The First ‘iPhone Bailout’ Is Now A Reality

This is bad news for Apple’s suppliers.

Cross-posted from Zero Hedge

The only companies who have been hurt more by the astounding flop of Apple’s latest crop of smartphones have been Apple’s suppliers. And following a beat-down in the shares of companies that produce displays, casing and internal components for the phones as Apple has now twice scaled back production guidance in a two month period, perhaps it was inevitable that some of these companies would need to seek some form of financial relief, due to their heavily reliance on the relationship with Apple.

And while so far the headlines relating to Apple’s suppliers have focused mostly on layoffs and retrenchment at the companies’ factories, for the first time on Tuesday, the Wall Street Journal reported that Japan Display, which manufactures the liquid-crystal displays used in the iPhone XR, is in advanced talks to secure outside funding from Taiwan’s TPK Holdings and the Chinese state-owned Silk Road Fund for a stake as large as 30% (which could give the companies control of a firm that was once deemed a strategic national asset by Tokyo).

And just like that, the first iPhone bailout is one step closer to becoming a reality.

Japan Display Inc. is in advanced talks with Taiwan’s TPK Holdings Co. and Chinese state-owned Silk Road Fund about an investment that would include a stake of about 30% with the possibility of greater control later, people familiar with the matter said. The size of the investment isn’t decided but could reach around ¥60 billion (around $550 million) or more, the people said.

That Japan Display is the first supplier to struggle in the wake of Apple’s guidance cut is hardly surprising: The company relied on Apple for roughly half of its revenue during the fiscal year ending in March 2018.

Also, aside from the liquid crystal display used in the iPhone XR, many of the other display products once manufactured by Japan Display have become commoditized – meaning that phone manufacturers can buy similar products more cheaply from producers in China and South Korea. And what’s worse for JD, Apple is expected to drop those displays altogether in its batch of phones set to debut in 2020, which are expected to feature an “organic” light-emitting diode display.

Though it’s days of being a cutting edge producer of display technology are far behind it, WSJ says Japan Display might still have some value for an Asian producer looking to leverage its ability to mass-produce low-density polysilicon sheets. The deal reported by WSJ hasn’t been finalized, but it’s looking increasingly likely that TPK and the Silk Road fund will purchase a slug of convertible JD bonds which they can then convert into stock.

TPK of Taiwan makes the touch-panel portion of displays for many smartphones including the iPhone. The Chinese investors are interested in building display factories in China using Japan Display’s technology, people familiar with the plans said. A TPK spokeswoman declined to comment, and Silk Road Fund didn’t respond to a request for comment.

Under the deal being discussed, the investor group wouldn’t initially take a majority stake and some of its money would go to purchase Japan Display bonds convertible into stock, paving the way for fuller control in the future, said people involved in the deal. INCJ, the Japanese government-backed fund, would hold on to its shares for now but might sell its stake in coming years, they said. INCJ currently owns 25% of Japan Display.

Japan Display plans to use the invested money for day-to-day operations and hopes to announce a deal as soon as mid-February, when it reports quarterly earnings, said people familiar with the deal. The investor group is likely to take up the majority of the company’s board, they said.

Final terms haven’t been set, and the deal could still fall apart. Other Chinese companies including display maker BOE Technology Group Co. and touch-panel maker O-Film Tech Co. at one point considered investing in Japan Display but dropped the idea, said people involved in the talks. Representatives of BOE Technology and O-Film Tech didn’t respond to requests for comment.

With Japan Display on the chopping block, we wonder if Apple’s other suppliers will come to their senses and start lobbying the iPhone maker to at least consider cutting prices as sales stall and the relative strength in the US dollar makes its phones increasingly unaffordable abroad.

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