Secrecy: the New Competitiveness
Largan Precision has successfully fended off challenges from many rivals in the smartphone camera lens sector, including a Chinese upstart. The secret: secrecy itself and a sustained edge in technology.
Secrecy: the New CompetitivenessBy Liang-Rong Chen
From CommonWealth Magazine (vol. 554 )
Every Taiwanese "Apple concept stock" has a Chinese counterpart lurking, waiting to spring an ambush.
In a research report on the technology sector released in late June called "Hello China, Goodbye Taiwan?" Kirk Yang, managing director and head of Asia ex-Japan Tech Hardware Research at Barclays Capital, recommended three Chinese stocks that would benefit the most from China’s ascendance and Taiwan’s decline. Two are relatively familiar names – Lenovo Group Ltd., and BYD Electronic (International) Company Ltd. – but the other, Sunny Optical Technology (Group) Co. Ltd., has sprung up out of nowhere over the past 18 months.
The optical supplier in Zhejiang province rose to stardom last year when it received a major order from Samsung Electronics Co. to supply camera lenses for its smartphones. The helped the company’s stock soar to a high of HK$11.56 on May 15, 2013, up from about HK$2.30 a year earlier. The stock then came back down to earth before rebounding and closed at HK$11.02 on Aug. 19.
Barclays predicted Sunny Optical will ship an average of 4 million lenses a month this year, double last year’s total, and higher-end 8 megapixel lenses will account for 30 percent of the mix, up from 8 percent in 2013.
In addition, Google announced at the 2014 Mobile World Congress in March that it had selected Sunny Optical to develop the 3D camera scanner module for Google’s "Project Tango," a new smartphone that can track 3D motion and create a 3D map of the environment, according to the Wall Street Journal.
Yet despite hearing the footsteps of its Chinese rival quickly approaching from behind, Largan Precision Co. CEO Adam Lin has remained calm and collected, pulling out a secret weapon that has been in the works for a while – a new 3x optical zoom lens.
A Secret Weapon to Take on Rivals
At the company’s first quarter investor conference, Lin announced Largan’s breakthrough in zoom lens technology. The new module’s "periscope-type structure" can deliver a zoom function without affecting a smartphone’s weight or thickness, and samples are expected to be in customers’ hands by the end of this year.
In other words, Largan has developed an ultra-compact lens module that can magnify objects by a factor of three. The module’s zoom action is performed by several (at least seven) lenses that can all fit in a smartphone body no thicker than 0.7 centimeters, leaving the device’s appearance completely unchanged.
It’s a game-changing function that every smartphone vendor dreams of having, and Citigroup Global Markets Analyst Arthur Lai expects the optical zoom lenses to be standard fare in next year’s iPhones.
Deutsche Bank analyst Birdy Lu adjusted his target price for Largan shares higher after the investor conference. "If Largan can ship (the new lenses) on schedule, it will become the first vendor in the world to offer smartphone camera lenses with an optical zoom function," Lu said.
The average price of Largan’s new "killer" product will be at least US$7 to US$8, Lu estimates, twice as high as the current price for high-end smartphone camera lens modules. Once the zoom lens becomes commonly adopted by smartphone vendors, Largan’s revenues could double.
The company’s innovative technological advance has helped its share price nearly double from NT$1,480.00 at the beginning of April to NT$2,635.00 at its peak close on July 16, setting a record for the highest priced stock ever in Taiwan’s equity markets. Though its stock price had retreated to NT$2,395.00 as of Aug. 18, Largan’s market capitalization still exceeded NT$320 billion, higher than that of computer giant Quanta Computer.
The disclosure of the zoom lens breakthrough was typical of the company’s style. Largan is normally tight-lipped with analysts, so when it discloses the unexpected at an investor conference, it sends shockwaves through the stock market for days.
With Sunny Optical in tight pursuit, Largan decided to rely on a technological breakthrough to simply pull further ahead.
In an interview with CommonWealth Magazine, a senior Sunny Optical executive was at first unwilling to concede anything to the company’s Taiwanese rival. He took shots at what he called the many inherent technological flaws of smartphone zoom lenses, such as high power consumption and the space it takes up, and said the market’s acceptance of the technology was uncertain.
But the executive, who spoke on condition of anonymity, later admitted that Largan’s smartphone lens technology "has a big lead," mainly manifested in the quality of the products it ships. The tolerances of Largan lenses that pass inspection are far tighter than those of Sunny Optical, he said.
"Largan is a rival we are trying our hardest to learn from," he stresses in a pronounced Zhejiang accent.
How to study Largan has been the real question. In fact, despite being competitors in the same field for many years, Sunny Optical’s knowledge of Largan’s operations is limited. When pressed by CommonWealth on what his company had actually absorbed from its Taiwanese foe, the executive could only cite basic principles, such as being "rigorous" and "focused."
"Largan is good at keeping secrets," the executive said, not without a trace of helplessness. "Such high margins, of course everybody wants to study (Largan)," he said.
As the Apple component supplier with the highest profit margin around the world, Largan has always been a focal point of its Japanese and Chinese rivals, but its headquarters in Taichung have been compared to an impenetrable black box that nobody can get a close look at.
"Even their regular customers can’t see the production line. Probably only Apple can get a look," says an executive at another Apple supplier in the Taichung area. Largan is so strict, the executive says, because it wants to eliminate any chance of a customer leaking information to a competitor. "The trick behind a high yield rate is often just that little bit of know-how. Once others pick it up, it’s gone," he says.
Secrecy: The Key to Staying Competitive
As recently as a decade ago, the main focus of Taiwan’s optical industry remained labor-intensive production of digital cameras on a contract basis for major brands. Largan and Asia Optical Co. had factories in Guangdong province in southern China employing more than 10,000 workers.
But as Chinese factories moved in on the contracting business and engaged in rampant poaching of workers, the Taiwanese suppliers came under pressure from talent drains. The former plant manager of Sunny Optical’s factory in Zhongshan in Guangdong province, for example, was previously Asia Optical’s most senior Chinese manager.
To deal with the threat, Largan co-founder Scott Lin decided to move his smartphone lens factory back to the company’s home base in Taichung and invest in automated equipment.
"At the time, most managers objected, thinking it wasn’t feasible to return manufacturing to Taiwan," Lin said in an interview with CommonWealth Magazine two years ago.
He devised and put in place a "black-box strategy" that stressed keeping the company’s technological secrets firmly locked up in Taiwan. The company became heavily self-reliant, developing for example its molds and automated production line on its own, and it has gone to whatever lengths necessary to keep them under wraps.
It even imitated Apple in managing its engineers, narrowly defining each individual’s duties so that one engineer would not know what another was doing. That prevents rivals from gaining extensive knowledge of Largan’s technology if they steal away a couple of engineers.
Among the main leaders of Taiwan’s optical industry, Lin is by far the most private and low profile. But when his second son Adam Lin, a doctor by trade, took over the company’s helm, the devotion to secrecy only intensified. The media, which had dubbed Largan as "low-profile," now commonly refers to it as "mysterious."
Since succeeding his father, Adam Lin has politely refused all media interview requests. He makes only one public appearance a year – at the company’s annual shareholders’ meeting – and even foreign institutional investors are kept at arms’ length. At the company’s quarterly conference calls with analysts, he replies to most of their questions with a "no comment," earning him the moniker "Mr. No Comment."
In September 2013, the younger Lin broke three decades of harmony in Taichung’s optical sector when he sued Ability Opto-Electronics Technology Co. for poaching Largan workers and stealing industrial secrets and asked the court for a provisional attachment of Ability’s assets and equipment. The ruthlessness of the move shocked the industry.
"This litigation was a form of deterrence, a warning to others not to commit a similar offense," observes another industry insider.
In today’s fiercely competitive world, "secrecy" is an important element of competitiveness. For that reason, Largan has almost exclusively cornered Apple’s smartphone camera lens orders, becoming the optical industry’s unrivaled champion.
Translated from the Chinese by Luke Sabatier