This year, Apple (NASDAQ:AAPL) launched an ultra-premium smartphone called the iPhone X. One of the standout features of the device is what the company refers to as its TrueDepth camera, which is a 3D-sensing camera that enables functionality such as secure facial recognition and facial tracking.
A key hardware component inside of the TrueDepth camera is a vertical-cavity surface-emitting laser, or VCSEL.
On Dec. 13, Apple announced that it would be making a $390 million investment in one of its VCSEL suppliers, Finisar (NASDAQ:FNSR). That investment, Apple says, will allow Finisar to "transform a long-shuttered 700,000-square-foot manufacturing plant in Sherman, Texas, into the high-tech VCSEL capital of the US."
"Hiring, capital equipment planning and infrastructure upgrades at the Sherman facility, which is expected to begin shipping in the second half of 2018," Apple's press release read.
Since Apple is expected to add the TrueDepth camera system across its 2018 iPhone and iPad lineups (a dramatic increase from just a single model in 2017), the extra VCSEL capacity is certainly going to be helpful.
Here's what this investment means for Apple, Finisar, and Apple's other VCSEL supplier, Lumentum (NASDAQ:LITE).
More supply, fiercer competition
Ultimately, Apple's goal with its supply chain moves is to ensure enough component supply and to bring down the costs of those components by as much as possible.
By giving Finisar a big cash infusion to build out VCSEL capacity -- an infusion that seems likely to include supply commitments to Apple -- Apple is taking steps to ensure stable and significant VCSEL supply from Finisar.
Finisar isn't the only vendor of VCSELs. In fact, it was believed that Lumentum was the sole vendor that supplied VCSEL components to Apple early on in the ramp of the iPhone X, as Finisar seemingly faced a delay in getting its VCSEL technology ready for mass production.
By giving Finisar a boost, Apple now seemingly has two capable suppliers with significant available VCSEL manufacturing capacity in place to serve its needs. This should give Apple access to all the VCSEL supply that it needs while simultaneously driving VCSEL prices down, as it'll have at least two capable suppliers vying for its orders.
Those orders are also probably set to surge in the next few years. Next year, Apple is expected to outfit all of its new iPhones with TrueDepth cameras, and in the year after that, Apple is expected to add 3D-sensing capabilities to the rear-facing cameras of the devices that it launches in that time frame.
Apple's going to need a lot of VCSEL components in the years ahead, and with this move, it's ensuring the supply will be there at relatively low prices. And, as a cherry on top, Apple says that all of the VCSEL components that it buys from Finisar will be produced in the Sherman, Texas, plant. Given the current administration's apparent focus on creating manufacturing jobs in the U.S., this will probably help Apple curry favor with it.
Apple is a clear winner here.
Finisar is clearly a winner here, too. The company will probably capture a greater amount of VCSEL share at Apple thanks to this investment than it would have otherwise. The loser, of course, seems to be Lumentum, as it'll likely not sell as many VCSEL components to Apple as it would've had Apple not propped Finisar up. Lumentum also seems likely to face price -- and possibly gross profit margin -- declines for the components that it does sell to Apple.