Apple’s Flagship iPhone Keeps Getting More Expensive To Build

by Trefis Team
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Research firm IHS has published its preliminary bill of materials analysis for Apple‘s (NASDAQ:AAPL) iPhone 7, reporting that the base 32 GB version of the device costs about $225 to manufacture. [1] The new phone is estimated to be $36.89 more expensive to build compared to last year’s iPhone 6S. Apple has clearly been packing more advanced components into its flagship smartphones each year. With the scope for functionality-based innovation slowing down, Apple has had to focus on more niche and potentially expensive technologies (3D-Touch, Taptic engines, dual cameras) in order to differentiate itself from rivals.

Trefis has a $120 price estimate for Apple, which is slightly ahead of the current market price.

See our complete analysis for Apple here

Although Apple has dismissed bill of material analysis as being a inaccurate representation of the cost it incurs in producing its devices, we believe that year-over-year comparisons (from the same research firm) do provide a sense of how Apple’s gross margins could trend.  For example, Apple’s overall gross margins during the iPhone 6 cycle (FY’15) stood at 40.1%, while the gross margins during the first nine months of sale of iPhone 6S (which was more expensive to build) stood at 39.4%. Now, going by the iPhone 7’s BoM, there is a possibility that margins could continue to decline.

There are two other factors that could impact gross margins over the iPhone 7 cycle. While initial iPhone 7 demand has been robust, it remains to be seen whether Apple can sustain the momentum, as the smartphone uses the same industrial design that debuted on 2014’s iPhone 6, potentially hindering Apple’s pricing power. Secondly, Apple has doubled storage across devices. While this doesn’t really reflect on the BoM of the 32 GB device that IHS used in its analysis (reported DRAM+NAND costs declined versus the 6S as DRAM capacity held steady while pricing fell), it is possible that the top-tier models (now 128 GB and 256 GB) could see weaker margins compared to their iPhone 6S counterparts, due to higher overall NAND costs.

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Notes:
  1. iPhone 7 Materials Costs Higher than Previous Versions, IHS Markit Teardown Reveals, IHS, September 2016 []
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