Nikkei Asian Review recently published an interesting report describing Apple's (NASDAQ: AAPL) interest in expanding its in-house chip development efforts; these are to include components such as processors for its Mac line of personal computers, display-driver chips for its iPhone and iPad product lines, and even its own cellular modems.
Apple's in-house technology development in some areas -- such as Touch ID, Face ID, A-series applications processors, Taptic Engine, and more -- have yielded tangible competitive advantages in products that affect a large portion of Apple's revenue. But the Nikkei report is a little troubling.
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There are certainly areas in which Apple should try to reduce, if not outright eliminate, its dependence on third-party suppliers. But I'm not convinced that cellular modem chips or Mac processors would be good places for that, when there are still obvious gaps in Apple's technology development capabilities.
Instead of trying to reinvent the wheel on components that just don't affect the marketability of its products that much, Apple should dramatically increase its investments in a truly high-impact area of technology: displays.
Apple's display disadvantage
Today, Apple relies on third-party manufacturers to build the displays found on its iPhones. This year, Apple introduced is first iPhone with an OLED (organic light emitting diode) display. Since Apple's archrival Samsung (NASDAQOTH: SSNLF) is generally believed to be the only company capable of building OLED displays that meet Apple's quality standards as well as in the quantities that Apple needs, it is ultimately at Samsung's mercy for this product cycle -- and probably the next, too.
Now, to be clear, Apple has display technologists in-house who work with its display manufacturing partners to build its screens -- I don't believe Apple just buys the same off-the-shelf displays that most other smartphone manufacturers buy. In fact, Apple has been poaching key technologists from major display manufacturers for years now.
However, there's strong evidence to suggest that Apple doesn't fully control the manufacturing recipes and technologies that are used to build its displays. If Apple had developed its own custom recipe for OLED displays, then it wouldn't need to rely exclusively on Samsung to build them -- it could take that technology to multiple vendors and have them do the production.
Apple's path forward
Since display technology is a key point of differentiation -- I'd argue that typical consumers care more about the shape and form factor of the display in a mobile device than they care about any other piece of hardware -- Apple should develop the manufacturing recipes for future displays entirely in-house.
This way, Apple could strike agreements with major manufacturers to produce displays using the Apple-designed recipes, eliminating the need for any display manufacturer that Apple uses to have worked out how to build those screens.
Doing this won't be easy: Apple would likely need to dramatically step up the number of people it employs in display research and development. It would also need to invest heavily in development factories, and the equipment inside of them, for the staff to do their work.
But if Apple wants to consistently deliver leadership in display quality and unique form factors, it needs to take full control of this critical technology, and it needs to do so as quickly as possible.
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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.