Apple’s Secret Factory Could Cost Samsung Billions of Dollars

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Apple Inc. (NASDAQ:AAPL) is supposedly eager and most likely to give a shakedown to the display manufacturing market. The latest developments might end its curious relationship with Samsung Electronics Co Ltd. (KRX:005930).

Apple is reportedly designing and producing its own display screens for the first time at a secret manufacturing facility near its California headquarters. The technology giant is developing next-gen MicroLED that will be first featured in upcoming Apple Watch. Apparently, its a small scale facility for testing purposes located in Santa Clara, California.

MicroLED is a highly advanced display technology that uses different light-emitting compounds than the current OLED displays and will be more power-efficient, slimmer yet brighter.

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Currently, Apple uses Samsung technology in the OLED panel for iPhones, and LG technology for the Apple watch. T159, a code name for the Apple’s display project, is one of a kind and the company’s first attempt at owning full display stack.

A Big Jolt for Samsung

Unlike its rivals, Apple is known to have designed and manufacture its key components in-house except for the display. On the other hand, all the major competitors in the smartphone business are aided by different tech companies for their hardware and software support. For instance, the processor chipset in almost every other Android phone is provided by Qualcomm or MediaTek or ARM Cortex. Apple, among other parts, exclusively makes its own processors.

T159 can have severe implications for other display makers like – Samsung Electronics Co., Japan Display Inc., Sharp Corp., and LG Display Co. It may also hurt companies like Synaptics Inc. and Universal Display Corp. which is a leading developer of OLED technology.

Shares of Asian display makers dropped after Bloomberg broke the news of the latest plans.

But, does this secret initiative has the potential to outgun giants like Samsung in the display market is still an imperative question to be answered yet.

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Samsung is the only company that can manufacture OLED displays, NAND flash, DRAM chip in the quantities required by Apple for its iPhones. The estimated cost of the display of iPhone X, which is provided by Samsung, is $110. Both these companies, being major competitors, are also reliant on each other. In Q4 2017, Apple sold 29 million units of iPhone X, which amounts to $3.19 billion that Apple had to pay to Samsung. The overall revenue Samsung generated by supplying LED panels to Apple is much more considering Apple uses Samsung’s LED panel in many other iPhone models as well.

Apple’s dependency on Samsung is quite significant as besides display panels, NAND flash and DRAM chips, used in iPhone, is supplied by the Korean electronics giant. Samsung’s component business (SEMICON) and Display Panel (DP) business, together, accounted for nearly 46%, which amounts to KRW 108.72 trillion, of company’s total revenue in 2017. The display panel (DP) business alone contributed KRW 34.46 trillion (US$32 billion) to the Samsung’s total revenue in 2017.

The Korean giant has long been known to tout superior screens and is already working on MicroLED screens but on a larger scale with its concept TV, The Wall. It is estimated that Samsung could mint as much as $22 billion from Apple by supplying flexible OLED panel for 2018 iPhone line up.

When Apple Learnt A Lesson In Hard Way

The high cost of OLED panels forced Apple to tag iPhone X with $1000 and more. Apple is finding it tough to scale the sales of iPhone with each passing quarter. Despite enjoying hyped created around the 10th anniversary iPhone, Apple could manage to sell 77.3 million units of iPhone in the first fiscal quarter of 2018 – 1 million fewer than the same quarter last year. Market analysts blamed the exorbitant price of iPhone as one of the main reasons behind the disappointing sales.

Besides price, the bitter experience with Samsung also, apparently, forced Apple to revisit its display sourcing strategy from Samsung. In November last year, when the demand for iPhone X was on its peak, Apple found itself in hot waters as it failed to meet the demand reportedly due to the short supply of OLED panels by Samsung.

Apple is all geared up to pour huge investments into this project, but, needless to say, mass-scale production can take up quite some time. In the wake of the expose, it would be interesting to see whether Apple could manage to meet the demand in-house or still end up paying to Samsung for flexible OLED panels in 2018.

Reports suggest that the upcoming 6.5inch “iPhone X Plus” would have the panel provided by LG. The current display module is perhaps costing Apple excruciatingly. With the advent of its in-house MicroLED technology, the tech mogul is deliberate to step-up its game among the top competitors that too without being dependent on any entity for technology.

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