Samsung Display is Apple’s (AAPL) primary flexible OLED supplier for the iPhone, with LG Display having rebuilt it relationship with the company after problems with OLED displays in 2019 forced LG Display to prove to Apple it had resolved OLED display production issues through an extended requalification process.  More recently China’s BOE, has also gone through such an extended qualification process with Apple that after a number of failures has now allowed them to become a 3rd OLED supplier for the iPhone line.  While the qualification process that Apple requires is based on both the quality of the display and the ability to meet production goals (yield), the reward, given the iPhone’s popularity and its premium price, is considerable and a goal for almost all OLED panel suppliers and while Apple tends to keep the number of display suppliers for the iPhone to a minimum, we expect almost all OLED suppliers have or will try to gain that access.
Apple certainly has an incentive to go through the qualification process with potential iPhone OLED panel suppliers as the company is always looking for ways to bargain down panel prices with Samsung and LGD, so the inclusion, or even the possibility of inclusion of another supplier gives them increased leverage.  The offset is that SDC has been producing flexible OLED panels longer and in higher volumes than other producers, which gives them an advantage as to both technical capability and production stability, both key factors in Apple’s iPhone display producer choices, and SDC’s ability to produce LTPO (Low-temperature Polyoxide) backplanes, a necessity for Apple’s variable refresh rate feature, still keeps them ahead of the pack.
That said, there are contenders, with China’s Visionox (002387.CH) sampling to Apple last year and more recently Chinastar (pvt), a subsidiary of TCL (000100.CH) forming a group to work toward conforming its small panel OLED production to Apple’s standards.  China star operates a Gen 6 OLED fab in Wuhan with a capacity of 30,000 sheets/month and plans to add an additional 15,000 sheet line to the fab, so in its present state Chianstar would be in the early stages of a qualification process, which could eventually lead to the development of a pilot line specifically designed to meet Apple’s specifications.  Whether this means an LTPS line, which would put them in contention with BOE, or an LTPO line, which would challenge SDC and LGD remains to be seen, although Chinastar does have considerable expertise in developing oxide backplanes for LCD, but we expect any real volume production for Apple would be 2 to 3 years out, if they are able to get through qualification.
With a folding iPhone somewhere in Apple’s future, a new display category could help smaller OLED producers like Visionox, Tianma (000050.CH), or Chinastar step forward with Apple, but again Samsung Display has considerable expert and experience in the foldable space already so new entrants would have to find a feature that would attract Apple’s attention as more than a point of leverage, which is not an easy task given SDC’s size and resources.  The capacity issue is also a factor as much of small panel OLED production for Apple is done on dedicated production lines, some of which have been partially financed by Apple itself, but building such high volume lines is capital intensive, time-consuming (18+ months) and has no guarantee that yields will be high enough to produce profits, and also carry the risk that Apple will decide to reduce its OLED exposure at some point down the road, so these are no decisions taken lightly.  That said, with the vision of selling millions of OLED displays to Apple in their heads, it is easy to see why almost all OLED panel producers will vie for that brass ring, even if it burdens financial goals for years.  It will take some very understanding capital sources for most smaller producers to enter such a competition in a realistic way, so we are a bit less excited about the prospects for new OLED panel producers being added to Apple’s iPhone supply chain, but it is certainly in Apple’s best interests to encourage same.

​The battle between Epic Games (pvt) and Apple (AAPL) over 3rd party payment restrictions for applications in the Apple store continue to play out with Epic filing an appeal last week to overturn the September 2021 ruling that declared that Apple was ‘not a monopoly’, lessening the impact of Epic’s initial claims.  That said, Apple has made some adjustments to it’s draconian policies concerning the use of ‘alternative’ payment methods on the app store, allowing some apps to provide sign-up links that are outside of the Apple App Store.  Previously not only were Apple App Store application developers forbidden from selling subscriptions directly or outside of the AAS in-app purchasing system, but had to give 30% of that subscription revenue to Apple, unless the user signs up for longer than 1 year, when the fee drops to 15%.
While Apple’s minor concession to what is a mounting tirade against such limiting policies, other countries have taken askance at the light being shed on same and have taken up the cause.  Japan’s Fair Trade Commission forced Apple to allow some applications in the store to direct users to their own websites to sign up for subscriptions, while South Korea passed legislation that banned all application store operators from forcing developers to use in-store payment processing, with Apple having submitted plans to comply with the new law earlier this month.
But just before Christmas last year the Netherlands Authority for Consumers and Markets published an order requiring Apple to “adjust the unreasonable conditions in its App Store that apply to dating-app providers”, as Dutch dating app providers are currently unable to choose a payment system.  The ACM went further in that the required Apple to adjust the system within 60 days or it would be fined €5m per week, up to a maximum of €50m, and while the Dutch authority chose to focus on dating apps, as they are most dependent on reaching a large audience (both Android and iPhone users), they are ‘forced’ to comply with Apple’s rules in order to reach the most potential users.
Apple did make some attempts to comply with the ruling while noting that they were being obligated to make such changes, although they have implemented nothing more than a form that allowed developers to express interest in using an alternative payment system, which does not seem to have assuaged the wrath of the ACM, especially as Apple only provides for a choice between in-house or external payment systems and not both as the law directs.  In order to compel Apple to comply with the letter of the new law, the ACM has imposed that €5m/week fine on the company, which it is appealing under the concept that the decisions ‘could compromise the user experience, and create new threats to user privacy and data security.”  Tim Sweeney, Epic Games’ CEO, a rather biased participant in the controversy, indicates that Apple’s plan for the Netherlands is to force Dutch dating applications to withdraw from the App Store and make users install a new ‘Dutch-only’ version that offers the mandated options, while still collecting a ‘tax’ on payments made through subscriptions processes through dating app websites.
All in, headline grabbing fines and rulings are continuing to focus attention of Apple’s App Store policies, which have gone under the radar for years.  We would expect other countries to take up the cause, especially when governments want to publicize their ‘consumer orientation’, and we also expect Apple will make some concessions but will fight the trend both in court and in the press when necessary, but we expect the end result is that Apple will have to concede and give developers the opportunity to process subscription payments in-house, likely still collecting its yearly fee (for listing) and a share of in-app purchases, so one might believe that all developers would want to take advantage of the new trend.  Likely not so, as many small developers do not have or cannot afford to have the capability for in-house payment processing and will be happy to let Apple do it for them, even at 30% as the exposure they get on the Apple App Store is considerably higher than those that might charge smaller fees.  Apps like Netflix (NFLX and Spotify (SPOT) have already made decisions as to whether they wanted to remain on the site under the old rules, but as the reins are loosened by Apple, either voluntarily or by mandate, things might change.

In our 10-28-21 note, we indicated that, among other countries, France took umbrage at Apple’s removal of chargers and earphones from the box when purchasing an iPhone.  The government of Brazil fined Apple for the change considering such devices as ‘defective’, and France cited the potential harmful effects of cell phone radiation on young children, forcing Apple to include headphones within the iPhone packaging.  Apple’s theory that most users already have chargers and headphones, leading the inclusion of same to product waste harmful to the environment, is a bit dubious, especially during a period when inflation is causing many components to become more expensive, and goes to the same but more subtle issue of how many consumer staple companies have reduced product weight/package to keep price consistent. (Example:  Sweet & low packets used to be 0.04 grams but are now 0.035g, a 12.5% reduction in weight).
That said, France has changed its mind toward Apple and has decided to overturn the law requiring headphone inclusion, now citing the same ‘waste’ issue that Apple’s lawyers had presented, and that the health argument is not enough to justify the additional waste, although it still requires that ‘compatible headphones are available for sale during the life of the product.’  According to Apple related sites in France the company has already sent a memo to carriers in France indicating that it will stop shipping iPhones with headphones after 1/24/21.  There is still the potential legislation in the EU that all smartphones must have a C-type port to connect to a charger, which would eliminate the necessity for a separate charger for Apple smartphones, but if it were that easy to reverse the headphone issue in France, the EU mandate might never see the light of day.

With 14 VR headsets from 8 brands being actually released in 2021, and the term “Metaverse” maintaining a near 100 (reference) search level since October, there has been considerable attention paid to the potential for the creation of VR and AR based hardware and content that can be used to focus attention on a 3 dimensional virtual ecosystem that can ‘enhance the user experience’ and allow anyone to visit an almost infinite number of worlds dreamed up by content creators and game designers.  There are big players like Facebook (FB), Steam (pvt) and Microsoft (MSFT) and literally hundreds of small players, with names like VRgineers (pvt) or XRspace (pvt), and while some CE companies have been a bit shy about eulogizing the absolute necessity of the Metaverse, many companies on the periphery of the CE space have somehow included the Metaverse in their public business plans, either by reference to some future development project or how the Metaverse will cause their existing business to expand.
There is one player who has been quiet about any direct plans for the Metaverse, and that is Apple (AAPL), whose entry into the space would be the hallmark of the Metaverse’s future with consumers.  Apple is not a technology leader in the sense of releasing product with the latest and most advanced features, but tends to start development early and continue such until they have been able to both justify a commercial product and have been able to find a way to put a differentiating Apple ‘stamp’ on the company’s foray into a new product market.
The less Apple says about its AR/VR technology development the more rumors circulate and Project T288 and other project names seem to ebb and flow like the Bay of Fundy tides, but other than making a number of AR/VR related acquisitions over the last few years, Apple has been quiet about its plans to enter what is now called the Metaverse, and while Apple’s acquisition focus might not have seemed as ‘Metaverse’ oriented back in the 2013’s and 2014’s, such acquisitions have all contributed to what are now AR/VR development projects. 
Much of the speculation about Apple’s entry into the AR/VR market is based on hardware.  We see speculation about processors, cameras, optics, displays, and ‘sleek designs’ almost daily, but what we believe is most important to Apple is the ecosystem that can and must be created around the hardware, as the company has done with many of its other products.  While the sales of AR/VR headsets will be important to Apple and to investors, what should be the driving force behind Apple’s VR/AR development projects is how that hardware will drive an Apple Store AR/VR segment.  Apple will make a profit on the hardware, and it will likely be a premium priced product relative to what is available at the time of release, but the real long-term game is not to have the best-selling AR/VR headset, but to have the highest secondary sales numbers for each headset sold and to sustain customer loyalty to build that base.
As with the iPhone, customer loyalty is developed by offering a better looking and better performing device, even if it is not entirely ‘bleeding edge, so while the eventual Apple AR/VR headset might not actually be as sophisticated as some that have been developed by competitive brands, Apple’s entry into the VR/AR market will signal another step function in the development of the industry that surrounds the Metaverse.  That said, we try to focus less on speculating on what hardware Apple might be developing or using and more on what users can do with the device.
Items such as development tools for an Apple VR OS, particularly porting existing VR games to such a platform will be essential, as will be Apple’s own Metaverse world development, which is a bit different than what has driven Apple store sales in the past.  Apple has relied on much outside development for applications and user content, and has built a large infrastructure around such content, however Apple has the option to create in-house VR/AR content, less like iTunes and more like “Appleverse” where Apple VR users can explore, and of course buy stuff.  This would be a bit more of a conflict with potential external Apple Metaverse content developers, but the ‘space’ in the Metaverse is so wide that Apple might stake a few claims and leave the door open to developers  to fill in areas of less interest.
For example, if you would be an Apple AR/VR headset user and subscriber, you could visit Apple’s iAvatar Metaverse, where you could wander down aisles of avatar parts, clothing, hairstyles and accoutrement, giving you the avatar ‘you always dreamed of’ for your own Metaverse site (that operates under a proprietary Apple Metaverse OS).  Perhaps Apple has designed the iAvatar Store itself, while offering ‘avatar-related products’ that have been developed by outside developers under the Apple Metaverse OS.  As an avatar developer, you would certainly want to tap into the potential Apple AR/VR base, just as developers do currently for IoS, and as, say a virtual furniture developer, you would want to find a good spot in Apple’s iFurniture store in the same way.  So there is far more to Apple’s entry into the VR/AR Metaverse space than just the hardware and speculation on how many 6DoF tracking cameras might be on such a device. This is interesting but rather limited in scope.  More to Apple’s long-term success in the Metaverse would be what Apple builds out alongside the release of an AR/VR headset as in the end having a fancy headset and not much to do with it is not going to generate the revenue that pays for a slew of acquisitions over the years.  Once again, content is king. “Can’t see the forest for the trees” – John Heywood

​If nothing else China’s largest LCD producer BOE (200725.CH) is persistent.   The company has been trying to enter Apple’s OLED display supply chain for over two years and finally has qualified to become a 3rd supplier to Apple for iPhone OLED displays (see our note 11/8/2021) late last year.  While the company is in the early stages of its flexible OLED relationship with Apple, it seems BOE is not wasting any time about pushing forward toward increasing that relationship.
According to local South Korean press, BOE is modifying the 3rd phase installation of its B12 Gen 6 OLED fab in Chongqing, to be able to produce flexible IT panels, rather than smaller flexible smartphone panels, as are  the other two lines at the B12 fab.  Expectations are that they will adapt the line, which is expected to begin equipment installation at the beginning of 2Q, to handle displays up to 15”, above the ~10” size used in the iPad.  The line is also expected to be able to manage a tandem (2 stack) OLED structure, different than the single stack used in smartphones.
BOE would again be in contention with Samsung Display (pvt) and LG Display (LPL), who are also small panel OLED suppliers to Apple, with Samsung dominating the flexible OLED tablet in laptop market.  Both SDC and LGD are said to be developing Gen 8 OLED fab capabilities in order to expand their ability to supply larger OLED displays to Apple and others, while BOE’s B12 fab is Gen 6, leading some to believe that the BOE B12 Phase 3 line is a pilot for a for a Gen 8.5 fab to be built in the future. 

On 12/16/21 we noted that Apple (AAPL) had notified employees that any return to offices for Apple staff employees, which had been tentatively scheduled for September and then pushed to October, would be postponed until January 2022 due to the Delta variant, which was then postponed indefinitely.  At various times Apple has closed its stores in a number of global locations in response tp the spread of COVID-19, particularly the Delta variant, with all stores finally being reopened in June of this year, for the first time in just under a year and a half.
As we mentioned in our recent note, Apple has begun to close a number of stores in the US and Canada and the Omicron variant spreads, and yesterday announced the closing of all of its stores in New York City, as new cases surged.  Apple has a number of flagship stores in NYC, with the largest being the 5th Avenue store between 58th and 59th, at one time being the only Apple store open 24 hours a day.  All stores are still open to outside product pickup, but only Apple employees are allowed inside.
While we certainly give Apple credit for being proactive concerning the safety of customers during the pandemic, all is not perfect in Appleland, with a strike and walkout staged by Apple employees on Christmas Eve, albeit one not endorsed by any Apple trade unions.  The walkout was the result of a customer incident in Jacksonville, Florida where a customer spit on an Apple employee, and was later allowed to return to the store, with the employee allegedly being told that ‘the customer did nothing wrong’.  Of course, once such was posted on Twitter, reports of other incidents, abusive store managers, and other employee issues soon followed.  While we doubt much changed as a result of the strike, which was said to encompass some 50 workers, a wise old man once said, “It’s a sewer out there”, and now it seems to also be a sewer in there.

​The South Korean trade press is reporting that LG Display has won an order from Apple to supply LTPO OLED small panel displays for the iPhone 14.  LTPO allows for the display to support a variable refresh rate system that reaches a maximum of 120 Hz, allowing for both a longer battery life and less blur during image playback.  Samsung Display (pvt) has been the sole vendor of LTPO displays to Apple and was expected to hold the same exclusive position in 2022, but it seems LGD has been qualified by Apple and will now supply at least a portion of the LTPO displays for the iPhone 14 Pro Max model, while SDC will remain the sole supplier for the iPhone 14 Pro.
Both LG Display and BOE (200725.CH) have been vying for a place in Apple’s LTPO display supply chain, and while both have been supplying LTPS OLED displays for the current iPhone line, neither was expected to be ready for volume LTPO display production in 2022.  LG Display has been part of Apple’s LTPO development project but had yet to prove it was able to produce such displays with a high enough yield that Apple would qualify them as a supplier.  BOE is working toward the same goal but has yet to commercialize its LTPO process for volume production, although it has entered Apple’s LTPS OLED supply chain this year and will expand its volumes in 2022.
On an overall basis, LG Display might not see an increase in the number of small panel overall displays it supplies to Apple in 2022 as the conversion of production lines from LTPS to LTPO will reduce the available capacity for LTPS displays, but the higher value LTPO displays will likely improve average small panel OLED ASP, and more importantly prove to Apple that LGD can become a major supplier of LTPO displays in the following years.  Of course, Apple will use the fact that it now has a 2nd LTPO display supplier to work down price with SDC, but the real competition will occur when BOE is able to be qualified for Apple’s LTPO displays, as Apple will squeeze SDC further as long as there are no display problems in 2022.

​Last Saturday Foxconn (2354.TT) closed its assembly plant in Chennai, India, not due to an outbreak of COVID-19, but due to food poisoning that put 159 of the ~12,000 plant workers in the hospital and left another 256 being treated as outpatients.  The food poisoning, which was allegedly linked to contamination from waste water (unconfirmed), led to protests led by over 4,000 workers who blocked a key highway, leading to some arrests.  The plant will reopen on Monday, having been empty for the week.  The Foxconn plant assembles Apple’s (AAPL) iPhone 12, along with some models of Amazon’s (AMZN) Fire Stick, and a small number of Xiaomi (1810.HK) products, but was recently said to be assembling small quantities of the iPhone 13 on a trial basis.
India is currently trying to gain credibility with both semiconductor and panel producers globally, with the intension of building a supporting infrastructure for downstream production rather than upstream assembly.  The government has downplayed the issue at Foxconn and maintained control over the protests to present an affable face to potential CE companies, but at the end of 2020, a protest at a Wistron (3231.TT) plant in Kolar, India, saw violence erupt of unpaid wages, leading to $60m in damages, with.  Wistron also being an Apple iPhone assembler.  As production for the holidays has already taken place, expectations for any impact on Apple’s iPhone deliveries are minimal, but more important would be the optics seen by potential semiconductor or display fan companies, who are already concerned that India will not have the resources to build an ecosystem that could support in-country production.

​Jahwa Electronics (033240.KS) is expected to be the producer of optical image stabilizers for the iPhone 14 due out in 2022, the first time the company has become part of the Apple supply chain.  Optical image stabilizers are used to keep small device movements by the user from disrupting the image as it moves through the lens system to the image sensor and blurring the picture.  This is done by making small counter-movements to the lens or the camera module itself as the picture is being taken.  The company has expanded its OIS operation through the purchase of an idle factory in Gumi, South Korea, the location where LG Innotek (011070.KS), the primary supplier of camera modules for the iPhone has a number of factories. Apple management visited the Jahwa factory in Cheogju in June of this year, leading to the qualification.  We expect the new Jahwa plant will be dedicated to Apple exclusively, who was instrumental in choosing the location of the new plant.
As the sophistication and cost of camera modules used in the iPhone have increased over the last few years, Apple has begun to change the way it procures camera modules.  In previous years the company purchased double and triple camera modules from LG Innotek, Sharp (6753.JP), and O-Film (002456.CH), with O-Film having been eliminated from the Apple supply chain for ethical violations this year.  Going forward, it is expected that Apple will procure camera module components individually, with LG Innotek and Sharp now supplying the cameras themselves to Foxconn (2354.TT), who will now do the module assembly for Apple. 
While we believe the motivation for the change is cost based, higher resolution image sensors in new cameras make the necessity for OIS considerably greater, requiring Apple to have more control over both the components and the assembly process, which includes an alignment step that is critical for the modules to function properly.  Hyvision (126700.KS), a producer of camera module inspection equipment is supplying such equipment to Foxconn and to LG Innotek for both optical camera and TOF production.  As Apple is expected to increase 2022 iPhone unit volume by up to 30%, Jawah’s commitment to the new plant is testament to Apple’s supply chain strength.

​Genesis Photonics (3383.TT), a supplier of LED products including flip-chip and specialty LEDs, has sued Apple (AAPL) in the Taiwan courts for infringing 9 of the company’s patents concerning LED packaging, including mini-LED packaging and mini-LED backlight modules.  The Apple products that the Genesis suit is focused on are the iPad Pro, the iPad Pro Mini and related products, with the suit requesting that all infringement cease and the firm be compensated for the infringement.  The documents specify compensation of $7.55m, which is the minimum necessary for the filing, with the actual amount to be refiled after the number of infringing products is determined.  Genesis expects to file similar documents in other countries.