Overview

In 2016, Apple loaned Japan Display Inc. (JDI) $1.5 billion to enable JDI to construct the Hakusan plant and further ensure Apple a stable supply of LCD panels for its iPhone series. The large production capacity combined with large orders, allowed JDI to become the biggest LCD panel supplier for its iPhone series line-up. 

The company saw LCD technology as a big opportunity and decided to invest significantly, ramping up production to cater to the opportunity. However, the company was hit by increasing competition from China display panel vendors which includes BOE, Tianma and TCL CSOT, leading to price wars and unfavorable business deals. During the years, JDI was unable to grab design wins and expand the size of orders to other customers and kept relying on Apple for most of its orders. We estimate more than half of its total revenue was contributed by Apple.


Japan Display and Sharp supplied panels to the new iPhone SE series


Image Source: Apple


Considering the common adoption of LCD with no unique value proposition, Apple decided to shift its focus on OLED panels and started to increase the utilization of OLED technology, partnering with Samsung Display and LG Display to produce panels for iPhone X, XS, 11 Pro series smartphones. 

Over the years, JDI was pushed by Apple to focus on OLED panel technology and mass produce panels for the iPhone series but the panel vendor was unable to do it. However, JDI did manage to produce OLED panels through J-OLED and supplied it to Apple’s Watch series along with LG Display.  The company’s OLED arm, J-OLED has created an innovative process to produce large-area TV panels based on inkjet printing and is also collaborating with TCL CSOT to mass-produce these panels. 

JDI is yet to offer innovative technology for the smartphone market and is looking to raise investments to fund its OLED production. Recently, the vendor raised capital from a Japanese investment company and Apple also invested further into the company.

As per Strategy Analytics estimates, the vendor’s smartphone panel shipments declined annually by 20 percent in CY 2019. The vendor has been losing money for its LCD business and recently recorded its 6th consecutive annual net loss in the fiscal year ended in March 2020. 

JDI also implemented structural reforms aimed at cost reduction which includes personnel cost reduction, suspending mobile display plant operation temporarily and asset sales especially the facilities that are currently a burden on JDI’s bottom line. JDI’s Hakusan plant has been underutilized for quite some time as demand for LCD based mobile products has been lower than expected. Hakusan Plant is a significant fixed cost for JDI and a sale is necessary to improve the company’s cash flow, turnaround its business.

Apple is set to announce the iPhone 12 series which will be completely based on OLED panel technology and would exclude an LCD mobile product for the first time in its announcement. JDI’s key customer, Apple has completely shifted to focus on OLED technology for new products  which means that the JDI’s mobile LCD business is increasingly jeopardizing its financial position in the near future if it is continuing to rely on Apple's LCD panel orders.

Plant Sale

JDI's Hakusan plant

Image Source: JDI

Japan Display announced today that they had struck a deal with Sharp Corporation to sell its LCD Display plant in Hakusan, Japan for $ 390 million and also agreed to sell plant equipment to Apple for a total of $ 285 million. The proceeds from the sales are expected to be used along with the company’s own funds, for repaying the advances received from Apple (close to $ 700 million).

The LCD plant transfer is expected to be completed by this September and Sharp is expected to start production as soon as Q4 2020 (October) and will rent the plant equipment owned by Apple. Sharp will take over any debt associated with the Hakusan plant.

Significance and Conclusion

The Hakusan plant focuses on the production of mobile LCD display panels for Apple iPhones. The transfer of the asset allows Sharp to take over the plant. Sharp is expected to spin off its display business and combine the new plant capabilities to raise the production capacity and meet customer demand. Sharp also negotiated a deal with Apple to use this plant to produce panels to supply other smartphone customers.

 

For Japan Display 

With the divestment of the Hakusan plant, JDI is expected to improve its bottom line and focus on generating a profitable and scalable business in the display industry. 

The mobile LCD panel production for the company is expected to consolidate at the Mobara plant (G6 LTPS fab) that has twice the production capacity along with an OLED production site. This allows JDI to continue meeting the smartphone LCD demand from its customers. 

The company is aiming to generate 50% of its revenue from the non-smartphone category which includes the automotive display, PC, VR and wearable display.

Key questions on JDI's prospects

• Given the strong relationship between Apple and JDI, What does this mean for panel orders from Apple and will the company reduce panel orders to JDI going forward?

• Will Japan Display focus on the Non-Mobile category that includes Mac, iPad and Apple Watch?


For Sharp

Now having taken over the Hakusan plant, Sharp is expected to become a major player in the Apple iPhone supply chain. This allows the display vendor to strengthen its market position in the smartphone display segment. The increased production capacity also ensures a steady supply of LCD panels to Apple’s iPhone series based on LCD technology. 

We also cannot ignore the role of Foxconn in this picture, who is being contracted by Apple to produce iPhones. We note that Foxconn being a major shareholder in Sharp Corporation, is looking to integrate the entire supply chain for iPhone production and display is a crucial component where Foxconn wants to control pricing and supply.

Sharp is expected to route all the smartphone panel orders through the Hakusan plant and tap the remaining capacity at the Kameyama plant (G6 LTPS fab) for new opportunities in the automotive and medical sectors.

Key questions on Sharp's prospects

• Since Sharp has boosted its panel capacity with the acquisition, will the panel vendor replace JDI in the supply chain for supplying LCD panels to Apple iPhone series?

• The plant acquisition also presents a risk of increasing fixed costs and the vendor would need to expand its customers beyond Apple, which all smartphone OEMs can be potential customers for Sharp?

The plant sale is expected to provide Japan Display and Sharp, a unique position to focus on next-generation technologies, especially on OLEDs. Apple has played a crucial role in facilitating this deal as it looks to reduce the reliance on Samsung Display and expand OLED supply to multiple panel vendors.