In a strategic move Apple has moved quickly to secure its position in the global supply chain of VCSEL chips, blocking off rivals such as Samsung Electronics Co Ltd, Huawei Technologies.
Apple Inc’s $390 million deal with Finisar Corp, a chip supplier, will enable it to lock away supplies of key components that Apple believes will play an important role in its future augmented reality related products.
According to analysts, given Finisar’s limited supply of chips, the deal also will help Apple block out Samsung Electronics Co Ltd, Huawei Technologies Co Ltd and its peers in the premium smartphone space from developing similar features.
According to Gene Munster, from Loup Ventures, the deal will help Apple to “get better supply and better pricing, and it makes it more difficult for Android phones to compete”.
Apple awarded Finisar $390 million from a $1 billion fund dedicated to American manufacturing.
With a market capitalization of $2.2 billion, Finisar, a much smaller firm, was quick to say that the deal represents “anticipated future business between the companies over a period of time.” It does not represent any debt or equity investment.
Finisar will now re-open a long-shuttered, 700,000-sqare-foot chip manufacturing plant in Sherman, Texas, to produce vertical-cavity surface-emitting lasers (VCSEL), a critical component of Apple’s new FaceID system in the iPhone X.
Although Apple did not name the supplier for the first round of lasers for its iPhone X flagship, Lumentum Holdings Inc has seen a surge of business attributed to a single customer that analysts believe is Apple.
The lasers are housed in sensors that enable 3-D mapping, a critical part of augmented reality in which digital objects are overlaid onto the real world. The more accurate the depth sensor, the more precisely digital objects can float on top of it.
Significantly, whereas Apple has rarely been forthcoming on future products, Tim Cook, Apple’s CEO, has been uncharacteristically vocal about Apple’s future focus on AR and has called it a “big and profound” technology shift.
The lasers that are critical to AR are however hard to come by since there is no existing supply chain like there is for more common chips.
In its latest quarterly report, Apple disclosed it has purchased more than 10 times as many of the lasers as had ever been manufactured over a similar time frame.
As per analysts, the key question is how far and to what extent will Apple go to block rivals, including Samsung and Huawei, from tapping Finisar’s chips, given the crunch in the supply of laser chips.
“If you’re Samsung today, you’re thinking, who can do these types of VSCEL arrays? I don’t know of anybody else” beyond Finisar and Lumentum, said Munster. “It’s a little bit of a tough spot for them.”
“This is one more example of Apple continuing to verticalize their supply chain by taking control of components that are hard to get or they think are critically important and that they can differentiate on,” said Bob O‘Donnell of Technalysis Research.