​This week Samsung’s (005930.KS) Vice-Chairman and empire heir Lee Jae-yong visited with Peter Wennink, the CEO of ASML (ASML) in the Netherlands to discuss the future of semiconductor technology, market prospects, and the supply of EUV equipment, according to tech press, but it is also said that the trip had another purpose and that was to secure the purchase of an extra EUV tool, above the orders originally set for this year.  With ASML as the only supplier of the EUV tools needed for semiconductor production at or below 7nm, Samsung’s ability to grow its chip business in order to catch up to leader Taiwan Semiconductor (TSM), is dependent on ASML, who has scheduled 51 such tools to be built this year. 
Currently Samsung has been scheduled to receive 18 such tools while TSM is to receive 22, leaving 11 for other customers, so the trip from Korea to the Netherlands is said to also have been made to secure another EUV tool from ASML to help Samsung grow a bit more than originally planned.  Samsung purchased a 3% stake in ASML in 2012 for $280.8m, which is worth ~$3.4b today, but Intel (INTC) and TSM also own stakes in the company (15% and 5% respectively), so being a stakeholder in ASML likely had little influence.  That said, a visit from the heir to the Samsung fortune and the company’s 2nd largest customer does hold some sway.  Whether it was enough to grab another $150m tool remains to be seen, but we expect it was more whether ASML can up the total number of units it produces this year, as we expect all of the other 11 units to be produced were already on order from other customers.

We have noted that a number of CE manufacturers, particularly in the smartphone space, have reduced targets and orders to suppliers as global inflation leading to weak demand has led to inventory levels that are no longer justifiable.  While both upstream and downstream producers and suppliers have seen some weakness, major CE companies have responded slowly, at least publicly, and have expressed optimism as to the better prospects for 3Q.  Last month Samsung Electronics (005930.KS) was said to have continued to provide suppliers with what was said to be a relatively ‘healthy’ view of the rest of 2022.
According to Japanese Tech press, Samsung has now halted issuing new purchase orders and asked a number of suppliers to reduce component shipments for the rest of this month and the full month of July.  While no product specifics were given, smartphones, TVs, and home appliances were the primary product categories, with semiconductors, packaging, and a number of other components were said to be involved.  Samsung is said to have told suppliers that it needs to closely review component and final product inventory, and while suppliers have not stopped shipping to Samsung, some suppliers indicate that shipments to the company have been cut by as much as 50%.
It would seem that with Samsung’s change of heart, much of the public optimism that CE companies had been expressing about a better 2nd half, regardless of whether it was seasonal or otherwise, has begun to evaporate, although there are still many suppliers, particularly those producing more specialized products, that are optimistic and see orders on the books through 3Q or the remainder of the year.  Our concern is that the current cuts being made by Samsung and other TV and smartphone brands are coming a bit too late to salvage the remainder of the year, inclusive of the holiday season.  Inventory levels in many CE products have been building since the beginning of the year, along with the higher costs associated with rising raw material and transportation costs, making it more onerous to offer the steep discounts needed to get consumers to use what remains of their buying power.
Our hope is that many CE companies will bite the bullet quickly and begin discounting aggressively to burn off excess, high-cost inventory, and the lack of new production allowing some reductions in component pricing, all of which would allow a somewhat more profitable holiday season.  That said, given the global macro and geo-political environment, the odds against such a scenario playing out are low, which means we should more likely expect a more ‘wait-and-see’ attitude from CE companies, who will maintain said reduced levels until August when the seasonal build period begins, and hope that even a seasonal increase foretells a better holiday season and likely begin inventory building.
It is hard not to be pessimistic when only a few CE companies were willing to look at markets like smartphones or TVs and project that the effects of COVID-19 on consumers that led to rising prices and component shortages had already become unglued early this year.  Rather, many assumed that this was to be the ‘new normal’ and the CE boom-bust pendulum would never swing back again.  Yes, it is easy to be a Sunday mooring quarterback, but the data has been pointing to progressively weaker results for at least two quarters, despite record 1Q results for many.  Now suddenly the CE space has a dark hue and concern over excessive inventory levels is now a major driver, which to us is the first step toward a better CE space in 2023.

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

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

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

We have noted a number of times the on again, off again negotiations between Samsung Electronics and LG Display (LPL) concerning the former’s purchase of OLED panels to begin producing an OLED TV brand.  This would be separate from the QD/OLED TV line that is based on such displays produced by affiliate Samsung Display (pvt) and would have been tiered above the company’s extensive quantum dot LCD TV line and their Mini-LED/QD TV line.  The negotiations have been ongoing for months and our assessment in recent notes indicated that if a deal were not made relatively soon it would become difficult for Samsung to assemble and market such a line before the holidays.
While negotiations seemingly were bogged down on price, with OLED supplier LG Display allegedly offering prices lower that what it receives from parent LG Electronics (066570.KS), Samsung has been said to be driving a very hard price position and with the rapidly falling price of LCD TV panels, it seems the negotiations have broken down again.  A spokesman from Samsung was quoted as saying “If we are to use LG OLED panels in our products this year, the discussion would have to be concluded by now. So chances are slim that we will release TV sets with LG OLEDs.   Still the possibilities remain open for future orders, although nothing is decided.”
As we have noted, with Samsung Display’s decision to end its production of large panel LCD displays, parent Samsung Electronics purchases its LCD displays from a number of panel producers, some of whom it has a financial connection with, such as Chinastar (pvt), owned by TCL (000100.CH), who purchased Samsung Display’s Suzhou LCD fab in August of 2020, with Samsung taking a 12.3% stake in TCL at the time.  Samsung also purchases LCD panels from China’s BOE (200725.CH) and Taiwan-based AU Optronics (2409.TT), among others. 
While the decision to terminate the large panel LCD display production business at Samsung Display was made by the board, we believe, based on the composition of the board, that Samsung Electronics was fully represented and was part of that decision, and while there was certainly some difficulty involved in establishing volume relationships with other suppliers, Samsung Electronics as a whole saw weaker TV set sales but higher profits from Samsung display during panel price increases  and saw the opposite during LCD panel price declines.  As the industry began to transition toward OLED, especially small panel OLED, we believe Samsung management was looking to capitalize on that growth and the long-term decline in LCD panel prices, which stimulate TV sales, without the offset of LCD TV panel losses at Samsung Display. 
The strategy suffered during the COVID-19 LCD TV panel price hike, but has since moved in Samsung’s favor, as in theory, TV set sales should increase as set prices decline, without the offset of large panel LCD losses at Samsung Display.  We note that of the 120 data points in Figure 1, 41.7% have been over the trend line, leaving 58.3% of months below trend, leading to a downward trend.  During the COVID-19 pandemic and the rise in LCD TV panel prices, the spread between LCD TV panel pricing and OLED TV panel pricing shrank, making Samsung more focused on offering OLED TVs to its customer base, but as that spread increased beginning last July, that necessity lessened and Samsung had less pressure to offer OLED TVs and more leverage with its QD/Mini-LED and pure quantum dot TVs, which are both based on LCD panels.  It would seem Samsung believes that scenario will continue through the end of this year and therefore has a greater incentive to lowball LGD for OLED displays and less pressure to come to a deal before the holidays.  We expect that Samsung will be highly promotional in regard to its quantum dot and QD/Mini-LED TVs this holiday season and will have less inclination to negotiate with LG Display until next year.

​In our note of 06/01/22 we indicated the love/hate relationship that smartphone brands have had with ToF sensors that map image distance through the use of laser and VCSEL technology.  While Samsung (005930.KS) has abandon their use in its smartphone line, Apple (AAPL) has remained a staunch supporter and continues to use the technology for both identification and in image processing.  While the note was focused on the potential for ToF sensing in the AR/VR space, Apple has taken ToF’s ability to create a three dimensional image of an object one step further in the company’s just introduced iOS 16.
There are a number of systems used to create 3 dimentional affectures for typical 2 dimentional audio recordings.  When recorded tracks are mixed in a studio, sound engineers can use a variety of ‘tricks’ to make sounds appear to have ‘depth’, and as far back as the early 1070’s, 4 channel consumer audio products became available, although they required a 4 speaker system.  As ‘quad’ was never effective enough to justify the added cost of the hardware, such systems disappeared quickly and over time various techniques were used by hardware manufacturers to enhance typical stereo recordings, particularly for films.  One such enhancement was the sub-woofer, which filtered out  all frequencies above 200Hz and passed the remaining low end sinals to a specialized amplifier and speaker to bring out the vibrations associated with action movie soundtracks.
As TV technology continued to improve, many found the imbedded audio insufficient and companies like Dolby (DLB), DTS (XPER), THX (DIS), and iMAX (IMAX) began to find ways to enhance audio by creating processing systems that enhanced audio by using digital means to separate a stereo feed into a number of components (typically 6, known as 5.1) that maintained a left/right speaker set-up but added a center channel, two rear channels and the sub-woofer noted above.  For years this was sufficient for most however as TV screens increased in size, 5.1 audio, which tends to be horizontal (as if performed on a stage), did not correspond to the fact that images on a large screen might be at the top or bottom and not always in the middle and so audio processing companies came up with the idea that since the audio was digitized, why don’t we add two more speakers (above and below, creating a 7.1 format.
Again, this was still not enough for designers who wanted to create even  more realistic audio to match what was happening on large screens, and the idea of ‘objects’ was developed.  Object oriented audio means that aside from the standard 7.1 locations where sounds can be located, certain sounds (objects) are given metadata that allows them to be placed anywhere in the spatial realm but also allows them to move in 3 dimensional space.  This means that a sound engineer can assign a particular sound (loosely defined as a track) as an object and move it to match an object moving on the screen, no matter what direction it moves.   Once assigned and tracked by the engineer that audio object will always appear to follow the image on the screen.
This technology is very effective in theaters and in residential environments where the required number of speakers can be placed, but with the expansion of mobile devices and earbuds, the world of audio plunged back into the dark ages.  Early ear buds (some still are) sounded like tin cans and the many hours of time artists and engineers spent trying to make a recording sound optimal were reduced to a tiny vibrating disc that had the frequency response of a 1950’s car radio.  Ear buds have improved, at least to a degree, but audio that was mixed to 5.1 or 7.1 became flat without the additional speakers that earbuds could not provide.
Implementations of Dolby Digital+™, the most popular digital audio format, began to appear in mobile devices, allowing 3D spatial audio to be implemented in headphones but was a bit limited and mixes had to be adjusted to compensate for the lack of 5.1 or 7.1 speakers, but Apple decided that it could do more than just provide relatively expensive earbuds to its users and came up with the idea of ‘Spatial Audio’.  Spatial Audio uses the accellerometer and gyroscope found in mobile devices to map the sound field to the users head movements, so if the user turns toward the left, the audio moves the same way.  As always, you would need an Apple device to use spatial audio (some Beats products also work) and the Air Pods must be 3rd generation to use the function, but with the release of iOS 16 Apple has taken the idea further and this is where ToF comes in.
Apple users can use their iPhone to ‘map’ their head and ears.  Similar to the Face ID setup, you not only hold the phone in front of your head but you also ‘map’ each side so the system can get an image of your ears and head shape from a number of different angles.  Once the process is completed iOS 16 will remember your ‘head configuration’ so changing Air Pods will not mean a bunch of new head scans.  Once you have been scanned you now have ‘Personalized Spatial Audio’ which is said to reduce the audio artifacts that appear when algorithms convert 3 dimensional audio to headphone formats, but the difference is likely to be rather elusive for the average user.  That said, the idea of mapping audio to each user is akin to making sure that the speakers in a 5.1 or 7.1 set-up are in the proper locations and is certainly a path toward improving audio when using earbuds.
Having been in the audio engineering business years before entering the financial world we can appreciate Apple’s pursuit of improving the audio experience, despite the fact that it is done through tiny speakers jammed intoi your ears.  Any system that helps to recreate the subtleties that are so painstakingly added to recorded music are o.k. with us and we commend Apple for trying, even though we expect the average Air Pod user is likely to never look at audio settings or listens with one bud out.  Yes we are audio purists and elitists and listen only to FLACs when using headphone (not earbuds) and vynal when listening on speakers, but we appreciate Apple’s efforts to make the earbud experience a bit more realistic.

According to local South Korean press, Samsung Electronics has notified major suppliers that workers at its Vietnam smartphone assembly plant will be reducing the number of days they work each week, with some lines as low as 3 days/week.  While unusual in anticipation of the August release of the Galaxy Fold/Flip lines, it is in keeping with the target reductions we have seen from Samsung itself and a number of its customers.  Samsung’s Vietnam assembly plant would be responsible for ~55% of Samsung’s smartphone volume this year, which would amount to ~154m units (280m total target) or 12.8m/month.  We know that a substantial portion of the Samsung Galaxy foldable line was assembled in Vietnam last year, with smaller amounts assembled in Brazil and South Korea, so with 6 months to produce, assemble, and ship ~10m foldable (series 4) units expected to be shipped this year we would expect that the Vietnam plant is scheduled to assemble ~8m units, with the remainder assembled in Brazil and South Korea. 
With maximum production in July for August shipment, the 2m Galaxy Folds we would expect for the month could be theoretically produced in 4.67 days utilizing the entire Vietnam plant, so utilizing 25% of the plant’s resources, a more realistic view, would take a bit over 18 days, which could be accomplished even if those lines were running 4 days/ week for half of the month, and likely the Galaxy Fold assembly lines would be the ones still running 5 days/week.  More likely would be reductions to 3 or 4 day/week on lines for outside customers, where the release of new product was not imminent, so we see the reductions as in line with the overall weakness in the smartphone market.

As we have noted previously the India smartphone market is the 2nd largest globally and represents a large opportunity for smartphone vendors who are able to understand the nuances of this vast country.  That said, India’s GNI (2020) was $1,900/capita, which compares with $64,140 in the US, $10,550 in China, $116,440 in Liechtenstein (the highest), $230 in Burundi (the lowest), and $11,077 for the world combined.  In order to cater to the entire Indian population, aside from flagship models, smartphone brands must pack many features into low and mid-priced phones, something Chinese brands are quite good at, and if we look at the top 10 best-selling smartphones in the country, as shown in Table 1, we can see that all but one are under $300 and two of the lowest priced models are among the top 3 sellers.

​We have mentioned Samsung’s continuing foray in commercializing Micro-LED TVs, with the most recent innovation being the impending release of their 110” Micro-LED based TV to Chinese residents.  The promotion is being done through JD.com (JD) with the device officially offered on June 18.  Despite the price of $156,145 US (1,049,999 yuan) more than 1,500 folks have signed up for an appointment to see the set, which has 4K UHD resolution, a 120Hz refresh rate, supports HDR10+ and has a peak brightness of 2,000 nits (more likely ~1,600), which is about twice that of other types of high-end TVs and far brighter than typical sets which are ~300 nits.  

In the US (2020) Christmas is the biggest spending holiday, generating ~84% of yearly retail sales, with Labor Day a distant 2nd at 3.66%, but that does not preclude retailers from offering financial inducements to encourage shoppers during lesser holidays, especially when demand has been weak in previous months and inventories are high.  With Memorial Day coming up on Monday, retailers, both brick & mortar and on-line, are beginning to offer discounts to grab some attention and stimulate CE sales.  We went back to Samsung’s (005930.KS) Mini-LED/QD TV line to see if there have been significant price changes in both the older 2021 line and the new 2022 line.
For reference Samsung introduced its 8K/4K Mini-LED/Quantum Dot TV line in May of last year, offering two categories of 8K Mini-LED/QD TVs, two categories of Mini-LED/QD 4K TVs, and three lines of Quantum Dot only TVs, for a total of 35 different models.  This year they updated those lines and brought the model count down to 33, eliminating some models that had very similar features, but continued to sell much of the 2021 line along with the newer 2022 models.
 As we have been collecting pricing data on the 2021 line since its release, the latest round of discounts has now brought the price of last year’s Mini-LED/QD and QD only line down from 29.2% early this month (from original price last May) to down 34.2% currently, although only 24 of the 35 models were at their lowest price point, down from 27 earlier this month.  8K Mini-LED/QD sets have declined the most since last year, down 41.7%, while 4K Mini-LED/QD sets have declined 39.9% over the last year, with QD only sets down 28.1% in the aggregate.
Since the Samsung 2022 Mini-LED/QD line was released in April today’s readings are the first to show discounting from those original prices, with an overall decline of 7.0% from initial April pricing, andthat includes one model set (4K Mini-LED/QD) that was just released.  8K Mini-LED/QD sets declined 8.1%, while 4K Mini-LED/QD sets declined 5.3%, and QD only sets dropped 8.3%.  In order to illustrate the price path of the 2021 models and the staring points of the equivalent 2022 models we have the price charts for the various models below.  W note that while the 2021 timeline is accurate, we have added the 2022 models as if they followed the same 2021 timeline to see how they track against last year’s price reductions and starting points, with the 2022 models represented as dotted lines. 
In most cases the 2022 line initial prices were lower than those in 2021, with the average 2022 starting price for the entire line 6.7% below the initial price of the 2021 line, which would portend interim and holiday pricing for the 2022 line below that of last year.  LCD TV panel prices have certainly come down on a y/y basis and we expect Mini-LED backlight arrays have also been reduced in price as new suppliers enter the market, but other components, raw materials, and transport costs have increased, offsetting some of those panel and backlight price declines.  Chinese brand TCL (000100.CH), the first TV brand to offer Mini-LED TV sets, has just released their 2022 (4th generation) Mini-LED/QD set line, which is priced considerably below the Samsung line, which would likely account for Samsung’s first round of price cuts (see Table 1 ), although Samsung considers its TV line to have more sophisticated features and a higher quality than Chinese brands and therefore deserving of a premium.  Consumers will determine if that is true for this line….

India is the 2nd largest market for smartphones and hosts assembly and component manufacturing for Samsung (005930.KS), Apple, Xiaomi (1810.HK), Vivo (pvt), Oppo (pvt), and others, but the country does not have any capability for producing LCD or OLED displays themselves.  The Indian government has sponsored various incentive programs over the last few years to attract producers to produce displays locally but most panel manufacturers are wary of building a new fab without the specialized infrastructure needed to support such an endeavor.  Such display complexes in Taiwan, South Korea, Japan and China are built around component supplier manufacturers, some of which are situated adjacent to the display facility to reduce transportation issues, and while India does have a plentiful supply of workers for assembly and similar processes, the country lacks both the supporting infrastructure (including reliable power and water) and the skilled talent to operate and maintain display fabs.
Display projects are expensive ($3b to $b typically for OLED) and require considerable government support both logistically and financially, to become a reality, and we have seen a number of display projects in China come and go over the last decade because of a lack of management and operating expertise, even with the support of the government, so when we read that a company with no experience in the display industry is ‘looking to sign an MOU with one Indian state within the next few weeks’ concerning such a project.  The company is Rajesh Exports (RJEX.IN), a Bangalore based company that is, according to the company, the largest processor of gold globally and the world’s lowest cost gold jewelers producer.  The company, also investing in the EV market (no experience there either), is looking to take advantage of the Indian government’s semiconductor incentives through a subsidiary Elest (pvt) in order to gain access to the potential financial funding, but will also fund through ‘internal accruals’, along with private equity infusions after the first year, with the project taking between 6 and 7 years.
So far there are 5 companies who have applied to access the government funding, committing a total of $20.5b, with one company having signed an agreement under the semiconductor and display portion of the incentives, ISMC Digital Fab (pvt) based in Mumbai, for a $3b plant, while other participants continue to look for deals with Indian state governments.  There is no doubt that India is a growing market for CE products and one that can support considerable assembly and board level production, but we are less sure that display projects are currently a viable alternative to China, Taiwan, Korea, or Japan, especially as the need for expertise in OLED displays manufacturing continues to grow.  Not saying it can’t happen, but most of the major display manufacturers have passed on the idea, which leaves the territory open to others, regardless of their experience.  Even with considerable government funding we give such display projects a relatively low chance of success and remind investors that Foxconn (2354.TT), the world’s largest assembler of CE products and the largest assembler in India, still has a mostly empty campus in Wisconsin that was going to be the first LCD fab in the US…still waiting on that one.