Fun with Data – iPhone 14 Pro Max Component Costs
It has been a difficult year for smartphone component prices and a difficult year for smartphones in general, following a number of slow growth years for the overall smartphones space. Apple (AAPL) has been a standout in that the company has been able to grow share over the last few years while volume leader Samsung (005930.KS) has seem no appreciable share growth. Apple plays a more subtle marketing game in the smartphone space, limiting offerings to a very small number of models each year and paying little attention to the ‘feature race’ that is common among smartphone brands. Rather than try to ‘out-feature’ its competitors, especially its biggest competitor, Samsung, who is also the leading smartphone display supplier to Apple, the company focuses more on style, performance, and building a large ecosystem that both feeds iPhone sales and is also fed by the same.
Samsung/Apple Smartphone Share Trend Analysis - Source: SCMR LLC, Company Data
The ‘feature race’ is a function of the fact that the cost of components for a steady state smartphone built in 2018, should decline over time as new suppliers compete against entrenched suppliers for Apple share, and along with that axiom, comes consumer attitudes that tend to see lesser values in features as they become commonplace and are therefore less willing to pay a premium for features that are ‘last year’. Brands, particularly Samsung, given its vast resources (captive display, captive semiconductor memory, etc.), are constantly adding features, especially to high-end or flagship models to entice consumers with the latest, greatest, or most talked about features.
Apple tends to be a laggard when it comes to features, with the company’s adoption of OLED, a slow process that was years behind other leading brands, but at the same time the company does considerable research in key areas and has bought a number of companies over the years that allow Apple to develop some of what it believes are key components, or at least have a prized research team/IP. An example is Apple’s focus on its “Face ID” system which it unveiled in 2017 on the iPhone X. Over 10 years ago Apple began working on developing the technology, purchasing PrimeSense (pvt) in 2013 and InVisage (pvt) in 2017 and has maintained its use since. On that same premise, Apple has spent years working toward developing its own processor and in 2020 it replaced incumbent Intel (INTC) with its own M1 chip, produced by Taiwan Semiconductor (TSM).
By bringing the chip design in house Apple can better control both its capabilities relative to the demands of iOS and key Apple applications, and its overall performance, one of Apple’s ‘differentiators’, and while iPhone performance has always been a selling point, better performance is a key driver for the devoted Apple fan base that is always ripe to criticize competitor brands’ more generic applications, slower performance, and overcompensation with features that are plentiful but are little used. While the A Chip series certainly is a differentiator, it also carries a cost, and Apple’s relentless push toward higher performance goals adds a bit to the BOM relative to a more generic processor or even its own predecessor.
Given that component costs have been on the rise over the last 18 months one would expect Apple to pass on those rising costs to consumers, however the high-end smartphone market has become less elastic as prices moved above $1,000 in 2017, however when looking at the iPhone Pro Max, the top end of the iPhone line, the price has not changed between 2018 and the current iPhone 14 Pro Max and remains at $1,099 base price. During that time, the BOM has varied, with more sophisticated communication hardware, larger batteries, and more plentiful suppliers. Apple has had to make up the margin impact of these component BOM changes in other places, such as negotiating lower assembly and shipping costs by establishing production closer to fast growing markets or by redesigning the physical aspects of the iPhone line, but in 2020 Apple stopped supplying chargers with new iPhones, which rang the bell indicating that Apple was pushing hard to maintain iPhone margins.
Component BOM for the iPhone Pro Max has varied between -4.4% and +5.2% from the mean during the period between 2018 and 2021, but soaring component costs this year have pushed the component BOM of the iPhone 14 Pro Max up 14.1% from the 2018/2021 mean, or 2.7 times the largest change over the period. Some of this can be attributed to the A16 processor that Apple is using in the iPhone Pro and Pro Max (iPhone 14 and iPhone 14+ use last year’s A15 processor), which is produced by TSM on a 4nm node[1]. While reviews seem to indicate that the faster clock speed and other features of the A16 give it a slight edge over the A15, most say the differences are negligible. With the A16 system cost rising from ~$45 (A15) to ~$110 (A16), based on recent teardown analysis, the performance boost is an expensive one and coupled with other more expensive components, the base component cost has reached new heights.
[1] Actually a 3rd Generation 5um node
Apple tends to be a laggard when it comes to features, with the company’s adoption of OLED, a slow process that was years behind other leading brands, but at the same time the company does considerable research in key areas and has bought a number of companies over the years that allow Apple to develop some of what it believes are key components, or at least have a prized research team/IP. An example is Apple’s focus on its “Face ID” system which it unveiled in 2017 on the iPhone X. Over 10 years ago Apple began working on developing the technology, purchasing PrimeSense (pvt) in 2013 and InVisage (pvt) in 2017 and has maintained its use since. On that same premise, Apple has spent years working toward developing its own processor and in 2020 it replaced incumbent Intel (INTC) with its own M1 chip, produced by Taiwan Semiconductor (TSM).
By bringing the chip design in house Apple can better control both its capabilities relative to the demands of iOS and key Apple applications, and its overall performance, one of Apple’s ‘differentiators’, and while iPhone performance has always been a selling point, better performance is a key driver for the devoted Apple fan base that is always ripe to criticize competitor brands’ more generic applications, slower performance, and overcompensation with features that are plentiful but are little used. While the A Chip series certainly is a differentiator, it also carries a cost, and Apple’s relentless push toward higher performance goals adds a bit to the BOM relative to a more generic processor or even its own predecessor.
Given that component costs have been on the rise over the last 18 months one would expect Apple to pass on those rising costs to consumers, however the high-end smartphone market has become less elastic as prices moved above $1,000 in 2017, however when looking at the iPhone Pro Max, the top end of the iPhone line, the price has not changed between 2018 and the current iPhone 14 Pro Max and remains at $1,099 base price. During that time, the BOM has varied, with more sophisticated communication hardware, larger batteries, and more plentiful suppliers. Apple has had to make up the margin impact of these component BOM changes in other places, such as negotiating lower assembly and shipping costs by establishing production closer to fast growing markets or by redesigning the physical aspects of the iPhone line, but in 2020 Apple stopped supplying chargers with new iPhones, which rang the bell indicating that Apple was pushing hard to maintain iPhone margins.
Component BOM for the iPhone Pro Max has varied between -4.4% and +5.2% from the mean during the period between 2018 and 2021, but soaring component costs this year have pushed the component BOM of the iPhone 14 Pro Max up 14.1% from the 2018/2021 mean, or 2.7 times the largest change over the period. Some of this can be attributed to the A16 processor that Apple is using in the iPhone Pro and Pro Max (iPhone 14 and iPhone 14+ use last year’s A15 processor), which is produced by TSM on a 4nm node[1]. While reviews seem to indicate that the faster clock speed and other features of the A16 give it a slight edge over the A15, most say the differences are negligible. With the A16 system cost rising from ~$45 (A15) to ~$110 (A16), based on recent teardown analysis, the performance boost is an expensive one and coupled with other more expensive components, the base component cost has reached new heights.
[1] Actually a 3rd Generation 5um node
iPhone Pro Max Component Cost as Share of Retail Price - Source: SCMR LLC, Formalhaut,nikkei.com
Apple will need to make up this incursion into iPhone Pro Max margin in other places, as materials and component prices, while having come down from recent peaks, are still a cost burden. We expect that Apple has negotiated price concessions with a number of key component suppliers by committing to higher unit volumes, which led to headlines a few months back about Apple increasing order volumes for older iPhone models along with the pre-release orders for the iPhone 14 line, a viable strategy at the time. That said, as the macroeconomic picture deteriorated over the last few months it is getting more difficult for any smartphone brand to develop an increasingly optimistic view of the remainder of the year, which could lead to Apple having to reduce 4Q supplier expectations and lessen those volume discounts.
There is still time for a big iPhone 14 advertising push into the holiday season, but it looks like it will be a bit more difficult for Apple to maintain iPhone 14 margins at the same level as the iPhone 13, especially as the performance differences between the iPhone 14/14+ and the iPhone 14 Pro/Pro Max seem to have encouraged consumers to lean toward higher than expected volumes of the Pro/Pro Max, which likely carry lower overall margins relative to the lower-end iPhone 14/14+. There is one positive behind all of these component machinations, and while it will do little to help Apple financially, a look at the source of the iPhone 14 Pro Max components reveals that 32.4% of the total component BOM are sourced in the US, up from 22.6% last year, while all other regions saw component share declines.
There is still time for a big iPhone 14 advertising push into the holiday season, but it looks like it will be a bit more difficult for Apple to maintain iPhone 14 margins at the same level as the iPhone 13, especially as the performance differences between the iPhone 14/14+ and the iPhone 14 Pro/Pro Max seem to have encouraged consumers to lean toward higher than expected volumes of the Pro/Pro Max, which likely carry lower overall margins relative to the lower-end iPhone 14/14+. There is one positive behind all of these component machinations, and while it will do little to help Apple financially, a look at the source of the iPhone 14 Pro Max components reveals that 32.4% of the total component BOM are sourced in the US, up from 22.6% last year, while all other regions saw component share declines.
iPhone Pro Max Major Part Comparison by Region - Source: SCMR LLC, Formalhaut, nikkei.com
RSS Feed