves its OLED notebook cost structure over the next year.  While OLED notebooks will remain in the ‘premium’ notebook category in 2022, we expect their use in mid-tier notebooks to expand in 2H 2022.

​Samsung’s consumer electronics division (~56% is TV), which is ~19.1% of sales, grew sales 5.2% q/q and 0.1% y/y but operating margins for the division as a whole declined from 7.9% in 2Q to 5.4% in 3Q.  While the TV division margins are not broken out, costs associated with the TV business (components, panel prices, logistics, etc.) were responsible for much of the margin reduction.  However the TV segment itself (10.6% of total company sales) grew 9.1% q/q but declined 5.1% y/y against a strong 3Q last year.  Typical 3Q q/q growth (including last year’s +55.2%) is 13.1%, although excluding 2020 would be a more normal 2.6% q/q increase, so it was still a strong quarter in terms of q/q sales averages with Samsung’s QD TV (not QD/OLED) and other premium products leading the way.
4Q guidance for the TV segment is for growth q/q but down again on a y/y basis as lessening COVID-19 restrictions move consumers away from a sequestered lifestyle.  Guidance for 2022 in the TV segment was less optimistic, with more emphasis on logistical issues slowing TV market growth.  While logistics are certainly an issue, we question whether that is the source of reduced demand, but we do agree with the lower demand outlook for TV sets.  That said, if TV panel prices continue to decline in 2022, while it will hurt LCD panel producers, it would be beneficial for Samsung’s TV business, giving them room for the discounting needed to compete against Chinese competitors. 
Samsung, as are almost all other TV set brands, is hoping that ‘premium’ TV products will offset lower overall set demand, and while the premium market will certainly be the growth driver for the TV set business in 2022, we expect Samsung’s broad range of premium TV products will take considerable shelf space in 2022.  With quantum dot enhanced LCD TV, Mini-LED TV, Ultra-large TVs, and potentially QD/OLED TV offerings, Samsung will certainly give consumers ample choices in the premium category, but competition from Chinese brands such as TCL (000100.CH) and Hisense (600060.CH) in key markets will still be an issue in 2022. 
Samsung will have less of a cost burden to carry than those Chinese brands that have their own TV panel production as large panel prices decline, and will be able to cherry pick the market for the best supply deal, which was the intent back in 2019, but the margin leverage usually gained by TV set manufacturers when panel prices decline could be offset by continued component shortages and logistics costs.  If we had to be somewhere in the TV space in a year when demand is reduced, it would be with either Samsung (more premium product and little large panel LCD production drag) or LG Electronics (066570.KS), given the growth of their OLED TV business in 2022, although LG Display (LPL) still has enough large panel LCD production to see some negative influence from that part of their business next year.  

Samsung IT/Mobile division (38.4% of sales) saw sales up 27.6% q/q, against a weak 2Q, but down 6.8% y/y against last year’s strong 3Q.  The mobile segment itself (37.0% of total sales) grew sales 27.6% q/q but declined 8.3% y/y.  IT/Mobile operating margins declined from 14.3% last quarter to 11.8% in 3Q.  Overall, Samsung’s smartphone shipments grew in the quarter with the introduction of new foldable smartphones and an expanded mid-tier lineup, but increased marketing costs (foldables) squeezed margins a bit.  Guidance for 4Q is for increased smartphone demand with a caveat toward component issues.  2022 guidance was still optimistic, with a focus on growing the foldables line, making it a significant part of its ‘flagship’ Galaxy offerings, which have been weak over the last two product cycles.  Samsung has begun to offer a ‘bespoke’ service for its foldables, customizing devices to customer specifications, which the company hopes will increase consume focus on foldable overall, but the service is too new to gain any insight in whether it will serve to generate additional sales without lower margins.

​Across the board, the segments we look at, Samsung did as well or better than most, and given their size, volumes, and internal capacity, they were able to sidestep at least some of the component and logistical issues facing most in the CE space.  The company still seems optimistic about 4Q but a bit less so for 2022, although we expect they are better positioned overall if 2022 looks more like pre-COVID years.  That said, Samsung’s success in 2022, in the markets we cover, will depend on their ability to differentiate their CE products.  Without that differentiation they will face the same diminishing returns that a slower CE growth environment places on participants.  They have a better shot than most but we expect 2022 will be a more difficult year.  

​Samsung (005730.KS) continues to play with its Mini-LED/QD TV pricing, almost on a weekly basis, and while two of the 36 sets in the 2021 Mini-LED/QD or QD only line-up are at their highest price point since release, 23 are at their lowest price point, with all 8K Mini-LED/QD sets at their lowest price points.  The biggest changes from our last pricing (2 weeks ago) show up in the same 8K Mini-LED/QD group, where the average price drop (wk/wk) is $400, with those sets down 25.3% from their original price on average, however as the largest size (85”) set has changed little in price over the last month, the two other sizes are down 29.3% from their original price.
A number of the QD only sets also moved considerably over the last two weeks, with one model (75QA) dropping from $2,700 to $1,900, an almost 30% discount, while most other 4K Mini-LED/QD and QD only sets are down from their original prices between the high teens and low 20% range.  While all TV brands play with TV pricing, Samsung seems to be far more willing to offer discounts on this year’s line, particularly with Mini-LED/QD sets.  While taking advantage of a particular bi-weekly change might get you some short-term savings, the trend has been downward, which will likely continue for the rest of the year.

On Friday we noted that LG Innotek (011070.KS) was committing just under $1b to expand its flip-chip ball grid array business, after noting that Samsung EM (009150.KS) had also committed to expanding it FC-BGA capacity, possibly in connection with Intel (INTC).  While both are able to garner significant financing from parent organizations to make such expansions, smaller FC-BGA suppliers are also increasing capacity as the technology become more widely adopted.  South Korean supplier Daeduck Electronics (353200.KS) has indicated that they will spend a bit over $250m US by next year to expand capacity after completing the construction of a new $75m plant in August.  The company has completed financing for the next line, which is expected to be in operation by the end of this year, and by the end of 2023 will have increased it capacity by 4x.  Korea Circuit (007810.KS) has also committed to a $167.2m expansion program after signing a long-term contract with a global communications chip manufacturer.
As we noted last week, during the shortages that the semiconductor industry has been facing, there is little opposition to funding advanced packing solution expansion projects such as these, and as complexity increases, low yields limit unit volumes to a degree which justifies expansion.  While growth over the next five years is pegged at  between 6% and 8%, FG-BGA products are typically higher margin for OSATs compared to typical consumer applications, with demand from AI, HPC, networking and automotive the drivers for the space, making such projects even more attractive.  Intel’s EMIB (Embedded Multi-Die Interconnect Bridge) and other 2.5 and 3D stacking methods are encouraging high-speed direct interconnects internal to the package, while eliminating TSVs and interposers, keeping packages smaller and connections faster.  FC-BGA compliments such advanced processes, which gives some upside to the market, but expansion seems to be happening at an unprecedented rate over the last few months, giving rise to a careful watch over the balance between supply and demand in 2022.  The diagram and table in Fig. 2 shows the advantage of using FC-BGA without TSV interposer and underfill in an image sensor product.

​Samsung Electronics (005930.KS) has made a lot of noise recently with the release of its newest foldable smartphones the Galaxy Z Fold and the Galaxy Z Flip, but while the press is certainly beneficial for the company, foldable devices are only a small part of Samsung’s mobile business which has been under considerable pressure this year.  In fact, as we noted recently (see our note 08/05/21) that the mobile division’s performance was under a detailed review that would likely lead to either a structural change or a management upheaval as Samsung’s Vice-Chairman resumes his leadership responsibilities.  With weakness across the smartphone market, Samsung has had to reduce its expectations for smartphone shipments from an optimistic 290m to 300m units to a more conservative 260m.
In order for Samsung to meet its revised shipment expectations, the company will begin production of the Galaxy S21 FE smartphone this month for release in the next few weeks, which puts it about four months later than originally expected.  Shortages of components, particularly application processors, has held back production for the S21 FE and has also affected shipments of the company’s A series smartphones, which are the company’s most popular phones.  Samsung has originally expected to ship ~15m S21 Fes but has lowered those expectations to between 10m and 12m this year.  Samsung will begin production of the 2022 flagship Galaxy S22 line in November, but shipments will not begin until January of next year.
Now that 5G smartphones have become commonplace and carry little or no premium pricing, the smartphone business returns to ‘feature’ competition although the trend of adding additional cameras to such devices seems to have played itself out.  There are some features that brands hope will set them apart in 2022, such as under-display cameras, but there are few new technology features that can be applied to typical smartphones that will make them suddenly more attractive next year.  Foldables are certainly the most attractive new segment, but Samsung’s goal of selling ~7m of the Z Fold/Flip 3 series is admirable but represents only 2.7% of Samsung’s revised shipment goal, meaning that while 2021 might be called the year of the foldables, in a global market of ~1.3b units foldables don’t move the needle.  Without the high volume workhorse smartphones like the S21 FE (Galaxy S20 FE sells for ~$700), or the Galaxy A series, which range in price from $425 down to $110, selling well, Samsung’s mobile division is going to struggle again next year, and while we expect component shortages to ease in 2022, any release delays will only make matters worse.

​Back before the internet, and even before electricity, kids had toys.  Maybe they were not particularly sophisticated by today’s standards, but you work with what you have, and endless hours were spent playing with what were mostly wooden toys.  There was one that was quite popular and was even written up in the 1889 issue of Scientific American called the Jacob’s Ladder, a simple toy made of thin blocks of wood and ribbons that looked like each block was descending down the chain when held.  The toy was actually an illusion, as the blocks only reversed sides and did not move, but the effect, at the time, was astounding.

At a recent exhibition in South Korea, Samsung Display (pvt) showed a version of what is likely a prototype of a potential foldable product slated for 2022 or 2023 that we have written about a number of times going back to 3/20/2018 (below) when SDC filed the initial patent, a number of times as further designs were revealed, and most recently in May of this year when SDC showed an earlier prototype.  In the most current version, the display is larger (7.2”), closer to a tablet than a phone and while the 35 second video (ctl-click here) shows little about how flexible the device is or how thick it is when closed, it does show a bit about how the display software works, adapting the image to a variety of formats that single out sections of the device or make it into a continues single image that can scroll across the device. 
Much of the development work behind this device seems to have been completed, which leads us to our conclusion that this will eventually become a viable foldable product with timing more likely set by marketing and production capabilities than technology limitations.  At least from our perspective it seems that SDC has realized that a tri-fold smartphone, given its fully folded thickness, might be a difficult sale relative to the almost paper thin devices currently available, but as a tablet, which would normally be more of a work device and typically carried rather than pocketed, the tri-fold concept makes more sense.  We have noted other tri-fold demos, such as the TCL (000100.CH) device we noted in a 12/23/2019 note (see Fig. 5), similar tri-fold demos from LG Display (LPL) and Visionox (002387.CH), and even a 2014 demo from Semiconductor Energy Lab (pvt) in Japan, but have yet to see an actual product, although it seems SDC is getting close(r).