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Nowadays, becoming an Apple supplier is no longer such a fortunate event. Apple is a heavy player in the field of self-developed chips, and its continuous deepening in this area demonstrates its desire for technological control and its determination to enhance product performance and efficiency. In the past, through self-developed chips, many of Apple's chip suppliers have been "abandoned."

In 2010, Apple began to use its self-designed A-series chips in products such as the iPhone and iPad. This decision freed Apple from the constraints of chip suppliers like Intel and also improved the performance and efficiency of its products.

In April 2017, Apple announced that it would stop using Imagination's GPU designs within 15 to 24 months and switch to its own designed products. This led to Imagination's stock price plummeting by more than 70% in a single day, with two-thirds of its market value evaporating.

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On December 5, 2017, Dialog Semiconductor stated that Apple believed it had sufficient resources and capabilities to independently research and develop power management chips, which led to a 23% drop in Dialog Semiconductor's stock price that day.

In November 2020, Apple released its first Mac computer based on the self-designed M1 chip. Since then, Apple's computer chips have all started to shift to its self-developed M-series chips. For Intel, Apple's decision is undoubtedly a huge blow. Apple is one of Intel's largest customers, accounting for about 10% of Intel's total revenue. Losing Apple's orders will lead to a decline in Intel's share of the PC chip market, causing significant losses to the company.

In addition to self-developed chips, Apple is also very good at using a diversified supplier strategy to maintain the competitiveness and cost of its terminal products, reducing excessive dependence on a single supply chain. The latest victim is the VCSEL chip supplier Lumentum, which is experiencing some changes in its supply to Apple.

The great contributor behind the development of VCSEL - Apple

First, let's understand what VCSEL is? Vertical-Cavity Surface-Emitting Laser (VCSEL) is a type of semiconductor laser that is different from traditional edge-emitting semiconductor lasers. VCSEL is a laser that emits light perpendicular to the substrate surface. VCSEL was first proposed by Professor Kenichi Iga of the Tokyo Institute of Technology in Japan in 1977 and began to attract attention in the industrial field in the early 1980s.

Because VCSEL emits light perpendicular to the substrate surface, tens of thousands of VCSELs can be processed on a single wafer. VCSELs can also be tested at various stages of the manufacturing process while still in the wafer state. Compared with other laser technologies, VCSEL has more controllable and predictable output, and lower manufacturing costs.In addition, VCSELs can be implemented in the form of a two-dimensional array, allowing a single chip to include hundreds of independent light sources, thereby increasing the maximum output power and long-term reliability. This array can also be customized to expand the power output, using only a single optical driver and driving current to best meet the application requirements. In terms of applications, VCSEL technology can be widely used in sensing, imaging, scanning, and ranging applications across multiple fields.

The commercial application of VCSEL technology can be traced back to the mid-1990s when Apple began to use VCSEL lasers for mouse sensors. However, the real large-scale application of VCSELs came in 2017 when Apple started using VCSEL lasers in the iPhone X Face ID module, with three VCSEL chips used in each iPhone X. Data from Yole Development shows that in 2017, iPhones consumed 41 million VCSELs, which became an important factor in the growth of the VCSEL market.

Other Android smartphone manufacturers quickly followed Apple's approach. In 2018, Huawei's Mate 20 Pro and Huawei Mate 20 RS Porsche both supported 3D facial unlocking, and Xiaomi, OPPO, and Samsung also successively introduced VCSELs in their flagship models. Huawei even invested in several innovative VCSEL companies such as Longhui Xinguang and Changguang Huaxin. In 2018, the mobile and consumer market became the largest consumer of VCSELs, reaching $440 million. However, a few years later, the Android camp began to stop using these components and switched to under-screen fingerprint sensors. Speaking of this, it is necessary to mention Goodix Technology, which became popular at that time with its under-screen fingerprint sensors.

So, as of now, Apple is almost still the only manufacturer that integrates VCSELs. Later, Apple also used VCSEL transmitters in its wireless earphones AirPods, which are used to monitor whether they are currently taken off or in use. In summary, Apple has promoted the commercial application of VCSEL lasers.

According to a report by Yole Development, in 2022, the VCSEL market almost doubled compared to 2018, reaching $840 million. However, starting from 2023, the data communication market may regain the leading position and dominate the VCSEL market in the next five years. It is expected that by 2027, the revenue of VCSELs in data communication will reach $2.1 billion, while the revenue of VCSELs in mobile and consumer categories will reach $1.9 billion in 2027. The automotive market is also worth paying attention to. With the rapid development trend of intelligence and electrification, automotive LiDAR is increasingly becoming an essential sensor for autonomous driving, and VCSELs will also usher in higher power requirements for automotive application opportunities.

Apple's VCSEL cake is divided into three parts

At present, in the VCSEL chip market, Lumentum and Coherent Corp (formerly II-VI Inc.) are the two major players, accounting for 80% of the VCSEL market. Then there are Germany's Trumpf (acquired Philips Photonics on April 1, 2019), ams (ams acquired VCSEL supplier Princeton Optronics in 2017), Broadcom, vertilite, and so on.

Lumentum's predecessor was the Communication and Commercial Optical Products ("CCOP") business department of JDSU. On August 3, 2015, Lumentum Holdings Inc. was spun off from JDSU and began to operate as an independent public company on August 1, 2015.II-VI Inc. has become one of the important suppliers of VCSEL chips through acquisitions of companies such as Finisar and Coherent: In 2019, II-VI acquired VCSEL chip supplier Finisar; in 2021, both Lumentum and II-VI wanted to acquire Coherent, but ultimately Coherent was acquired by II-VI at a price of about 7 billion US dollars. In 2022, after II-VI acquired the laser manufacturer Coherent, Inc., II-VI adopted its name.

The early suppliers of Apple's VCSEL chips were also these two companies:

In 2017, Apple selected Lumentum as the main supplier of VCSEL chips for its iPhone X Face ID technology.

At the same time, in December 2017, Apple invested 390 million US dollars in Finisar to support the construction of its VCSEL chip manufacturing plant in Texas. In 2018, Finisar officially supplied VCSEL chips to Apple, and Lumentum and Finisar jointly provided VCSEL chips for Apple in the iPhone X. After II-VI Inc. acquired Finisar in 2019, it continued to supply VCSEL chips to Apple. In 2021, Apple invested 410 million US dollars in II-VI from its Advanced Manufacturing Fund.

However, now other competitors have also joined the list of Apple's chip suppliers, and Sony is also coming to share a piece of the cake. According to industry sources, Apple is allocating its VCSEL chip orders to three suppliers: Lumentum, II-VI, and Sony.

The VCSEL for the iPhone 14 and iPhone 14 Pro series is provided by Lumentum. On February 25, 2023, analyst Ming-Chi Kuo tweeted that Sony will replace Lumentum and Win Semiconductor (Lumentum does not produce VCSEL chips itself, and they are manufactured by Win Semiconductor), becoming the exclusive supplier of LiDAR optical radar scanner parts for Apple's iPhone 15 Pro models.

Sony has been researching and developing vertical cavity surface emitting lasers (VCSEL) since 2000. According to Ming-Chi Kuo, Sony's ToF VCSEL integrates VCSEL and driver IC, which can reduce power consumption (beneficial to battery life) or provide better ToF performance while maintaining the same power consumption (beneficial to cameras and AR applications).

As more and more competitors come to erode Apple's VCSEL orders, Lumentum's situation is becoming more and more difficult. Ming-Chi Kuo pointed out that with the increased supply share of Sony and II-VI, Lumentum, which designs VCSEL, and Win Semiconductor, which manufactures VCSEL, will see their share in the upcoming high-end iPhone models drop from the previous 50% to between 30% and 40%. However, Lumentum is still Apple's largest VCSEL producer.

Lumentum is having a hard time and has introduced a layoff plan.

According to industry sources, Lumentum has already laid off employees at the end of last year, with a layoff ratio of about 15% for Lumentum and its recently acquired subsidiary Neophotonics. The first round of layoffs was in December last year, when Lumentum's stock price also plummeted. There are rumors that they will have a second round of layoffs.Lumentum's Stock Market Performance in the Past Year

Speculations on Lumentum's potential layoffs may be due to several factors:

One aspect is the impact of Apple adding Sony as a supplier, which may lead to a decrease in orders for VCSEL chips from Apple.

Furthermore, the current consumer desire to replace mobile phones and other terminal devices is not strong, and the consumer electronics market is in the process of destocking. In addition to Apple, Lumentum's largest customers include Ciena, with both companies accounting for 29% and 13% of Lumentum's revenue in the 2022 fiscal year, respectively.

Lumentum's President and CEO, Alan Lowe, pointed out in the initial earnings forecast for the third quarter of the 2023 fiscal year in early April: "At the end of our third quarter of the 2023 fiscal year, a network equipment manufacturer accounting for more than 10% of our second quarter revenue notified us that due to their inventory management, they will not accept the shipments we originally expected for this quarter. This gap is the main reason why our revenue for the third quarter of the 2023 fiscal year will be lower than the lower end of our previous guidance range." The industry speculates that the company is Ciena. In the third quarter of the 2023 fiscal year, Lumentum revised its expected revenue to between $380 million and $384 million, compared to the previous expectation of $430 million to $460 million.

Another reason is that after acquiring NeoPhotonics (New Feitong), Lumentum is now promoting the development of factories in Thailand. The production line transfer has led to the need for integration of NeoPhotonics personnel, and the relocation of the production line is currently in full swing. After the failure to acquire Coherent Corp in 2021, Lumentum continues to expand its business through acquisitions: on August 3, 2022, Lumentum announced the completion of the acquisition of NeoPhotonics (New Feitong); on August 15, 2022, Lumentum announced that it had acquired the telecommunication transmission product line of IPG Photonics.

However, for Lumentum, it is not the worst news yet, as Apple has not yet chosen to develop its own VCSEL chips.

What other potential "victims" are there?

Apple is currently working hard to develop its own modem chips (baseband chips), which are one of the most important components in smartphones. Qualcomm may be the next supplier to be cut. For many years, Apple has been poaching talent from Qualcomm's baseband chip team.

Apple and Qualcomm signed a six-year patent licensing agreement for baseband chips in 2019. Regardless of whether they use its chips, Qualcomm charges licensing fees to mobile phone manufacturers based on the patents it owns. This agreement will expire in 2025, and it will be seen whether Apple can succeed in self-development at that time.If Apple's in-house development of baseband chips is successful, considering the close cooperative relationship between RF chips and baseband chips, Apple is very likely to adopt in-house RF chips. Therefore, this also troubles RF chip manufacturers such as Broadcom, Qorvo, and Skyworks. As a result, we see that these RF chip manufacturers are building stronger moats to avoid being constrained by Apple. Broadcom continues to expand into the software field, Qorvo has started to focus on power supply and the Internet of Things, with SiC being its next big bet; the veteran company Skyworks, which rarely makes big moves, also spent $2.75 billion last year to acquire the relevant business of Silicon Labs. The actions of these companies were interpreted in the article "Are RF chips not fragrant anymore?"

In conclusion, Apple's global influence and market position cannot be underestimated. Becoming an Apple chip supplier has both advantages and disadvantages. On the positive side, it is a stable market with relatively stable orders and high profit margins. At the same time, cooperation with Apple will also bring reputation and recognition, which will help attract more customers and partners. However, there are also some risks and challenges in becoming an Apple chip supplier. They need to provide high-quality, high-performance, and low-power chips to be qualified. This means that they need to continuously invest and innovate in technology research and development to meet Apple's requirements. A slight carelessness will be overtaken by other competitors.