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 
​

Smartphone shipments in China in July declined 28.9% m/m to 19.9m units, down 30.6% y/y against a typical July (5 year average) of -1.3% m/m.  While not the lowest shipment month this year, July was a bit disappointing after strong June shipments which showed the first month of positive y/y shipments this year.  On a YTD basis Shipments of smartphones in China this year are down 23.02% y/y.  5G smartphone shipments fell 36.1% m/m, also down 35.6% y/y, with 5G share of total smartphones shipped falling to 73.9%, the lowest share this year, while domestic brand shipments on the Mainland fell 25.3% m/m and fell 29.3% y/y in July, while domestic brands saw a 92.0% share of the Chinese market, the highest share in almost a year.  We expect some of that might have to do with the then pending Apple (AAPL) iPhone 14 family release, but on a general basis it would seem Chinese smartphone buyers stuck with domestic brands during lockdowns.  While we do not have sales value data yet, we expect the focus was on less expensive models as the global economic situation deteriorated and COVID lockdowns began to have a more serious economic impact on a more local basis.
All in it was a particularly bad month for Chinese smartphone shipments and with the exception of a shipment bounce in June, the year has deteriorated from the very strong January that we had hoped would set the tone for the year, or at least would have indicated that the 2022 was going to see Chinese domestic shipment improvement.  As the year progressed, with both the continuing stringent COVID lockdowns that the Chinese government continues to use to minimize the spread of COVID variants and the effects of increasing inflation across the globe, our optimistic view of Chinese smartphone shipments has deteriorated.  In February that optimism generated a full year estimate of Chinese smartphone shipments of 381.24m units, up 8.7% y/y, which we admit seems more that a Chinese state-propaganda piece than a realistic estimate, but at the time COVID was waning (China was averaging ~100 new cases a day) and inflation was less than 1% domestically, while January smartphone shipments in China remained strong after a strong December ’21.
So, while we can make a myriad of excuses as to why we expected a stronger year of smartphone shipments in China, we are bringing down estimates to better reflect the past few months and our expectations for the remainder of the year.  Statistically, based on 5 year averages of m/m shipments for the remainder of the year the estimate should be 255.13m units down 27.2% y/y however we expect that is a bit more negative than actual results, so on a slightly better than statistically average year, we estimate shipments to be 260.5m units, down 25.7% y/y and the worst year since 2012, which is the earliest data we have.  The good news would be that Chinese New Year 2023 comes a bit early (1/22/23) so there is a chance that discounting in November and December to clear older inventory will take place, moving shipments above seasonal norms, but it is hard to find scenarios that would boost shipments much further than our new estimate unless the government changes its attitude toward COVID lockdowns or the Chinese economy takes a sharp upward turn, neither of which seem particularly likely.
As a consequence of our substantial reduction in full year Chinese smartphone shipments, we also have to revise our estimates for 5G shipments in China.  Based on an average share of smartphone shipments of 80.5%, we now estimate that 5G smartphone shipments will total 210m units, the first down year since 5G smartphones were offered in China.  There is a bit of possible upside as 5G share of new models offered for the remainder of the year should increase from the unusually low share in July, but the increment is still rather small.

​As we have noted previously, there have been issues surrounding the production of displays for the iPhone 14 series this year, with questions as to BOE (200725.CH) status with Apple generally, and problems that LG Display (LPL) was having with the production of LTPO (Low-temperature Poly-Oxide) displays, which are used in the iPhone 14 Pro and Pro Max.  Given that Samsung Display (pvt) has been producing LTPO displays for a number of customers, including parent Samsung Electronics (005930.KS) since August 2020, they have considerable experience in that display production process and have supplied a number of smartphone brands with such displays, including last year’s iPhone 13 Pro Max.
According to recent industry estimates, Apple has ordered over 17m iPhone 14 units from its display suppliers through the end of August and is expected to order ~16.5m units this month.  With delivery dates of 9/16 for all models other than the iPhone 14+ (10/7/22) we assume the company expects it has sufficient inventory to meet pre-order deliveries that are similar to last year.  That said, Samsung Display ordered additional module process equipment last month and this month for its production facilities in Vietnam, with confirmed orders from at least three local Korean suppliers, AP Systems (265520.KS), HB Solutions (297890.KS), and Philoptics (161580.KS) totaling over $40m.  We expect that the popularity of the iPhone Pro and Pro Max, and the production limitations at LG Display, will skew SDC’s share of iPhone 14 family display share higher than expected, especially as they participate in the production of displays for all four models, although we expect the highest margins (and their biggest focus) is on the LTPO models, which seem to be getting most of the pre-orders (see “iPhone Sells in China Despite Criticism” above).

​The iPhone is popular in China, although in most quarters, its share lags behind a number of Chinese smartphone brands.  The partial demise of what was China’s formerly best-selling brand Huawei (pvt) a result of US trade sanctions, has given Apple a bit of room to gain former Huawei customers as iPhone buyers, although other Chinese brands have also gained share for the same reason.  The lower price of the iPhone 13 have even more incentive to Chinese buyers when it was released last year but there is a certain status associated with the US brand in China and that is also a contributor to the iPhone’s success and share on the Mainland over the last two years.
That success seems to have continued with the recent release of the iPhone 14 line, which is available for pre-order in China.  According to numbers from JD.com (9618.HK), who hosts the Apple store, just 24 hours after the iPhone 14 line became available for pre-order, 2m orders had been placed, despite the fact that no price reductions relative to last year’s models were given.  In fact it was noted that some configurations were seeing mark-ups over standard pricing.  Significant was the fact that the two iPhone 14 models that the iPhone Pro Max and the iPhone Pro, the two of the four models that contain the new A16 Bionic chip and are the most expensive models, received the most orders, 1m and .8m respectively, while the iPhone Plus and the iPhone 14 models received only 10% combined.
This all comes as the iPhone 14 line received a lukewarm reception from critics, with little innovation, both from the technology and the design, from many reviewers, with which we agree.  It would seem that relative to Huawei’s most recent offerings, which do not offer 5G, the iPhone offers both more valued features and the cache of status to Chinese buyers, especially in the premium smartphone segment.  Complaints about the fact that Apple’s China site was slow or unable to process payments during the onset of the pre-order period seemed to create a bit of a stir, but the with that number of orders going through, roughly matching the popular iPhone 13’s first 24 hours last year, the site issues did not seem much of a deterrent.

While Samsung Electronics’ (005930.KS) smartphone production goals for this year were optimistic when they were made late last year, they now seem even more optimistic given the confluence of events that have suppressed smartphone sales across the globe.  Samsung’s original production estimate for this year was for the production of 240m units and an additional 60m to 70m produced by ODM, for a total of 300m to 310m.  Samsung shipped 74m units in 1Q but likely produced ~77m units, leaving an excess of ~3m units.  Based on our estimates for Samsung’s production and shipments for the remainder of the year, we expect using Samsung’s original production estimate (single point of 305m units), the company would overproduce by between 13m and 14m units.

​[1] 5 Year Average Share of Full Year Shipments
[1] Aggregated shipments from multiple sources

​Based on our existing shipment estimates for 2Q – 4Q we expect Samsung would likely reduce production in 2Q and 3Q, with signs that they have already reduced production in April and a bit more severely in May seem to indicate that they are at least at this point on the path to a reduction in overall production this year.  We have seen estimates for production as low as 280m units but we remain a bit more optimistic at 290m based on what we know so far.  Our biggest concern would be if 2Q shipments come in lower than 68m units, which would push us to lower full year again, although we expect Samsung will push production back up in June as the COVID restrictions in China are loosened.
The effect of reductions in Samsung’s smartphone production plans will likely be felt more by ODMs, as Samsung will likely focus on marketing the more profitable flagship phones that it produces internally, and we noted last week that Samsung was already expected to reduce the number of feature phones it produces for the India market this year, which are produced by Dixon Technologies (DIXON.IN).  We expect Samsung’s other ODM, most likely Wingtech (600745.CH) and Huaqin (pvt) will have seen some cutbacks, with Samsung Display (pvt), an affiliate of parent Samsung Electronics, seeing less of a reduction as it produces the Galaxy S series flagship line and the Z Flip & Z Fold, Samsung’s foldable smartphone offerings.

​We have noted that expectations for Samsung Electronics’ (005930.KS) smartphone shipments have been declining as the company pulled back orders from component suppliers and OEMs.  Expectations for Samsung’s own smartphone production have also declined from the initial plan to produce 333m units, while shipping almost 300m, to shipping 260m units, less than the number shipped last year, although still better than 2020 when only 250m were shipped, according to South Korean press, although our 2020 number of 257.6 is a bit higher.
Samsung had expected to ship 60m units in the 1st quarter, and met that goal, but fell short of the 53m it expected in 2Q, shipping 48m units.  3Q internal expectations were for 47m units, and expectations are for 46m, which is expected to be met.  Samsung has yet to set a target for 4Q shipments, particularly as they will begin to produce phones for the Galaxy S23 to be released in 2023, but looking at just October/November expectations of 30m units, production estimates seem to be falling below last year’s total, although we see less of a shortfall (-2.8%) than others as we build in ~20m units for December production. 
Actual total units shipped will also include OEM units and channel inventory from 2021, but we expect that Samsung has cut back OEMs even more than it has cut back its own smartphone production as we expect internal margins are higher than those from OEMs.  All in, macro issues have affected almost all smartphone brands, with Apple (AAPL) expected to be the only major brand seeing growth this year, but we expect even iPhone shipments felt the sting of weak consumer confidence as we entered 3Q, which means the iPhone 14 needs to be enough to give consumers a reason to upgrade.  It is going to be a difficult 2H for all smartphone brands, with Apple still at risk for a bit of disappointment in 4Q in our view.

​Last month we commented on the upcoming Samsung (005930.KS) ‘event’ that was expected to contain the announcement of Samsung’s latest foldable smartphones, the Galaxy Fold/Flip 4 series, and what we hoped might be part of that release.  The event has taken place, the new phones announced, and while we have yet to examine the software, we can point to how our hopes and expectations were met, at least thus far.
Our first ‘hope’ was for a lower price, pitting economies of scale against the higher cost of silicon and other components.  Unfortunately, at least at the onset, it looks like there was little pricing movement, with the Z Fold 4 (256Gb) selling for $1,799, even with the Z Fold 3, while the 512Gb version is a few dollars more expensive than last year’s model.  There is a new version of the Z Fold 4 that has 1Tb of memory that sells for $2,159 so there is no comparison to the older model.  The Z Flip 4 (128Gb) is priced at $999, the same as the previous model, with the 256Gb version $10 more than the previous year’s model, so little change, although there is now a 512Gb version that sells for $1,179, so there is little change overall on pricing, a bit of a disappointment and somewhat of a stumbling block to incremental y/y shipments.
We had hoped for a bigger 2nd screen on the new models, as the less often the device has to be opened the longer it will last and when closed a foldable should be the equivalent of a ‘regular’ smartphone, with a full sized high-resolution display.  When comparing the new Galaxy Fold 4 to the previous model, it turns out that the size of the device is actually slightly smaller (~2%) but marginally thinner (under a mm difference when closed), although its .28oz. lighter.  The main (foldable) display still has a 7.6” diagonal with marginally smaller bezels, with a 90.9% SBR vs. the Fold 3’s 88.8% SBR, with both having a PPI of 374.  The cover display on the Fold 4 is still a 6.2” display but with a a higher resolution (+10.9%), so on an overall basis there was little change as to the displays on the Z Fold 4.  The Galaxy Z Flip 4 has the same main (foldable) screen as the previous model, and the same size cover screen (1.9”) and the overall device is a mere 2.1% smaller than last year, so again little movement on our 2nd wish.
As far as our hope that the new device would be more ‘durable’, both new models have upgraded the cover glass from Corning’s (GLW) Victus to Victus+ with higher scratch resistance and the new X Fold 4 has a higher pixel count main camera and a 3x (vs. 2X) zoom on Cam #2, with pretty much everything else staying the same, while the Z Flip 4 has a 12% more powerful battery.  Both new versions have upgraded chipsets, CPU’s, and GPUs, as one would expect, which should eke out slightly better performance, but on an overall basis most of the hardware has remained the same.
As we have yet to look at the software and built-in apps, we cannot tell if Samsung has made progress toward the development of applications that take further advantage of the device’s foldability, our 4th hope, so we will have to leave that slot open, but we are leaving the table feeling a bit unsatisfied, kind of like grocery store Sushi…you want to like it bit there is little to get excited about, somewhere between Masa and gas station tuna…