Apple Makes A Smart Move By Developing Its Own Display Components

by Trefis Team
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Apple (NASDAQ:AAPL) is reportedly taking steps to design and manufacture its own display components for the first time, as it looks to reduce its dependence on suppliers such as Samsung Electronics, while keeping its component costs in check. Bloomberg reports that the tech behemoth is using a secret production facility located near its headquarters to make screens that use next-generation MicroLED technology. Below, we take a look at how the developments could benefit Apple.

Apple’s component costs have been increasing steadily over the last few years, putting pressure on the company’s gross margins while also causing it to price new devices like the iPhone X at higher price points which are apparently hurting sales. For instance, the  OLED display module on Apple’s iPhone X, which is sourced from Samsung, is reported to cost as much as $110 per unit, up from around $40 for the LCD display on the previous generation iPhone 7. (related: Is Apple’s Custom Silicon Strategy Gaining Momentum?)  The escalation in component prices is partly due to the fact that competition in the production of smartphone parts is also fairly limited, given the high barriers to entry both in terms of technology and investment. However, Apple has the financial and technical resources to undertake the development of new technology, and this could pay off in the long run.

Apple has been increasingly moving towards custom designed parts, including app processors and some proprietary components such as taptic sensors. However, advanced displays are generally a big selling point for modern smartphones, and Apple has so far largely relied on off-the-shelf display components. This is in contrast to rival Samsung, which has been able to differentiate its flagship products by providing distinctive displays such as curved OLED screens, which are proprietary to the company. By developing and potentially controlling next generation MicroLED technology, which could make future products thinner, brighter and more battery-efficient, Apple could take on rivals like Samsung more directly, while controlling manufacturing costs and improving its margins.

We have created an interactive dashboard outlining how higher iPhone and Services revenues/margins could drive an upside to Apple’s stock price. You can come up with your own estimates for Apple’s stock by dragging the blue dots on the charts for Apple’s smartphone market share, iPhone ASP, service revenues, net margins and valuation multiples.

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