Apple Inc. Has a Tough iPhone Problem to Solve in 2018

On Sept. 12, Apple (NASDAQ: AAPL) lifted the curtain off a trio of new iPhones: iPhone 8, iPhone 8 Plus, and iPhone X (pronounced "iPhone ten").

The first two phones include traditional liquid crystal displays, for which Apple has multiple viable suppliers and plenty of supply available, and the third uses a more advanced organic light-emitting diode (OLED) display.

The OLED display on the iPhone X is certainly more beautiful than the displays on either the iPhone 8 or iPhone 8 Plus -- colors should be richer and contrast should be substantially better. It's also a full-face design that virtually eliminates bezels, further adding to the aesthetic of the iPhone X.

On the other hand, the OLED display is much harder to manufacture than the LCDs on the iPhone 8 and iPhone 8 Plus, and Apple has only a single supplier for the OLED displays used in the iPhone X -- bitter rival Samsung (NASDAQOTH: SSNLF).

That means higher component costs for Apple, as well as relatively limited supply -- two factors that probably led Apple to launch a higher-priced premium iPhone this year alongside two standard models.

Though Apple appears to have deftly managed the display supply situation for this product cycle, it faces a potentially tougher problem next year.

A lot more OLED displays needed

It's highly unlikely that Apple will be able to launch yet another iPhone family with the same basic form factor as the iPhone 6, 6s, 7, and 8. And to be frank, I'd be surprised if Apple utilized LCDs on any future flagship iPhones. Indeed, the only device that I'd expect to get a "new" LCD is a potential refresh of the iPhone SE.

If we accept the assumptions made, then that leads to the following conclusions:

  1. Apple will need to source many more OLED displays in the following product cycle.
  2. Apple will need to source OLED displays more cheaply to sell lower-cost devices employing such displays.

I don't think the first part would necessarily be a problem; I'm sure Samsung Display would be more than happy to build out additional OLED display capacity for Apple if Apple would be willing to commit to purchasing enough displays to keep those factories at high utilization rates.

It's the second part that I'd be worried about if I were Apple.

There has been some chatter that LG Display (NYSE: LPL) could be added as a second source in the iPhone display supply chain, but it doesn't look as if LG Display will be able to deliver panels in reasonable quantities until the end of 2018, and even then it doesn't sound as if it'd have the bandwidth to take over a significant portion of Apple's growing OLED display needs.

Longtime Apple iPhone LCD supplier Japan Display has also been talking about its ambitions to go into mass production on OLED displays by the first half of 2018, but given its relatively weak financial position and its poor technical position in OLED manufacturing compared with Samsung and even LG Display -- which, at the very least, is shipping OLED displays into LG's V30 flagship smartphones -- I doubt Apple is going to bet the farm on this supplier.

At this point, it's tough to see how Apple is going to solve this issue, but I look forward to the inevitable stream of supply-chain leaks pertaining to the next-generation iPhones to get a sense of how Apple is planning to deal with this issue.

It shouldn't be long now.

10 stocks we like better than AppleWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Apple wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of September 5, 2017

Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.