Apple is well known for squeezing suppliers on price and playing one factory off another, but its tactics have had little effect on the optical lens sector.

Demand exceeding supply and constantly improving pixel specifications are among the reasons for that, but the biggest factor is Apple’s inability to cultivate a “second Largan.” 

Taichung-based Largan Precision has maintained a price-earnings ratio of over 20 in recent years while other stocks in the Apple supply chain have struggled to keep their P/E ratios above 10, reflecting how well the company is positioned.

Able to Hold Its Own

As the world’s biggest supplier of smartphone camera lenses, Largan commands a 30 percent market share across the globe. It produces more than 200 million lenses a year that range in price from US$1.80 to US$5.50, according to a foreign brokerage, but it has the distinct advantage of being the only supplier that can mass produce and ship the advanced lenses that sell for more than US$5.00 a pop.

At the company’s quarterly investor conference on July 9, Largan CEO Adam Lin (林恩平) confirmed that customers had trimmed their orders because of the global COVID-19 pandemic. Over the longer term, however, he was confident customers would still demand smartphone camera lenses with ever more advanced specs.

Largan began shipping “8P” lenses (so-named because each lens is made up of eight plastic lenses stacked together) at the end of 2019, and customers have begun using them in their phones this year. 

The company has started working on 9P lenses (the most advanced mass-produced lens spec on the market), Lin said, and could have a product with more than 100 megapixels as early as the second half of the year. Free-form lenses, expected to improve the quality of ultra-wide-angle images, are also under development.

Most other lens suppliers around the world are stuck on improving the yield rates of their 7P lens processes, not to mention overcoming bottlenecks in 8P production.

A veteran optical industry insider explained the challenge. Even if you assume that each lens only has two variables – its upper and lower sides – stacking eight lenses means contending with and controlling 256 variables (2 to the eighth power – 28). Largan stands out as the only vendor in the optical lens sector able to overcome those barriers and mass produce the 8P lens, the source said.

Its competitors have a ways to go to catch up.

A second optical lens supplier Apple is actively supporting – Taichung-based Genius Electronic Optical – has improved its yield rate on 7P lenses to more than 70 percent and is currency developing 8P technology, its chairman, Jones Chen, said recently.

Another vendor that Apple once had great hopes for – China-based Sunny Optical – is not expected to ship 6P lenses for Apple’s less expensive smartphones until 2021 at the earliest, according to one foreign investment analyst.   

In today’s world, however, everyone uses smartphones to take photos, record videos, and connect to live streams, and the thirst for high-resolution, large aperture, and ultra-wide-angle lenses and technologies such as the highly anticipated “water drop” and periscope lenses ideal for full screen or ultra-thin phones continues to drive technologies and competition in the sector.    

A manager in the Apple supply chain summarized Largan’s three main advantages: the first mover advantage, a big patent portfolio, and no apparent technical ceiling, leaving plenty of room for smartphone lens specs to scale new heights.

Advantage 1: Technology Lead
A one-generation edge over its rivals

Scott Lin (林耀英) founded Largan Precision in 1987 and he would later take the advice of friend and Premier Technology Chairman John Huang (黃震智) to focus on light and thin lenses because that was the way the consumer electronics market was going. As a result, the Largan founder decided to abandon glass lenses in favor of develop plastic lenses.   

That vision has since developed into a battle of miniscule dimensions. The industry has been competing over tolerances of 0.1 micrometers (1/500th the diameter of a human hair) for quite a while, multiple optical sector executives told CommonWealth. 

“For margins of error of under 0.1 µm, not even the smallest detail can be overlooked,” one of them said.

An engineer with Ability Opto-Electronics Technology said that even the smallest details, such as floor vibrations, the alignment of equipment, the factory or environmental temperature and many other details can lead to flaws in the injection molded lenses. 

The engineer cited the example of “off-center” tolerances to explain that there is no such thing as a true circle in the world – that a perfect circle is only a mathematical assumption. Any circle magnified 10,000 times will naturally become slightly elliptical, leaving the center point slightly off, he said. 

That matters, because when a beam of light enters a lens and is refracted to form an image, if it doesn’t hit the ideal center point of the original optical design, it will be off-center, the engineer said.

When lenses are stacked, their focal points must match up exactly and be of consistent quality. The more lenses, the greater the difficulty – a challenge that every optical lens struggles to overcome.

An optical factory executive revealed that many optical vendors have actually studied Largan’s approach, putting their production line in a basement to control the temperature, buying extremely precise molds, and even poaching Largan employees. But even then, while most vendors are engaged in making 6P and 7P lenses and trying to elevate their yield rates, Largan continues to remain at least a generation ahead and is now eyeing the development of 9P lenses.

Adam Lin said smartphone lens are constantly being upgraded, whether larger apertures or more pixels, but a bigger aperture means more light is let in, placing even greater demands on the precision of the stacked plastic lenses so that the beams of light all hit the correct spots.

“There are many processes in the optical industry, and every single one has to be done as well as possible,” the Largan CEO said, stressing that from the molds, the forming of the lens and mass production to the stacking of the lenses, and imaging design, the quality of every step must be consistent to assemble the perfect lens.

Advantage 2: High Patent Threshold
Forcing other Vendors to Find Alternative Designs

Largan has more than 2,700 patents, forming a formidable technology barrier that competitors are hard pressed to overcome. 

Since 2013, Largan has launched several patent battles, suing Samsung, Genius, Ability and others. In its suit against Ability for infringement of Largan’s business secrets and patents, the Intellectual Property Court ruled in Largan’s favor in 2017 and ordered the defendant to pay NT$1.52 billion in compensation, the highest damages ever awarded in a patent case in Taiwan. 

The verdict is being appealed, but when Ability executives discuss the issue, it is with some trepidation and they are reluctant to say much about it.

A source familiar with the sector predicted another round of patent wars in the optical industry in the next five years.

“In the Internet of Everything age, every technology needs lenses, from mobile phone image transmission, vehicle applications, smart cities and surveillance tools. Patents provide a tangible advantage, backing lawsuits that can harass rivals, block their advancement, or pressure them into settlements.

In 2013, Largan sued Samsung, and the sides eventually reached a settlement. After that, Largan successfully gained access to the Korean electronics giant’s mobile phone supply chain.

Adam Lin once said that Largan has practically cornered the market on product patents for 5P lenses and above. “Vendors generally have a hard time escaping Largan’s patents. It just depends what kind of action is taken,” he said at the time.  

In Largan’s suit against Genius, there is speculation that Apple stepped in and helped broker a settlement in 2016. A year later, Genius got a foothold in Apple’s iPhone 8 main lens supply chain, and the next year successfully shipped iPhone XR rear camera lenses.

Apple now accounts for up to 90 percent of Genius’ revenues. Genius President Lee Kuo said the company is currently shipping 4P to 7P lenses, with medium- to high-end products comprising 60-70 percent of total shipments.

Armed with a huge technology edge, Largan is constantly pushing the physical limits of plastic lenses, currently moving from 8P to 9P assemblies featuring more than 100 megapixels, ready to capitalize on the ongoing trend toward smartphones with multiple lenses.

Advantage 3: Escalation of Spec Battle

Already well-positioned, Largan stands to benefit further from the emergence of the periscope lens – seen as a new “blue ocean” amid the push for thinner, full screen smartphones. The P30 Pro rolled out by Huawei in 2019 was the first high-end phone to have a periscope lens, and it was supplied by Largan. This year, Samsung, Xiaomi, Oppo, and Huawei have launched new models with periscope lenses.

(Source: Getty Images)

IBF Securities Investment Consulting President Paul Wang (王博文) said lens spec upgrades in the future will also include ultra-wide-angle, large aperture, higher magnification zoom, and higher “P” or “P+G” (plastic + glass) periscope lenses. Whether it is sharpening night photos or using a bigger sensor to improve image quality, every lens technology has room for growth.       

Apple’s iPhone 12 is expected out in the second half the year, and one analyst expects its main upgrades to involve 5G and lens specs, giving big boosts to suppliers of related components. Among the smartphone models currently hitting the market, triple and quad camera phones have now become more common than dual camera models. Current trends, in fact, point to increases in the shipments and prices of lens and optical modules far outpacing smartphone market growth, also benefiting lens makers.

Brokerage: New Apple Phone to Drive Shipments

Apple assembly plants generally run gross margins of 3-4 percent, but the optical lens sector’s high technology thresholds and low number of players allow for gross margins for lenses to range from 10-50 percent.

“Honestly, our industry should thank Largan,” said the chairman of an optical industry company, even though his company has been sued by Largan in the past. 

He said Largan has raised the technology threshold allowing for greater price differentiation, enabling even “bad boys like us” the chance to supply lenses for low-end mobile phones or Apple Mac computers or iPads. 

“Apple has been unable to nurture a second Largan. If there is a second Largan in the future, prices will be slashed and today’s shared prosperity will no longer exist,” he predicted.

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Translated by Luke Sabatier
Uploaded by Judy Lu