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
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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.
 

In June smartphone shipments in China increased 34.6% m/m and 9.2% y/y to 28m units, the first positive y/y comparison since December of last year with 98.2% of those phones being smartphones.  5G shipments were 23m or 82.1% of the total, up 29.9% m/m and 16.2% y/y.  34 new models were released in June, with 28 being smartphones and 25 being equip for 5G (73.5% of new models).  Domestic brands shipped ~24.5m units or 87.5% of the total, up 47.6% m/m but down 0.4% y/y.
The increase in June shipments is certainly a step toward at least some recovery from the dismal shipment metrics seen in China since January, which we believe reflects both the Chinese New Year holiday period and the aggressive lockdowns that were initiated by state and local governments.  We expect there was considerable pent-up demand at the consumer level and for brands whose production was limited during the quarantines.  We expect smartphone shipments to level off for the remainder of the year, albeit at a lower average level than last year, as can be seen in the charts below. 
While certainly a recovery from the last few months, it is difficult to see a demand based recovery in the Chinese smartphone market as there is little new in the way of features and new form factors (foldables) are still a very small portion of unit volumes.  The driver for any smartphone sales on the Mainland has certainly been 5G as China continues to push forward with base station installations outside of COVID hot zones and with 5G smartphones represented 3:1 in new models, all brands are making sure they have at least a number of offerings for potential new customers or 4G converters.  All in it was certainly the best month in the quarter, but the long-term chart tells the story of consumers unwilling to spend for upgrades that don’t appreciably move the needle and higher brand costs make the steep discounts needed to get Chinese consumers to open their wallets are hard to come by this year.
Chinese smartphone producers, both OEMs and assemblers have been facing volume challenges for a number of years as the Chinese smartphone market peaked in 2016 and has been on the decline since.  As volumes were reduced manufacturers searched for products that could help them fill lines that were now running at low utilization rates.  Due to the attraction of the smartphone market, which has among the highest unit volumes of all major CE product categories, phone manufacturers were not willing to give up on the smartphone market, despite the slowdowns and were willing to take smaller and lower profit margin orders over the last few years than they would have in the 2017’s and 2018’s, but competition, even for these smaller orders became so intense that manufacturers began to look for other CE products that could help them maintain high levels of utilization.
While volumes for such ‘non-phone’ products (tablets, laptops, etc.) were not as high, the initial margins were enough to be profitable and fill the lines, however over the last year the competition for these products has become so intense that unit pricing wars have begun to push smaller producers and assemblers out of the ‘non-phone’ market, leaving them without alternatives to fill production gaps.  We make the assumption that this will cause some to finally give up the ghost and the market will tighten a bit, but until then it seems that smaller Chinese smartphone producers are going to be fighting a losing battle amongst themselves.

Samsung Electronics does not like ToF (Time of Flight) sensors.  While promoting the idea of using ToF sensors in smartphones as adjunctive depth maps to optical cameras, they have slowly abandon the concept, particularly on their flagship models, while other brands, particularly Apple (AAPL) and a number of Chinese brands continue to use the functions to augment security and imaging.  Samsung is now contemplating the removal of ToF sensors on the upcoming versions of the Galaxy A24, A34, and A54, which are among the company’s best-selling (volume) smartphones.
While we have gone into considerable detail as to why Samsung made the decision to abandon ToF, we expect the most recent change is one based on cost, with the elimination of the ToF module a cost saving measure on these mid-priced smartphones in a very competitive segment of the market.  Of course there is the marketing jargon that says the company feels it is better to focus on developing better quality cameras than on maintaining a high number of different camera types on its phones, which is the antithesis of the thought process a year or two ago when the battleground was who could put more cameras on their phones, but with silicon and component prices still at high levels, Samsung’s marketing motivation has shifted from quantity to quality for next year’s mid-range models.
Underneath all of the pro/anti ToF rhetoric, is the fact that Samsung Electro-Mechanics (009150.KS), the Samsung affiliate that produces many of Samsung’s camera modules, had made a decision about the ‘type’ of ToF sensor it was to develop a number of years ago, choosing what is known as ‘indirect sensing’ over the ‘direct sensing’ choice made by ToF camera competitor Sony (SNE).  When Apple settled on Sony’s solution battle lines were drawn between the two types of ToF sensors and competition heated up, tightening margins and putting pressure on SEM to reduce costs in order to counter what Sony was promoting as superior ToF technology (see table below).  We believe SEM was not able to bring cost down low enough for parent Samsung Electronics to justify the cost given the weaker characteristics and the decision was made to eliminate ToF from flagship models and now from mid-range priced models.
All in, Samsung’s continued insistence that consumers do not use the functions associated with ToF sensors as a justification for removing them still rings hollow with us, and seems more like a justification for the need to cut costs, as was the ‘environmental’ justification of removing chargers from the box when consumers purchased a new phone last year (Apple did the same), but ToF lives on outside of the Samsung world, and as we noted in our 6/10/22 seems to be finding its way into other applications in the CE space, while remaining an integral component of the various forms of driver assistance systems and fully automated vehicle systems.  While we might be a bit bruised by Samsung’s continuing battle against ToF in the smartphone space, we see its value increasing across a wider swath of applications…

The smartphone market is highly competitive to say the least, and both small and large marketing departments are constantly challenged to find ways in which to differentiate their products and make them more appealing to the buying public.  In some cases this can be a sleek or fancy new design, in others leading technology, and finally in some, the wedding cake approach, tier after tier of extra features that are meant to overwhelm the user with the phone’s ability to run almost every aspect of life.  As in all things CE this works in cycles, with categories like multiple cameras, higher pixel displays, or faster charging all taking p[precedent for a period of time only to fall prey to consumer ennui after they become commonplace, so every once and a while a brand, in this case a new brand, decided to try to simplify and return to basics, or so the copy says.
Nothing (pvt) Technology was formed in 2021 (we noted same in our 03/25/22 note) by Carl Pei, the founder of Chinese smartphone brand OnePlus (pvt) and added a number of well-known investors from other successful CE companies (all of whom are prominently shown on the company website) and released an earbud product in July.  A few days before our earlier note the company announced its intent to release a smartphone with a simplified OS on top of Android and in June of this year began taking pre-orders for the phone which had been promised for the summer of this year, with 100,000 pre-orders said to be signed up.
In a ½ hour event the phone was announced under the concept that it was designed with ‘less distractions. More Soul and pure instinct’, with a self-effacing video that describes how the inventors were imbued with the idea of removing the barriers between technology and people by eliminating silly product names and tech-speak, leaving just artistry, passion, and trust.  What came out was a phone that looks a bit different in that it is made with clear glass, allowing the insides to be exposed, and uses ‘Glyphs’, essentially LED lights, to notify users of calls or other functions if sounds are turned off.  While flashing lights in someone’s pocket might play well at meetings or in movie theaters (remember those?), LED lights do seem to be a way to attract the attention of young buyers, likely an outgrowth of in vitro disco hopping by their parents.
We compared the feature set against the Apple (AAPL) iPhone SE and the Samsung (005930.KS) Galaxy A53, as both are popular mid-range priced smartphones.  As far as we can see, at least from a hardware standpoint, the Nothing phone is about what might expect from a manufacturer trying to compete with a wide variety of $250 to $500 smartphones that was looking to add a bit of pizazz to their marketing campaign and as we have yet to see the actual phone or the OS we cannot yet evaluate how well it interfaces with other CE products (both Android and iOS) as it was originally touted, so we reserve full evaluation to a later date .  We do expect lots of excitement from fanboys, who will see the pictures of Twitch (AMZN) and Reddit (pvt) founders on the site and buy the phone regardless of how it functions or how practical it is, and some who will appreciate the odd-ball features, but as to sustainability, the company will have to sustain the flashing light mantra going forward or continue to find other shiny objects to attract the attention of younger smartphone buyers when there are over 100 brands and thousands of models to choose from.  

​On 7/12/22  we noted that the Indian Law Enforcement Agency froze 119 accounts totaling $57.4m, along with fixed deposits, 2Kg of gold, and cash of the Chinese smartphone firm Vivo (pvt), under the accusation that the company had been funneling sales revenue back to its parent BBK Electronics (pvt) in China to avoid paying taxes in India.  Vivo is a sister brand of BBK along with Oppo (pvt), OnePlus (pvt), RealMe (pvt), and iQOO (pvt), and to understand how important Chinese brands are to the Indian smartphone market, in 1Q of this year, Chinese brands represented 84.8% of the Indian smartphone market, with only Samsung (005930.KS) and ‘other’ making it into the top 6 group.
It seems that the India\n government has struck again, with the Directorate of Revenue Intelligence, part of the country’s finance ministry, indicating that it had found evidence that Oppo “willfully and wrongly declared description of certain items it imported which allowed it to improperly avail duty exemption benefits of $374.3 million,” with management accepting the wrongful submissions before the Customs Authority at the time of import.  The ministry searched the offices of the company and the residences of the management team as part of the investigation which led to the recovery of incriminating evidence.  The Ministry also added that Oppo had made $176m in license and royalty payments to other companies, both in and out of China that it did not disclose in the value of goods it imported into India, which violates Indian customs law.  Oppo has voluntarily deposited $56.5m as partial customs duty since the investigation.
Oppo’s view however is a bit different than that of the Indian government in that it believes such issues are ‘industry-wide’ and is reviewing a recent warning that the ministry issued after the earlier Vivo incident and an even earlier investigation that led to the seizure of $725m of assets owned by China based Xiaomi (), which erupted into threats of physical violence and harsh statements from the Chinese government during the investigation.  The enmity between the two countries stems from border wars that began in the 1960’s but reignited in May of 2020 when Chinese and Indian troops battled along disputed border areas, eventually erupting into gunfire in September 2020 after 45 years of relative peace. 
Those battles resulted in the Indian government banning Chinese software applications and some cancellations of contracts between Chinese companies in strategic Indian markets and considerable anti-China protests.  While the effect on Chinese smartphone brands was felt for a shot period, they regained popularity with Indian consumers because Chinese smartphone brands designed products designed for the Indian population that had some very specific needs, while more global brands did not, leading to a very loyal following on the sub-continent, aside from the political wrangling.. 

​Vivo (pvt) is not a smartphone brand well-known in the US, however the company held a 7.9% share of the global smartphone market at the end of last year, and a ~16% of the Chinese market at the same point.  Owned by China’s  BBK Electronics (pvt), along with its sister brands Oppo (pvt), OnePlus (pvt), RealMe (pvt), and iQOO (pvt), Vivo is among the most popular smartphone brands in India, with a share that is on par with Samsung.  That said, there has been considerable enmity between the Indian and Chinese governments over border issues for the last few years and occasional flare-ups of anti-Chinese sentiment have been focused on Chinese smartphone brands at times.  Some of that antagonism seems to have made it way to the Indian Law Enforcement Agency who recently froze Vivo’s bank accounts, citing the investigation of 48 Vivo locations in India under provisions of the Indian Money Laundering Act.
The Bureau has accused the company (and others) of remitting 62.48t rupees (~$7.85b US) to China and other locations to avoid paying taxes, which represents about half of the company’s revenue.  The bureau froze 119 Vivo accounts totaling $57.4m, along with fixed deposits, 2Kg of gold, and cash.  Vivo has asked the New Delhi High Court to unblock a number of the accounts so it can pay salaries and dues, who then gave the enforcement agency until tomorrow to make a decision as to whether to unlock the few necessary accounts.  The enforcement agency has indicated that the capital was shifted back to China to make the Indian operation look like it was producing a loss and therefore avoid taxes and alleged that some Vivo executives had tried to leave the country when they discovered the investigation and had used forged identification and address documents when they formed the Indian subsidiaries of the company, strangely using the addresses of what turned out to be a government building and the home of a local bureaucrat instead of the real corporate address.  The investigation continues….
 

The smartphone market has been relatively weak this year, with optimistic shipment targets made late last year being trimmed so far this year.  There has been little hope that sales will pick up appreciably, outside of seasonal norms in 3Q and 4Q, other than Apple’s (AAPL) iPhone 14 family release in mid- September, and that could be delayed a bit if there are problems with logistics.  Typically (5 year average) smartphone shipments increase ~1.1% in 2Q and 13.5% in 3Q, and while much of the hard shipment data for 2Q has yet to be published, early estimates are that shipments are expected to decline ~3.0%.  3Q however is more of a crapshoot (non-technical term for statistical anomaly)) as the typical 3Q q/q gain is 13.5%, which, given the macro environment, might be a bit difficult for the industry to meet, especially given the higher than normal inventories plaguing a number of CE product categories.
In the past OLED based smartphones have defied broader growth patterns for the broad smartphone market as share grew, but with OLED smartphone share reaching ~43% last year and continued share growth this year, OLED smartphones are mainstream and face macro challenges similar to those for LCD smartphone displays.  This is made more understandable considering that the competitive nature of the OLED display space continues to increase with Chinese small panel OLED display producers pushing to gain share to prove their worth in the overall display market, as they have done in the large panel LCD space and Chinese rhetoric about how they are challenging the dominance of South Korean small panel OLED producers Samsung Display (pvt) and LG Display (LPL) with a bent toward the goal of ‘world dominance’.
As we have previously noted, South Korean small panel OLED producers have a number of advantages over Chinese small panel OLED producers, primarily the production experience that comes from 15 years of small panel OLED fab operation and a broad supporting infrastructure, while Chinese players began what would barely be called commercial production 9 years ago.  That said, Chinese small panel OLED producers do have one large advantage, and that is capital, which despite questionable operational profitability (without subsidies), seems to be readily available to OLED producers for expansion and to make up operational shortfalls.  The expansion capital has allowed Chinese small panel OLED producers to add considerable capacity over the years as seen in Figure 2, and without question we expect Chinese small panel OLED producers to eclipse South Korean capacity some time over the next 2 – 3 years.
That said, while the numbers would indicate that Chinese small panel OLED producers can take over the lead position in production capacity from South Korean rivals, there are missing factors in Figure 2, and those are utilization and yield.  Given Samsung Display and LG Display’s long-term small panel OLED production experience, they maintain high yield ratios, and while they vary according to how long a product has been in production and the complexity of the display, we believe South Korean small panel producers maintain higher yields than their Chinese rivals and are therefore able to produce more sophisticated small panel OLED displays.  While such sophisticated displays carry a higher profit margin, the market for same is smaller than that of more generic small panel OLED displays, which theoretically should lead Chinese small panel OLED producers to higher utilization rates and higher unit counts, however this is not the case based on our data, and even with China’s largest OLED producer BOE (200725.CH) becoming part of the Apple iPhone OLED display supply chain, utilization rates at Chinese small panel OLED producers remain low, and given the weakness in the overall smartphone market, we expect relatively low utilization rates to continue into 3Q for most Chinese small panel OLED producers.
We expect composite small panel OLED demand to be up 8.7% q/q, but down 1.8% y/y, with only 4 of 8 smartphone brands (including ‘other’) seeing an increase q/q, with Apple the greatest increase based on the iPhone 14 estimated release dat.   We do expect declines in small panel OLED displays from Huawei (pvt), Oppo (pvt), and Vivo (pvt) in 3Q, which would affect production at Visionox (002387.CH) and Tianma (000050.CH), while any Chinese branded smartphone order reductions at BOE will likely be offset by production for the iPhone 14, for which BOE is expected to produce 5m units.  To put that in perspective BOE has been producing ~15m small panel OLED units on average, for the last 6 quarters, with SDC and LGD expected to produce 60m and 25m respectively, based on a 90m order from Apple, which seems to be the latest estimate.
While we are certainly not denigrating the competitive threat to South Korean small panel OLED suppliers from Chinese suppliers, we point to the fact that even with BOE’s participation in the iPhone 14, Chinese small panel OLED producers have maintained a relatively stable supply share of ~23.6% (6 quarter average including 2Q/3Q forecasts) while South Korean producer share has averaged 76.4% over the same period.  Given our expectations for 23.2% and 76.8% respectively for 3Q, we see little change over the average.  As we noted above, we do expect China’s small panel OLED share to increase as their capacity and experience grows, but we are far more willing to accept that change when factoring in utilization, yield, and profitability and given how rapidly the technology seems to be changing, we expect it will take more than subsidies and capacity for Chinese small panel OLED producers to overtake South Korean suppliers in the near to mid-term.  After that, it’s anybody’s game…