Why Apple Inc.'s Shift to Sapphire In the iPhone 6 Will Be Brilliant -- and Perfectly Timed
At this point, there should be little doubt left that Apple will transition from Corning Gorilla Glass to sapphire in both upcoming iPhone 6 models. Despite Apple's desire for secrecy, some of its bigger moves of late simply can't be hidden from the public.
Apple couldn't hide the acquisition of a publicly traded company. When Apple bought AuthenTec in 2012, fingerprint sensors were clearly in the pipeline for the iPhone. GT Advanced Technology had to disclose its partnership with Apple last November, since the deal had major financial implications for the smaller company and entailed a significant transition in GT's business model. Given the magnitude of this deal, Apple obviously had lofty ambitions for sapphire material.
Talk of sapphire hit the mainstream more than six months before the GT deal, after MIT Technology Review discussed the possibility. It's now been eight months since the deal was announced. In that time, rivals have had ample time to evaluate sapphire for use in their own smartphones with the hopes of keeping up with Apple. They can't.
A tale of two Apple competitors
Two of Apple's largest rivals are Samsung and LG Electronics. Both have reportedly sampled sapphire and explored using the material in future phones but abandoned the efforts because of cost considerations.
Just this week, LG exec Ken Hong told Engadget: "The cost and supply aren't where we'd like them to be for sapphire to be practical just yet. Sapphire's durability and scratch-resistance are certainly attractive, but Gorilla Glass isn't going to be displaced anytime soon."
At the time of the MIT Technology Review article last year, the cost differential was estimated to be tenfold. A sapphire cover would cost $30, compared with Gorilla Glass at $3. Most smartphones cost between $200 and $230 to build. Even if the cost difference has narrowed from $27 to something like $20, that's still approximately a 10% increase in component costs.
Furthermore, this is all before operating expenses come into play. Last quarter, LG's mobile division had an operating margin of negative-0.3%, which was after shipping 12.3 million smartphones.
For a company like LG, such a cost increase simply isn't an option.
What about Samsung?
After Apple, Samsung is the second most-profitable smartphone OEM. However, Samsung is currently facing a slowdown in smartphone sales, across nearly all market segments. That's putting pressure on Samsung's own component businesses. Unlike LG, Samsung's phone operations are solidly profitable, generating a 20.5% operating margin last quarter.
That means that Samsung could theoretically bite the bullet and pay up to copy Apple (as usual). Sapphire would only be included in Samsung's high-end models, so the bulk of its product lineup would be unaffected. Samsung's earnings guidance implies that Apple is faring quite well in the high end, though, which is why the timing of shifting to sapphire would be perfect for the Mac maker.
Just when Samsung is getting squeezed from the low end and the high end, Apple is putting it to a decision on whether it wants to absorb a cost increase with the hopes of reinvigorating unit sales in the high end. Even if Samsung sees success, margins will then be the ones getting squeezed.
What about everyone else?
As far as other OEMs go, almost no other smartphone vendor has positive operating margins. Even if they do, they're razor-thin. Apple and Samsung have long gobbled up all of the industry's operating profits, with Apple taking home the lion's share. Not many companies can afford to put down $578 million prepayments to secure unparalleled supply.
Another anonymous smartphone representative told Engadget that the cost wouldn't be worth it unless there was "some perceived marketing advantage." Well, it turns out that marketing advantages are precisely what Apple is made of. Don't be surprised if Apple spends 30 minutes touting sapphire's advantages when it unveils the iPhone 6, as the world watches and consumers begin lining up around the block.
I'd like to call the shift to sapphire "revolutionary," but revolutions imply that everyone gets onboard. But in this case, virtually no one can follow in Apple's footsteps. Eventually, as sapphire costs come down in the long run, broader adoption may occur. But by then, Apple will already have a grand plan in motion for its next trend-setting innovation. Let's just call the move to sapphire brilliant.
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The article Why Apple Inc.'s Shift to Sapphire In the iPhone 6 Will Be Brilliant -- and Perfectly Timed originally appeared on Fool.com.Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends and owns shares of Apple and Corning. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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