AAPL: Production Cuts About Move to IGZO, Not Demand, Says Global Equities

Trip Chowdhry of Global Equities Research today writes that the worries about rumored supply-chain cuts in Apple‘s (AAPL) iPhone production are overdone because the cuts pertain to a change of technology, not a change in demand patterns, in his opinion.

Chowdry, reiterating an Overweight rating on Apple shares and a $650 price target, argues Apple has been shifting from using traditional displays to instead use the emerging technology “IGZO,” a compound semiconductor made up of indium, gallium, and zinc-oxide.

Sharp Electronics (6753JP), the pioneer in the technology, talked about it extensively last week at the Consumer Electronics Show in Las Vegas. At its booth at the convention center, the company showed off some first IGZO-based smartphones, which are selling solely in Japan at the moment. They did, indeed, have lovely displays, based on my casual examination of the phones. Sharp reps suggest such devices get days of standby despite greater brightness and resolution, thanks to lower battery use.

Chowdhry is convinced by what he saw at CES, and other trade-show events, that Apple is in fact moving to IGZO:

We attended various display conferences last year and the Consumer Electronics Show (CES) 2013 last week. Based on our discussions with technologists at these conferences, here is the converged view we got: Apple cut LCD orders by 40% to 80% not because the demand has declined by 40% to 80% but probably because Apple is shifting to IGZO (Indium Gallium Zinc Oxide) display techology; IGZO is ideal for large TV panels; IGZO is also ideal for flexible displays such as in the new iPhones, iPads and MacBooks; IGZO has 40 times faster response time than today’s LCD TVs.

Apple, notes Chowdhry, had already switched its devices from traditional “amorphous-silicon” technology used in conventional displays of the organic LED (OLED) and LED-backlit type, to something called “low-temperature poly-silicon,” or LTPS, which has much higher “carrier mobility” of electrons, making feasible sharper, faster displays. However, “LTPS is very expensive because it requires additional manufacturing steps, it is difficult to achieve film uniformity in large panels (hence, sizes of LTPS panels do not exceed 3 square meters), and also the manufacturing yields are low.”

IGZO, writes Chowdhry, will solve all that for Apple, most importantly because it’s simpler to make, but it will also allow Apple to produce devices with “flexible,” meaning bendable, displays, as “the deposition happens at room temperature” in the IGZO manufacturing process.

Chowdhry opines that along with benefits to Apple, use of IGZO will help Sharp itself, and also Applied Materials (AMAT) and Corning (GLW).

Apple shares today are up $23.15, or almost 5%, at $509.07.