‘Peak Smartphone’ Slams Tech Hardware

‘…we are reaching ‘peak smartphone’ and the upgrade cycle is lengthening as new features prove less than compelling – the mobile app landscape has certainly become stagnant. Heavy discounting of the Samsung S8 ($150 plus) is apparent already in the US and the recent profit warning by the UK’s largest phone retailer highlighted a consumer behavioural shift. While the hype cycle will intensify ahead of this month’s launch of a premium advanced OLED screen model with facial recognition security, if the queues outside Apple shops for the new iPhones prove surprisingly short (or short lived), watch out below.’ Weekly Insight, September 6th, 2017

‘The ‘Peak Smartphone’ theme justified an underweight stance back in Q4 across the most heavily exposure Asian supply chain stocks, with DDR4 DRAM prices down about 20% from its January peak and NAND flash down a third. Many DRAM bulls put premature faith in AI and AVs as incremental demand drivers, certainly valid medium term, but not on a scale to offset smartphone/PV weakness this year while for chip makers the end of the crypto mining frenzy is starting to impact. TSMC said this week that sales will rise by only a ‘high single-digit’ percentage in USD terms, down from a previous (reduced) projection of 10%.’ Weekly Insight, July 20th 2018

The smartphone saturation risk we covered over a year ago has gone mainstream and rippled through the global hardware supply chain, with NAND flash prices crashing this year, DRAM also now peaking while production volumes for premium new phone models have disappointed across the sector. It’s hard to believe that most tech analysts missed this pretty obvious inflection point, when even the IMF noticed the industry had topped out as an Asian growth driver (smartphone shipments were about a sixth of global trade growth last year), but mindless extrapolation of the prevailing trend remains the default setting of bottom up analysts.

Smartphones have seen little innovation beyond camera quality and biometric security since 2016; the lack of compelling new hardware features (or new apps requiring them), and the growing ‘digital detox’ trend as awareness of the adverse productivity impact of notification addiction rises have both dragged on demand growth. Tighter network upgrade policies as well as limited ‘must have’ innovation have seen US and European consumers replacing phones every 2.5 plus years, a rise of 7-8 months since early 2016.

As we highlighted a year ago, the refurbished market has seen explosive growth and was the fastest growth segment last year, reaching over 140m units and is still growing at a mid-late teens pace. Three-year old ‘as new’ iPhones and Samsungs have been flooding emerging markets at typically a third of the price but nearly all the functionality of new. The weak outlook was confirmed by several Apple suppliers this week including Lumentum, Japan Display and UK chipmaker IQE this week – Apple as a ’luxury’ tech brand has finally succumbed to wider sector dynamics, although higher ASPs and the shift to services mean that the component supply chain takes a bigger hit.

Until 5G rolls out at scale from 2020 (and compelling new use cases beyond watching Netflix on the move have yet to appear), it’s hard to see the wireless sector regaining much impetus. While Samsung and Huawei plan foldable screen launches next year, initial volumes are likely to be modest at a price point above $1,000. Valuations now certainly look far more reasonable and expectations more realistic, but the downgrade cycle looks set to run into Q1 19. Our view remains to focus exposure  on stocks with high exposure to the nascent autonomous vehicle/automation sensor and emerging consumer segments such as smart speakers.

However, there will be an opportunity in the 5G rollout in niche areas such as high-end optical chips/dark fibre as well as smart antennae. Chinese producers will have a head start and gain critical mass, as the country embarks on the telecom equivalent of the hugely impressive high-speed rail network, which I used several times on a research visit last month. There will certainly be opportunities in China for specialist foreign vendors like Nokia, but the ‘full strength’ 5G being implemented via a new national core network is a critical component in the effort to drive domestic suppliers up the hardware value chain, in both phones and wireless infrastructure.

‘Internet of Things’ Set to Drive a Connectivity and Industrial Capex Boom…

5th December 2013

A key structural theme this year (see April monthly ‘The Rise of the Intelligent Machines’) has been to overweight global industrial capex/automation plays, in anticipation of a belated cyclical rebound in global factory investment, China’s growing automation trend but also a new wave of connectivity which is adding previously ‘dumb’ standalone hardware to the Internet and will drive an upgrade cycle. The jargon and acronyms in this emerging tech cycle can be confusing, but the bottom line is that makers of sensors, smartphone components such as radio chips and batteries, electric motors and automation equipment are all in an investment sweet spot over the next few years as technologies from the consumer mobile and gaming sectors are embedded within the industrial and urban infrastructure There are a number of new technology cycles gaining momentum, but this one will probably have the widest economic and market impact.  The so-called ‘Internet of Things’ (IoT) isn’t just about household appliances that can be remotely controlled, but a new generation of sensors and actuators embedded in physical objects from pipeline valves to factory machine tools that are for the first time networked.

These networks (of which Machine to Machine communication or M2M is an industrial/infrastructure subset of the IoT) then generate huge volumes of data for analysis and far more precise control of energy use, supply chain optimization etc. While investor/analyst focus has been excessively on smartphone sales to consumers, it’s crucial to understand that the wireless ‘ecosystem’ is rapidly expanding to encompass physical objects, whether household durable goods or parts of the industrial infrastructure, and this new market will be a key driver of incremental revenue growth for mobile component manufacturers (and indeed network operators). The combination of advanced gyroscope/visual/temperature etc. sensors plus wireless technology to create an intelligent network with real time feedback will gradually have huge economic impact, ranging from productivity growth to corporate margins and trend unemployment rates as more functions are automated.

More than 9bn devices around the world are currently connected to the Internet, including PCs and smartphones but that number will explode, with over 12bn M2M devices alone connected by end decade and upwards of 180-200bn devices in total from gaming consoles to fridges, cars and personal healthcare monitoring devices will have some form of internet connection on IDC estimates. Only a small fraction of those will use existing 3/4G wireless rather than wide area fixed WiFi networks and various short-range communication technologies. They will all need RF chips, MEMS based sensors etc. to function. Forecasts vary widely as to the market opportunity given a variety of regulatory and technology issues that need to be resolved (e.g. we will need far more IP addresses on the web) but with the cost of adding communications functionality to a device having tumbled sub $10, the classic tech ‘J Curve’ volume tipping point is in sight.