Early 4Q smartphone shipment readings have just started coming in, with even some of the more previous forecasts seeing additional reductions.  One source that had estimated total smartphone shipments for 2022 of 1.176b units only a bit over a month ago, cut its full year 2022 forecast by an additional 1%, doing the same for this year’s estimate, and reduced its 5G smartphone shipment estimate for 2022 by 2.6%, along with a similar reduction in this year’s target.  While none of this is surprising, those estimates were among the most aggressive toward the downside, and only 5 weeks later are being reduced, which gives some measure of by how much the global CE space saw demand decline. 
If the trend is any indication, we would expect further reductions for 1Q, although Samsung’s typical flagship (non-foldable) release schedule will help a bit.  While we might have seen the effects of inflation on CE product demand at its worst in 4Q, we expect demand to show only modest signs of recovery on a y/y basis given the demand strength seen in 1Q ’22, and while we still expect those comparisons to be negative in 2Q, 3Q should begin to see such comparisons remain flat or turn positive.  Unfortunately much of that scenario is based on how poorly the CE space did in 2H ’22, so there are still questions as to what might help push demand in the back half of this year and those are far from being answered.  As Chinese New Year comes relatively early this year (1/22), results from the holiday will give some help in understanding whether or by how much of a recovery will be seen in China, which will go a long way toward building a more realistic model for the 2023 year.

​Huawei (pvt) has been the target of anti-China sentiment in the US government going back to 2012 when government agencies were banned from using Huawei’s telecom equipment.  Things escalated further in 2019 when then President Trump added the company to the US Entities list, extending the ban to US commercial telecom networks, and eventually tightening the rules to force both US and foreign companies from supplying advanced semiconductor technology and components to the company.  As is well documented this caused Huawei, once the 2nd largest smartphone vendor behind Samsung (005930.KS)[1], to fall to a share 85% below its peak, while its global telecom business also declined significantly.
Huawei’s founder vowed that the company would survive the loss of US components and technology by building local sourcing with the help of the Chinese government.  Over the past few years Huawei itself, and many Chinese government sponsored programs and subsidy enticements have helped to build the infrastructure that Huawei, and other banned Chinese companies need to survive, but it is hard to gauge how much dependency Huawei still has on foreign components given the Chinese government’s positively biased propaganda extoling the virtues of locally produced components. A recent teardown of Huawei’s Mate 50 Pro, the company’s most popular smartphone (released in September of 2022) gives some indication as to the progress Huawei has made toward local sourcing.
According to the most recent teardown, ~90% of the components in the Huawei Mate 50 Pro smartphone are sourced from Chinese companies.  The display, which tends to be the most costly single component, is sourced from BOE (200725.CH) and Visionox (002387.CH), which is not surprising,, with the lens cover supplied by Lens Technology (300433.CH), with a long list of Chinese companies supplying everything from structural parts, analog chips, batteries, PCBs, and touch and fingerprint ID components, but there were still a variety of components produced outside of China, some of which are key components.
In particular Qualcomm (QCOM) provides the 4G processor, a number of power management chips, an audio codec, RF transceiver, Wi-Fi, and power amplifier, many of which operate under it’s Snapdragon 8+ Gen 1 processor that runs the phone.  SK Hynix (000660.KS), Samsung (00930.KS) , and Micron (MU) provide memory, along with HiSilicon (pvt), which is owned by Huawei.  Qorvo (QRVO) provides RF front-end silicon, ST Micro (STM) supplies encryption protection, NXP (NXPI) NFC, audio power amp, and battery charging management, while Maxim (ADI), IDT (IDT), Skyworks (SWKS) and Broadcom (AVGO) all supply various sensors and other silicon.
While Huawei has developed its own OS (Harmony 3.0) the company must still rely on outside companies for its main processor, the Qualcomm Snap 8+ which is produced using a 4nm process as China’s silicon fabs have been unable to develop the necessary technology to duplicate much silicon at these node levels.  Even more stringent limitations on EUV and potentially DUV tools from ASML (ASML) have made things even harder, forcing the Chinese semiconductor industry to try to develop such tools internally, a process that will take years.  The big issue that still remains however is the inability to access current versions of Android or access to the Google (GOOG) store applications, which continues to keep Huawei’s markets primarily in China.
That said, Huawei has certainly gone a long way from the over 70% non-local component content seen a few years back, and while there have been fits and starts as to negotiations between Huawei and the US government, we expect little will change unless the global (and US) semiconductor industry goes into a sustained downturn, at which point we would expect some of those restrictions to be eased, although that would likely not be this year.  In the interim, Huawei will have to try to eke out another percent or two of local sourcing to keep from inciting the US government to tighten sanctions further.


[1] Huawei – 19.4% Samsung 19.5% in 2Q ’20 according to our composite smartphone shipment database.

​As the world’s largest smartphone brand, Samsung presents consumers with a large variety of smartphones at as many price points as possible, but while the aim is to capture every possible smartphone buyer, be it a potential $116 M04 series buyer or a $1,150 Z Fold series buyer, presenting such a wide variety of models and price points can become an expensive proposition from both a production cost perspective and a marketing perspective.  The chart below shows the number of models that Samsung has offered each year since 2016 compared to normalized (2016) global smartphone shipments and those of Samsung alone.  It can be seen that while global and Samsung’s own smartphone shipments declined between 2018 and 2022 (we assume a flat 4Q ’22), the number of models offered by Samsung increased until 2021 when offerings began to be reduced, now falling below the 2016 starting point and nearing the low point seen in 2017.
Given the prospects for a weak 1Q ’23 and relatively flat global smartphone shipments this year, we expect that Samsung will reduce the number of models it offers again this year, particularly for those lines where volumes have been decreasing.  We expect there will be a new foldable model released this year, likely a double folding smartphone, but we also expect the flagship ‘S’ line to be narrowed to two, rather than three models, as rumors that Samsung has abandon 2023 development of the Galaxy S+ line to concentrate on the better selling ‘regular S’ and the Galaxy S Ultra, which has replaced the former Galaxy Note line, also cannibalized by the Galaxy Fold series.  Samsung’s Mid-priced Galaxy A series and the lower priced Galaxy M series have some price overlaps, so we would expect to see at least two model eliminations in those series, after the A40 and M40 series were eliminated last year.
All in, Samsung needs to continue to focus on best selling models in each series to keep its own component inventory levels low, along with those of its OED/OEM partners, especially given the increases seen in component costs last year.  All things to all people is a great philosophy but it doesn’t take into account the inventory, marketing, and stocking costs associated with smaller volume models, and against a backdrop of relatively weak overall smartphone volume growth, the necessity to focus on higher margin and higher volume models becomes even more important.   We expect 2023 will see an overall continuing reduction in the number of smartphone models Samsung offers, with an emphasis on the top and bottom models in each smartphone price tier.

We have mentioned previously that the Indian government has been investigating a number of Chinese smartphone companies that operate on the sub-continent, with Xiaomi (1810.HK), Vivo (pvt) and Oppo (pvt) seemingly in the governmental crosshairs.  While financials and business practices are certainly the focus of these investigations and a number of discrepancies have already been found, border conflicts between China and India have raised the level of tension between the two for the last 2+ years and have politicized the fact that Chinese companies are the dominant suppliers of smartphones to the Indian market with a 62.3% share in 3Q.
Things have taken a turn for the worse this week when Indian authorities halted the exportation of some 27,000 Vivo smartphones (value of ~$15m) from be shipped out of India to other countries.  The Vivo phones were produced in India at Vivo’s Noida facility, which the company built in 2015 and has increased production from 50m units last year to 60m this year, with a target of 120m units in the future.  Vivo can meet all of its smartphone demand for India itself currently and has just begun shipping the excess to nearby countries, such as Saudi Arabia and Thailand.  The phones in question are being held at the New Delhi airport over questionable export declarations, particularly their value.  India’s own cellular and electronics lobbying association wrote a letter to the government, asking for a quick release of the devices and how the incident is a negative toward the encouragement of manufacturing for export in the country, but the government has refused to comment on the investigation.
All in, the conflicts between China’s smartphone vendors and the Indian government will do little to encourage companies to establish or increase their manufacturing bases in India, but at the same time, Chinese smartphone brands have been playing fast and loose with import and export rules and have been extremely ‘creative’ when it comes to financials, finding many ways to show losses that allow for tax incentives and subsidies on a local basis, and profits for the parent companies in China.  As India is relatively new to the global manufacturing world, and is somewhat unused to the ‘Chinese way’ of doing business under a totalitarian government that hides considerable graft and subterfuge, they seem to have decided to show that they will not stand for such double-dealing recently, and while that will counter some of their “Made in India” momentum, it does set the tone for a more rational approach to manufacturers from other countries, particularly semiconductor companies that might be looking to diversify away from China while still feeding a large and growing market. 
As the two counties now have populations that are almost the same (China is the larger by 2.76%) and India is a Democracy while China is a single-party dictatorship, India’s show of strength toward Chinese companies, despite their dependance on, puts them in stead with the US and its allies, who are key to developing the infrastructure necessary to build India’s electronics and semiconductor business.  Hopefully these skirmishes do not move Chinese smartphone vendors out of the country before others, such as Samsung (005930.KS), can fill the gap, although a key executive at Xiaomi’s India division resigned yesterday as the case against the company, whose assets have been seized, winds through governmental channels. 

The China Academy for Information & Communications (CAICT) has released China’s smartphone shipments for September which came in at 20.922m units, a bit above our 19.79m unit estimate, putting the month up 10.22% and down only 2.2% y/y.  While the slight outperformance is a positive, September 2021 was a particularly weak month, followed by stronger showings during the next three months.  This will make y/y comparisons considerably more difficult for the remainder of the year and into January unless there is a meaningful upswell in Chinese smartphone demand.  Discounting could be a factor in such a scenario, and there is likely a bit of pent-up demand to be released as the country eases it COVID stance, but we see those as relatively small factors rather than creating significant momentum.
5G shipments were 15.104m units, up 5.9% m/m and essentially flat y/y, while representing 72.2% of all phones shipped on the Mainland in September, a bit lower than in past months this year.  It is difficult to attribute the lower 5G share to a singular factor, but we would expect the overall macro situation might attract consumers to lower tier phones, where 5G is less penetrated.  We would become concerned if the 5G share fell below 70% for more than a month or so, but our expectation is for a range between 70% and 80% for 2023, and our overall expectations for full year smartphone shipments in China remains at 252m units.

​Honor (pvt) was the #1 smartphone brand in China in 2Q and the #2 brand in 3Q.  The brand has been around since 2013 but went through a major change in November 2020 when the brand was sold by then parent Huawei (pvt) to a group of the company’s suppliers and distributors, and a state-owned supervisory organization.  The reason for the sale was the sanctions that the US government had placed on Huawei, with the company’s founder indicating that while Huawei itself would fall under the US rules, if Honor was an independent company, it would be able to avoid the US sanctions and survive as a company.
Honor has done well for itself over the last few years and has challenged Xiaomi (1810.HK), typically the smartphone share leader in China, a number of times since its divestiture from Huawei and continues to grow its base in China while expanding its product offerings to laptops, tablets, and wearables.  With just a bit under 50% of Honor’s phones being OLED based, a number of Chinese OLED producers are vying for the company’s smartphone business.  China’s Visionox (002387.CH) has most recently supplied the OLED display for the Honor 70, released in June, while BOE (200725.CH) has supplied displays for the Honor 60, Magic 3, and Honor’s Magic V foldable.
It seems that BOE is not taking any chances that it might fall behind other suppliers with Honor as the fastest growing Chinese smartphone brand, and has taken a stake in the company, although has not disclosed the size of the investment, stating, “It has not reached the disclosure standards”, meaning it is not large enough that it has to be disclosed in a filing.  That said, with BOE’s investment, once again rumors that Honor will be filing for listing on one of the Chinese exchanges have resurfaced, as they have a number of times since the spin-off.  Some Chinese tipsters have insisted that there was a requirement in the purchase agreement that the company would submit an IPO within 3 years from its separation from Huawei, which would be November of 2023, although that remains unconfirmed.
This is the second recent investment BOE has made recently, after taking a ~$291m controlling stake in HC Semitek (300323.CH), a supplier of LEDs for BOE’s mini-LED array business, so it seems that BOE is bent on making sure it has a favorable position with suppliers, in this case both semiconductors and LEDs.  BOE calls these acquisitions ‘anti-cyclical’, which seems a bit confusing as we expect the LED business in China follows the same basic economic patterns as does the display business, and while the semiconductor business is a bit more of a wild card (or has been recently), we expect the ‘anti-cyclical’ theory is really the idea that under poor macro-economic situations, BOE will still have direct access to basic components, avoiding the shortages that plagued the CE space last year and earlier this year, and even more pressing problem that could recur in the future.
These protective moves by BOE are commendable, and while the company will still be at risk for display glass substrates, given China’s lack of reliable large-area display glass production, BOE has had a long-standing relationship with Corning (GLW), who has built glass substrate production facilities alongside BOE display fabs.  Further, they would be in the same situation with Universal Display (OLED), who is the exclusive supplier of phosphorescent OLED emitters that are the basis for BOE’s OLED display production.  We only mention this because there has been considerable chatter about the US government adding the display industry to the trade restrictions it has imposed on the Chinese semiconductor industry, and while we expect a portion of BOE’s motivation for its recent acquisitions and investments might have something to do with that fear, we expect the shortages the company experienced is the key motivation.
From the perspective of how a ban on trade with the Chinese display industry would affect the companies mentioned above, 31.8% of Corning’s sales in 2021 were in China, along with 23.2% of its long-term assets, while UDC saw 34.7% of its revenue in 2021 come from the Mainland.  Aside from the considerable damage such a ban would do to the two companies mentioned above, there are innumerable other US companies in the display supply chain that would also be affected if such a ban were to be enacted.  Since the US does not have a localized ‘display’ industry that competes directly with China, it seems a stretch to envision such a ban, so we are doubtful that there is reasoning behind such talk, other than from a political standpoint, but we also note that the semiconductor trade bans have gone further than we would have thought, so we cannot rule anything out.  As BOE seems to be proactive, even in the midst of a weak CE scenario, we give them credit for at least trying to avoid the same issues that caused problems during the throes of the COVID pandemic and perhaps the foreshadowing of another potential issue that could face the Chinese display industry.

​As we have noted previously results from China’s 11/11 shopping holiday were tepid at best for the CE space, with some categories seeing considerable declines on a y/y basis.  Data from Strategy Analytics concerning smartphone sales during the holiday paint a bleak picture, with ~9m units sold, down ~35% y/y and lower than the 9.6m units sold in 2020.  On the ‘almost’ positive side, the retail value of those sales was up 10% y/y as the mix of higher-end devices was better than last year, but the overall value of smartphone sales during the holiday was down ~29% to $5.28b US.  Apple (AAPL) was the winner in terms of both unit volume and dollar value, selling 3.5m units, down ~27%, staying ahead of the overall market, and generated ~$3.5b in sales (~$1,000 avg. price), garnering a 39% share of units and a 68% share of revenue.  Xiaomi took 2nd place, selling ~2.8m units and generating ~$670m, while Honor (see above) generated a roughly 8% volume share, up slightly y/y.  TV sales during the shopping holiday were also rumored to have been weak this year but we have yet to see quantifiable data.

​From the title, one might surmise that mobile phone shipments in China have been weak, which has certainly been the case, but more to the title is China’s strange delay in providing monthly data on mobile phone shipments in China through its usual source, the China Academy for Information and Communication (CAICT).  Typically, CAICT releases monthly smartphone shipment data a month or so behind the relevant month, although this year they seem to have slowed the process considerably, with the last release being for August.  Perhaps there has been a mandate from the government to slow the flow of negative data under the guise of COVID related issues, or just a general malaise over reporting what is likely increasingly bad news, but either way, the best we can see is August data as shown below.
August saw mobile phone shipments in China decrease by 4.6% m/m and by 21.9% y/y to 18.979m units, a bit below our estimate of 19.08m units.  Smartphone shipments were 18.135m units, down 5.1% m/m and down 21.5% y/y, while 5G phones represented 75.2% of total shipments, down 2.9% m/m and down 19.3% y/y.  Domestic brand shipments were 17.87m units, down 2.3% m/m and down 21.6% y/y but represented 94.2% of total shipments, the highest level we have seen since 9/2021.  We note that August data is rather opaque as it does not represent the most recent downward leg of the CE cycle, and our estimate for Chinese mobile shipments for the 2022 year drops a bit lower to 252m units, now down 28.2% y/y.
We would expect a continuation of the weakness seen to date in the Chinese smartphone market, with the only saving grace being a relatively large number of new models being released in August (albeit still down on a y/y basis), and the release of the iPhone 14 family, although as noted above, shipments of some models have been pushed to later in the quarter or into early 2023.  5G remains strong overall although y/y growth will be difficult for the remainder of the year as a strong 4Q last year will foil y/y growth and overall smartphone unit volume in China remains extremely weak.

​As we noted previously Foxconn’s (2354.TT) smartphone assembly plant in Zhengzhou has faced continuing COVID restrictions that have limited its ability to assemble the iPhone 14 family.  In October the wait for delivery of some iPhone 14 models was extended by two weeks and in November, extended for another week.  It seems that while the iPhone 14 and the iPhone 14+ are available for store pickup or same day delivery in China, the iPhone 14 Pro and Pro Max are seeing delivery dates that extend in January.  The iPhone 14 and iPhone 14 + displays are produced by Samsung Display (pvt), LG Display (LPL), and China’s BOE (200725.CH), while the iPhone 14 Pro and Pro Max displays are produced by Samsung Display and LG Display.
With ~15% of iPhone sales occurring in China, and the same issue facing both orders placed on the Apple store (on-line) and other local e-commerce sites, potential customers have been vocal about the delays on social media, especially as most are used to Apple delivering before the promised date in previous years.  Foxconn’s plant, which employs up to 300,000 workers during peak season, is said to be short by ~100,000 currently as many left at the onset of the lockdown last month.   Apple’s warning about delays in shipments seems to have not satisfied Chinese consumers but little data as to cancellations has appeared, so we expect most will complain about their deliveries being pushed past the end of the year, but there is little that can be done until Foxconn is able to restore full service in Zhengzhou. 

​In June we noted that Foxconn (2354.TT) had been offering aggressive bonuses to workers at its Zhengzhou assembly plant known as “iPhone City”, where it employs over 200,000 to assemble iPhones and similar Apple (AAPL) products.  The incentives were offered to assuage worker fears that COVID restrictions might keep them at the plant for an extended period of time and limit their ability to travel to their homes when not working.  Last week we noted that the Zhengzhou government had done just as the worker’s feared and locked down the city, with many workers having anticipated the move and left the plant days earlier.  Foxconn provides for the workers that remain on campus with dormitories, food, and a few stores, but communal meals and other typical amenities are restricted.
Early indications pointed to Foxconn’s ability to transfer some of the Zhengzhou workflow to its assembly plant in Shenzhen, which faced its own closings in March and July, but was still operating at normal capacity.  In our note last week we calculated that while the issues in Zhengzhou could push out delivery times, they would not substantially impact 4th quarter iPhone shipments, though in worst case could push some sales into 1Q ‘23.  It seems that we were wrong as Apple made the following announcement this morning:
“We continue to see strong demand for iPhone 14 Pro and iPhone 14 Pro Max models.  However, we now expect lower iPhone 14 Pro and iPhone 14 Pro Max shipments than we previously anticipated and customers will experience longer wait times to receive their new products.” 
While we expect there might be a bit of the general economic macro malaise built into that statement, it seems more workers than expected anticipated the lockdown and took off before the restrictions began, leaving the factory at lower capacity than we had expected.  Apple did not give specific targets for 4Q iPhone shipments, but street expectations seem to be concentrated between 50m and 55m units for this year.  Apple’s previously had an optimistic view of iPhone shipments, as in June the company was said to have increased orders for iPhone components from suppliers by 5%, and during the pre-order period that started September 9, early pre-orders, especially for the iPhone 14 Pro and Pro Max, were said to be ahead of the corresponding iPhone 13 models released last year.  With this morning’s iPhone statement and what is likely another week+ of lockdown in Zhengzhou, the lockdown seems to be having a greater impact than we originally thought.  Our estimation of an 11.2m unit shortfall seemed high at the time and a bit extreme, but today’s comments from Apple make it less so.