The Cost of Aggressive Estimates
Samsung Display (pvt) is a primary OLED display provider to Apple (AAPL) and has dedicated much of their A3 fab to the production of displays particular to Apple’s needs. While there are few CE brands that have enough demand to create such deals, Apple is certainly one and has made similar deals with others, particularly Japan Display (6740.JP), with whom they ‘pre-paid’ over $1b to help finance an LCD fab that was to be exclusively for production of Apple displays. That said, the deal with Samsung Display is more of a contractual obligation, which requires Apple to purchase a certain number (or value) of panels over the course of a contractual year. As Samsung Display has committed production resources to Apple under the yearly contract, there seems to be a ‘take-or-pay’ clause that requires Apple to meet its estimated demand goals or make up the difference as a payment. While Samsung Display is not the only possible small panel OLED vendor Apple could use (Apple also uses LG Display (LPL) and BOE (200725.CH) to a lesser degree), they are the industry leader in flexible OLED displays and tend to be the highest volume supplier to all smartphone brands.
Given this leadership role in flexible OLED displays, and the resource commitment SDC makes to Apple each year, there is logic behind the take-or-pay situation, as SDC could be using those resources for other customers, so the onus falls on Apple to make accurate estimates of its anticipated production targets, usually made in 4Q of the previous year. This is a tricky situation for Apple, who at times has faced display shortages when a particular iPhone model turns out to be more popular than expected, however the opposite has also been the case in 2019 and 2020 when Apple has had to pay almost $700m and over $900m, according to estimates, to SDC for ordering less volume than the company estimated, and it seems that Apple is already off to a similar start this year.
As we have previously noted, the iPhone Mini has been a disappointment in terms of unit volumes and has been in part responsible for a 20% reduction in OLED display orders for the iPhone 12 series in 1H. As the sole supplier of displays for the Mini, Samsung Display saw a 9% decrease in OLED panel shipments in January, while combined OLED/LCD shipments were only down 4% during the month for the industry. While we don’t know how granular the contract requirements are between SDC and Apple, without a very popular iPhone 13 series offering, it would seem that Apple will again have to pony up this year. As we all can attest to, demand estimates are moving targets and it doesn’t take much to make them look like fever dreams or wishful thinking. Lost revenue from being unable to provide customers with product is both a financial and psychological issue for a brand, but at the same time smartphone brands have a tendency to overestimate future demand and Apple does not seem to be immune from the problem.
Given this leadership role in flexible OLED displays, and the resource commitment SDC makes to Apple each year, there is logic behind the take-or-pay situation, as SDC could be using those resources for other customers, so the onus falls on Apple to make accurate estimates of its anticipated production targets, usually made in 4Q of the previous year. This is a tricky situation for Apple, who at times has faced display shortages when a particular iPhone model turns out to be more popular than expected, however the opposite has also been the case in 2019 and 2020 when Apple has had to pay almost $700m and over $900m, according to estimates, to SDC for ordering less volume than the company estimated, and it seems that Apple is already off to a similar start this year.
As we have previously noted, the iPhone Mini has been a disappointment in terms of unit volumes and has been in part responsible for a 20% reduction in OLED display orders for the iPhone 12 series in 1H. As the sole supplier of displays for the Mini, Samsung Display saw a 9% decrease in OLED panel shipments in January, while combined OLED/LCD shipments were only down 4% during the month for the industry. While we don’t know how granular the contract requirements are between SDC and Apple, without a very popular iPhone 13 series offering, it would seem that Apple will again have to pony up this year. As we all can attest to, demand estimates are moving targets and it doesn’t take much to make them look like fever dreams or wishful thinking. Lost revenue from being unable to provide customers with product is both a financial and psychological issue for a brand, but at the same time smartphone brands have a tendency to overestimate future demand and Apple does not seem to be immune from the problem.
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