When a new batch of iPhones come out, the first thing tech enthusiasts want to know is what new capabilities have been added to Apple's (NASDAQ:AAPL)flagship product. But the real hard-core techies also want to know what's inside the phones and how much it costs Apple to build them.
On Wednesday, IHS filled in the blanks about Apple's costs, after it completed its customary teardown of the new iPhones. IHS found the iPhone 5c costs $173 to produce, including $7 in assembly costs. Its higher-end sibling, the iPhone 5s, costs $199 to produce, which includes assembly costs of $8.
Two teardowns, no waiting
In the teardown process, IHS opens up new technology products to see what's inside and estimate production costs based on the components being used. The iPhone 5c teardown revealed there were relatively few changes from the iPhone 5. The biggest difference was the move to a plastic casing.
Switching from aluminum to plastic shaved as much as $10 off of Apple's production cost. Other component costs also dropped over the last year. As a result, IHS estimated the iPhone 5c's production cost at $173.45, compared with a final estimate of $197 for the iPhone 5 last year.
What's in the estimate?
Meanwhile, IHS pegged the cost of the iPhone 5s at $199. That puts it right in the same range as the iPhone 5's production cost when it was introduced last year. Apple took advantage of component cost declines to add new features such as a "motion co-processor" and a fingerprint sensor without increasing the production cost very much.
IHS teardown estimates are helpful for getting a basic understanding of how much it costs to produce different technology products, but they do not provide a full picture of Apple's costs. First, the teardown estimates only include hardware and manufacturing costs; licensing, software, and logistics costs are excluded.
Second, the IHS estimates capture production cost at peak production efficiency. But when new products are introduced, they tend to have lower yields: more units are defective and must be discarded. The cost of testing units and discarding faulty ones is not considered in the IHS study but represents a significant cost for Apple, especially early in a product's life cycle.
It's also important to note that IHS labels its cost estimates as "preliminary." Last year, the company quoted the production cost of the iPhone 5 at $207 in its press release, but eventually cut its estimate to $197.
More good news for margins
Overall, the IHS teardowns reinforce my belief that the current iPhone refresh cycle will be very good for Apple's gross margin. Furthermore, the IHS teardowns probably understate the cost improvements in this year's product cycle.
For example, the iPhone 5s maintains the iPhone 5 form factor, while the iPhone 5c uses a plastic casing. Both of these design choices (as well as the significant commonality between the two models) should result in higher manufacturing yields in the first few months of production, boosting gross margin. These benefits are not included in the IHS cost estimates.
Additionally, both new iPhones offer more LTE bands than the iPhone 5. This means that a single phone can be compatible with more wireless networks than was previously the case. This cuts down on complexity, which should lead to lower costs over time. Ultimately, Apple could be aiming to use the same chipset in every iPhone, rather than building numerous models tailored to different carriers.
Foolish bottom line
Apple's new iPhones have gotten off to a strong start, as the company managed to sell 9 million units last weekend. The IHS teardowns suggest that the new iPhones will be very profitable for Apple. Moreover, the significant commonalities between the two new models and the iPhone 5 should boost early manufacturing yields compared to last year. Altogether, Apple is well positioned for a return to profit growth this fall.
Fool contributor Adam Levine-Weinberg owns shares of Apple and is long January 2015 $390 calls on Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.