Last month, Fingerprint Cards issued a quarterly update featuring unusually stark language about the state of the mobile fingerprint sensor industry. The company, which has made its name over the past decade as a leading provider of fingerprint sensors for mobile devices, hadn’t had a good Q3. Sales were down 37 percent from Q2, and down 60 percent year-over-year.
In his commentary, CEO Christian Fredrikson did not beat around the bush regarding the “sharp decline in demand for smartphones in China,” which he attributed to “COVID-19-related restrictions in the country.” And it wasn’t just the pandemic policies that were having a negative impact on FPC’s business: China’s real estate crisis, supply chain issues, and declining demand were all important factors as well.
From a certain perspective, it all sounds like really bad luck for a fingerprint sensor vendor like Fingerprint Cards. But industry analysts suggest that the company’s update offers darker portents for the sector more broadly.
A Construction Boom Goes Bust
The real estate front delivered problems for an important emerging business area on FPC’s part – access control. Fredrikson noted that sales in this area declined in Q3 “partly as a result of lower activity in the construction sector in China, with an impact on sales of biometric door locks.” COVID-related lockdowns surely had an effect here, but China’s real estate market is also struggling with a unique debt crisis after decades of rapid growth. A government effort to depress the real estate sector’s speculative bubble has pushed developers like Evergrande into default territory and left many projects stalled and unfinished.
Offering her perspective on the situation to FindBiometrics, Frost & Sullivan analyst Danielle VanZandt explained it in blunt terms. “FPC’s not going to go install a bunch of their biometric-enabled readers in a building where they know they may or may not get paid by the construction company,” she said. “If they were banking on that big construction boom, then yeah, that’s going to affect your bottom line.”
Physical access control is a new business sector for FPC – part of an effort to expand beyond mobile sensor integrations. And government policy turns out to have been a key factor in both areas for Fingerprints’ bottom line, with China’s authorities having been steadfast in their application of zero-COVID policies and refusals to bail out parts of the real estate sector.
To Acuity Market Intelligence‘s Maxine Most, Fingerprint Cards itself gets some of the blame for exposing itself so heavily to the decisions of the CCP.
“I sort of think it’s shocking that any company operating in the Western world would be relying on China for the majority of their business,” she said, though she went on to acknowledge that China, together with India, may be where most of the world’s smartphone sensors end up being used. “So I understand it on some level,” she added.
Of course, Fingerprint Cards is not alone in struggling in the China market. Goodix, a major, Shenzhen-based rival, posted a 37 percent year-over-year decline in revenues in an Interim Report published on September 15. Its net profit was down almost 95 percent. But the China-based company was less specific about the negative factors impacting its fingerprint sensors business, saying that in the first half of 2022, global demand for smartphones was “affected by the international situation, macroeconomic conditions and other factors”.
The language, while vague, suggests that both companies are struggling with similar macro-level challenges. But as perhaps the most important third-party vendor of mobile sensors in the West, if not the world, Fingerprint Cards offers important signals about the broader trajectory of the mobile sensor industry in being so forthright about its business challenges.
Supply Chain Disruption
“The decrease in revenue since the previous quarter was due to the destocking that is now taking place across the supply chain,” asserted FPC’s Fredrikson in the company’s Q3 report. “We have rapidly gone from a situation where earlier this year we were limited by insufficient access to production capacity caused by the global component shortage, to a position where we, our suppliers and our customers instead must handle a very sharp decline in demand.”
Fredrikson went on to explain that the entire industry, from sensor suppliers to distributors to phone manufacturers, is now holding too much stock. OEMs “had planned for significantly higher sales volumes in 2022,” he said, and they “are only now approaching more normal inventory levels”. For FPC, he explained, “this means that we can begin to reduce our inventory only now, at the beginning of the fourth quarter.”
“The stock accumulation and decline in demand has left us in a strained situation in terms of working capital,” Fredrikson noted.
It sounds dire, but FPC is taking financial measures including the use of hybrid equity instruments to address the capital problem in the immediate term, and the company’s leadership believe China’s lockdowns “are of a temporary nature.” As they are lifted, FPC expects “a return to historical levels of demand for mobile phones, albeit perhaps initially not fully.”
The Future of Fingerprints
Fingerprints’ leadership may prove to be correct in the short or medium term, but analysts are skeptical about the longer-term prospects of mobile fingerprint sensors in general.
You'll need to register to continue reading – it's free and only takes a moment: