Improved iPhone 5 less expensive to make than iPhone 4S

iPhone 5 product shot

There are few companies I can think of that improve their products while holding prices and still reaping the rewards of high profit margins. Apple, of course, is one of those and the latest iPhone 5 cost estimates from IHS iSuppli only further reinforce the idea that when it comes to managing supply chain costs, Apple is setting the gold standard.

It’s worth noting that the teardown is “preliminary in nature, account only for hardware and manufacturing costs and do not include other expenses such as software, licensing, royalties or other expenditures,” says the research firm. In light of that, IHS iSuppli suggests that the total bill of materials plus an $8 manufacturing cost for the 16 GB iPhone 5 is $207. Bump up the iPhone to 32 GB or 64 GB of memory and that number increases to $217 and $238 respectively; a vast difference from the phone’s full price to consumers, which are $649, $749 and $849, respectively.

Buying a subsidized handset still gets Apple its profit though; carriers pay hundreds of dollars per handset to Apple in return for voice and data plan commitments from the consumer.

iPhone 5 vs iPhone 4S costs

One aspect of the cost breakdown that jumped out to me is that the 64 GB iPhone 5 model actually costs Apple $15 less in parts and production than last year’s phone. The other two models cost slightly more: Apple spends an additional $2 to create this year’s 32 GB phone and $11 more for the 16 GB version, per the IHS iSuppli figures.

Still, if Apple were to sell an equal amount of each model this year; it works out to a net gain: The $13 more to create the two lower models is more than offset by the savings on the high-end model. I’m not implying that Apple actually does sell an equal number across the model line, but it’s an interesting profit hedge scenario. And I suspect that more people — especially existing iPhone owners that are upgrading — gravitate towards the models with more storage capacity.

Samsung memoryWhere’s the big savings this year? The largest is Apple moving away from Samsung for its flash memory. SanDisk memory was found in the iPhone 5 torn down for the IHS iSuppli analysis, although the research firm says that Samsung, Hynix and Toshiba could be suppliers across the line too. This difference is huge by comparison to all other parts. Last year, the memory in Apple’s 64 GB iPhone 4S cost $76.80; this year, that part is $41.60.

Not only does this illustrate how well Apple manages its part supply prices, but also why it’s in a position to do so. Instead of multiple phone models with different sizes and varied components, the iPhone is generally a fixed entity with few major design changes that would impact parts as much as other hardware makers. Sure, this year, the iPhone has a larger screen and form factor, which surely affects production lines and parts, but if history holds true, Apple will likely keep this size and shape for a few years and reap the benefits of superior supply chain management and economies of scale.

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