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…

According to local press, the Indian government is looking to limit Chinese smartphone brands from selling devices priced below 12,000 rupees, the equivalent of ~$150 in order to preserve local manufacturers.  While the Indian market is based on a wide variety of brands, very low-end phones are predominantly produced by Indian brands, with prices running as low as $7.30 for a 2G dual camera (0.3MP) phone with a 1.8” display.  Roughly 1/3 of sales volume thus far this year in India is with phones under $150.
The first 3G offering starts at ~$20.75 and there are many models to choose from in those price ranges, so the government, while encouraging smartphone brands to enter the Indian market and manufacture locally, seem to be reserving the low-end market for those that produce at home.  Chinese brands do offer some of those very low-end phones but popular Chinese brands like Xiaomi (1810.HK), Oppo (pvt) and Vivo (pvt) rely on phones in the $100 to $200 range given the average price of a smartphone in India was $211 in 1Q of this year.  High end brand names will likely not be affected to any large degree.
 

Fun with Data – iPad Procurement
​

Chinese panel producer BOE (200725.CH) has been on a roller coaster ride with Apple (AAPL), with Apple rejecting the company’s displays for entry into the iPhone supply chain a number of times in 2020 and 2021, but the company persevered and was accepted into the exclusive fold typically dominated by Samsung Display (pvt) and LG Display (LPL).  Just when things seemed to be going well, stories began to circulate earlier this year that BOE had changed driver circuitry on a display it was supplying to Apple without permission, and they were suspended from iPhone production for a period of time.  Since then there have been various projections as to how much participation BOE will have in the iPhone 14 series, which should begin this month.
Much has been made in the Chinese trade press as to how BOE is now challenging South Korean dominance in Apple’s display supply chain, with considerable and mostly well-deserved nationalistic pride, but while the press champions BOE’s success with the iPhone, they miss the fact that BOE was the primary supplier of LCD displays to Apple’s iPad line in 2021 and is expected to remain so this year, despite reductions in Apple’s display procurement for the product., which is expected to decline by 25.8%.  In fact, if estimates for LCD iPad display procurement are correct, BOE will see only a small drop in y/y units shipped (-2.7%), while LG Display will see a 17.0% reduction in units and Sharp (6753.JP) will see a 59.2% y/y unit reduction this year.  MacBook shipments are expected to see a 1.9% increase this year, and while BOE will not have the dominant share, it will be the only supplier to see an increase in units (+87.5%), with both LG Display (-5.1%) and Sharp (-9.6%) seeing decreases, which points to the fact that BOE, while still facing some challenges in the OLED space, is seeing considerable success with Apple in the LCD display space.
While OLED displays, particularly flexible OLED displays tend to be the focus for number crunching and press releases, there is still a vast LCD display world that gets little recognition unless it has ‘quantum dot’ or ‘mini-LED’ attached, but that world is still a very large one with ~891.2m large panel LCD units shipped last year, generating over $85b in revenue and one that Chinese display producers dominate.  While the Chinese press glorifies any statistics that show Chinese supremacy in the display space, credit is due to BOE, Chinastar (pvt) and other Chinese LCD display producers, who hold the top share in the large pane LCD space.  One can question whether that will be as valuable a position 5 years from now, but currently they certainly have accomplished their goal of becoming the leading source of large panel LCD displays.

Smartphone prices vary on a country by country basis, with logistics and currency playing a significant roll in setting those prices, and with the rapid depreciation of the yen against the dollar this has become quite apparent as Apple (AAPL) raised iPhone prices in Japan as of July 1 in order to protect profitability as profits are converted back to dollars.  Not only are current models now more expensive, but older models have also seen price increases and less expensive models like the iPhone SE are becoming scarce, particularly the iPhone SE (2nd Generation) Apple’s low-priced offering released in April 2020.  That phone (used) used to sell for ¥20,000 ($146.34 US) but is now selling for ¥30,000 ($219.51 US), a 50% increase according to retailers in Tokyo.
Other iPhone models have also seen increases, such as the iPhone 13 (128GB), which was released in September 2021, and has gone from ¥98,800 ($722.91 US) to ¥117,800 ($861.92 US), a 19.2% increase, and the iPhone SE (3rd Generation), which was released in March of this year, has increased in price from ¥57,800 ($422.92 US) to ¥62,800 ($459.50 US), an 8.6% increase since its release., and the iPhone 11[1] (released 9/2019), the iPhone 12 (released 10/2020), and the iPhone 13 (released 9/21) have increased in price by 15.4%, 8.5%, and 7.8% respectively.  A recent survey added that ownership of used phones (purchased used or refurbished) in Japan in April of this year was 11.6%, almost 2 times the rate over the last 20 years.
While certainly disconcerting from the Japanese consumer’s standpoint, however iPhone prices in Japan are still below those of the equivalent phones in other countries as shown in the table below, which shows both the pre and post price increase in Japan compared to the US, Germany, and China representing the North American, European, and Chinese markets[2], although the US price does not reflect retail sales tax as they vary from state to state.  As the price rises in Japan it pushes the iPhone purchaser’s income threshold higher but still represents a bargain for those in most other countries and ‘pre-increase’, the Apple direct sales sites in 34 countries averaged $925.23 for the iPhone 13 (128GB), while the Japanese site price was $723.02, the lowest of all.  Some Japanese retailers have noted that since Japan’s COVID tourist restrictions have been eased the number of iPhones sold, both new and used, has increased, with some purchasing more than one, leading to speculation that they are being resold in other countries.
 


[1] 256GB for all iPhone 11,12,13

[2] Table conversion rates are 139¥, 1€, and 6.7 yuan to the dollar.
 
 
 

With 4 of the top 5 selling smartphones in Japan being iPhones (52% share in April 2022), the Japanese smartphone consumer is very sensitive to Apple smartphone price changes and fears that further price increases in existing or upcoming iPhone models will price them out of the Japanese market, despite their low cost relative to the global averages, so it will be up to Apple as to whether it will continue to increase prices if the yen depreciates further against the dollar.  That said, Apple has US investors to consider and a larger vested interest in the US Federal Reserve’s policy moves than it does in the Bank of Japan’s and the US smartphone market alone is over 5 times the size of the Japanese market, so the decision to raise prices based on the spread between the yen and the dollar was actually an easy one and will continue to be so if the trend continues.

As we have previously noted Apple (AAPL) iPhone assembler Foxconn (2354.TT) has faced a bit of difficulty this year when it comes to seasonal hiring as while the crowds of potential workers brought to the company by recruitment agencies were still coming, they were fewer than last year, assumedly due to fear of the potential spread of COVID-19 in such close quarters.  Even with bigger sign-on bonuses, some potential workers that might typically sign on during this the busy season for iPhone assembly, Foxconn is having trouble filling the necessary quotas to keep the lines up to speed and has reportedly increased signing bonuses by another 20% to fill the gap.  The hiring bonus in at the Longhua factory was $782.23 on July 19 and is currently (yesterday) $960.01 and it seems that it is even higher at the Foxconn factory in Zhengzhou, where it was recently $1481.50, as long as employment conditions are met, while competitor Pegatron (4938.TT) is offering a $2,074.10 monthly salary to fill its ranks.
Unfortunately for those hired it seems that only hours ago the city of Shenzhen has ordered over 100 companies in the city, Foxconn included, into a ‘closed loop’ lockdown, to contain COVID-19 infection breakouts.   Other firms, including Chinese companies, BYD (002594.CH), ZTE (000063.CH), and Huawei (pvt) have been included in the company list,  The process means that only employees that live on site, meaning in company or company-sponsored campus housing, will be allowed to work, and no new employees may enter and no existing employees may leave.   All of this comes after the government of Shanghai held over 20 meetings with a variety of foreign firms that have representation in the city in June to try to mend fences after the 60 day lockdown that blemished the city’s reputation as a hub for foreign businesses.  Shenzhen itself is not locked down officially but is trying to seal off those residential and commercial areas where it sees the highest risk, a bit less onerous than the March lockdown, which forced residents to be tested multiple times and allowed only one individual in each household to leave to buy necessities every few days.