Apple saved the sapphire industry in 2013 and will transform it in 2014.
How will this revolution happen?
APPLE SAVED THE SAPPHIRE INDUSTRY IN 2013…
The sapphire industry recently ended an 18 month period of depressed pricing and achieved US$936 million in revenue for wafer products. Recovery was helped by an increase in LED demand due to growing adoption in general lighting and a resilient LCD backlight market. But the saving grace was new consumer electronic (CE) applications: camera lens and fingerprint reader covers, mostly driven by Apple in 2013. Overall, the growth in wafer demand will be enough to justify a capacity increase toward the end of 2014. For the longer term, we analyzed opportunities of alternative LED substrates (GaN and Si) but concluded that sapphire will retain > 90% of the market through 2020.
After almost 2 years of losses, core prices increased by more than 50% in 2013; tier-1 sapphire vendors are finally selling at prices close to breakeven costs. After a short pause, we expect the uptrend to resume through Q2 and Q3. But leading vendors’ interests are not to increase prices above levels that would allow tier-2 competitors to generate a profit as well. We therefore expect prices to stabilize by the end of the year.
Due to strong competition, finishing companies didn’t pass the higher material costs on to their customers. Wafer prices remained stable in 2013 but will go up slightly in Q2-2014. For PSS, which now dominates with 85% penetration rate, prices could increase faster as supply currently falls short of demand in Taiwan. This will continue until leading suppliers increase capacity and emerging players in China ramp up and enter the supply chain later in 2014. Overall, sapphire prices should stabilize by the end of 2014 and start decreasing again in late 2015 as the industry keeps improving its cost structure.
The report provides historical price trends and forecasts for cores and wafers, detailed capacity and revenue analysis, rankings and market share, as well as a thorough supply vs. demand analysis.
… AND APPLE COULD COMPLETELY TRANSFORM THE INDUSTRY IN 2014!
Sapphire has been used for years in various luxury cell phones. In 2013 we indicated that adoption in more accessible models could start in 2014. This just happened with the introduction by Gionee of the first “non-luxury” (<$1000) smartphone to feature a sapphire display cover. If adopted by leading cell phone OEMs for their flagship models, total sapphire demand could increase by up to 2x by the end of 2014 and 20x by the end of the decade.
On November 4th 2013, GTAT and Apple announced a partnership to set up a large sapphire manufacturing plant in Mesa, Arizona. We thoroughly analyzed the deal and reached the conclusion that exiting 2014, the plant could reach a capacity equivalent of more than twice the current worldwide capacity. What for? Demand for home buttons and camera lens covers are expected to increase in 2014 and 2015, but even with aggressive forecasts for smart watches (and assuming that Apple uses sapphire for its own model which we don’t believe it will), the company could still tap into the existing supply chain to procure the sapphire it needs. It’s therefore difficult to justify this US$1 billion investment unless new applications requiring a lot of sapphire are coming to market. From our analysis, we consider cell phone display covers to be the most likely outlet for this capacity.
We modeled the Mesa operations and believe that the plant will make sapphire slabs that will then be sliced and polished by Apple subcontractors in China. The simulated slab cost of $6.40 per part would enable a US$17 cost per finished display cover, with a path for <$13 ASP in the midterm. The plant could deliver an equivalent of 42 million display covers in 2014 and more than 85 million in 2015.
The report includes a thorough analysis of the GTAT/Apple deal with everything we know and the remaining grey areas. It explains the rationale behind all key hypothesis of our cost model.
THE SAPPHIRE INDUSTRY TO BENEFIT BUT NOT EVERYBODY WILL WIN
With display applications, total revenue from polished sapphire products could grow at a 50% CAGR through 2018 and exceed US$5b. Sapphire is now a strategic material for Apple that it will use as an element of differentiation versus Samsung and other competitors. With the Mesa plant, Apple is creating its own supply chain, sheltered from any risk of shortage or price increase. But a second source is needed. We therefore expect other sapphire makers to increase capacity and join the Apple supply chain in the next few months.
There’s still a risk associated with the unprecedented ramp up that GTAT and their suppliers committed to. Even a few months from its targeted full capacity operation, Apple could still walk away from the project. In addition, sapphire needs to deliver its promises of stronger displays. Bloggers can be creative in their ways to destroy phones and if initial reports don’t show a noticeable improvement in breakage rates, it will create a negative perception of the technology.
The impact of Apple’s commitment to sapphire is positive for the industry. It brings a lot of visibility to sapphire and could spur new applications. But we must guard against the notion that everybody will benefit: 2014-2015 will be good for those with efficient cost structures that position themselves in the supply chain. Shortages might occur if other cell phone OEMs decide to use sapphire as well. Their volume needs will be too small to justify an Apple-like investment so they will tap into the existing supply chain, even a small % of adoption will lead to vast amounts of sapphire per the industry standards.
Now that the deal is sealed, it is in the interest of other sapphire vendors that GTAT and Apple succeed: the Mesa plant provides unprecedented economies of scale and expertise in high volume sapphire manufacturing. If Apple was to use less sapphire than anticipated, GTAT might flood the market with unused capacity at very competitive prices. The report thoroughly analyzes the impact on the sapphire industry and supply chain.
OBJECTIVES OF THE REPORT
The report provides a detailed analysis of the status and prospect of the sapphire industry:
Recent trends and market drivers in established and emerging applications
Why are Apple and GTAT investing more than US$1 billion in sapphire manufacturing?
Drivers for adoption of alternative LED substrates (GaN and Si)
Sapphire supply and demand trends: Where are prices headed?
Identify and know the key players (established and emerging)
Geographic trends and specificities
Analysis of new consumer electronic applications: smart watches, camera lens and fingerprint reader covers, and display cover
Analysis of the GTAT/Apple partnership: capacity and revenue analysis, display cover manufacturing cost modeling
Detailed analysis of PSS manufacturing trends and supply chain
KEY FEATURES OF THE REPORT
Detailed analysis of the GTAT/Apple deal: cost, capacity and revenue model
Detailed analysis of sapphire use for: LED, SoS, camera lens & fingerprint reader covers, smart watches, and display covers
Volume & revenue through 2019 for all applications
Supply/demand, company revenue & capacity rankings
Diameter and geographic breakdown, MOCVD capacity
PSS supply chain and manufacturing
Alternative substrates for LED: requirements, status, key player, cost of ownership modeling, and penetration rates
LIST OF COMPANIES AND R&D INSTITUTIONS (non-exhaustive list)