The trade press in Korea is reporting that the CEO of Samsung’s mobile division visited the US twice earlier this year to negotiate with chip suppliers to increase the volumes of application processors allocated to Samsung mobile products.  Tae-moon Roh visited ‘a global application processor maker’, likely Qualcomm (QCOM) but was unable to secure a commitment to increase volumes as the supplier was unable to increase production and was honoring commitments made to other CE companies.  Roh was said to be so upset over his inability to increase Samsung’s allocation that he left a senior VP behind in the US, ordering them to return only once the issue was resolved.  The VP was said to remain in the US for another 3 months.
This unusual circumstance, where Samsung is refused such a request, is indicative of how tight the AP market has been, but is also a result of Samsung’s increasing reliance on ODMs in China for the design and assembly of some of the lower priced Samsung smartphones, a system developed by Roh when he took the Mobile reins in January 2020.  By outsourcing ~20% of the mobile division’s production, Samsung itself has become a smaller component buyer and therefore has less influence over suppliers as the OEMs can opt for different component suppliers than would be the case for Samsung flagship phones.
While we believe the decision to outsource some of Samsung’s mobile device design in order for the company to stay competitive against Chinese brands, the timing was unfortunate.  COVID-19 has disrupted many aspects of the mobile supply chain and continues to do so at a time when Samsung is trying to make a transition from declining flagship sales (Galaxy S series and Galaxy Note) to Galaxy foldables, where Samsung has a clear advantage over other brands.  Not only has overall smartphone demand been weak, but the gap in sales between the older flagship legacy products and the new foldables is still large, and while prices for foldables are falling below $1,000, consumers are still a bit hesitant to buy into the foldable story.  With foldables representing less than 3% of Samsung’s smartphone shipments this year we would have to call this a ‘gap year’ for Samsung’s mobile division.

​Samsung (005930.KS) has had considerable success with what it calls the “Fan Editions” of a number of its smartphones, although the original “FE” model was a refurbished Galaxy Note 7, a phone that was recalled due to a overheating battery issue that caused some of the units to catch fire.  The popularity of the original Note 7, before the problems were discovered, led Samsung to replace the batteries in unsold Note 7s and sell them as the “Note 7 Fan Edition” about a year after the original release, which both attracted considerable attention and allowed Samsung to recoup a bit of the loss incurred during the recall.   The concept of a limited number of units that were similar to the original model, selling at a discount, gave a bit of cache to what might have looked like a heavily discount flagship smartphone, if the ‘FE’ moniker was not attached, so Samsung continued the idea with the release of the Galaxy S21 FE, a $700 version of the Galaxy S21 flagship, which sold for $1,000.  The S20 FE, released in October of last year (S20 was released in March 2020) also proved popular, with Samsung expecting to do the same with this year’s Galaxy S21.
Unfortunately, as we noted a number of times in June that the Galaxy S21 FE, which was originally expected to be released in August, was expected to be sold only in the US and Europe, due to a shortage of Qualcomm (QCOM) application processors, and later that production was halted for the same reason, with vague plans about pushing out the release until October.  It seems that Samsung has put the S21 FE back in production and while plans have yet to be finalized, the S21 FE is expected to be released some time in 4Q although likely in limited quantities at the onset. 
The good news is that Samsung’s return to production of the FE indicates that the shortage of application processors, at least for Samsung, is easing a bit, which could allow Samsung to have at least some chance of getting close to its internal smartphone shipment and share goals, especially given the popularity of the Fan Edition series.  That said, much will be determined by how many units Samsung can garner and when it is released, as it is already a month late and likely will be a bit capacity constrained going forward.  While overall foundry capacity remains tight, especially at 28nm and larger nodes, the Qualcomm AP is produced at Taiwan Semi (TSM) on 7nm (2nd Gen) so it is competing with high-end customers for fab time, rather than against every other foundry customer.  This obviously did not matter over the last month or so given the production halt, but Samsung seems to have been able to regain fab time at TSM recently, which could give them the ability to push FE production and squeeze out product up to and during the holidays.

​China’s smartphone shipments declined by 15.2% m/m and by 9.6% y/y in August.   Looking at the year thus far shipments have been 227m units, up 29.5% y/y but against the very weak early COVID-19 days last year.  The quarterly comparisons for this year are 1Q, up 100.2% y/y, 2Q down 26.9%, and thus far in 3Q up 7.7%.  But from a more qualitative point of view, the first four months of this year were volatile in the Chinese smartphone market, averaging 31.4m units/month and m/m swings between -45.6% and +65.6%, while the next four months have been relatively steady, averaging 25.4m units/month, with swings between -16.4% m/m and +11.8%.
There was a big jump in new models released in August, increasing from 26 in July to 57 in August, while this in itself is not unusual in that 3Q is usually the peak quarter during which new smartphones are released, but going back as far as 2017 September has always been the strongest month for new smartphone releases in China.  That would imply an even greater number of new models released on th Mainland in September (typically the increase of new models released in September on a m/m basis has been between 28.8% to 100%) unless the desire to anticipate the release of Apple’s (AAPL) iPhone 13 family pulled in many of those releases (we believe the former).
5G smartphone shipments in China were 17.69m units, down 22.5% m/m and up 9.4% y/y in August, a relatively weak month after a strong July, leading to a 72.8% share of total shipments.  While a bit on the low side in terms of absolute 5G shipments, 5G shipments have maintained a share above 70% since February of this year and we expect little change from that metric going forward, especially under the above assumption that September this year will see an increasing number of new model releases in China.  The share of 5G models out of all new models released in China this year has been averaging about 50%, which we also expect to stay consistent for the rest of the year.
 All in, shipments were as expected, to a bit lower, which reflects the increasing concerns over the economic effects of a resurgence of COVID-19 in China and a tight component market.  Based on our expectations for the remainder of the year, we expect total mobile shipments in China to be 333m units, up 8.1% over last year, but down from our original estimate (late 2020) of 364.3m units, which would have been up 18.3% y/y.    Based on our revised estimate, we expect 5G shipments in China to be between 248m and 255m units this year, which would be up between 53% and 56.7% y/y.

​In the Spring of 2012 a Pakistani citizen contacted an employee of AT&T (T) through Facebook using an alias, and convinced the employee to help him unlock AT&T smartphones.  He offered money and the incentive that he could earn more if he recruited other employees to join the scheme.  Muhammad Fahd, (real name) helped the recruits set up fake businesses and bank accounts, generate invoices, and got AT&T employees to use their company credentials to unlock phones for customers that were unable to qualify for an AT&T account.  In 2013 however, AT&T developed a more sophisticated unlocking system, making it more difficult to bypass the company’s protection software.  Fahd then hired a software developer to design malware that could be installed on AT&T devices with the company’s knowledge that would allow him to unlock phones more efficiently and in larger volumes, all done remotely.
Those AT&T employees ‘hired’ by Fahd gave him confidential information about the AT&T systems and company network access which he [passed on to his developer, allowing the developer to design malware that could enter and work on AT&T’s system computers.  Over a period of ~3 years, the indictment against Fahd, made in 2017, indicated that ~1.9m smartphones had been unlocked by members of the nefarious group, generating (AT&T’s number) over $201m in lost revenue for the company, as those whose phones where unlocked, stopped making payments on their phones and likely moved to another carrier with the unlocked phone.  Fahd, was arrested in Hong Kong in 2018 and extradited to the US and eventually pleaded guilty to wire fraud last year.  The judge in the case ordered him to repay ~$200m and to serve 12 years in prison.  It might take a while to make much of what Fahd owes to the government as the wages for in-prison work ranges from $0.16 to $0.65/hour. (147,929 years at $0.65/hr.).

China’s largest panel producer BOE (200725.CH) has been trying to break into the Apple (AAPL) iPhone OLED display supply chain since Apple began using OLED displays back in 2017, and while the Chinese trade press has applauded any rumors to the positive, citing China’s and BOE’s eventual dominance over South Korean OLED panel producers, there has been little to get excited about.  There have been reviews where Apple has requested samples from BOE to meet certain evaluation standards and production abilities, but Apple is a strict taskmaster when it comes to components and requires both tight specification control and yield compliance which heretofore has not been met.
We believe at times BOE has been able to provide small quantities of OLED displays, primarily for screen repair and replacements, but has not quite been able to meet Apple’s standards.  While likely embarrassing for BOE management, since the dance between the company and Apple has been reasonably public, we certainly give them credit for trying without hesitancy, especially knowing that even LG Display, second only to Samsung Display as Apple’s RGB OLED display supplier, saw its share of Apple’s OLED display business shrink after a problem with a limited number of LGD’s displays were made public.
There could be some celebrating at BOE headquarters in Beijing as it seems Apple has given BOE ‘conditional’ approval as an OLED supplier for the iPhone 13.  In this case conditional means that BOE has not yet met full compliance with Apple’s standards, but has a prescribed period during which to fix issues or to meet other Apple requirements in order to become a fully approved supplier.  We believe this is not the first time BOE has reached this stage with Apple, having failed to fully qualify previously, but at least they are back in the running once again and given the close similarity to the iPhone 12, which BOE has been approved to produce, this go round should be a bit easier than last year.
Regardless of whether BOE gets final approval we would expect volumes to be relatively small, likely less than 5m, potentially due to the fact that BOE would likely have to be separately qualified to produce LTPO OLED displays that are used in the two upper-tier iPhone models.  As Samsung Display is currently the only supplier of LTPO (VRR) OLED panels, both BOE and the more experienced LG Display would be looking to take share from SDC.  While LGD’s more extensive small panel OLED experience, we would expect that battle, should it occur next year, to be considerably more toward LGD’s favor.
All in, any progress Is a good thing for BOE on the Apple OLED front, given the typically high unit volumes and ‘once-a-year’ release process, but from Apple’s standpoint, BOE is the ideal leverage point to be used to squeeze out a few more pricing concessions from SDC and LGD.  We would expect Apple to push BOE with “if you were to get approval, we would need a better price”, and then take that back to SDC and LGD, and we would expect BOE to be a willing participant and one that would be willing to work for very tight margins in order to garner Apple’s favor.  But for BOE to become a high volume small panel OLED supplier to Apple, price is not the biggest factor and the massive amount of experience SDC has with small panel OLED will take years for BOE to develop while at the same time SDC and LGD keep pushing the OLED development cycle.  South Korea will inevitably lose small panel OLED share to China, but Chinese dominance is still a ways away as having the capacity to dominate is a paper metric while having the experience to dominate wins the game.

As we noted, Apple has maintained pricing for this year’s iPhone 13 family relative to last year, however in China the price of the new iPhone 13 series, while higher than in the US, is lower than the starting prices seen for the iPhone 12.  As can be seen in the table below base models of the iPhone 13 are less expensive than the iPhone 12 (original price) by between 3.2% and 13.3%, but still remain at a premium to US prices, which are between 13.5% and 21.5% less expensive.  Currency has played a part in the decrease, but Apple’s component cost leverage and a desire to stave off domestic competition are also factors.
Apple’s biggest competitors in China are from domestic brands, particularly Oppo (pvt), Vivo (pvt), and Xiaomi (1810.HK), whose share of 21.2%, 23.7%, and 17% all outperformed Apple’s 11.8% share in 2Q ’21.  That said, Apple will have at least a part of 3Q and all of 4Q to gain share now that the iPhone 13 has been released and we expect the lower price could attract a bit more attention, or at the least provide some competition against those Chinese domestic brands that have tried to move up to more premium oriented smartphone models, especially given the massive pressure put on Huawei by US trade sanctions.   While we expect Apple is looking to squeeze a few more share points out of China for the remainder of the year by lowering prices a bit, they will also likely slow those domestic brands from moving up the price curve at the same time.

​There are only a few places where data on Chinese smartphones is available, and fewer where the data is consistent and reliable, so we are always a bit hesitant when quoting statistics from unnamed or even named state organizations.  That said, the China Academy of Information & Communication, a well-known think tank that operates under the Ministry of Industry & Information Technology, the state-run organization that is responsible for regulating and developing almost anything involving communication, has been unusually consistent with both monthly smartphone unit volumes, and an occasional look into more detailed Chinese smartphone statistics.
A recent blurb from CAIC indicated how certain smartphone characteristics were broken down between 4G and 5G smartphone in 2Q, and while the data is certainly pointed toward presenting China’s 5G model in its best light, we were able to make some comparisons on a global rather than a regional basis to see how different the global metrics were from the CAICT data.
While 5” smartphones are not uncommon globally, looking at the 10 most popular smartphones on a global basis this year, we note that all are above 6.4” and as large as 6.78” (display size), so while China boasts that 76.9% of all smartphones shipped in 2Q were greater than 5” and 100% of all 5G smartphones were greater than 5”, we would have been more interested in 4G/5G smartphones 6” or greater, as the data would indicate more information about current consumer tastes, and when comparing the Chinese data to global data, 23.1% of all Chinese smartphones shipped in 2Q were under 5”, while only 7% of all global smartphones shipped were under 5”.  Looking at the global list of most popular smartphones, we were unable to find any smartphone (4G or 5G) under 5” within the top 70 most popular phones.
In the same way the Chinese data indicated that 74.4% of all smartphones shipped in 2Q had a resolution of 720 (HD) or better, while the global data indicated that 92.5% of all smartphones shipped globally were at least 720, although it seems that 5G smartphones in China are almost all (97.8%) 720p or greater while only 46.8% were 720 or greater on a global basis.  It is hard to reconcile that such a small number of global 5G smartphones would have 720 or greater resolution we are more suspect of the global data than the Chinese data in this case, as we expect few 5G smartphones would add much value to consumers at resolutions lower than 720.
Cameras are still a big deal to many smartphone buyers, although we wonder how many can actually tell the difference between an image taken with a 25MP camera and one taken on a 50MP camera, but according to the CAICT data all 5G smartphones shipped in China in 2Q had at least a 50MP main cameras, while on a global basis the data shows that only 42.6% of main smartphone cameras were at least 50MP.  Further, the CAICT data showed also that 100% of all 5G smartphones with selfie cameras had at least a 13MP selfie camera, while the global data showed that only 37.4% of 5G smartphones met the same criteria.  In this case we can see the possibility of inexpensive 5G smartphones that are more oriented toward high-speed data and voice than the necessity to take high quality photos, but again it remains hard to reconcile much of the Chinese and global data, but anyone who works with data, particularly big data, can tell you that how you present the data has as much to do with how it is perceived than the data itself, sort of the glass half full/half empty debate…

As we have noted previously, there are considerable differences between sources when it comes to smartphone shipment data.  In order to compensate for such dissimilarities we average shipment data from at least 6 and as many as 9 data sources.  While this does not allow for share totals that add up to 100%, it does remove the effect of unusually optimistic or pessimistic estimates from single sources.  Fig. 4 shows the top 6 Global Smartphone Brands from 1Q 2017 to 2Q 2021 and the share of that group relative to the total market.  Samsung (005930.KS) remains the smartphone shipment leader but is seriously being challenged by China’s Xiaomi (1810.HK), who has picked up much of the share loss from Huawei.  Oppo (pvt) and Vivo (pvt) have taken some share but are running close to trendline while Xiaomi has broken out of its typical range.  Apple’s (AAPL) ups and downs, due to its single release window makes it a harder read, but Fig. 5 shows only the trend lines for each brand, making directional changes a bit more obvious.  We note that the trend lines for Oppo and Vivo are so close that they completely overlap.
 

​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.

Despite the fact that smartphone prices, at least at the high-end, peaked out last year, smartphones are still expensive and even more expensive for smartphone brands to get rid of when they are traded in for new models.  In the US ~350,000 smartphones are disposed of EACH DAY of which only 15% are recycled.  Since 100% of all smartphones are repairable or recyclable, this leads to an enormous amount of waste being added to the planet, and these numbers are only for the US.  Looking at just a few of the recoverable materials in smartphones, we put together a table showing the value of four such materials based on the recycling of 1m smartphones.  Here’s what it looks like:

So making the case for recycling smartphones is an easy one to make, but most smartphones that are traded in can be repaired or refurbished, and that has become a big business for smartphone brands, particularly Apple (AAPL) who has a 44% share of the refurbished market and Samsung (005930.KS) who has a 20% share.  In fact Samsung has selling refurbished phones in the US and Europe on a limited basis since 2018, but has now undertaken a plan to expand its refurbished smartphone business by branding such phones as ‘Certified Used Phone’ and putting each potential certified phone through a battery of over 100 tests and inspections, along with a new battery and packaging, along with a 1 year warranty.
Samsung has set up a separate section on its US website for ‘Certified Re-Newed’ product and is selling over a dozen such models at substantial discounts, with some being offered as replacements for new units of the same model that are out of stock.  Here are a few examples:

​While we believe some of the motivation associated with refurbished smartphones is for the good of the planet, it also serves as a profit center for phones that have been turned in as part of smartphone brand upgrade discount programs.  Rather than recycle a phone, which has a holistic benefit, a refurbished phone generates a return, and brands capitalize on that holistic view on social media, while still making a profit on returned phones, and those who are willing to work with a 1 year warranty, which is not much different from many new phones, the discounts are quite appealing, especially if you are one of those who lose phones or tend to shorten their lives by not purchasing a protective case.