TF International Securities, home to Ming-Chi Kuo, has released a new report to clients titled "Ming-Chi Tech Research: Three challenges and new investment opportunities under the paradigm shift for the technology industry in 2022." While not Apple specific, the report does point to tech industry trends that could affect Apple and others.
The report notes that in the past, many investors viewed component shortages as positive, but now these shortages are increasingly becoming a new bearish risk.
In the past, component shortages usually represented strong demand, structural changes in demand, or opportunities for lifting prices. However, more and more investors are now seeing shortages as a negative.
For components in short supply, the increasing range and frequency of price increases have slowed significantly. For components that are not in short supply and end products, shortages mean that shipments will be lower than expected. The risk of port congestion creates a significant information asymmetry between supply and demand sides and order cuts due to rising costs.
The reason for the overbooking from distributors and the significant increase in parts inventory is the severe information asymmetry between the supply and demand sides. The motive of overbooking for distributors is to reduce the uncertainty of supply caused by port congestion, so the orders received by the supply side may not necessarily reflect the actual market demand. This phenomenon is pronounced in consumer electronics.
Order cutting due to increased costs will cause shipments to fall short of expectations. We believe that if the increase in freight rates causes the selling price to increase by 20–30% or more, many brands will stop production to avoid slow sales after raising the selling price. The most notable examples are TV and Chromebook. Inflation and the post-COVID-19 economy have led to structural changes in demand. We believe the negative impact of this change on the technology industry will become significant in 1Q22 at the earliest.
Demand benefiting from the spread of COVID-19, including PC/Notebook and TV/TV game console (home entertainment), will slow down or even decline post-COVID-19.
Because consumer electronics are not a necessity, inflation is not favorable to consumer electronics. In addition, most of the demand for consumer electronics replacement has been satisfied in the past two years, so if products cannot provide an innovative user experience, most of the demand for consumer electronics may decline more significantly in the inflationary era.
Most companies currently blame the order cuts on component shortages or port congestion, but we believe that the order cut may also reflect the structural changes in demand. It is difficult to judge the actual impact of structural changes in demand on order cuts, but we predict that the matter will become more apparent in 1Q22 at the earliest.
The core of the technology industry investment strategy for 2019–2021 is a component shortage and price hike. However, the investment paradigm for the technology industry will return to innovation-driven demand growth in 2022.
In the coming years, we expect more innovation opportunities in the technology industry to come from head-mount-display (HMD) devices (AR/VR/MR/XR), folding phones, infrastructure and related IoT devices, and electronic vehicles (EV).
HMD devices (AR/VR/MR/XR): The next generation of user interface revolution will replace most consumer electronics equipped with displays in the long run. However, in the short term, this device is still affected by the gaming industry.
Folding Smartphones: This is the next revolution in mobile devices, expected to drive demand for high-end smartphones and tablets. The key to success lies in the ecosystem, software, panels, and mechanical parts.
Infrastructure and Related IoT Devices: New infrastructure applications are mainly communications (e.g., 5G, Open-RAN, satellite communications, etc.) and energy (smart grid), which will also drive demand for IoT devices and related components.
Electric Vehicles (EVs): The shortage of components will lead to a shortfall of 7.5–8 million vehicles in 2021. EVs and the supply chain will benefit significantly in 2022 from marked improvements in component shortages and new consumer behaviors.
The automotive industry is a relatively significant contributor to GDP and employment rate among all electronics industries. Therefore, some governments (e.g., the US) are involved in component procurement. As a result, we believe that automotive/EV component shortages will improve most significantly in 2022, favoring shipment growth.
We remain positive on semiconductor industry trends as many specification upgrades and innovative experiences will continue to be driven by semiconductor components. However, it is worth noting that the main theme of semiconductor investment will shift from being shortage- and price-hike-driven to innovation-driven in 2022.
Stock for actions: The technology industry is facing three major challenges, including component shortage, port congestion, and structural changes in demand. In the coming years, we expect more innovation opportunities in the technology industry to come from HMD devices (AR/VR/MR/XR), folding phones, infrastructure and related IoT devices, and EVs. Risk: New product shipment delays or lower-than-expected demand.
The report highlights head-mount-display (HMD) devices (AR/VR/MR/XR) as the likely leading innovation coming to market in 2022 going forward which just happens to coincide with Ming-Chi Kuo's predictions of Apple entering this market in 2022.
The folding device segment is still a mystery for Apple. Patents have proven (examples 01, 02 and 03) that Apple is continuing to research this area of the market but it's unknown if Apple will in fact enter this market any time soon. If this trend proves successful with consumers at some point in the future, then Apple is likely to enter this segment. Whether this segment will be as big as expected by Ming-Chi's Tech Research is a little doubtful at present.