Teardowns reveal Apple's customary high margins for both iPhone 5S and 5C

iPhone 5S' fingerprint scanner the source of pinched supply, says IHS analyst Andrew Rassweiler

The 16GB iPhone 5S costs Apple approximately $199 to manufacture, while the plastic-encased 16GB iPhone 5C runs $173, putting both new smartphones comfortably within the Cupertino, Calif. company's envious profit margins, an analyst said today.

Apple sells the iPhone 5S, its flagship, starting at $649 for a 16GB model sans a subsidy, and the iPhone 5C for $549, just $100 less. The smartphones are priced at $199 and $99, respectively, with a two-year carrier contract in the U.S.

"Once again, Apple has stuck to its old tried-and-true formula of optimizing its iPhone hardware gross margins to attain maximum profitability," said Wayne Lam, a senior analyst at IHS, an El Segundo, Calif.-based research company, in a statement today.

IHS, formerly known as iSuppli, regularly disassembles smartphones and tablets to see which component suppliers are on the upswing, which have been dumped by designers and manufacturers, and uses its examinations to estimate a "bill of materials," or BOM, of the device's manufacturing cost.

The $199 BOM -- which includes an $8 estimate for actually assembling the iPhone 5S -- was almost identical to the $197 IHS pegged for 2012's iPhone 5 cost.

"Technically, the iPhone 5S is a couple of bucks more than the iPhone 5," said Andrew Rassweiler, a senior director of HIS' cost benchmarking team, in an interview Wednesday. "But that's still a preliminary number and subject to change."

In fact, the more Rassweiler and other IHS analysts look at the iPhone 5S, particularly its fingerprint scanner -- marketed as "Touch ID" by Apple -- the more they suspect that their $7 estimate for those components is too low. Costs of other components, however, may be lowered in the meantime, perhaps ending with a wash on the BOM.

But the Touch ID addition to the iPhone 5S -- Apple didn't put the technology in the lower-priced 5C -- was intriguing to IHS for other reasons besides its component cost.

"The fingerprint sensor is new stuff, and whenever you're dealing with new stuff, you're dealing with poor yield, which drives cost up and availability down," said Rassweiler.

If there's a problem in Apple's supply chain for the iPhone 5S -- which most analysts believe there is, based on the shortages that appeared almost instantly with the launch last Friday -- it's in the fingerprint scanning components, said Rassweiler.

"It's the pinch point," he said. "There are a lot of upgrades [in the 5S], new technologies and other new choices, but they're not so new and not so cutting-edge that it could become a problem."

Apple ran through its initial stocks of the iPhone 5S within hours of opening the digital doors of its online store Friday at 12:01 a.m. PT. Its chain of retail stores exhausted supplies of the smartphone no later than Sunday mornings.

CEO Tim Cook even mentioned the shortages Monday as the company announced a record-setting opening weekend, an indication of the seriousness of the emptied inventory. "We appreciate everyone's patience and are working hard to build enough new iPhones for everyone," Cook said in a statement earlier this week.

Rassweiler dismissed the idea that the iPhone 5S' new A7 system-on-a-chip (SoC), which contains the smartphone industry's first-ever 64-bit processor, may have caused the shortages.

"The A7, yes, it's new technology," Rassweiler said. "But [any problems with it are] still traditional wafer fab issues, and nothing like a completely new assembly like the fingerprint scanner. They're on two different planets. The [fingerprint] scanner is far more novel."

According to IHS' teardown and BOM estimate, the cost of the A7 and M7 processors -- the latter was a motion processor found only in the iPhone 5S that continuously measures motion data generated by the built-in accelerometer, gyroscope and compass -- were $19 together. That was a far cry from the most expensive component, the $41 for the display and touch-screen, and also under the $32 for the smartphone's wireless components.

Meanwhile, the iPhone 5C sported a BOM $25.25 less than the 5S' estimate, but still produced an implied margin almost as high as that of its pricier sibling: 68% for the 5C versus 69% for the 5S.

IHS credited the normal cost reductions that accrue during a year for the lower BOM of the iPhone 5C. Apple leveraged the reductions by building the iPhone 5C as a knock-off of 2012's iPhone 5.

"The iPhone 5C is basically an iPhone 5 in a plastic disguise," said Rassweiler. "The combination of the design and component reuse --- and the plastic enclosure --- has allowed Apple to offer a less expensive version of the iPhone, although it's still not cheap enough to be a true low-cost smartphone."

IHS expected the iPhone 5C to cost even less before it began pulling one apart, largely because it had not accounted for the interior steel frame around which the plastic case is wrapped. Apple said that the frame also doubles as the smartphone's antenna.

"They left a lot of downward price potential on the table," said Rassweiler of the 5C's components, design and construction. "We had made the naive assumption that the plastic iPhone would be more plasticky. But under the plastic case is a not-inexpensive metal frame."

More information about the IHS cost estimates of the iPhone 5S and iPhone 5C can be found on the firm's website.

IHS tore apart the iPhone 5S to find what it was made of, and how it was made, then built acost-of-manufacturing estimate that pegged Apple's margin at a whopping 69%. (Image: IHS.)

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, or subscribe to Gregg's RSS feed . His email address is gkeizer@ix.netcom.com.

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