It is useful to have a look at some basic concepts of strategic sourcing when analyzing the competitive environment in the industry. Below is an illustration of selected strategies laid out by consulting firm A.T. Kearney.
The framework outlines sourcing strategies based on demand power and supply power. In a situation where a supplier is dominant in a market and has strong IP creating barriers to entry, strategies employed by sourcing organizations include:
· Bottleneck management – for example multi-sourcing and dual-sourcing
· Vertical integration – for example Apple’s acquisition of fingerprint supplier AuthenTec
· Specification assessment – assessment what is a must-have and what is nice to have – good enough vs best-in-class
· Invention on demand – seek a partner/supplier who can develop an alternative solution
We argue that had there not been a viable supplier base for capacitive fingerprint sensors, the technology of choice would have been another one as the risk of lock-in would be too great for OEMs if there was only one supplier.
When it comes to bottleneck management, dual sourcing and multi sourcing is a common strategy to mitigate the supply chain risks. Customers even subsidize alternative suppliers to ensure a healthy supplier base. At the same time, distributing the volumes over too many suppliers makes no sense in the semiconductor industry where scale is a prerequisite to be able to offer cost competitive and technologically advanced products. Typically, the second source will deliver 5-30 percent of the volumes and the first source the remaining 70-95 percent. In the case of three suppliers, the split might be 5-10 percent, 10-30 percent and 60-85 percent. The logic is that you want to benefit from the scale of the preferred supplier but still have a back-up - no matter if you are best friends with your main supplier today you must handle risks.
Several of FPC’s OEM customers have more than one FPS supplier already, a few examples below:
· Huawei is purchasing FPS from Synaptics and possibly also Silead
· BBK (Oppo, Vivo, Oneplus) use Goodix FPS in several devices
The same is true for other important OEM customers including LG and Lenovo.
We argue that the growth in the market for fingerprint sensors will compensate for the volumes lost to competitors as a consequence of dual or multi sourcing, at least in terms of volumes. Revenues are largely dependent on ASP. Should FPC lose traction in the high-end mobile device segment, ASP would be lower and revenue growth risk stalling even if volumes increase.
A final note on dual/multi sourcing. It is worthwhile to remember that it can also benefit Fingerprint Cards. As of right now, out of the tier-1 smartphone OEMs there are three that are not customers of FPC; Apple, Samsung and TCL. We have previously stated that we believe FPC will count Samsung to its customers. We still believe FPC has a good chance to be launched in a Samsung device in 2017. The recent announcement of Samsung LSI’s development of its own capacitive FPS has not led us to rule out FPC as a supplier.