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What Do Current Teardown Analysis Concerning the New Apple iPhones Imply?

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Like all things related to Apple, the race is on for research firms to discover the innards of the newly released iPhone 5s and iPhone 5c models, not to mention hacker competitions as to who can first discover product vulnerabilities like the new fingerprint scanner incorporated in the 5s, are underway in earnest.

On the teardown front, research firm IHS has issued rather startling preliminary findings, which should be the interest of product management and supply chain time-to-market teams. It certainly caught our attention since it refutes the theory that Apple was deploying a lower-cost supply chain segmentation strategy.

In its findings, IHS concluded that the iPhone 5cturned out to follow Apple Inc.’s familiar formula, combining premium pricing with a hardware design almost completely identical to the original iPhone 5” IHS further concludes “The biggest difference between the iPhone 5c and the original iPhone 5 lies in the radio frequency (RF) transceiver, which has been updated to support more 4G Long Term Evolution (LTE) bands.” The IHS senior director of benchmarking indicates ““The iPhone 5c is basically an iPhone 5 in a plastic disguise

Web based repair guide firm iFixIt also published a pictorial look at the inside of the new 5c model which seems to reinforce the use of similar iPhone 5 components.

From our Supply Chain Matters lens, so much for the notion of Apple’s track record of value-chain innovation, and our belief that Apple was charging ahead with a lower-cost supply chain segmentation value-chain. That might have been the original intent, but these findings indicate otherwise. More than likely, it is a risk mitigation strategy involving the supplier segment.

In its preliminary analysis IHS pegs the full bill of material and manufacturing cost of the 5c model with 16G of memory at a value of $173 with the unsubsidized carrier price tag of $549.  The firm also concludes that in order to meet expectations of an unsubsidized target of $400, the manufacturing cost would have had to come in at a $130 cost range. Thus the supply chain cost savings opportunity ramp appears to be steep with the current design. Perhaps Apple’s engineering teams have something else in mind.

On the value-chain plus side, according to IHS, Apple was able to innovate cost curve and functionality savings by working with its three strategic LCD screen providers, garnering more enhanced functionality at similar cost.

Again by our view, if these findings are corroborated by other sources, it is going to shed a lot more concern on Apple’s overall smartphone product strategy in regards to contrasting strategic strategies, one for garnering scale by expanding emerging market penetration  or the other in maintaining healthy product margins. We are certainly going to review the inside details of this IHS teardown to determine which is at play.  Then again, Apple is the ultimate determinant.

A supplemental data point concerns current business media reports that Apple sold as much as 8 million phones in the first week of introduction.  That is certainly impressive but some of the reports point to the factor of building channel inventory and potential distortions as to which model sold the most in the first week.  For its part, Apple is refusing to provide further details, which adds more to speculation. In its reporting, the Wall Street Journal quotes a Piper Jaffrey analyst as indicating that as much as 2.5 million units may have been shipments to non-Apple retailers, netting first week unit sales to 5.5 million units, in range with similar iPhone shipments in the first week.

At this point, we can all wait and anticipate how events will play out from here.  Inventory of the 5s has sold out and rumors of volume ramp issues persist.  How the 5c will be received in emerging markets will be factored by how quickly Apple wraps up new distribution deals with carriers China Mobile and others, and how consumers vote with their wallets.

In all cases, Apple’s supply chain teams will be smack in the middle of these developments, while continuing to both fill the volume and new product pipeline. We speculate that certain of Apple suppliers if ever released from the shackles of sworn secrecy would have an opinion as to whether ‘design for supply chain’ is an active principle being practiced in Cupertino,

Quite the interesting drama for those of us with supply chain DNA.

Bob Ferrari

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