Speaking at Apple’s first-quarter financial call, Chief Operating Officer Tim Cook stated that the company had executed long-term supply agreements with three vendors. These agreements were expected to involve about $3.9 billion in inventory component prepayments and capital expenditures during a two-year period.
Based on an analysis of Apple’s existing supplier relations, intellectual property ownership and licensing and technology, it is believed the companies in question may be LG Display, Sharp Corp. and Toshiba Mobile Display. The agreements would involve the supply of Apple’s retina display, used in the iPhone and iPad. The retina display employs the use of advanced in-plane switching (IPS) and low-temperature polysilicon (LTPS) technology that provides extremely high resolutions in small displays by using pixels that are smaller than the human eye can perceive.
“In the era of the iPad and iPhone, the user interface—particularly the display and touch screen—has become the most critical competitive differentiator for tablets and smart phones,” noted Vinita Jakhanwal, director for small and medium displays at IHS. “With sales of smart phones booming, and a flood of new entrants into the tablet market this year, competition among original equipment manufacturers (OEMs) for available supplies of high-end small and medium displays has reached a fever pitch, straining availability of critical types of displays. Because of this, Apple has moved to invest some its enormous cash reserve in securing the supply of advanced displays.”
Displays of Extravagance
Apple already expends vast quantities on displays. In 2010 alone, Apple spent nearly $2 billion on displays for its iPad and iPhone lines, sourcing LCD panels from LG Display, Samsung Electronics, Sharp and Toshiba Mobile Display.
To be sure, the company’s move to invest in displays represents a major expansion of its activity in the area. Rather than simply purchasing displays from suppliers, Apple may provide money that LG Display, Sharp and Toshiba Mobile Display can use to invest in the production of IPS and LTPS LCD panels.
By doing this, Apple should be able to lay claim to a major share of global output of IPS LCD and LTPS LCD panels, Jakhanwal noted.
Apple’s moves to corner the IPS and LTPS markets have major implications for all competitors participating in the smart phone and tablet market.
Since IPS LCD production is limited to suppliers that own or have access to the IPS license, it is a challenge to match demand to suppliers that own production capacity and IPS licenses. Furthermore, manufacturing yields associated with IPS LCD are still poor. For LTPS LCD, the established capacity base is limited and with the sudden growth in smart phone demand, may prove insufficient to meet market demand. The major alternative to IPS wide viewing and power saving features in smart phones currently is the active matrix organic light- emitting diode (AMOLED) display, used in many Android operating system-based models. At present, Samsung Mobile Displays and LG Display represent the only sources for AMOLED panels, with Samsung Mobile Displays accounting for the vast majority of shipments. Given this limited supply base, AMOLEDs have gone into a state of critical shortage.
“With Apple trying to invest in assuring IPS supply, and Samsung Electronics having preferential access to small- and medium-sized AMOLED supply, the rest of the smart phone makers are caught between the two giants,” Jakhanwal said. “This has left other OEMs to resort to other technologies when it comes to advanced displays, giving Apple and Samsung a huge edge in product differentiation in a highly competitive market.”
Apple’s capability to reshape the display chain springs from its massive cash reserves, the highest among any technology firm. Apple has built its tremendous war chest by selling high-margin, high-value-added hardware. As shown by the IHS iSuppli Teardown Analysis service, Apple commands hardware gross margins in the range of 50 percent on the iPhone, in comparison to 20 percent to 40 percent for competitive products.
In the past, Apple has used this vast resource to snap up supplies of NAND flash to guarantee sufficient volumes for its iPhone line.
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