Apple iPad

Teardown: iPad

The new iPad has managed to develop improvements without increasing the retail cost. How have Apple managed this?

If there is one thing Apple is known for among its commercial partners, it is the aggressive protection of its margins. With the new iPad, however, the company has decided to take a substantial reduction, at least on initial production runs.

According to E&T's teardown partners at IHS, the new model costs $316.05 (£199.07) to produce in its basic 16GB Wi-Fi version, compared with $245.10 for the iPad 2. Taking 16GB of memory with 4G (LTE) wireless capability raises these costs to $358.30 against $271 for the 3G-enabled iPad 2. Retail prices on lead products, though, remain at the same levels as for the previous generation, ranging from $499 for the basic 16GB model, to $829 for a 64GB/4G model.

It is possible to speculate that these numbers - which are for parts and manufacturing, but not less easy to estimate factors like pre-packaged software - are now slightly higher still. Since the new iPad's release, Apple and its Asian manufacturing partner Foxconn have announced that they will take steps to improve widely criticised working conditions for Foxconn employees. A rise in labour costs therefore seems inevitable, but could be relatively modest.

The bulk of the increase in materials and manufacturing can be attributed to Apple's decision to move to a far higher resolution LCD TFT screen.

"The Retina display represents the centrepiece of the new iPad and is the most obvious enhancement in features compared to previous-generation models," says Andrew Rassweiler, senior principal analyst, Teardown Services, at IHS. "The first two generations of the iPad employed the same type of display - a screen with resolution of 1024x768 pixels. For the third-generation new iPad, Apple has taken a significant step up in display capabilities."

The Retina display has a resolution of 2048x1536 pixels and costs $87, compared with $57 for the iPad 2. It accounts for 25'per cent of the bill of materials (BOM) of the new iPad with 16GB NAND and LTE.

Couple Apple's decision to hold retail pricing firm on its top-tier iPads to a 25 per cent cut on remaining iPad 2 stocks, and you can say that the company is looking over its shoulder at high-profile rivals such as the Amazon Fire and Samsung Galaxy, as well as sophisticated low-cost options built around maturing reference designs.

Nevertheless, Apple remains undeterred with its business model. The Fire is a subsidised device, with manufacturing and materials costs just below $190. Allowing for extra software and marketing, Amazon is selling its hardware at a loss, banking on longer-term profits from content. Much the same is true of Barnes & Noble's Nook Tablet, expected to arrive in the UK soon.

In contrast, Apple continues to rake in money from iTunes, has greatly expanded its presence in the online book market and is aggressively targeting education. It also retains a healthy mark-up on the iPad.

Indeed, the further it can get the consumer to trade up, the better its margins. The BOM and production represents 63 per cent of the asking price for a 16GB Wi-Fi-only model, but this gradually declines to 49 per cent for a 64GB Wi-Fi/4G model.

There are some familiar Apple manoeuvres here. In most of the IT sector, the saying goes that 'storage is free'. It isn't, of course, but the huge production runs, advanced fab processes and resulting economies of scale do keep costs comparatively low. That said, Apple is still confident that it can add $200 to the retail price in return for just an extra $50 in NAND Flash between the 16GB and 64GB models. There's something to be said for those 'proprietary' screws and the lack of extension slots.

Another interesting factor in the new iPad is that it shows Apple depending still more on Samsung as a supplier even though the two companies are locked in some pretty vicious patent litigation over their rival tablets. The Korean giant already supplies the flash memory and is the foundry manufacturer of the ARM-based A5 applications processor. Now, in the short term at any rate, Samsung is set to be its main supplier of the Retina display (though Apple will ultimately source from LG Display and Sharp). That's business for you.

Samsung is a massive conglomerate made up of largely independent units - and none of those are going to turn down a huge-volume customer, even if the chaps next door are locked in congress with the lawyers.

The bigger question is whether disappointment at the absence of Siri voice control will be outweighed by the Retina screen. Certainly, when you get your hands on the new iPad it does give the lie to the notion that much higher resolutions can only be appreciated on screen sizes above 30in. Though, yes, it does so at a price.

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