Corning Inc. (GLW:US), a 163-year-old company that once made cookware and railroad lanterns, has emerged as an improbable star of the $280 billion smartphone industry as it develops curved screens and glass that repels germs.
As smartphone sales slow, Apple Inc. (AAPL:US), Samsung Electronics Co. and Google Inc. are increasingly counting on display technology to lure consumers. That’s elevated the importance of Corning, the top supplier of glass for high-end phones. Like the chipmakers of Silicon Valley, the company is under pressure to build products that are both thinner and stronger -- whether that means better withstanding scratches, blocking glare or taking on new shapes.
At stake is device makers’ ability to create products that stand out, almost seven years after the original iPhone introduced the touch-screen slab design that is now ubiquitous. Curved displays would allow phones to come in more ergonomic shapes and let on-screen information spill over onto the sides of devices.
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“What we are best at is inventing something brand new or solving a customer’s very difficult problem,” Corning Chief Financial Officer James Flaws said in an interview at Bloomberg headquarters in New York. “We call ourselves a specialty glassmaker. We think of ourselves as a technology company.”
The challenge for Corning is coming up with that next innovation before a competitor does. While the Corning, New York-based company is the market leader in smartphone-cover glass, suppliers that use other treated glasses or materials could upend its position, said Paul Semenza, president of supply-chain researcher NPD DisplaySearch’s technology-analyst business.
Nippon Electric Glass Co., based in Japan, is developing an ultrathin screen that can bend without shattering, said Andrew Uerkwitz, a senior analyst at Oppenheimer & Co. Asahi Glass Co. sells a chemically strengthened glass called Dragontrail that competes with Corning’s Gorilla Glass, the shatter-resisting material used to cover the iPhone.
In September, Apple applied for a patent for using sapphire to create sturdier displays, and it has made other moves to explore the usefulness of the gemstone. Plastic may also be an alternative to glass, Semenza said.
Optimism that Corning can maintain its advantage sent the stock up 41 percent last year, outpacing the 30 percent gain for the Standard & Poor’s 500 Index. The shares (GLW:US) rose less than 1 percent to $17.89 at the close Jan. 3 in New York.
Corning got its start in 1851 as a maker of window glass, ceramics and other materials. It developed the first glass enclosure for Thomas Edison’s incandescent light bulb, and that product went on to account for about half its business by 1908. It also created Pyrex glassware, used in kitchens since the early 1900s, though it sold most of that business in 1998 to focus on high-tech investments.
Corning got a leg up in the smartphone industry from Steve Jobs, the Apple co-founder who died in 2011. Before introducing the first iPhone, Jobs asked Corning to create the glass for the device. With less than a year to develop the new material, Corning drew on automotive research from the 1960s to make something strong enough to meet Jobs’s famously exacting standards.
Since then, Corning’s Gorilla Glass has been adopted (GLW:US) by other smartphone makers -- including Samsung, Apple’s biggest rival. The glass has been upgraded three times since its introduction in 2007, making it stronger and thinner, and CEO Wendell Weeks cites it as the fastest-growing product in Corning’s history.
The company spent (GLW:US) $726 million on research and development in the 12 months through September -- about 9.1 percent of its annual revenue. While the percentage is lower than that of technology companies such as Intel Corp. or Microsoft Corp., the investment is mostly devoted to the company’s newer lines of business, Flaws said.
The spending has helped Corning avoid the pitfalls of companies like Eastman Kodak (KODK:US) Co., the former film-and-camera maker that struggled to adapt to technological shifts. R&D funding at Kodak shrunk every year from 2006 to 2012, the year it filed for bankruptcy. Corning boosted its investment annually during that time, except in 2009 in the midst of the financial crisis. In addition to phone screens, the glassmaker sells components for 3-D televisions, fiber-optic cables and diesel-exhaust filters.
“Because they have been around such a long time and have big R&D in terms of electronics, they have an edge on the competition,” said Mehdi Hosseini, an analyst at Susquehanna Financial Group LLP in San Francisco. “For Apple to remain competitive and provide those displays, they have to work with Corning.”
Each new product can be a costly (GLW:US) gamble, Flaws said. Once Corning consults with a customer and starts developing a specific type of glass, it can require a large amount of capital spending, he said. The company also sends out samples of new technologies to device makers, aiming to steal away customers that are using plastic or other types of glass in their products.
Corning’s new technology may also give Apple’s engineers a jolt of inspiration. The iPhone doesn’t look radically different today than it did in 2007, fueling criticism that the company hasn’t done enough to rethink the design of the devices.
Shaped glass is one way that smartphone makers could shake up the industry, said Dave Velasquez, director of marketing and commercial operations for Corning’s Gorilla Glass. The company has developed a technique that can curve and mold cover material into three-dimensional parts, he said. While he declined to say which handset makers will be using the product, both Apple and Samsung are working on new rounded phones, people with knowledge of the matter said in November.
Samsung plans to release a Galaxy smartphone next year with a three-sided display that wraps around the edges, so messages can be read from an angle, people with knowledge of the matter said. Apple will introduce models with glass that curves downward at the edges, another person said.
In December, Apple was granted a patent for a curved touch sensor, another clue about its product development.
Corning has created an antimicrobial cover glass, which could keep devices from being a haven for germs, the company said today in a statement. An antireflective material for smartphones is also being worked on so users could view screens in bright sunlight, Velasquez said.
The challenge for Corning is to come up with a new hit for glass before rival materials gain an edge. Apple has used sapphire in its smartphones as a camera-lens cover since 2012, and the material now tops the fingerprint-reading button in its iPhone 5s, according to research firm IHS.
The smartphone maker announced plans in November to spend $578 million to equip a new Mesa, Arizona, factory with machines that use sapphire crystal. Corning shares tumbled 4.4 percent the day after the deal was announced, their biggest one-day decline in more than a year, on concern the Gorilla Glass iPhone cover could be replaced.
IPhone users are looking for screens that never shatter, something that may be easier to accomplish with sapphire, Oppenheimer’s Uerkwitz said. Still, the cost of the gemstone would make a switch expensive, he said.
“If Apple is really listening to their customers, then it could mean finding a material that is stronger than Gorilla Glass,” Uerkwitz said. “I wouldn’t be surprised if they did release a phone with sapphire, but that won’t be for a while.”
Craig Leighton, portfolio manager at Frost Investment Advisors LLC, is betting that Corning will work closely with its customers to keep from ceding its position in the market. Corning shares represent one of the five biggest holdings in the fund (FIDVX:US) he manages.
“They have this suite of products -- be it bendable, antibacterial, super hard, very thin, whichever way you want to go,” he said. “They are right there.”
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