There are many examples of Apple (NASDAQ:AAPL) transitioning away from Samsung wherever possible in its supply chain. That's far easier said than done, since Samsung is such a huge player in semiconductors and other parts that go into consumer electronics. Plus, Samsung is really good at providing top-notch hardware components. For example, Apple switched to Taiwan Semiconductor for contract chip manufacturing a few years back. Samsung was reportedly in the running to win back some chip manufacturing business in 2018, but Taiwan Semiconductor may be able to keep its spot thanks to improvements in its 7-nanometer process.
There's inherent risk is relying on a competitor as a primary supplier, so the strategic benefits of diversifying away from the South Korean conglomerate are obvious. Apple is expected to finally adopt OLED display technology this year, with Samsung as the sole supplier for OLED panels. However, the Mac maker is already developing its own OLED technology, which would lay the foundation for an inevitable transition away from Samsung down the road.
Investing in production equipment
DIGITIMES reports that Apple has recently bought chemical vapor deposition (CVD) machines in order to build an OLED production line, citing Korea's ET News. CVD machines are used in manufacturing OLED panels, helping to prevent contamination. It's not clear how many CVD machines that Apple has purchased, but Samsung has reportedly bought five so far this year, LG Display has purchased two, and China's BOE Technology bought one.
Apple was reportedly in talks with BOE earlier this year to supply OLED panels, and BOE is one of a handful of Chinese companies that are continuing to invest in OLED manufacturing capacity. LG Display's panels haven't been validated by Apple yet and BOE isn't expected to ramp production until 2018, which may explain why Samsung is expected to be the sole supplier in 2017.
Apple probably wouldn't operate OLED production
While Apple may be purchasing CVD machines for an OLED production ramp, it's important to remember that it's highly unlikely that Apple will operate this equipment itself. Instead, it would probably install this equipment at a contract manufacturer's facilities, and the contract manufacturer's employees would operate the equipment. This is Apple's standard manufacturing model.
For example, the company had $7.8 billion worth of long-lived assets located in China at the end of 2016 (Apple only discloses this information on an annual basis), which consists "primarily of product tooling and manufacturing process equipment and assets related to retail stores and related infrastructure."
There's another interesting implication from this report. If Apple does want to take greater ownership over its OLED supply chain by purchasing the necessary equipment, that suggests that it may need to consider a direct license with Universal Display (NASDAQ:OLED) at some point. As bullish as Universal Display investors have been for years over the prospect of Apple adopting OLED, they have largely assumed that Apple would just buy panels from existing Universal Display licensees/customers like Samsung or LG Display. While being a direct Apple supplier is often a double-edged sword, scoring Apple as a direct licensee would be a huge win for the small OLED specialist.
Evan Niu, CFA owns shares of Apple and Universal Display. Evan Niu, CFA has the following options: long January 2018 $50 calls on Universal Display. The Motley Fool owns shares of and recommends Apple and Universal Display. The Motley Fool has a disclosure policy.