Apple Looks To Integrate Display Chip Design; Puts Overseas Cash To Work

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Apple (NASDAQ:AAPL) is rumored to be in talks with Renesas regarding a potential acquisition of a 55% stake in its display chip joint venture with Sharp and Powerchip, Renesas SP Drivers. [1] The struggling Japanese chipmaker is restructuring to increase its focus on its core auto business and limit exposure to non-core business units, which is why it is looking to offload its stake in the display-chip unit. It is in talks with other companies as well, but Apple seems to be the frontrunner in these discussions given its offer of $480 million and Renesas’ strategic importance to the iPhone maker.

Renesas SP Drivers is the world’s leading manufacturer of drivers and controllers for small- and mid-sized LCD displays used in mobile devices, and accounts for almost a third of the market. It is also the sole supplier of display controllers used in the iPhone, and counts all three of the companies that make iPhone displays, namely Sharp, Japan Display and LG Display, among its key clients.

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Use of overseas cash

Sharp, which owns a stake of about 25% in Renesas SP Drivers, is likely to follow suit and sell its stake to Apple should the Apple-Renesas deal materialize. Overall, the deal could cost Apple about $700 million in cash should it acquire both Renesas’ and Sharp’s stakes at the same valuation. This could be an effective utilization of Apple’s cash hoard, almost 80% of which is held in foreign accounts and cannot be repatriated back to the U.S. without attracting a huge tax outlay. However, it will hardly move the needle on Apple’s overseas cash balance, which stood at over $124 billion at the end of the December quarter.

Vertical integration

Still, Apple’s interest in a display-chip designing unit potentially signals its intention to become more vertically integrated in its mobile device businesses. Apple has so far designed only its app processors and fingerprint scanners, and could be looking at integrating display design as well with its overall product development. This will not only help Apple improve the overall user experience of its devices, but also potentially increase its gross margins. Apple’s gross margins have recently come under pressure in recent quarters due to the rising sales mix of lower-margin products and the introduction of the iPad mini. Last fiscal year, Apple’s gross margins declined by about 630 basis points over FY 2012. Closely melding Renesas’ chip designs with its own could help Apple control costs and drive power efficiency, fitting right in with the iPhone maker’s core product philosophy of tightly integrating components.

Supply chain control

At the same time, having a controlling majority stake in Renesas SP Drivers helps Apple secure the supply of a key component that is vital to the overall iPhone experience. With Renesas looking for exit options, this could also be a strategic ploy by Apple to stop a key supplier from falling into rivals’ hands. Such a move would not be a first for the company, which has a history of locking in suppliers with capital investment. Recently, it entered into a deal with GT Advanced, providing it with capital to build out a sapphire manufacturing facility in return for an exclusive contract and a commitment which secured a minimum level of low-cost sapphire supply. It has also purchased chip developers such as P.A. Semi and Passif Semiconductor in the past to bolster its semiconductor capabilities. [2]

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Notes:
  1. Apple in talks to buy Japan chip venture to secure iPhone supply chain, Reuters, April, 2014 []
  2. Apple Seeking to Boost iPhone Display Quality by Acquiring Chip Firm Renesas SP Drivers, Macrumors, April, 2014 []