Apple is teaming up with Taiwan Semiconductor Manufacturing (TSMC) to develop and manufacture new high-tech displays for next-generation devices.

The two companies have reportedly set up a secretive facility in Taiwan as part of the partnership.

Sources with knowledge in the matter said that the two companies are aiming to develop micro OLED displays that can be installed directly onto chip wafers. The new type of display is meant to be used in next-generation devices such as compact augmented reality wearable systems.

Apple's decision to partner with TSMC is based on the fact that micro OLED displays don't use glass substrates like normal LCD screens. Instead, the displays are built directly onto chip wafers, a form of a substrate that TSMC is an expert in developing and manufacturing.

"Panel players are good at making screens bigger and bigger, but when it comes to thin and light devices like AR glasses, you need a very small screen. Apple is partnering with TSMC to develop the technology because the chipmaker's expertise is making things ultra-small and good," the sources said.

The two companies reportedly have a highly secretive facility located in the Longtan District of Taiwan's Taoyuan City. Apart from micro OLEDs, the companies are reportedly also working on a new type of LED technology.

The complex inside the Longtan Science Park reportedly consists of several unmarked buildings, free of any company logos. The facility is also within walking distance of another facility reportedly owned by TSMC.

The same sources said that the new type of advanced display is now at the trial production stage and it will likely still be a couple of years before it is ready for mass production.

Analysts said that the new type of display technology will likely not make its way into any new Apple products anytime soon. Instead, Apple could strategically apply patents to the new technologies and gain more control over the segment.

The new partnership is essentially an extension of the existing business relationship between the two companies. TSMC is currently the sole supplier of Apple's iPhone processors. The Taiwanese company also has an existing partnership with Apple to help build and design the central processors for its Mac computers.