Apple pays the price to stay at the bleeding edge

APPLE Inc looks like it may put down close to US$1 billion just to keep its devices at the leading edge. Japan Display Inc, one of its key providers of screens, said Friday it would get up to US$400 million from bailout partner Harvest Tech Investment Management Co. Nestled into its two-page stock exchange statement was the revelation that the funding includes US$100 million already pledged by a customer.

That customer is Apple, according to a Bloomberg News story published in late June. Taiwan's TPK Holding Co, another long-time iPhone component supplier, had been in talks to join a US$1.1 billion rescue package for Japan Display but pulled out. That left the company needing to look elsewhere, and Apple stepped in to help fill the void.

This development comes a week after Apple's main screen supplier, Samsung Electronics Co, made a cryptic reference to a "one-time gain related to the display business" in its preliminary second-quarter earnings statement.

Mass purchases

The US company will pay as much as one trillion won (S$1.16 billion) to make up for a shortfall in purchases of organic light-emitting diode, or OLED, according to South Korea's Electronics Times and analysts at Citigroup Global Markets. (Apple hadn't replied to a request for comment by publication time Friday.)

What's interesting about both these cases is that neither of the payments appears to be for purchasing components directly. Rather, they are simply to prop up or compensate suppliers that Apple uses to manufacture the most advanced screens available.

Samsung is among companies that preceded Apple in incorporating OLED displays in smartphones, yet the iPhone maker is the only one that buys them by the tens of millions. It relies on Samsung's display division to make that happen.

Apple probably locked in that supply by promising to buy a minimum amount, and it may have fallen short given recent weakness in iPhone growth. At the same time, the US company desperately needs alternative sources to ensure it's not beholden to any one supplier.

That's where a Japan Display bailout comes in. The Japanese company said its 20.4 billion yen (S$255 million) operating loss in the March quarter was wider than the prior period "as a result of R&D expenses for preparation of OLED mass production".

Technological leadership

Japan Display being able to make lots of OLED screens is great news for Apple - as long as it doesn't go belly-up before that happens. Apple, therefore, has an incentive to keep the company afloat. With global smartphone brands running out of novel ways to spice up their offerings, it's crucial for premium devices such as the iPhone to maintain technological leadership. In a downturn, Apple is starting to find out the price of staying at the bleeding edge. BLOOMBERG