Apple may have lowered margins with iPhone 7

Apple may have cut down on profit margins on the new iPhone 7 series as it has launched the new phone at the same price as iPhone 6S but has spent more on the bill of materials (BOM) needed to manufacture the device.

Apple may have cut down on profit margins on the new iPhone 7 series as it has launched the new phone at the same price as iPhone 6S but has spent more on the bill of materials (BOM) needed to manufacture the device. (Apple)

Apple may have cut down on profit margins on the new iPhone 7 series as it has launched the new phone at the same price as iPhone 6S but has spent more on the bill of materials (BOM) needed to manufacture the device.

The BOM for an iPhone 7, equipped with 32 GB of NAND flash memory, is $219.80. This is according to a preliminary estimate from IHS Markit, a critical information, analytics and solutions firm.

After $5 in basic manufacturing costs are added, Apple's total cost to manufacture the iPhone 7 rises to $224.80. This is $36.89 higher than the final analysis of the iPhone 6S published by IHS in December 2015. The launch price for a 32GB iPhone 7 was $649, same as iPhone 6S.

"Total BOM costs for the iPhone 7 are more in line with what we have seen in teardowns of recent flagship phones from Apple's main competitor, Samsung, in that the costs are higher than in previous iPhone teardown analyses," said Andrew Rassweiler, senior director of cost benchmarking services for IHS Markit. "All other things being equal, Apple still makes more margin from hardware than Samsung, but materials costs are higher than in the past."

The increase in BOM can also be seen in Apple's move of ditching 16GB models. "From a cost perspective, the shift from 16GB/64GB/128GB iPhones to 32GB/128GB/256GB is a big jump. Despite significant cost erosion in NAND flash over the last year, this increase in the overall memory cost definitely puts pressure on the bill of materials costs -- and therefore margins -- from Apple's perspective," Rassweiler explained.

The supposed drop in margins can be attributed to Apple trying to make up for sliding profits and the failure of the iPhone SE. The four-inch iPhone SE, which was aimed at emerging markets, failed to impress consumers and the effect was immediately seen on the company's shipments.

In April, Apple had reported its first-ever drop in iPhone sales, with 16% lower shipments. That was lower than the 61.1 million the company sold in the same period last year, though it is in line with the 51 million units analysts expected Apple to sell in the three months ending in March.

Even worse, the company had said that sales for this quarter may fall by double-digits yet again. Apple's targeting sales between $41 billion and $43 billion for the three months ended in June, below analyst expectations of $47.3 billion.

The company is also facing sales crunch in China which was its biggest overseas market. According to a Canalys report, the company will continue to face pressure in the Chinese market even after the iPhone 7 launch and has to look at markets like India to match sales figures.

However, IHS Markit said that it has not yet performed a teardown analysis on the larger iPhone 7 Plus yet. But it said that the iPhone 7 has a wider color gamut in its display which improves the rendering of photos and videos. The device's haptic engine, which provides the "click" feel for users, has also been improved for longer-duty cycles and better dynamic response. The home button is now static and mimics the MacBook in terms of a solid-state button design.

Apple has also eliminated the 3.5 millimeter headphone jack, allowing a larger battery and haptic motor. "Where there was an audio jack in the previous design, Apple replaced it with a symmetrical grill -- not for speakers, but for the waterproof microphone, leaving more room for the larger battery and Taptic Engine," Rassweiler said.

The research and analysis firm has also praised the improved battery life of the product and the inclusion of optical image stabilisation in the camera.