iPad Bill of Materials (BOM) Cost Analysis

Michael ChenMay 12, 2012

Background • Apple introduced the first iPad in April

2010, released iPad 2 in March 2011 and the 3rd generation new iPad in March 2012

• During 2010, Apple sold 14.8 million, representing 75% of tablet PC sales at the end of 2010

• The 4th quarter of 2011 alone, Apple sold 15.4 million iPads, doubled what it sold in the same period a year ago

Sources: Apple 10-Q for FY 2010, 2011

Background • The iPad is assembled by Foxconn in

Shenzhen, China

• Similar to Southwest Airlines and Vanguard (the mutual fund company), Foxconn follows a cost leadership strategy

• Foxconn has been profitable and has grown over the years through relentless cost management

Sources: Apple 10-Q for FY 2010, 2011

Background • Apple follows a product differentiation

strategy

• It generates its profit and growth on the basis of its ability to offer differentiated or unique products or services that appeal to its customers

• Customers are willing to pay higher prices for its products than that of its competitors

Sources: Apple 10-Q for FY 2010, 2011

Background • Apple’s margin has more than doubled the past five

year

• During the same period, the margin of Hon Hai Precision, Foxconn’s Taipei-listed flagship has become smaller

• The margin spread between these two companies have widen since the first iPad debut in April, 2010

Source: Bloomberg.com news Chart of the Day

New iPad Bill of Materials (BOM) Cost Analysis

Source: IHS iSuppli Research

New iPad (3rd Generation) WiFi WiFi + 4G

Components/Hardware Elements 16GB 32GB 64GB 16GB 32GB 64GB

Retail Pricing $499.00 $599.00 $699.00 $629.00 $729.00 $829.00

Total BOM Cost $306.05 $322.85 $356.45 $347.55 $364.35 $397.95

Manufacturing Cost $10.00 $10.00 $10.00 $10.75 $10.75 $10.75

BOM + Manufacturing $316.05 $332.85 $366.45 $358.30 $375.10 $408.70

Major Cost Drivers

Memory

NAND Flash $16.80 $33.60 $67.20 $16.80 $33.60 $67.20

DRAM $13.90 $13.90 $13.90 $13.90 $13.90 $13.90

Display & Touchscreen

Display $87.00 $87.00 $87.00 $87.00 $87.00 $87.00

Touchscreen $40.00 $40.00 $40.00 $40.00 $40.00 $40.00

Processor $23.00 $23.00 $23.00 $23.00 $23.00 $23.00

Camera(s) $12.35 $12.35 $12.35 $12.35 $12.35 $12.35

Wireless Section - BB/RF/PA (Module) $41.50 $41.50 $41.50

User Interface & Sensors & Combo Module $15.00 $15.00 $15.00 $15.00 $15.00 $15.00

Power Management $10.00 $10.00 $10.00 $10.00 $10.00 $10.00

Battery $32.00 $32.00 $32.00 $32.00 $32.00 $32.00

Mechanical/ Electro-Mechanical / Other $50.50 $50.50 $50.50 $50.50 $50.50 $50.50

Box Contents $5.50 $5.50 $5.50 $5.50 $5.50 $5.50

Gross Profit $182.95 $266.15 $332.55 $270.70 $353.90 $420.30

Gross Margin % 36.66% 44.43% 47.58% 43.04% 48.55% 50.70%

New iPad Bill of Materials (BOM) Cost Analysis

New iPad (3rd Generation) WiFi WiFi + 4G

Components/Hardware Elements 16GB 32GB 64GB 16GB 32GB 64GB

Retail Pricing $499.00 $599.00 $699.00 $629.00 $729.00 $829.00

Total BOM Cost $306.05 $322.85 $356.45 $347.55 $364.35 $397.95

Manufacturing Cost $10.00 $10.00 $10.00 $10.75 $10.75 $10.75

BOM + Manufacturing $316.05 $332.85 $366.45 $358.30 $375.10 $408.70

Major Cost Drivers as % of Total BOM Cost

Memory

NAND Flash 5.49% 10.41% 18.85% 4.83% 9.22% 16.89%

DRAM 4.54% 4.31% 3.90% 4.00% 3.82% 3.49%

Display & Touchscreen

Display 28.43% 26.95% 24.41% 25.03% 23.88% 21.86%

Touchscreen 13.07% 12.39% 11.22% 11.51% 10.98% 10.05%

Processor 7.52% 7.12% 6.45% 6.62% 6.31% 5.78%

Camera(s) 4.04% 3.83% 3.46% 3.55% 3.39% 3.10%

Wireless Section - BB/RF/PA (Module) 11.94% 11.39% 10.43%

User Interface & Sensors & Combo Module 4.90% 4.65% 4.21% 4.32% 4.12% 3.77%

Power Management 3.27% 3.10% 2.81% 2.88% 2.74% 2.51%

Battery 10.46% 9.91% 8.98% 9.21% 8.78% 8.04%

Mechanical/ Electro-Mechanical / Other 16.50% 15.64% 14.17% 14.53% 13.86% 12.69%

Box Contents 1.80% 1.70% 1.54% 1.58% 1.51% 1.38%

Gross Profit $182.95 $266.15 $332.55 $270.70 $353.90 $420.30

Gross Margin % 36.66% 44.43% 47.58% 43.04% 48.55% 50.70%

Major Cost Drivers Highlights

Display:

• The new iPad’s Retina display which costs $87 is the most single component in the tablet• The display accounts for 24 % of the BOM of the 32 GB LTE model• Samsung supplied both the display and the applications processor• Other qualified vendors include LG Display and Sharp Electronics

Touchscreen:

• Costs an estimated $40, or 10.9 % of the BOM• Main suppliers are still TPK, Wintek and Chi Mei

Wireless section:

• Costs $41.50 and accounts for 11.4% of the BOM• Qulcomm Inc is the supplier for the MDM9600 baseband processor

Application processor:

• The A5X applications processor costs $23, or 6.3 of the total BOM• Samsung serves as foundry partner to Apple• Apple is the designer and owner of the intellectual property of A5X

Source: Andrew Rassweiler, senior principal analyst at HIS.

Observations

• Samsung with display and application process combined, accounts for 30% total BOM and is

the largest for any supplier

• With the exception of the display, Apple’s margin will increase as the cost of all other components continue to go down • Apple upgrades iPad every year and that will keep competitors from staying in high margin sweet spot for too long

The End