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. 

​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).
 

​You finished work, hopped into your car and head home, but when you get there you find that your apartment door is partially open.  You’ve been robbed!  After calling the police, the apartment management and a locksmith, you realize that since the thieves took your 65” Samsung (005930.KS) TV, you will be watching TV on your smartphone until you can get a chance to get to a store and buy a replacement. You get even angrier as you envision the robbers sitting around your beautiful TV with a few beers, watching the Lakers game and laughing about today’s caper.  Well, a call to Samsung and a few questions identifying you and your TV is going to give you at least a little satisfaction as Samsung then activates a remote ‘kill switch’, turning off your stolen TV and putting a damper on the burglars basketball bash. 
Samsung seems to have installed such a remote kill switch in its TVs, allowing the company to disable a stolen or lost TV in the same way your carrier can disable your smartphone if it is lost or stolen.  Samsung used this function when the population in South Africa (see our note 7/14/21) rioted over the detention of the country’s former president and a number of Samsung and LG Electronics (066590.KS) warehouses and factories were looted near the Durban airport.  Samsung was able to identify the stolen TVs taken from their distribution center in Cato Ridge and use the switch to disable the stolen sets.  A Samsung official stated "In keeping with our values to leverage the power of technology to resolve societal challenges, we will continuously develop and expand strategic products in our consumer electronics division with defence-grade security, purpose-built, with innovative and intuitive business tools designed for a new world. This technology can have a positive impact at this time, and will also be of use to both the industry and customers in the future".
While this is a handy item to have and one that might discourage a few potential thieves, if they knew of its existence, it does open the question as to whether the system by which Samsung is able to remotely control TVs is secure and whether it could be coopted by hackers looking to control your TV or worse, enter your network.  Backdoors, which are ways in which companies can enter software potentially to diagnose problems or make upgrades, are a vulnerability that hackers use to either gather information, effect ransomware, or to gain access to other hardware that might allow further illegal activity.  While backdoors are common in lots of software, they are a vulnerability and despite the potential security that the brand might profess concerning access, they are hard to control in absolute terms.  Turning off a stolen TV is a bit of justice for those who have been wronged but of little consequence in the long-run.  Good homeowners insurance and a security system would like be a better alternative.
 

Samsung Electronics (005930.KS) finally released its latest iteration of foldable smartphones, the Galaxy Z Fold 3 and the Galaxy Z Flip 3.  Given that there has been an endless number of ‘leaks’ associated with these two devices, there is little to say that hasn’t been said, so as Sgt. Joe Friday used to say “Just the facts, ma’am”

​Last week we mentioned that a group of 14 US House of Representatives Republicans sent a letter to the Department of Commerce requesting that Honor (pvt), a spin-off from Huawei, be included in the DOC’s ‘entity’ list of companies with whom suppliers must petition the US government to receive a license to trade, which in most cases is not granted.  According to a financial institution in Hong Kong, Honor sent a letter to its core dealers indicating that it may be listed in the near future and those dealers can purchase original shares.  According to the source, the subscription ranges from 5m yuan ($772,300 US) to 50m yuan $7.72m US) depending on the location of the dealer and the timing of the decision, as some regions require an almost immediate answer while others do not.  The top 10 dealers in each province have received the notice and are eligible to purchase shares.
While we are not quite sure how listing might change the status of Honor with the US government, some of the distributors stated that “We believe that the main purpose of the listing is to avoid US suppression.  If Honor has private shares after its listing, it will not be easy to suppress,” which does little to answer that question, but a recent comment from the President of Honor stated that while he does not exclude future listings, there is no plan to go public in the near future. “Glory (Honor) independence has only been eight or nine months, and we have never pursued overnight wealth.  Honor is thinking about how to compete with Apple (AAPL) in mobile phones and full-scenario products, and even surpass Apple.”
We believe the Honor brand sold between 6.7 and 8.4m units in 2Q ’21, against Apple’s ~44.3m units globally and Apple’s 7.9m to 8.6m units in China, so Honor can make a case for direct competition on the Mainland, but while Apple is certainly a presence in China (~8.4% share in 2Q), Vivo (pvt), the top smartphone brand in China, along with Oppo (pvt) and Xiaomi (1810.HK) have a combined share of over 40%, with Vivo alone at 16.7%, so Honor has a way to go in its home turf before it takes on other smartphone contenders.  Perhaps the company is expecting to raise capital to better compete, but we doubt it will change the minds of those intent on pushing the Huawei spin-off onto the DOC list and choking off their component supplier list.

Overall mobile phone shipments in China in July increased 11.8% m/m and saw a y/y increase of 28.6%, the first y/y increase seen on the Mainland since March.  We do note that July of 2020 was a weak month last year, following a strong rebound in 2Q ’20, after the onset of COVID-19 in 1Q.  The overall trend (black dotted line in Fig.1) remains consistent with the past 2 ½ years.  On a YTD basis, total smartphone shipments in China have been 202.82m units, up 15.6% y/y, again noting that the YTD comparison includes the very weak 1Q 2020.  Looking at the last 4 months gives a better picture of the state of China’s mobile phone shipments really are, as it shows the YTD for April through July down 17.11% in terms of total mobile shipments.
5G shipments however continue to grow, up 15.4% m/m and 64.2% y/y, and represented 79.6% of total shipments in July, the highest share since we have been collecting data.  A relative small number of new 5G models were released in China in July (11, representing 42.3% of total new models), this comes off an unusually large number of new models last month (20), which puts the average around 17 new 5G models/month, but given that Chinese consumers have now been able to buy 5G phones for over two years, there seems to be ample models to choose from, putting the focus on total 5G unit shipments.
Seasonality in the Chinese smartphone market runs (5 year average) 47.8% in the 1st half and 52.2% in the 2nd half.  As expected, 2020 was a bit different, with 49.7% in the 1st half and 50.3% in the 2nd, but we would expect this year to be closer to the 5 year average.  That would imply 190.2m units for the 2nd half of this year for a total of 364.34m units for the year, up 18.3% y/y and would be the first up year for the China smartphone market since the data was published.  Assuming and 80% share of total shipments for 5G smartphones, implied 2H 5G shipments would be 152.16 units, or 279.96m 5G units for the 2021 year, up 88.3% y/y.  While the 5G average share of total shipments has been lower than 80% for the year to date (see Fig. 2), the trend has been just under that amount for much of this year and will likely continue to rise for the rest of the year.
We hesitate to forecast Chinese smartphone shipments using averages however, as the pandemic does not seem to have been brought under control as much as we expected, and component shortages could further limit smartphone shipments.  We note also that Huawei (pvt) will be a much smaller component of China’s smartphone shipments this year, which is another mitigating factor, however it seems that other domestic and foreign brands have made up the very weak Huawei smartphone shipments thus far this year.

On 11/11/20 we noted that reports out of China had indicated that Huawei (pvt) was planning to sell its Honor (pvt) smartphone brand to a consortium led by the Shenzhen government and Digital China (000034.CH), the largest IT service provider in China.  A few days later the actual deal was announced, with a newly formed company Shenzhen Zhixin New Information Technology Co (state) the ultimate owner.  That organization was formed by the Shenzhen Smart City Technology Development Group, the majority shareholder, which is wholly-owned by the Shenzhen government, and over 30 agents and dealers of the Honor brand along with a number of investment firms.  Digital China, a spin-off of Lenovo (992.HK) was rumored to be part of the consortium but was never disclosed, while China Telecom (601728.CH), which is owned by the state government is said to also have a small stake.
Huawei had developed the Honor brand to broaden its smartphone offerings by adding a new mid/low tier line that would allow Huawei to maintain its stature, and found that the brand was even more successful than it had planned, and represented between 30% and 40% of Huawei’s smartphone shipments in China, and higher percentages outside of the country.  As the US continued to tighten restrictions on Huawei’s ability to sell product, eventually extending those restrictions to all suppliers whose products use American made components or are produced using US software, subsidiary Honor found it also was tacitly being included in the ban on its parent, and would likely be unable to procure the components it needed to continue production.  Parent Huawei was large enough to withstand the US trade sanctions, albeit not quite as easily as anticipated, but the Honor brand organization saw the handwriting on the wall.
While the actual price of the Honor brand purchase was not disclosed, it was assumed to be ~$15b, which essentially went from the Shenzhen government to Huawei, who then disavowed any connection to the brand.  The transaction was meant to separate the Honor brand from Huawei’s inclusion on the US Entities list, and Honor was then able to sign its own deals with US suppliers. Since then Honor has seen its share of the Chinese smartphone market vary between ~5% and 14% and has continued to develop and release 14 new smartphone models this year, shipping ~12m units in the 1st half.
However that success might be nearing an end if a group of 14 House Republicans get their way.  The group has requested that the ‘End-User Review Committee” of the Department of Commerce should include the Honor Device Company in the DOC’s Entity list and restrict the flow of US technology and software to the company, as it has done with Huawei and many of its subsidiaries.  Citing a 3rd party interview of a former analyst at a Washington DC think tank which suggested that the spin-off was guided by the Chinese Communist Party and revealed “the extent to which nominally private entities, such as Honor, are deeply embedded within a PRC ecosystem that leverages interconnections among the CCP, state-owned banks, local governments, and venture capital for strategic objectives.”  The group is requesting a response within two weeks and is requesting a briefing with the committee to “ensure the Administration is moving with enough speed to counter CCP attempts at export control evasion.”
The CEO of Honor responded to the letter at an event launching the company’s first ‘flagship’ smartphone since the spin-off.  He emphasized that Honor is now an independent company that is no longer involved with Huawei and said, “We believe that if we keep on doing well in what we do that all these problems can be solved” (see Fig. 1).  The new phone is based on the Qualcomm (QCOM) Snapdragon 888 chipset, whose CEO made positive comments about the phone through a pre-recorded message at the event.
While we certainly are not going to pick a side in this heavily political debate, there seems to be little hiding the fact that the Chinese government, whether directed by the CCP or motivated by face-saving, structured the Honor deal to skirt the devastating effects of the US trade ban, but this is something that happens all the time in China.  We have seen display companies taken over by state owned entities when they looked like they were heading toward failure and more recently with semiconductor start-ups that faced a lack of experienced management. 
The Honor spin-off also had the obvious hope behind it that the economics involved with many US and foreign companies would supersede the fact that it allowed the Chinese government to both bail out Huawei and try to ‘slip one by’ the US.  What they did not consider was that politicians in the US love to hang their hats on scapegoats when things are not going their way, and while China is certainly not without its faults, it has become a representation of the antithesis of the American way of life and therefore is a perfect stooge for US political grandstanding. 
Should Honor be restricted?  If Huawei is then Honor should but that begs the question as to why Huawei was put on the list in the first place.  Ostensibly it was because the US suspected that backdoors in Huawei’s telecom equipment was allowing the Chinese government to monitor US government communication, and then mushroomed into a more ‘…we can’t let them win…’ in the semiconductor space.  As we have said in the past, rather than winning by doing as much damage to your competitor as possible, perhaps winning by being more creative and innovative than your competitor is a better strategy.  It works for Apple (AAPL), but maybe we are just drifting toward the unicorns and rainbows view.

​Figure 1 - Rainbow Unicorns - Source: theunicornlife.com            Figure 2 - Trade War Cartoon - Source: Kevin Kallaugher

​Samsung Electronics (005930.KS) held their latest ‘unpacked’ event today, releasing 4 new products, all of which have been talked about in the tech media ad nauseam.  They are…the Galaxy Z Fold 3 smartphone, the Galaxy Z Flip 3, the Galaxy Watch 4, and Galaxy Buds 2.  They are all currently available for pre-order and will become available on August 27th.  The Z Fold 3 5G (unlocked) sells for $1,799 and the Galaxy Z Flip 3 (unlocked) sells for $999, both exactly as expected.  The Galaxy Watch 4 comes in two sizes in either Bluetooth or LTE, with the former needing to be paired with a smartphone and the later cell enabled.  The prices range from $145 to $115 for the LTE versions and $95 to $65 for the Bluetooth versions.  There is also a ‘Classic’ version that sells for between $195 and $165.  The Galaxy Buds 2 sell for $150.  Since these devices have been leaked for months, rather than spend time going over the specs of each device, we have attached links to Samsung’s site where the specs are available.