According to a report in The Investor, Samsung (NASDAQOTH: SSNLF), which is widely believed to be the most capable manufacturer of advanced organic light-emitting diode (OLED) displays for smartphone applications, will supply Apple (NASDAQ: AAPL) with between 180 million and 200 million OLED displays for next year's iPhone lineup.
"Improved yield rates at Samsung's A3 panel production lines are being cited as the main reason behind the display maker's decision to increase supplies to Apple next year," the report said.
Image source: Apple.
Yield rate is a figure that indicates the percentage of the displays manufactured that are viable. For example, if Samsung produces 100 displays and only 60 of those displays work as intended, the yield rate is 60%.
Per the report, the yield rate of OLED displays on Samsung's A3 production line "was around 60%," but is now solidly north of 80%.
Here's what that means for Samsung and Apple.
Higher yields, better costs and supply
Manufacturing yields affect both manufacturing costs and supply.
The impact to manufacturing costs is easy to understand: If Samsung manufactures 100 panels and only 60 of them work, then the average manufacturing cost per working panel is the cost of manufacturing 100 panels divided by 60.
If that number is higher -- let's say, 80 of the 100 work -- then the effective cost per working panel is the cost of manufacturing 100 panels divided by 80. In that case, the effective manufacturing cost per panel is substantially lower.
Depending on the supply agreement Samsung has with Apple, this could translate into better profits for Samsung (since its cost structure would improve) or potentially lower prices for Apple -- which is said to be paying a pretty penny for the OLED displays found in this year's iPhone X -- at roughly similar levels of profit per panel to Samsung.
There's also the fact that supply will improve with higher yields. Notice in the article, The Investor says that Samsung had considered investing more in its A5 lines to meet Apple's demand but thanks to the improved yield rates at the A3 line, it ultimately didn't have to.
For a given amount of capacity that's put into place -- think factory space and the complex and expensive equipment used in the display production lines -- a higher yield rate means more working product, which means higher effective capacity.
Of course, relatively low yield rates can be offset by putting into place a lot more manufacturing capacity, but this is problematic for two reasons: