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Apple Rescues Japan Display: A Supply Chain Revamp?

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Apple (AAPL) is considering a $186 million investment to rescue Japan Display, according to the Wall Street Journal. Chinese investment firm Harvest Fund Management indicated that it wanted to opt out of a bailout plan for Japan Display. After this, the company had no other option but to seek additional investors.

In July, Apple announced that it would invest $100 million in its ailing supplier. Apple accounts for more than 60% of Japan Display’s revenues. Japan Display makes OLED displays for Apple Watch and LCD panels for the iPhone XR.

Apple’s association with Japan Display dates back a few years. Reports suggest that in 2015, Apple had financed $1.5 billion for a new LCD factory for Japan Display. The agreement stated that Japan Display would repay Apple a percentage of each display sold. However, that didn’t happen.

The factory only operated to half capacity as the smartphone industry moved toward OLED displays from LCD screens. A slowdown in iPhone sales also led to Japan Display’s dismal condition.

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Why does Apple want to rescue Japan Display?

We believe Apple’s investment in Japan Display stems from its strategy to diversify its supply chain. Currently, Apple depends heavily on Samsung for OLED displays, which are very expensive. The OLED displays are the major cost components in the iPhone XS and iPhone XS Max devices.

Apple plans to add more OLED suppliers to boost volume and reduce costs via economies of scale. Adding more suppliers could also reduce the company’s supply chain risk, putting it in a better position to negotiate.

In June 2018, Bloomberg reported that Apple had asked Samsung to lower its costs by 9%. The company was set to add LG Display as a second supplier to expand its options.

In 2019, the Nikkei Asian Review stated that the iPhone maker is in the final stages of testing China’s BOE Technology Group for the iPhone lineup in 2020. However, amid the trade war uncertainty, Apple might consider moving its supply of LCD screens from China to Japan.

Apple and OLED screens

Japan Display has been supplying LCD screens to Apple for years, and it has a good relationship with the tech giant. However, it now needs to shift its capacity to expand its OLED production. Japan Display supplied OLED displays for Apple’s latest Watch 5.

Apple analyst Ming-Chi Kuo projected that Japan Display would see an increase in OLED display orders from 15%–20% in 2019 to 70%–80% in 2021. Apple wants to support this growth. Once the Japanese firm turns around, it can also supply OLED displays from all the iPhones in the future.

Apple plans to adopt OLED screens for all iPhones. The OLED displays are more cost-effective and allow more flexibility in handset designs.

Another reason for bailing out Japan Display is its technical expertise, particularly in manufacturing low-temperature polysilicon sheets. This is a component that enables faster refresh rates and greater energy efficiency in displays, and Apple needs this component in its cutting-edge iPhones.

Will supply chain diversification lead to lower iPhone costs?

Apple aims to lower the cost of its iPhone and manage supply chain risks by adding OLED display suppliers other than Samsung. However, only the next cycle of production for iPhones in 2020 would reveal whether there are any visible effects on the iPhone’s cost of production.

We’ll need to wait and see whether the reduced price of iPhones, if any, are passed on to its customers. Moreover, focusing on only OLED iPhones in 2020 gives buyers another reason to wait for the next round of iPhone upgrades.

Apple stock gained 1.5% and ended at $221.03 on September 25. The stock outperformed the daily gain of the S&P 500 at 0.62%. Year-to-date, Apple stock has gained 39%, and the company plans to announce its next earnings results toward the end of October.

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