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Is This How Apple, Inc. Can Afford Sapphire For the Rumored iPhone 6?

Paper-thin sheet of sapphire produced using Hyperion ion implanter technology. Source: GT Advanced Technology.

The sapphire smartphone storyline has come full circle. Last March, MIT Technology Review was among the first to contemplate whether or not sapphire could displace Corning Gorilla Glass in high-end smartphones. With Apple's (NASDAQ: AAPL  ) expected release of a sapphire-equipped iPhone 6 just months away, MIT Technology Review is back with some more details on how supplier GT Advanced Technology (NASDAQOTH: GTATQ  ) could be cooking up copious amounts of the material.

One of the most prominent hurdles to sapphire adoption is the cost differential, although that gap has narrowed over the past year. In early 2013, a pure sapphire cover glass would cost $30 compared to Gorilla Glass's $3. A pure sapphire cover glass now costs $15-$20. However, there is an alternative to using a pure sapphire cover glass: using sapphire as a laminate.

To Hyperion and beyond
Applying an incredibly thin layer of sapphire to a less expensive material could be a way to balance out the premium while retaining the appealing characteristics. GT Advanced has implemented a new Hyperion ion implanting technology (acquired through GT's 2012 $10 million acquisition of assets and intellectual property from Twin Creeks) that allows it to produce sapphire layers as thin as 26-micrometers, which can then be applied on top of another material. Analysts estimate that laminating glass with sapphire could cost as little as $6.

This technology makes much more efficient use of the sapphire material, since, traditionally, sapphire pieces must be cut from larger wafers. That process takes a lot of sawing and grinding, and ends up wasting considerable quantities of the material. GT Advanced expects to get its first Hyperion order this year.

Even Apple likes to save money
That cost differential for laminated sapphire is much more manageable for OEMs, including Apple. No one knows quite yet whether or not Apple will use pure sapphire or laminated sapphire. Of course, Apple could easily afford to spend extra if it feels confident that sapphire would be a differentiated and marketable feature, but at the same time the marginal benefit to using pure sapphire over laminated sapphire could be negligible compared to the marginal cost. Margins are margins, and there's no reason to take unnecessary hits.

Rivals can't really afford pure sapphire, as most operate at negative margins. The only (but most important) competitor that could afford it is Samsung, but Samsung's handset business is hitting a ceiling right now as competition intensifies.

Pushing forward with sapphire
GT Advanced continues to be very bullish on sapphire's prospects, with its sapphire segment still expected to comprise 80% of revenue this year. Demand in the merchant market also remains robust, outpacing supply. In May, the company announced its next-generation ASF 165 furnace, which boosts boule size by 40% to 165 kilograms while also reducing production costs. Commercial availability of these new furnaces is slated for the third quarter.

In recent years, GT Advanced has also been designing its furnaces so that they can be upgraded with the latest and greatest without having to purchase entirely new equipment. For example, previous-generation ASF 115 furnaces can be upgraded to ASF 165, and GT Advanced expects many customers to convert their equipment. This will prove key, since the net result is reduced capital expenditures for sapphire material vendors, which will help keep prices down and potentially spur adoption.

Patience is a virtue
In a few short months, all will be known. Apple's iPhone 6 event is expected in September, where it will detail precisely what is or isn't in the handset. Apple's gross margins have stabilized meaningfully and the Mac maker's profitability was a particular area of strength last quarter.

The potential shift to sapphire could be a margin headwind, especially if Apple decides to go with pure sapphire cover glass (if at all). The upside would be that Apple appears to be preparing for a massive iPhone 6 launch.

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Read/Post Comments (4) | Recommend This Article (14)

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 July 29, 2014, at 3:05 PM, imvho wrote:

    Great article!

    Lamination solves a lot of the concerns that have arisen regarding cost, efficiency, and supply levels of providing Sapphire displays for iPhone 6.

  • Report this Comment On July 29, 2014, at 3:13 PM, mds wrote:

    Well actually yes and no.

    Yes if they call it a sapphire laminate; no if they call it sapphire.

    It would be analogous to referring to gold plated as gold.

    It would be misrepresentation.

    Now the real answer is the boatload of money AAPL invested in equipment, solely dedicated to AAPL, on exclusive production lines "jointly" owed by AAPL and GT. Which allows for lower cost; because AAPL is a partner with the supplier.

    This is called vertical integration in manufacturing.

    And that is how they can afford to do it.

    Maybe they will use sapphire laminate for a cheaper phone, to upgrade it, for emerging markets. But they will not use it on the 6 and call it what it is not.

  • Report this Comment On July 30, 2014, at 12:29 PM, DarSea wrote:

    Great article!

    Apple is estimated to be building around 80 million units of the next iPhone. Solid sapphire screens are not feasible yet. Apple is not Vertu.

    And Actually I don't think Apple has mentioned that they're making a sapphire anything.

    If they brand this stuff, (iSapphire or SapphireBrite) they could make it out of whatever combination they want. Laminating or micro coatings could perform and be highly favorable in ways that solid sapphire can't (curved iWatch screens too)

  • Report this Comment On July 31, 2014, at 2:17 PM, 0gre wrote:

    @mds They can say something along these lines "Then we covered the iPhone's screen with pure sapphire to give it incredible scratch resistance and durability ..."

    The words "laminate" will not be used. It's a technical term and one few people care about. It's not being sold based on the value of the material as gold is, it's being sold based on the physical benefits those materials bring to the product.

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Evan Niu

Evan is a Senior Technology Specialist at The Motley Fool. He was previously a Senior Trading Specialist at a major discount broker. Evan graduated from the University of Texas at Austin, and is a CFA charterholder.

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