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The iPhone 7 costs more to make, but Apple's margin remains high

21 September 2016 Andrew Rassweiler

Apple spent more than ever before to make the iPhone 7, but the company still enjoys higher "hardware" margins than chief rival Samsung, according to a new IHS Markit teardown analysis on Apple's latest smartphone.

The preliminary estimates of our teardown reveal that for the 32-gigabyte (GB) base model of the iPhone 7, total manufacturing and materials costs amount to $219.80. Remember, that's a preliminary estimate, and is likely to change as we produce our much more detailed final analysis. Throw in manufacturing estimates, and the iPhone 7's complete bill-of-materials (BOM) cost along with manufacturing costs comes to $224.80, which is $36.89 more-or nearly 20% higher-than the final analysis of the BOM cost of $187.91 performed on last year's iPhone 6S, which had also been the subject of a similar IHS Markit dissection.

Below is the exploded view of the iPhone 7.

Prior to the release of the iPhone 7, I had read some headlines that suggested Apple was putting pressure on its suppliers to get cost reductions. Here in teardowns we all thought, "That's not news-that's just an everyday reality for any manufacturer and their suppliers." But it got me thinking that the headline might suggest that the iPhone 7 and 7 Plus were coming in with a higher cost structure than iPhones historically have had, and that Apple was possibly driven to push harder than usual for reductions to compensate. Remember, too, that at the bottom end of the spectrum Apple maintains a constant entry-level price point of $649 retail. If the selling price of the entry-point model doesn't change, Apple wouldn't want its hardware budget to change, either.

So although our preliminary estimate of approximately $225 is not the TOTAL cost-that would have to include non-BOM costs, like software-for Apple to produce the entry-level iPhone since costs have gone up on hardware, we can conclude with all other things being equal that margins must take a hit.

Even so, Apple continues to obtain a solid margin on the iPhone 7, which sells at $649 for the entry-level 32-GB model. In comparison, the Galaxy S7-we tore down the Verizon model in April of this year-one of Samsung's nearest competing flagship smartphones to the iPhone, incurred a BOM cost of $264. That's roughly $39 more than the iPhone 7, even though both the S7 and iPhone 7 sell at approximately the same price ($672 and $649, respectively, at the time of initial analysis).

The increased costs for the iPhone 7 can be traced to various changes implemented in the latest iteration of Apple's best-selling product, which IHS Markit Senior Director Ian Fogg says, in a penetrating analyst insight piece, accounts for as much as 57% of the company's total revenue in the second calendar quarter. Among the various components responsible for the cost changes are the iPhone 7's processor and box contents.

In the first, the A10 processor in the iPhone 7 costs $3.40 more than the A9 processor in the iPhone 6S. The new processor marks a significant win for chipmaker Intel, which has managed to work its way back into the Apple supplier ecosystem after six years of absence.

Also adding to the cost of the iPhone 7 are the box contents. A special dongle is now included in order to connect wired headphones to the phone's Lightning power connector, given Apple's decision to do away with the 3.5-millimeter headphone jack. Costing for the iPhone 7's box contents amounted to $11.40 compared to just $4.00 in the iPhone 6S-a substantial difference of $8.00.

Another source of change in cost comes from the increase in NAND flash memory in the iPhone line. For its three iPhone 7 models, Apple has doubled memory capacities to 32, 128 and 256 GB-up from the original 16, 64 and 128 GB in the iPhone 6S. While the cost difference for the base model-going from 16 to 32 GB-is minimal for Apple at only about $1 more, the difference is much greater for what is now the 256 GB model compared to the previous high-memory mark of 128 GB in the iPhone 6S. Here the cost difference in memory between the old and new model is closer to $8-a sizable variance.

The one component whose cost has remained flat and unchanged from the iPhone 6S to the iPhone 7 is the display. At $43, the iPhone 7's display, including its touch-screen module, is also the phone's most expensive component, and comes in at the same price point we estimated in 2015. This was surprising for me, because given the largely similar specifications we expected to see greater erosion on price for Apple. Our display team understands that pricing has been kept largely the same for this latest revision, and though the current iPhone 6S display price has likely eroded, the new revisions to the display and touch-screen panel being made would "reset" those prices. This has a big impact on BOM cost.

Below is the table showing the cost summary for the 32-GB iPhone 7.

IHS Markit iPhone 7 Teardown Cost Table

Watch for our teardown analysis on the iPhone 7 Plus, soon to come.

Andrew Rassweiler is Senior Director, Cost Benchmarking Services, within the IHS Technology Group at IHS Markit
Posted 21 September 2016

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