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.

Samsung Electronics, as the world’s largest producer of smartphones, has assembly plants across the entire globe, but over the last few years has farmed out both the design and assembly of some of its phones to outside sources under its Joint Development & Production program (JDM).    While Samsung shares in the design of these phones, the four outside assemblers work with Samsung on the design and are responsible for purchasing all components directly with suppliers, as opposed to OEMs, who are subcontractors and are told who they can order from.  Samsung has been increasing the amount of JDM it uses each year, moving from ~6% of total phone production in 2019, to over 10% in 2020 and is expected to reach almost 20% in 2023 in order to reduce the cost of Samsung’s low and mid-priced phones.
At the same time Samsung still produces the majority of its phones through its own facilities around the globe, utilizing lower-cost labor for the manually intensive assembly process.  Given the high cost of labor in South Korea, Samsung does little assembly work in its home country, with the majority of phone assembly going to factories it owns in Vietnam, but this year Vietnam has been plagued with COVID lockdowns and rapidly rising labor costs, up 6% this year after a one year freeze in 2021, so Samsung is reducing Vietnam’s share of total production from 50% to 60% this year to 45.8% next year, with much of the shift going to India and Indonesia, two regions where Samsung has aggressive long-term production plans.
Of course, in terms of actual production, much will depend on whether Samsung is able to reach its mobile phone production target for next year, which is 320m units, as it will likely fall short of its original 310m target for this year by ~10%, but the rise in JDM share will remain on the increase to contain costs.  There is however some downside to the JDM program, the loss of leverage for Samsung itself with suppliers.  As the JDM is responsible for choosing suppliers and purchases parts directly, Samsung will lose a bit more of the buying power it has with suppliers, and that could result in higher costs, so there is a difficult evaluation that has to be made if the JDM program is to continue to grow, and the difficult task of determining whether the cost of components is going up because of macro trends or due to a loss of leverage, will have to be made by the company, a complex task at best.  It seems the world learned much about the global supply chain over the last year, but it is infinitely more complex than most people think, with billions of dollars at stake with each new factory or supplier relationship
 

Sounds like a novel you read as a young teen, but it represents the evolution of mobile devices that we can use to make our daily lives easier.  Of course this comes with a dependency that has become ‘the silent epidemic’, but that is for another day, while right now we seem to be on the verge of a potential transition to the next level of mobile ‘convenience’ devices, the smart ring.  While smart rings are currently available from a number of brands, most of which are not recognizable names and are privately funded, but the big boys are just around the corner, sort of.
Apple (AAPL) filed its first ‘ring’ patent back in 2015, followed by Samsung Electronics (005930.KS) just two month later, with both adding follow-up filings over the years, but both were beaten by Amazon (AMZN) who released the “Echo Loop” in September 2019, only to kill the product before year-end 2020.  Apple’s ring development is said to be linked to its potential XR device while Samsung’s development path is more toward being a ‘control’ center for a variety of devices, but the ‘rings’ that are currently available are more like smart watches in that they typically measure and track a number of body functions, and potentially offer advice as to how to ‘live your best life’, meaning staying healthy, while others are far more specific to the needs of specific user types.
For instance, the Oura (pvt) Gen 3, a $349 device made from titanium and weighing between 4g to 6g, comes with 6 month of free ‘membership’ ($5.99/month thereafter) and includes an optical heart rate sensor, a blood oxygen sensor, a skin temperature sensor, and a PPG sensor that measures HRV (Heart rate variability aka Photoplethysmography), a substitute for ECG that has recently been incorporated in a number of commercially available devices, along with an accelerometer.  The devices lasts between 4 and 7 days before recharging and the membership software, aside from the data itself, gives you an in-depth sleep analysis every morning, personalized health insights and recommendations, live heart rate monitoring, and skin temperature readings to let you know if you are sick or heading into a menstrual cycle.

While the Oura is at the top of ring pricing, there are a number of other less expensive ring devices that offer more specific functions, such as the $100 McLear (pvt) ring that is designed to execute “RingPay” transactions, essentially a wallet that allows the user to make contactless purchases as if they were using a contactless card.  The company offers cash back rewards to users, which increase if you become a member, and allows multiple ‘rings’ and the ability to transfer between them, but no sensors for bodily function measurements.  One step further from the ‘measurement rings is the $58 ArcX (pvt) ring that serves as a Bluetooth joystick that allows you to control a smartphone, camera, and similar devices, while keeping the controlled device in a pocket or backpack.  You can use it to control music during a workout and even accept calls, all using one hand.

But Samsung and likely Apple seem to be taking the ring concept further and a 2021 South Korean filing by Samsung shows a far more sophisticated ring device that includes a display and is oriented toward being a control center for a variety of devices, and while it could have a variety of sensors, including photodiodes, LEDs, and a PPG sensor, the objective is to give the user easy access and control over their devices, without touching the device, through various touch and mechanical switches and dials built into the ring.  According to the patent documents the ring is able to pass on any sensor information to other devices when necessary or to evaluate sensor data and can be charged wirelessly.
The smartwatch market, the most similar to the rings described above was roughly $30b last year, so the development of any device that can feed into such a market is a given for major CE companies, and with the current crop of smart watches ranging from $60 (OnePlus (pvt)) to ~$800 (Apple Ultra), there seems to be enough interest in what is now a small and underserved market to attract some spending.  We expect much of the market evaluation at major CE companies is based on whether the smart ring market will eat into the smart watch market, but we believe the evaluation is much more complex and is oriented toward the impact it might have on the smartphone market, a cash cow for many CE companies. 
As brands face the constant battle to differentiate their smartphones, features become an important part of that differentiation, but as smartphones mature, it becomes more of a game to find something ‘new’, such as Samsung’s focus on foldable devices.  If smart rings can perform smart watch functions and allow you to keep your smartphone in your pocket for much of the day, it lessens the value of those two devices, not something major CE companies want to face.  That said, a good marketing department could latch on to a smart ring as an adjunct to a smartphone sale, as a $50 or $100 accessory.  Tablets were feared to have the potential to destroy the laptop market and yet they both exist, and foldable smartphones have been said to be the demise of tablets, but all still exist and find a niche where they provide the user with convenience, they key to CE popularity.  As we noted, a good marketing department can find a purpose for even the most worthless of CE products and based on what we have seen so far, there are certainly applications where smart rings make more sense than watches or even smartphones in some cases.

​In our 05/02/22 note we indicated that despite Xiaomi (1810. HK) being the best-selling smartphone on the subcontinent only a month before, the government of India decided to freeze the company’s assets, continuing an investigation that accused the company of transferring large amounts of capital out of the country under the guise of 'royalty payments’ that violated Indian statutes.  The government alleged that since 2015 Xiaomi had been using this method to move what was alleged to be over $680m, with the implication that company employees had given misleading information to local banks in order to exact the transactions.
It seems that Xiaomi’s appeal fell on deaf ears as the Appeals Court agreed with the earlier decision and confirmed the legality of the seizure of $682m in Xiaomi assets, of which ~84% is said to be royalty payment to be made to Qualcomm (QCOM), with both companies supporting each other in that they agree that a legal agreement to license Qualcomm’s IP was the ultimate end for the capital transferred, with Xiaomi adding, “We will continue to use all means to protect the reputation and interests of the company and our stakeholders,” although it is going to be a difficult task considering India has also accused and fined a number of other Chinese smartphone brands over violations said to have been made in recent years.
Under the more obvious alleged violations, there has been considerable bad vlood between China and India over border conflicts that began in 2020 when conflicts over a road being built by Indian workers was said to cross into disputed land between the two countries.  Since then India has been closely watching for incursions by Chinese military, and has taken a very aggressive stance toward Chinese smartphone brands, we believe partly as a  a public face toward Chinese aggression, but also as a way to lessen the dominance that Chinese smartphone brands have in India, in order to give Indian brands a helping hand.  While whether the allegations against Xiaomi, Oppo (pvt) and other Chinese smartphone brands are legitimate or not, the conflict does not help India’s programs to encourage display and semiconductor companies to build actual production facilities on the sub-continent, especially given the history of the Indian government’s incentive programs, which have come and gone a number of times as administrations changed.  Not quite biting the hand that feeds you, but maybe nipping at the fingers…

Smartphones are like cars, they depreciate rapidly as soon as you take them out of the box.  Most carriers and smartphone brands offer trade-in options to encourage users to upgrade or replace their phones with the ‘newest’ models with those values based on complex formulae for each brand and model. There are alternatives to carrier or brand trade-in values, with aggregators showing the best prices available for used phones, which can be shipped to the purchasing company for free (They even give you a printable shipping label), with payment via PayPal (EBAY) within 2 days of the receipt of the phone.  Most deals have a 14 day lock-in on the quoted price, with the only mitigating factor being the condition of the phone, as most give quotes for mint or good condition levels and quotes for those with cracked screens are considerably lower.
 What was most interesting is the data we put together for a number of Samsung (005930.KS) Galaxy phones gives some understanding of how smartphones depreciate.  The most recent additions to the Galaxy line, the Z Flip 4 and Z Fold 4 have depreciated 60.0% and 59.4% in the ~1.7 months since their release, given credence to the “…as soon as you open the box…” theory, and while last year’s Z Flip 3 and Fold 3 models have continued to depreciate 12 months after their release, they have only seen a total depreciation increase of 12% and 10% over the initial drop.  Taking those models back even further, the Z Fold 2, released in September of 2020 saw only a 6.5% increase in depreciation over the newer model during its second year of life.
The Galaxy S flagship series fared a bit better, with the newest models, the S22 Ultra, S22+, and S22 depreciating only 46.6%, 54.7%, and 57.9% respectively since their release in February of this year.  Samsung’s mid-priced line, the “A” series, priced between $600 and $250, did not fare well, with the most recent model, the A53, released in March, depreciating by 87.3% of its initial value in only 7 months, for a rate of 13% price depreciation/ month.  Even Samsung’s lowest price tier models, the “A0s” series, which sell for between $250 and $105, saw slower depreciation rates, although most have little or no residual value.
The table below shows a variety of Samsung Galaxy models, their initial price when released, the best current offer for ‘mint or good condition’ phones, the release date, monthly depreciation rate, and the total depreciation, using the first day of the release month for calculations. Figure 1 shows the monthly rate of depreciation from release date to today across those models in the list.  While it does not represent the total Samsung line, it gives a better understanding of the monthly rate of value depreciation as the phones age.
Note: I personally have two smartphones, a relatively new (8/21) which cost $499 and a very old (4/14) S5, which cost $649.  While the S5 is over 8 years old, it’s the phone I use the most because of its size, which is ~14% smaller than the newer model and doesn’t stretch out pockets.  The monthly depreciation rate on the S5 is 1%/month, although it has no residual value 
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