(Bloomberg) -- Back in 1972, engineers working at Osram Licht AG set their sights on developing applications for infrared. The unit of Siemens AG in southeastern Germany went on to develop an expertise in the light, used in night-vision equipment and galaxy-gazing telescopes.
Almost half a century later, Osram is a stand-alone lighting company and infrared is one of its fastest-growing businesses, thanks in part to soaring demand for a component to scan human irises. The biometric identification system is now part of Samsung Electronics Co.’s flagship Galaxy S8 mobile phone, and promoted as a more secure way to unlock devices than fingerprint or facial scanning.
Osram is touting the product as a major step in its transformation into a high-tech company from making light bulbs within Siemens. The refocus has been contentious, leading to a boardroom clash over strategy and public spat with the German engineering giant, which remains Osram’s biggest shareholder. While critics, including Barclays analyst David Vos, say prospects for iris scanners may be overdone, Chief Executive Officer Olaf Berlien says they are taking off, and within five years “every single mobile phone” will have one as will other devices like cash machines.
“The trend is there,” said Aldo Kamper, head of Osram’s expanding Opto Semiconductor division that makes the scanners. The importance of phone security will grow as devices are increasingly used to make payments for all kinds of goods and services, he said in an interview.
Already, Opto has the highest earnings before interest, taxes and amortization of Osram’s three divisions and twice the R&D budget. This is partly because of Osram’s decision -- attacked by Siemens -- to spend about 1 billion euros ($1.1 billion) on a Malaysian plant to make semiconductors for light-emitting diodes, or LEDs, the energy-efficient form of lighting overtaking classic incandescent bulbs. The division also makes lights and sensors that are used in devices from self-driving cars to smartwatch heart-rate monitors.
Osram is hiring as may as 1,000 people at its plant in Regensburg, Germany to meet increasing demand for components and has raised its target for full-year earnings, citing “sharp” growth in infrared. The company completed the sale in March of its traditional lamps business, moving along a different path from long-time competitor Philips Lighting NV. Another rival, General Electric Co., said Thursday it plans to sell its light-bulb division.
Osram shares rose 0.6 percent to 70.71 euros at 11:06 a.m. in Frankfurt, giving it a market value of 7.4 billion euros.
Osram’s bet on iris-scanning isn’t without hurdles.
Samsung bills the iris option as a fail-safe way to control access to devices because every person has a unique set of iris patterns that are “virtually impossible” to copy. Yet a video published last month purports to show how a Galaxy S8 was unlocked by a printed photo of an eye and a contact lens.
Samsung said it would respond “as quickly as possible” to resolve any potential vulnerabilities in the smartphone. The company has also noted that the photo was taken with an infrared camera, and a rare combination of circumstances would have to be in place for the security break to occur.
A spokesman for Osram declined to comment. The German company won’t confirm the names of its customers, although Berlien left no doubt on a May earnings call that the Samsung phone carries its technology.
“The iris is extremely individual, and extremely hard to fake,” Kamper said in the interview before the video surfaced, adding that faces tend to be “more manipulable” and so less reliably recognizable.
The mobile application works by scanning tiny ridges on a user’s iris and comparing them with a secure profile stored locally in the device. If there’s a match, the phone unlocks.
Adoption by one smartphone maker may not be enough to ensure Osram’s future expansion in the area. The company’s projections about the prevalence of the scanners in the coming years may be misguided, according to Barclays analyst Vos, noting in a report that Apple Inc. is favoring face recognition.
“Wherever Apple goes, people tend to follow, and Apple is choosing a completely different direction on this one,” Vos said.
Apple is currently more focused on fingerprint-based security. Since 2013, it has embedded such sensors in its iPhones, and more recently in iPads and MacBook Pro laptops. To date, none of these products feature iris-scanning as a form of security.
Osram is counting on other kinds of Opto products like the LIDAR applications for self-driving cars and smartwatch lasers to underpin growth should infrared fail to develop the way it expects.
“Our growth is on a broad basis,” Kamper said. “It’s not just iris scanners. It’s car headlights, it’s projection uses, it’s health-care applications, it’s horticultural.”
For Vos, Osram would do better focusing more on automotive lighting than overestimating the market for iris scanners. Osram should be careful not to get “over-hyped,” he said.
--With assistance from Sam Kim
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