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Report: Apple Inc. Will Invest $2.7 Billion in OLED Manufacturing Plant

According to The Korea Herald (via AppleInsider), citing the Korea Economic DailyApple (NASDAQ: AAPL) will pony up $2.7 billion as an "advance payment" to LG Display (NYSE: LPL) for future organic light emitting diode, or OLED, display supply.

"Sources say LG Display is likely to build a production line dedicated to iPhone orders only," The Korea Herald report said.

Image source: Apple.

Here's what this means for LG Display, Samsung Electronics (NASDAQOTH: SSNLF), and Apple.

Positive for Apple and LG, negative for Samsung Display

Today, Samsung is the market leader when it comes to smartphone-sized OLED-based displays. It's no surprise, then, that Apple is reportedly leaning on Samsung -- Apple's bitter rival in the high-end smartphone market -- for supply of OLED displays for its upcoming premium iPhone, commonly referred to as the iPhone 8.

OLED displays offer several advantages over the liquid crystal displays that are currently used in Apple's iPhone 7 series smartphones, such as better contrast, potentially better power efficiency for certain types of content, and the ability to be curved/bent.

Samsung's pole position in smartphone-use OLED displays has served it well as more smartphone manufacturers, particularly for their higher-end smartphone models, adopt the technology. Samsung's display division saw its revenue grow 20% year over year last quarter and operating profit climb from just 140 billion Korean won (about $125 million) to 1.71 trillion Korean won (about $1.5 billion).

As the iPhone 8 ramps up, Samsung should further benefit.

However, while Samsung is in an extremely favorable position today, that could be set to change with this reported deal. If Apple shifts some orders way from Samsung in the 2018 iPhone cycle, this could negatively impact Samsung Display's shipment performance year over year.

That said, it's important to keep in mind that Apple is likely to buy far more OLED displays during the 2018 iPhone cycle than in the 2017 iPhone cycle as it proliferates OLED technology across its iPhone product stack, so that could buoy Samsung Display's revenue.

Another negative here for Samsung (and, conversely, a positive for Apple) would be that with another source of panels available to it, Apple would gain an upper hand in pricing negotiations. Right now, Apple has no choice but to pay Samsung what it asks, but that should change with the 2018 iPhone lineup. That could pressure Samsung Display's gross profit margin percentage, and thus operating profit, relating to the Apple business beginning in the 2018 iPhone cycle.

Another positive for Apple from bringing LG Display on board is that with more suppliers ready and willing to supply key components, the iPhone supply chain becomes more resilient to issues cropping up at any one supplier. If one supplier, for whatever reason, fails to deliver, Apple can still supply product by leaning more heavily on others. Without such a second source, if that one supplier doesn't deliver, Apple doesn't sell iPhones.

And not selling iPhones, given how dependent Apple's business is on it, would be utterly devastating to the company's financial results and, thus, share price.

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.