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Here's What This Apple Inc. Supplier Is Spending to Develop OLEDs

By Ashraf Eassa - Feb 11, 2016 at 9:15AM

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It's a lot.

Apple (AAPL -0.57%) is truly a company that knows how to play its supply chain like a fiddle. Many technology companies spend hundreds of millions each year in a bid to try to develop competitive products in the hopes that they will land sizable component orders from the iDevice maker.

Japan Display, a major supplier of liquid crystal displays, or LCDs, to Apple for the latter's popular iPhone product line is no exception.

Interestingly, Japan Display is expected to swing to an operating loss in the coming quarter primarily as a result of a ramp up of spending on research and development aimed at developing displays using OLED.

What I thought was particularly interesting is that the company actually quantified the incremental research and development spending required to make its goal of OLED mass production in 2018 a reality.

What does 3 billion Japanese yen per quarter buy you?
According to Japan Display's management team, the company will spend an additional 3 billion Japanese yen in the current quarter in support of its OLED development efforts. In U.S. dollar terms, that's about $26.2 million dollars at the current exchange rate of 0.0087 USD to 1 Japanese yen.

If we assume that its OLED spending prior to this increase was fairly minimal (and given that it has been heavily promoting LCDs and isn't expected to go into production on OLEDs until 2018, this seems a reasonable assumption), then this gives us a pretty good idea of how much it costs to develop this technology.

About $26.2 million per quarter works out to roughly $105 million per year. Over roughly two years, Japan Display is looking at sinking more than $200 million to get this technology viable for mass production.

To put this into perspective, its research and development budget for the full fiscal year 2015 is expected to be around 24 billion Japanese yen (roughly $210 million) and, according to Japan Display's Keiichi Yoshida, this number isn't expected to grow much in the coming fiscal year. 

Why this investment is necessary
In its presentation for investors, Japan Display noted a couple of negative trends. The first is that management reported that shipments at the high end of the market were affected "on greater competition with OLED." Then, in "medium price range" mobile displays, the company saw lower shipments "due to competition."

The company says that it's currently "ramping up competitive products to meet goal of [a fiscal year 2016] sales recovery."

From these business trends, it's clear why it wants to invest in OLED displays. Only a handful of companies know how to produce mobile OLED displays in high volume and at good yields, so if Japan Display is able to count itself among those few, it should be able to enjoy both better pricing power and market share position at the high end of the market.

Additionally, Apple tends to be something of a trendsetter in mobile devices. Although an increasing number of devices use OLEDs these days, I suspect the floodgates will open once Apple transitions to the technology. Any company that can't mass produce such displays risks being left behind with products only suitable for low-end and perhaps mid-range smartphones.

The winner here? Apple
At the end of the day, companies like Japan Display, LG Display (LPL 0.64%), and Samsung Display (NASDAQOTH: SSNLF) will continue to spend like crazy to develop next-generation technologies. These companies will continue to compete aggressively with one another to develop better products to win Apple's orders, ultimately to Apple's benefit. 

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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