The iPhone's German Accent
Last year wasn't exactly auspicious for German mobile-phone components maker Balda. The company issued two profit warnings, shed 70% of its 2,400 German workers, and ended the year with a loss equal to 13% of sales. So why would a heavy hitter such as Apple Inc. (AAPL ) hand Balda a contract to make the touch screens that are the most important design element of the much-anticipated iPhone?
Although neither Balda nor Apple has actually said the German company is going to make the displays, it's an open secret in the industry that Balda has the job. It's the only company in the world currently capable of producing the millions of advanced small-format displays that Apple will need. And Apple isn't the only reputable company betting on Balda, which is hardly a household name even in Germany. Nokia (NOK ), Sony Ericsson, and Motorola (MOT ) are Balda customers (see BusinessWeek.com, 4/1/07, "Motorola: Cut Icahn's Interference"), and lots of smart investors are grabbing shares of the company based in the northwest German spa town of Bad Oeynhausen. Fund manager FMR Corp., better known as Fidelity, and New York-based Wyser-Pratte Management Co., have both bought big stakes in recent months.
They're not crazy. Although Balda was better known as a maker of plastic shells for cell phones, a well-timed deal with a Chinese producer of touch screens catapulted the German company into what looks like a profitable new business. With the Chinese technology, Balda now makes glass-surfaced screens that are far more sensitive, thinner, and harder to scratch or smudge than the plastic displays that now dominate. They offer sharper resolution, and unlike conventional touch screens—which get confused by more than one finger at a time—Balda's displays can sense several human digits simultaneously. Apple, which plans to launch the iPhone in June, has already patented software that would allow a user to place thumb and forefinger on the display, then spread them apart to magnify an image. What Balda has done "seems to be far ahead of the competition," says investor Guy P. Wyser-Pratte, who has 7% of Balda and says he's still buying.
Balda's reversal of fortune is remarkable considering the rough patch it went through just a few months ago. It got slammed last year when Taiwanese electronics maker BenQ Corp., a major customer, declared its German handset operations insolvent barely 12 months after buying the business from Siemens (SI ). In addition, Balda's core business of handset casings suffered as prices plunged. Overall sales fell 7%, to $482 million, in 2006, while the company suffered a pretax loss of $64 million, almost the same as its year-earlier profit. Balda shares slumped nearly 60% from April to October, when management issued a second profit warning. "It was a year of turmoil," CEO Joachim Gut told reporters on Mar. 28.
It might be more accurate to say that Balda underwent the corporate equivalent of simultaneous organ transplants. The company sold five of its six German factories, then opened new facilities in China and India. And Balda bought 50% of TPK Holding, a Xiamen (China) company that had the crucial touch-screen technology. Although Balda had no experience in touch screens, its connections to blue-chip handset makers will likely open up new markets for TPK, and Balda says it may soon double capacity, to 70 million displays annually.
Initial skepticism about Balda's transformation was huge. Analyst Nicolas von Stackelberg of German bank Sal. Oppenheim Jr. even flew to China to make sure that TPK was everything Balda claimed. Stackelberg came away impressed by TPK's modern campus and Michael Chiang, its Taiwanese founder. Chiang's family acquired 15% of Balda as part of the deal and is now the combined company's biggest shareholder. "He's a very energetic entrepreneur type," says Stackelberg, who later upgraded Balda shares to a "buy."
There are doubters who still wonder whether Balda can make the acquisition pay off. The company has promised to boost pretax profits this year to at least $65 million on sales of $845 million—a goal some analysts say is a stretch. On Mar. 29, Düsseldorf-based bank Westlb downgraded Balda shares to "sell," warning of "significant risk" that second-half sales won't be as spectacular as management expects. Further down the road, other touch-screen makers such as California-based Synaptics Inc. (SYNA ) may be able to ramp up production enough to compete. Although Apple declined to comment for this story, the company dislikes depending on one supplier for important components and typically encourages rivals to join the fray.
But most investors are still bullish. Balda's shares have jumped by 55% since the November low point. Fidelity has increased its stake to 10% since disclosing a 5% holding in March, though the fund company declined to comment. One likely reason for the optimism: The iPhone may encourage more creative use of touch screens in other handsets, as well as gadgets such as MP3 players, medical equipment, and perhaps even appliances like toasters and refrigerators. "This touch-screen technology has massive potential," says Michael Treichl, managing partner of London-based fund Audley Capital, which owns some 8% of the company. "Balda is in a good position to take advantage of it."
By Jack Ewing and Arik Hesseldahl