New smaller tablet is more profitable than the third-generation, full-sized iPad
The base model of Apple’s new iPad mini, with Wi-Fi only and 16 gigabytes of NAND flash memory, carries a bill of materials (BOM) of $188.00, according to a preliminary estimate from the IHS iSuppli Teardown Analysis Service. When the $10.00 manufacturing expense is added in, the total cost to manufacture the iPad mini rises to $198.00.
Based on the ratio of cost to retail price, IHS has concluded that the iPad mini is slightly more profitable on a percentage basis than the comparably equipped version of the New iPad when it was released in March 2012.
With the iPad mini, Apple is sticking to the premium-brand strategy it has always used for its media tablet and smartphone products. Apple’s strategy entails offering differentiated hardware that justifies higher price tags than comparable products. This differs markedly from Amazon’s 7-inch Kindle Fire HD and Google’s Nexus 7 tablets, both of which are essentially low-margin or no-margin giveaways at a $199 retail price. Apple makes healthy margins on its hardware, while Amazon and Google employ different strategies with their 7-inch tablets.
Amazon’s Kindle Fire HD and Google’s Nexus 7 have set new consumer pricing expectations for 7.x-inch media tablets, starting at the $199 point. These low-priced tablets pose a competitive challenge to Apple’s media tablet dominance.
Amazon and Google want to put tablets in consumers’ hands—even if it means doing so at a minimal hardware profit— with the intent of making their money on the content users buy, and/or the advertising and paid content they will be exposed to by buying the devices.
With the iPad mini, Apple continues to garner even greater profits from sales of the higher-end tablet models that have greater amounts of flash memory. Because Apple provides consumers no option to expand the iPad mini’s storage capacity with any sort of removable memory card, the only way users can upgrade the amount of flash available on the product is to buy the higher-end 32GByte and 64GByte models.
These higher-end models—with or without 4G wireless capabilities—are priced at $100 intervals, at $429 and $529. However, the incremental cost of the additional NAND flash memory to Apple is only $9.60 for the additional 16GBytes of memory and $19.20 for an additional 32GBytes of memory. This means that compared to the 16GByte model, the 32GByte version of the iPad mini generates about $90 in additional profit for Apple for every unit sold. For the 64GByte model, Apple’s profit is about $171 higher than the 16GByte version.
The individual iPad mini dissected by IHS included only a Wi-Fi connection, with no 4G Long Term Evolution (LTE) wireless hardware included. Based on the preliminary teardown analysis, the addition of the 4G LTE module hardware would cost approximately $34.00. This cost excludes essential intellectual property licensing fees, such as those for CDMA/WCDMA/LTE wireless technology.
The defining feature of the iPad mini is its 7.9-inch display, larger than comparable 7.x-inch tablets, whose displays are nearly 1-inch smaller, at just 7.0-inches. The iPad mini employs GF2 multi-touch touchscreen technology, which allows the touchscreen module to be thinner than competing tablets. However, the new GF2 technology also makes manufacturing more challenging during initial production by reducing manufacturing yields.
This drives up pricing for the touchscreen module. The initial cost of the display and touchscreen module is preliminarily estimated at $80.00, representing a hefty 43 percent of the total BOM for the low-end iPad mini.
The main display suppliers for the iPad Mini are likely to be LG Display of South Korea and AU Optronics (AUO) of Taiwan. LG Display has been supplying panels for the entire iPad line since the launch of the first iPad, and is likely to be the main supplier for the iPad mini displays. The IHS iSuppli Teardown analysis service identified Samsung as the supplier of the display in the individual New iPad that was dissected in March. It is important to note that Apple has multiple sources for many key components, such as the display.
With the high price of the display module, Apple needed to reduce expenses in other sections of the iPad mini. The most notable example of cost cutting is in the processor: an A5 chip manufactured with a 32-nanometer process technology. The A5 used in the mini is a part that has been used in two other Apple products, including the latest Apple TV model—with that version using only one of the cores in the A5 32nm—as well as the latest version of iPad 2. Because of this, the A5 processor costs just $13.00, accounting for only 4 percent of the total BOM. This compares to $16.50 for the Texas Instruments Inc. OMAP processor used in Amazon’s Kindle Fire HD.
The use of the A5 is a great example of Apple leveraging a common component in as many devices as possible in order to increase purchasing volumes and keep costs to a minimum.
Despite the well-publicized legal battles between Samsung and Apple, Samsung remains the manufacturer of the processor, the same as in the iPad 2 and New iPad. The A5 is based on Apple’s own design, and Samsung simply serves as the part’s foundry manufacturer, rather than as its supplier.
Other notable suppliers in the iPad mini include:
· SK Hynix and Elpida, which respectively supply the NAND flash and DRAM, collectively estimated to cost $15.50
· Dynapack, the maker of the $13.50 battery
· STMicroelectronics, which sells the gyroscope used in the user interface and sensor combo module.
The teardown assessments by IHS iSuppli are preliminary in nature, account only for hardware and manufacturing costs, and do not include additional expenses such as software, licensing, royalties or other expenditures.
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