What FPC’s ‘Strained Situation’ Can Tell Us About the Future of Fingerprint Sensors

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.”

Bad Bets?

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.

“I’m sure China is one of their manufacturing hubs, so the constant stop-and-start that’s been happening because of zero-COVID probably hasn’t helped them,” acknowledged Frost & Sullivan’s VanZandt. But she pointed to FindBiometrics’ own Year in Review analysis, which found a decrease in the popularity of the fingerprint sensor modality after the onset of the COVID-19 pandemic, and suggested that these sensors don’t have a bright outlook in the long term.

Acuity’s Principal Analyst put it bluntly. “Why would you have touch-based technology when you can have touchless technology?” she said. “To me the whole business is going to go touchless.”

Both analysts said that the fingerprint modality is likely to continue to play an important role in other areas besides the mobile sector, such as law enforcement, where it has a strong legacy and continues to play an important role in registering criminal suspects and forensic investigations. And both acknowledged the centrality of the smartphone to digital identity in today’s world. But face biometrics has enjoyed a rising profile in the mobile sector in recent years, and the pandemic has engendered a more general aversion to touch-based interfaces.

Remarkably, both analysts independently noted the sophistication of contemporary smartphone cameras for fingerprint recognition, as opposed to the use of a touch-based sensor. Acuity’s Most noted that “there are applications now where you can get a really high quality AFIS four-finger capture off your phone using a camera,” adding that with such capabilities now commercially available, “You don’t need specialized devices” for fingerprint recognition.

VanZandt suggested that camera-based scanning could actually make fingerprint recognition more widely available, offering a way “to get away from just hardware in general” and make fingerprint biometrics more widely accessible.

“This is one of the key themes in my research, that we’re in this new phase of the biometrics industry where in order to get to new use cases and be able to use biometrics more effectively, they need to be accessible to people, and a lot of people don’t want to go through and re-register biometrics in so many different venues,” she said.

That line of thinking points toward a positive future for fingerprint biometrics, if not for the kinds of fingerprint sensors that vendors like FPC and Goodix specialize in today. But these are long-term trends, and sensor makers today have more immediate concerns, particularly in China. Whether or not the analysts of Acuity and Frost & Sullivan are correct about the future, Fingerprint Cards, in its Q3 update, has delivered what appears to be a candid description of the challenges of the near term, and its next report could offer even more clarity on where the mobile sensor market is heading.

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November 2, 2022 – by Alex Perala