By Jin Lu

Ningbo's Sunny Optical is set to return as an Apple supplier, according to a recent report by Ming-Chi Kuo, analyst at TF International Securities. By 2025, the company is expected to become a core supplier of CCMs for Apple's devices, with production based in Vietnam to support the next-generation M5-powered MacBooks.

The news has placed Sunny Optical and other Apple supply chain companies back into the spotlight for investors, who are now closely watching the potential impact of this partnership. If these predictions hold true, what could this mean for Sunny Optical's growth, and what strategic steps have enabled the company to reach this position?

Higher Potential Gains

Founded in 1984, Sunny Optical entered Apple's supply chain in 2021 by providing front cameras for the iPhone 13. During this time, the company's stock price surged 45%, reaching a record high of HKD 257.56 per share and a peak market capitalization exceeding HKD 280 billion. However, financial reports indicate that the anticipated boost from working with Apple did not translate to significant growth, as the global smartphone market had entered a period of declining demand.

Industry data reflects this downturn: Canalys reported an 11.3% year-on-year drop in global smartphone shipments in 2022, marking the lowest level in a decade, followed by an additional 4% decrease in 2023, down to 1.14 billion units.

Now, with the potential for Sunny Optical to rejoin Apple's supply chain in 2024, experts predict a stronger revenue and profit outlook than during its initial partnership. Apple's upcoming product lines are anticipated to generate substantial demand amid an AI-driven upgrade cycle, impacting not only phones and PCs but also rapidly evolving VR, AR, and XR devices. Enhanced technology is increasing the appeal of mobile electronics, which, in turn, boosts demand and raises the value of integrated components. Early suppliers like Sunny Optical could stand to gain considerably.

Optical components—critical to smart devices—are subject to the highest standards in mobile device components, and Apple's commitment to quality allows for better bargaining positions and profitability for its suppliers. Sunny Optical, positioned as a provider of both camera modules and lenses, is set to benefit from its integrated production model. Analyst Ming-Chi Kuo notes that re-establishing its role as Apple's camera module supplier could potentially double Sunny Optical's revenue in the long run, with vertical integration supporting further profit growth.

Commitment to Quality

Sunny Optical's success hinges on its ability to deliver high-quality, innovative products that align with the latest tech trends.

One example is its alignment with leading camera technology. The iPhone 16 series, released in September, builds on hardware and software advancements introduced in the iPhone 15 with Pro and Pro Max models featuring the tetraprism camera. This advanced periscope design incorporates a folded glass structure to reflect light multiple times, enabling longer focal lengths and higher optical zoom without adding bulk. Similar technology appears in Huawei's P70 flagship models, and with the market dominance of Apple and Huawei, periscope lenses and variable aperture designs are likely to become standard across the industry.

Currently, Apple and Huawei primarily source their periscope lenses from Largan Precision, but Sunny Optical is competitive, having launched its own 5x and 10x optical zoom modules and mass-produced periscope cameras in 2023.

At the core of Sunny Optical's competitive edge is its technical innovation. Creating a compact long-focus camera, as achieved with the tetraprism design, demands advanced miniaturization and precision engineering. Sunny Optical delivers with its high-precision optical alignment, ensuring sub-micron alignment and enabling mass production of compact cameras fit for XR and IoT applications, where size and performance are critical.

In the VR sector, where optical component performance is paramount, Sunny Optical is the preferred supplier for global brands like Meta and Pico, establishing itself through its expertise in integrated, miniaturized, and high-performance optical design.

Production relocation also strengthens Sunny's competitiveness. Responding to both supply chain shifts and component production trends in Southeast Asia, Sunny Optical proposed a $2-2.5 billion industrial center in Vietnam in 2023. With Apple planning MacBook production in Vietnam, Sunny Optical's proximity could facilitate tighter collaboration with the tech giant.

Thanks to these internal strengths and the opportunities within the sector, Apple may indeed re-integrate Sunny Optical into its supply chain, potentially expanding to include components for MacBook models.

Takeaways from Sunny's Success

For Apple's extensive network of suppliers, several key takeaways emerge:

1. Product Quality: Chinese suppliers in Apple's ecosystem are increasingly focusing on quality and performance. In 2023, Goertek and Changying Precision invested 4.716 billion yuan and 8.189 billion yuan in research and development, respectively, highlighting the fact that Apple's reputation ultimately relies on the strength and quality of its suppliers.

2. Diversification: To reduce their dependency on Apple, many Chinese suppliers have diversified their portfolios of clients. Sunny Optical has expanded into smartphones, automotive, security, and AR/VR sectors. Goertek has moved towards VR and AR, while Lens Technology has entered the fields of electric vehicles, smart wearables, and photovoltaics. Similarly, Lingyi iTech has branched into automotive and solar energy sectors.

3. Building Domestic Champions: A strong domestic leader in the supply chain is crucial for stability and resilience, reducing the impact of Apple's supplier reshuffling. Such a leader would support greater security and independence within the supply chain.

As consumer electronics rebound, China's supply chain is entering a new phase. With true independence and a focus on innovation powered by advanced technology, this supply chain has a solid foundation for future strength.