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Should Corning Be Scared of Sapphire?

The story of Corning's (NYSE: GLW  ) Gorilla Glass dates back over six decades. The glass maker accidentally made a product that no one was interested in using, and for years it was known as Chemcor and simply had no addressable market. In the early '70s, Corning gave up trying to sell the stuff and the formula gathered dust for 40 years.

That was until Steve Jobs came around and wanted to cover Apple's (NASDAQ: AAPL  ) iPhone with the material, since most smartphone displays predating Apple's device were covered in plastic that was easily scratched. In the years since, Gorilla Glass has grown to become one of Corning's most important growth businesses, thanks in large part to smartphone adoption and Apple effectively standardizing the material's use in high-end mobile devices.

Source: SEC filings. "Other" segment not shown due to negligible sales.

Gorilla Glass is included in Corning's specialty materials segment and is the primary reason why that operating segment has grown from just 6% of sales in 2009 to an impressive 17% of revenue in 2012.

In November, Corning guided the Gorilla Glass business to $1 billion in annual revenue, a target that it subsequently hit. That was up 44% from 2011, and the majority of the $1.3 billion in revenue that specialty materials generated in 2012. Gorilla Glass also carries gross margins that are much higher than the corporate average.

It turns out that there may be a threat on the horizon to Gorilla Glass, and one that Apple may be catalyzing. Should Corning be scared of sapphire?

Monkey business
Last week, MIT Technology Review published a report on the possible future use of sapphire in smartphone screens, which could potentially replace Gorilla Glass eventually. This threat isn't at all imminent, as the cost differential remains very high, so most smartphone vendors wouldn't yet consider adopting it.

A Gorilla Glass display cover currently costs less than $3, which is much cheaper than the $30 that a similar sapphire display would set an OEM back. Eventually, the cost of sapphire could decline to below $20 due to competition and technological advances.

Such a pricey component would put a serious damper on margins. For example, the iPhone 5's bill of materials excluding manufacturing was estimated at $199, so an extra $27 for the display's cover material would be a 14% increase in component costs that would represent a gross margin reduction of 4%. While Apple is one of the few smartphone OEMs that could technically afford this type of hit, it certainly doesn't want to.

Sapphire is much stronger and more scratch resistant than glass, which would make it an ideal candidate if costs permit. At the same time, Corning isn't resting on its laurels and has now launched Gorilla Glass 3, which includes what the company calls Native Damage Resistance for improved durability. The first smartphone to be unveiled with Gorilla Glass 3 was Samsung's Galaxy S4 that was shown off earlier this month.

It begins?
Apple has already started using sapphire, but only to a small extent, likely due to cost constraints. The newest iPhone 5 features a sapphire camera lens cover on the back, which is much smaller than the large piece of Gorilla Glass found on the other side.

Sapphire camera lens covers used in the iPhone 5. Source: Apple.

Some analysts believe that 2013 will be the year that some smartphone OEMs begin using sapphire in their flagship devices. Apple is an obvious possibility as the biggest company that's publicly marketing its use of the material, but Google is also rumored to use sapphire in the upcoming Motorola "X Phone."

Talk of this possibility began last year, with Sterne Agee supply checks finding prototype smartphones with sapphire displays in the works. Most of the sapphire industry sells into the LED industry, and incremental opportunities in smartphones could be enormous. Sterne Agee estimated that the smartphone industry translated into 9 billion square inches of material in 2012, which towers over the 150 million square inches used by the LED industry over the same time. If sapphire were able to penetrate just 2% of the smartphone market, the industry's addressable market would double.

Crystalline winners
Sapphire suppliers like Rubicon Technology (NASDAQ: RBCN  ) and GT Advanced Technologies (NASDAQOTH: GTATQ  ) could benefit in the same way that Corning did years ago.

Cover and touchscreen applications of sapphire. Source: GT Advanced Technologies.

Rubicon is a vertically integrated supplier that uses a proprietary technology for growing the crystals that it calls ES2. Rubicon believes its methods are more efficient than traditional growing methods used by rivals. GT Advanced is hoping to put thin layers of sapphire on top of the touchscreen displays found on mobile devices, which could be a cheaper alternative than an all-sapphire display. GT's estimates of sapphire costs are less, and the company believes that they cost "only" three to four times as much as Gorilla Glass.

As sapphire makers progress down the cost curves, even as Corning continues to strengthen Gorilla Glass at lower price points, someday soon Corning may need to fear this crystalline transition materializing.

With the explosive growth of smartphones worldwide, many investors thought they would ride Corning's dominant cover glass to massive investment returns. That hasn't played out yet, as mobile growth has failed to offset declines in the company's core business. In this brand new premium research report on Corning, our analyst walks through the business, as well as the key opportunities and risks facing it today. Click here to claim your copy.

Read/Post Comments (3) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 27, 2013, at 1:40 PM, luxetlibertas wrote:

    Scratch resistance does not seem to be a problem anymore, and even sapphire is not immune to shattering if a phone lands on a corner. So I have my doubts about the business case for sapphire smartphone screens unless the price premium becomes quite small.

    But other properties, optical, surface feel, ease of melding with the display itself, ease of processing, or tolerance to heat or chemicals may also play a role.

    Gorilla glass seems to do quite a good job for now.

  • Report this Comment On April 05, 2013, at 7:48 PM, Vetiver wrote:

    Apple may be looking at Sapphire but only because their materials expertise is so weak. There is no chance that Apple will switch to Sapphire. The index of refraction (the inherent reflectivity) of the material is to high to have a usable screen outdoors. Sapphire makers are pushing the idea as so many producers came on-line to supply LED substrates, there is a great deal of overcapacity. However, the properties are such, Apple could not use Sapphire even if it were free.

  • Report this Comment On April 09, 2013, at 12:41 PM, GirlsUnder30 wrote:

    I agree with the comments above, touch screens will be a tough market for sapphire to win but there are plenty of other applications like upscale televisions and super market scanning beds that are just starting to catch on. This is not the best GTAT story, you guys are missing the real potential landslide profit driver which was not even mentioned in their last financial report. On February 25th they signed an agreement with SOITEC to enter the FD-SOI business and I believe it will be an amazing success. Incidentally, have you guys read?

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