Last year, Apple (NASDAQ: AAPL) introduced three new iPhones: iPhone 8, iPhone 8 Plus, and iPhone X. While the iPhone 8 and iPhone 8 Plus used traditional liquid crystal displays (LCD), the iPhone X used a more advanced type of display technology, known as organic light emitting diode, or OLED.
OLED displays enable better image quality and faster pixel response times compared to LCDs, which serves to improve the user experience.
Image source: Apple.
The problem for Apple is that while it has many potential LCD suppliers vying for its business, only Samsung (NASDAQOTH: SSNLF) was believed to be able to build displays that met Apple's quality and quantity requirements for the iPhone X.
According to a new report from The Wall Street Journal (subscription required), Apple wanted to tap LG Display (NYSE: LPL) as a second source for OLED displays for the company's next-generation smartphones, but LG Display seems to be running into issues.
"Manufacturing problems have caused LG to fall behind in the schedule that many suppliers follow before beginning mass production for iPhones," the report said. "As a result, opinions within Apple are divided on whether LG Display can become a second source of OLED displays for the upcoming iPhones."
Let's go over what this means for Apple's business.
Potentially higher component prices
One important reason that Apple likes to have multiple suppliers for most of its critical components is to ensure that it has the upper hand in price negotiations with potential suppliers.
As The Wall Street Journal points out, Apple having a credible second-source for OLED display supply "could help Apple lower prices for the component, boosting Apple's profit margins or giving it leeway to cut phone prices."
If LG Display bails out, then that could give Samsung Display pricing power through the entirety of the upcoming iPhone product cycle.
Giving technology to the enemy
One analyst quoted by The Wall Street Journal, Hisohi Hayase, said "Because Samsung is Apple's competitor, it's an issue for Apple if it has to continue buying the component from Samsung."
The reality is that while, in theory, Samsung Display shouldn't (and is likely contractually obligated) not to share key technology details and product plans with Apple's direct rival Samsung Mobile, it's probably unreasonable to expect that Samsung Mobile won't get "hints" as to what Apple and Samsung Display are working on for next-generation iPhones.
Even if we assume that nothing leaks out, Apple buying displays from Samsung Display boosts Samsung's overall financial performance, increasing its ability to invest to compete more effectively against Apple.
In short, there are good strategic reasons for Apple to not want to tie itself to Samsung Display for smartphone screen supply indefinitely.
Over the next two cycles, at a bare minimum, I expect Apple to continue to rely on Samsung Display to some degree -- it looks like LG Display could sit this cycle out and even if it can participate in the next one, Apple would be negligent to bet its entire high-end iPhone lineup on a single unproven supplier.
If LG Display (and potentially others) can prove themselves over the next two to three years, however, then I could see Apple cutting ties with Samsung Display for the iPhones that launch in 2021 or 2022.
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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.