iPhones Are Improving Every Year Thanks to an Obscure Japanese Company

After two decades in development, chipmakers are making a costly bet on a technology that will cram even more transistors onto silicon. Their success may hinge on a little-known company in the suburbs of Tokyo.

Lasertec Corp. is the world’s sole maker of equipment that tests glass squares slightly bigger than a CD case that act as a stencil for chip designs. By shining light through the squares, circuits smaller than the width of a few strands of DNA are imprinted onto silicon wafers in a process called lithography. These templates have to be perfect: even a tiny defect can make every single chip in the batch unusable.

Consumers take it for granted that gadgets will keep getting slimmer, more powerful and cheaper, but the chip companies are running out of ways to etch ever smaller circuit patterns onto silicon. After years of setbacks, the industry has settled on extreme ultraviolet lithography, which uses plasma as the light source to draw lines smaller than 7 nanometers. That’s the size seen in Apple Inc.’s A12 Bionic chip, featured in the iPhone XS and XR

In 2017, Yokohama, Japan-based Lasertec solved the final piece of the puzzle when it created a machine that can test blank EUV masks for internal flaws, giving it a monopoly. The company’s stock has tripled since then.

In Pics: Here are the latest predictions for Apple’s 2019 products

Ming-Chi Kuo predicts the 2019 iPhones will have:

A frosted glass casing (most likely for the rear)
Reverse wireless charging to charge other devices that also support wireless charging
Upgraded Face ID
A triple-lens camera system, likely for the largest "Max" model
Bigger batteries
The same size screens as the current XR and XS generation: 5.8-, 6.1-, and 6.5-inch screens
Lightning ports, suggesting Apple won't make the move to USB-C

Lasertec has already received orders for 4 billion yen ($36 million) machines that test EUV blanks, according to Lasertec President Osamu Okabayashi. The company may see additional sales as soon as this summer, depending on how quickly Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co. ramp up mass production, he said. Lasertec closed 5.2 percent higher in Tokyo on Tuesday, the biggest gain since the start of the month.

“We spent six years developing this equipment,” Okabayashi said in an interview. “At this point it’s become an industry standard and it would be very difficult for somebody else to enter the space.”

a hand holding a cell phone: A customer views an Apple Inc. iPhone XS during a sales launch at a store in Chicago, Illinois, U.S., on Friday, Sept. 21, 2018. The iPhone XS is up to $200 more expensive than last years already pricey iPhone X and represents one of the smallest advances in the product lines history. But that means little to the Apple Inc. faithful or those seeking to upgrade their older iPhone.© Bloomberg A customer views an Apple Inc. iPhone XS during a sales launch at a store in Chicago, Illinois, U.S., on Friday, Sept. 21, 2018. The iPhone XS is up to $200 more expensive than last years already pricey iPhone X and represents one of the smallest advances in the product lines history. But that means little to the Apple Inc. faithful or those seeking to upgrade their older iPhone.

An EUV mask, a sandwich of about 80 alternating layers of silicon and molybdenum, can fetch as much as $100,000. Only two companies – glassmakers Hoya Corp. and AGC Inc., both in Japan – manufacture the blanks. Lasertec’s machines can spot problems early on, which is critical to making the technology cost competitive. “For EUV, masks have to be perfect,” Okabayashi said.

EUV lithography is so complex and expensive that so far only Samsung and TSMC have said they will use it to move to 7-nanometer chipmaking. Intel Corp. has delayed its introduction, while difficulties in making EUV economically viable have prompted Globalfoundries Inc. to reportedly abandon it altogether.

Samsung has said that the move lets it use chip area 40 percent more efficiently, improves performance by 20 percent and halves power consumption. Apple’s 7-nanometer processor is manufactured by TSMC and is specialized for machine-learning applications. In the past few months, Qualcomm Inc. and Huawei Technologies Co. unveiled a 7-nanometer chip that will power 5G devices.

“It used to be that chip demand was completely dependent on product cycles for personal computers,” Okabayashi said. “But then came smartphones and pretty soon we’ll be able to add AI, IOT and 5G to the list of applications driving demand.”

It will take a while for the impact from new orders to show up in earnings, because EUV blank testers take about two years to build. Lasertec is forecasting that sales will climb 32 percent to 28 billion yen in the year to June 30, while operating income will grow 14 percent. Revenue may jump about 50 percent next fiscal year and profit could double, according to analyst estimates.

The company’s shares have climbed 55 percent this year, approaching the 4,590 yen record high set in March 2018. Of the eight analysts tracked by Bloomberg, six recommend buying the shares.

“Earnings have a lot of room to grow because we haven’t even seen the spending on 5 nanometer process yet,” said Yasuo Imanaka, an analyst at Rakuten Securities Inc. “This is a very good company.”

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