Is This Company About to Become Apple Inc.'s Latest Supplier?

The notion that Apple (AAPL 1.27%) will finally transition from traditional liquid-crystal displays to displays based on organic light-emitting diodes, or OLEDs, for future iPhones has picked up significant steam within the investment community.

Given the advantages that OLEDs can deliver relative to LCDs (assuming that the disadvantages can be worked through), it's no surprised that the iDevice maker is interested in adopting the technology at some point.

Previous reports had pegged LG Display (LPL 1.00%) and Samsung Electronics (NASDAQOTH: SSNLF) as Apple's two major future OLED display suppliers, but it would seem that yet another potential supplier is being added to the mix: AU Optronics (AUO 5.22%).

Apple reportedly wants to invest in AU Optronics
According to Focus Taiwan, Apple wants to invest in AU Optronics in a bid to "transform" the display maker into a vendor of AMOLED displays for future iPhones.

It's not clear whether Apple would take a direct ownership stake in the display maker (an easy task for Apple, since AUO's market capitalization sits at just under $3 billion) or if Apple perhaps plans to fund the capital expenditures required to build and equip Apple-specific OLED manufacturing plants.

At any rate, if these reports are accurate, and if AU Optronics actually agrees, then this could be quite transformative for the display maker, particularly as it could see a fairly sizable revenue boost from the sale of panels to Apple.

Additionally, if AU Optronics becomes a leading vendor of OLED-based displays, this could help it become a larger player in market for smartphone displays beyond Apple, potentially boosting its revenue significantly from current levels.

What's Apple's end game here?
Apple is quite the master of the supply chain and what the company seems to be doing vis-a-vis the various display vendors seems to be proof of that.

Note that, in addition to some technical challenges, one of the main hurdles that Apple faces in adopting OLED-based displays is the fact that OLEDs are relatively costly to make.

It's also worth noting, though, that since relatively few panel makers can successfully manufacture OLED-based smartphone displays, the margins that current OLED panel vendors (or more likely "vendor," since Samsung seems to be the main supplier of smartphone-oriented OLED-based displays) command are likely quite a bit higher than what are essentially commodity LCDs.

What Apple seems to be doing, then, is trying to enable a whole host of vendors to be able to successfully manufacture such displays. This makes sense for a number of reasons. First, by having many suppliers, Apple's iPhone business won't necessarily come to a screeching halt if something bad happens to one of its suppliers (it can just shift orders to another supplier).

Perhaps more important, though, is that Apple wants to maximize its own profit margins. The fact that Apple buys components in extremely high volumes certainly helps (since vendors will be willing to take lower margins in exchange for the huge volumes), but it would be much easier to drive supplier margins down (and Apple's margins up) if there are many competitors vying for Apple's orders.

By enabling AU Optronics to become a vendor of leading-edge smartphone displays, Apple's negotiating position with the likes of Samsung Display and LG Display becomes far stronger.