In just a month or so, Apple (AAPL 0.02%) is expected to formally unveil its latest iPhone models. Among them is expected to be a "premium" iPhone with a full-face OLED display, as well as other goodies that many expect will help boost the company's iPhone business, which is by far the company's largest and most important.
Per a social media post from a Foxconn executive (Foxconn is believed to be the contract manufacturer responsible for the assembly of the upcoming OLED iPhone models), the yield rates on the OLED display that Apple plans to fit the new phones with is super hard to make.
Image source: Apple.
Let's take a closer look at the details.
Low yield rate
The executive reportedly said in the social media post (it's in Chinese, and I can't read Chinese, so I'm relying on second-hand translations of the now-deleted tweet) that the manufacturing yield rate of the OLED iPhone's display is just 60%.
OLED displays are already inherently more expensive than LCDs because of several factors, not the least of which is the simple fact that there's only one supplier that can reportedly meet Apple's stringent quality/performance demands -- Samsung (NASDAQOTH: SSNLF).
By contrast, there are several manufacturers of the more common liquid crystal display (LCD) technology that's used in Apple's current iPhone models (and is expected to be employed in this year's iPhone 7s and iPhone 7s Plus). This means greater competition, lower margin for the suppliers, and therefore lower component costs for Apple.
The yield rate is reportedly negatively impacted by the "notch" design of the display (a portion of the display is cut out to allow the camera sensors and speaker to poke through).
However, I doubt that it's just the "notch" that's driving the yields of these displays down. Apple's displays, particularly recently, offer exceptionally good performance in terms of viewing angles, color accuracy, and brightness.
Additionally, Bloomberg recently reported that Apple is planning to add high-refresh rate displays to its iPhone models this year, so this will add further complexity to the display manufacturing process.
Apple likely wants to raise the display performance bar with this year's OLED iPhone models, which is certainly good from a user experience perspective, but such stringent quality demands will probably make it so that many of the panels that come off the line that'd be "good enough" for most smartphone vendors simply won't cut it for Apple.
So, I firmly believe that it's the combination of Apple's pursuit of exceptional mobile display performance, coupled with the novel "notch" design, that's keeping a lid on the manufacturing yields and is therefore driving display manufacturing costs up.
Foolish final thoughts
The good news is that the OLED iPhone isn't expected to be the company's only new iPhone model this year; it's meant to be a lower volume, higher-priced product.
That said, many Apple customers seem to be willing to pay more to get more (as Apple's strong iPhone 7 Plus performance seems to have proven), so demand for the higher-priced OLED iPhone should still be quite robust.
This means that neither Apple nor Samsung can afford to rest on their laurels, and I expect them to work hard to improve the yield rates of the OLED display over time. Not only will improved yield rates lead to better supply, but it'd also lower display manufacturing costs, which should ultimately help Apple's gross profit margin percentage.
