iSuppli and Teardowns

Business

The business of dissecting electronics

The lowdown on teardowns

Ripping apart smart-phones reveals their true cost

Jan 21st 2010 | From The Economist print edition

GADGET-LOVERS the world over are already salivating at the thought of getting their hands on Apple’s much-hyped tablet computer, which is expected to be revealed on January 27th. Most of them just like the idea of playing with a new high-tech toy. But a few have darker designs. They cannot wait to rip the device apart, analyse its design, identify its parts and calculate how much it costs to make.

These “teardowns”, as they are called, are common practice in the electronics industry, and are usually performed in-house. Now, however, more of this activity is being outsourced to specialised firms such as iSuppli and UBM TechInsights. Their findings provide a glimpse into the inner workings not just of individual devices but also the fast-growing consumer-electronics business itself.

Derek Lidow, iSuppli’s boss, says companies that design and market gadgets sometimes hire firms like his to tear apart and analyse products whose manufacture they have outsourced to others. Some customers simply want to know why their competitors, often of Chinese provenance, can be so cheap—either to prove suspicions of dumping or to show their own engineers how to do better.

With a smart-phone, for example, iSuppli starts by looking at how its 1,000 or so parts are put together. Apple has the most creative and dense designs, says Andrew Rassweiler, who heads iSuppli’s teardown service. But its rivals are catching up fast. The design of Google’s recently launched phone, the Nexus One, made by HTC of Taiwan, is almost as advanced as that of the latest iPhone.

The next steps in a teardown are identifying the parts and calculating the costs of materials and assembly. Components, especially memory chips, have continued to fall in price. This is why the first iPhone model cost $218 to build and the latest only $170, despite its superior performance. Assembly costs are minimal—just $6.50 for the current iPhone. Even though the parts in high-end smart-phones differ widely, their total construction cost often falls in a narrow range of $170-180 (see chart). Makers apparently set a budget and see what they can fit in, says Mr Rassweiler.

Most smart-phones’ retail prices (before operator subsidies) are around $500-$600. Not all of the difference is profit. There are many other costs, such as research, design, marketing and patent fees, as well as the retailer’s own costs. But the big gap between the cost of building a smart-phone and its price in the shops should widen further as ever more previously discrete components are packed on to a single main microchip. Howard Curtis of UBM TechInsights predicts that as software and mobile services come to represent more of a smart-phone’s overall value, this too will widen the gap between manufacturing costs and selling prices.

What this gap demonstrates is that for smart-phones, like most other electronic devices, most of the value lies not in manufacturing but in all the services and intellectual property it takes to create and market such products. That is something for politicians to ponder: instead of making empty promises about saving ailing manufacturers they might instead consider how best to promote the growth of high-value service industries.