In the fall of 2017, Apple (NASDAQ: AAPL) introduced three new iPhones -- iPhone 8, iPhone 8 Plus, and iPhone X. The iPhone 8 and iPhone 8 Plus both use liquid crystal displays (LCD) -- a proven and widely available display technology that has been used in all prior-generation iPhones.
On the other hand, the iPhone X uses a different type of display technology known as an organic light-emitting diode (OLED). It has several advantages over LCDs, such as richer color saturation, much higher contrast ratios, and quicker response times. However, OLED displays do suffer some drawbacks compared to LCDs, such as significant color shifting at wide viewing angles, higher manufacturing costs, and limited supplier choice.
The displays used in the iPhone X are believed to be supplied exclusively by Samsung (NASDAQOTH: SSNLF) Display, which is thought to be the only display manufacturer capable of cranking out displays at the quality levels and in the quantities that Apple needed to support the iPhone X product cycle.
According to a new report from Electronic Times(via MacRumors), Apple is planning to add LG Display (NYSE: LPL) as another supplier of OLED displays for its next-generation iPhone lineup.
LG Display and the next iPhone X
Next year, Apple is expected to equip two of its three flagship iPhones with OLED displays. The successor to this year's iPhone X is expected to sport a similarly sized OLED display as the one on the current iPhone X. Apple is also expected to augment its iPhone product line with a larger-screen version of that iPhone X-successor.
Put simply, for its next iPhone product cycle, Apple is going to need far more OLED displays.
Samsung Display is, of course, expected to supply the bulk of those displays to Apple, which means that Samsung Display should still enjoy Apple-related OLED display shipment growth even if it loses some share to LG Display.
However, the Electronic Times report indicates that LG Display is set to supply between 15 million and 16 million OLED displays to Apple in support of the next-generation iPhone lineup.
Perhaps more interestingly, a translation of the report says that the "panel for the iPhone to be supplied by LG Display is known to be 6.5-inches."
A sensible supply chain move
The impression that I get from this report (admittedly, the translation is a little bit rough) is that Samsung Display will be the sole source of the panels for the next-generation 5.85-inch iPhone X while both Samsung and LG Display will supply panels for the 6.46-inch next-generation iPhone X.
This makes sense. Although larger displays are often more difficult to build than smaller ones, this really seems like a move designed to mitigate risk.
It's highly likely that Apple's best-selling iPhone in the following product cycle will be the direct successor to this year's iPhone X -- in other words, the iPhone with the smaller OLED display. This means that Apple needs to ensure that supply of displays for that product is highly reliable. Samsung Display is the proven leader in the manufacture of mobile OLED displays (it seems to have successfully delivered for the current iPhone X), so it makes sense for Apple to bet on Samsung for that product.
The 6.46-inch iPhone X is likely to be quite popular, but a phone with a 6.46-inch display might be a little too big for quite a few potential iPhone buyers. On top of that, the 6.46-inch iPhone X is likely to be more expensive than the 5.85-inch version, which could make it less financially accessible. It's very possible then that Apple is planning to ship significantly fewer 6.46-inch iPhone X devices than 5.85-inch iPhone X devices in the coming product cycle.
It's still important that Apple have access to stable display supply for the 6.46-inch iPhone X, which is likely why LG Display isn't likely to get most, let alone all, of the panel orders for the device. But if there's one model that Apple should use to test-drive LG Display as an OLED display supplier for, it's the lower-volume 6.46-inch model.
This way, if LG Display can't produce enough usable displays to meet Apple's needs for the 6.46-inch iPhone X, Apple has the opportunity to shift the required orders over to Samsung in a reasonable time frame, mitigating the risk to the next product cycle.
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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.