iPad 2 Cost Only a Few Dollars More to Build Than Original

An analysis of iPad 2 finds that Apple's total cost to produce the tablet is almost identical to that of the original iPad introduced a year ago.

Apple was able to keep costs down despite the fact that a number of iPad 2 components, including the display subsystem and battery, are considerably more expensive than those of the original tablet.

The analysis breaks down the components of the iPad 2, assigns a price tag for each, and estimates the actual manufacturing costs to come up with a total. There's only a $3 difference between the GSM- and CDMA-equipped 32GB iPad 2 models: $336.60 for the former, $333.25, according to IHS iSuppli.

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Most of that total is a tally of the bill of materials (BOM) -- all the chips, memory, the display components, and so on -- totaling $326.60 for the GSM model, and $323.25 for the CDMA model. iSuppli estimates the cost to manufacture each tablet is $10.

The most expensive components: display, at $127; memory (for the 32GB model) at $65.70; mechanical/electrical (enclosure, connectors, etc.), at $35; and the battery, at $25.

The total BOM for the iPad 2 is only just a few dollars more than the total for the original iPad, which iSuppli put at $320 when it the tablet was released in April 2010.

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Among other things, Apple may have been able to leverage its supply chain relationships in light of the much higher anticipated unit sales of iPad 2. The original iPad sold about 15 million units in the nine months it was available in 2010. Estimates of iPad 2 sales typically start at about twice that and go up.

iSuppli's analysis shows that the components and vendors for iPad 2 are little changed from the original tablet. "The iPad 1 and iPad 2 use the same components and suppliers for the NAND flash, the multi-touch controllers and touch screen drivers, as well as the same core chip in the wireless section as was found in the iPhone 4," says Andrew Rassweiler, senior director and principal analyst and teardown services manager for IHS, in a statement. "Many of the other components -- including the apps processor and the Bluetooth/frequency/global positioning system/wireless local-area network chips -- have the same suppliers and are essentially new revisions of the chips found in the previous iPad and other iPhones."

Holding the iPad 2 cost flat is all the more remarkable considering that the new tablet's screen is quite a bit more expensive than the original's, by about one-third, according to iSuppli. The firm estimates the iPad 2 display/touch screen subsystem carries a price tag of $127, compared to the its estimate of $95 for the first iPad.

There are a number of reasons for the jump in costs, most traceable to the manufacturing challenges faced by suppliers. iSuppli: "Production yields, though they have been improving, have been very low throughout 2010, and drove prices to be much higher than initially expected. Furthermore, refinements in the touch screen specifications have driven the price point even higher for the iPad 2. Contributing factors to that cost increases include more expensive glue to improve the efficiency/performance in the bonding, thinner Gorilla cover glass and a more detailed inspection process requiring additional equipment for optical and panel examination."

The new tablet's battery is more expensive, at $25 versus $21 in iPad 1. For the new tablet, the battery is much thinner and uses three cells instead of two. The associated power management circuitry for these batteries is a key reason why Apple can maximize battery life while holding down battery size and weight, according to iSuppli.

The other notably more expensive component is the A5 processor, the first dual-core version of Apple's custom-designed, and Samsung-built, CPU. According to iSuppli, the A5's estimated price of $14 is 75% higher than that of the A4 used in the original iPad. The firm notes that this cost will drop over time as chip production volume increases.

Those components alone add $39.50 to the cost of the original iPad. Yet, somehow, Apple was able to hold down the total cost of the iPad 2 components list plus manufacturing, perhaps by squeezing out other costs from its supply chain. This may explain why one analyst's predicted price cut for the iPad 2 didn't materialize: (See "Will the hottest thing about iPad 2 be the price?")

Former equities analyst Anton Wahlman noted that with iPad 2, Apple "is probably looking to sell 60 million units worldwide starting this March" compared to about 15 million for iPad 1. The much higher volume gives Apple supply chain leverage. Wahlman wrote: "When you go from planning under 10 million units to 60 million, you can negotiate much better manufacturing prices. Components can also be optimized for cost, to a different degree. Apple is pre-paying for critical parts, such as memory and displays, taking risk out of the contract manufacturers, which pressures the price down."

Squeezing out those extra costs let Apple absorb the higher-priced iPad 2 components, keep the total iPad cost almost level, and keep the consumer price tag unchanged, giving it a price advantage compared to rival Android-based tablets, perhaps for many months.

John Cox covers wireless networking and mobile computing for Network World.

Twitter: http://twitter.com/johnwcoxnww

E-mail: john_cox@nww.com

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