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Fault lines in iPad teardown cost analysis

Consumer electronics product manufacturing cost must be less than 33% of retail price. Total component cost must be less than 25% of product retail price. Most iPad components and printed circuit boards supplied by Taiwanese and Korean manufacturers.

Apple’s iPad, the new revolutionary tablet computer hit the market last week in the United States. Apple is arguably the leader in market hype and creating a buzz prior to a product launch. (Read: Apple iPad vs. netbooks, notebooks, smartphones)

The long line of customers in front of Apple stores patiently waiting to purchase the iPad is a testament to the company’s advertising savvy.

Some news stories from Japan reported loyal Apple customers making the two day trip to the U.S. to purchase the iPad, not content to wait until the end of April when the product is set to launch in Japan.

Industry news groups reported sales reached almost 700,000 units on the first day.

Amongst the loyal consumers waiting anxiously in line to purchase the iPad were competitors of Apple as well as personnel from research companies.

Individuals from these two groups would have only a few hours to play with their iPads.

Their agenda is not to check out the fancy applications, but rather tear the thing apart and view the detailed construction.

Tear down analysis is common in the electronics industry where your competition is eager to discover any new technologies, and determine the material vendors and part manufacturers companies secure to manufacture products. (See, also: Will iPad 3 get killed by Android and Windows 8?)

Unfortunately, researchers did not discover very innovative new technologies or parts inside the iPad.

Most of the iPad components and printed circuit boards are supplied by Taiwanese and Korean manufacturers.

There were no fine components in the iPad that were made in Japan.

The following is my recap form the iPad tear down analysis.

Apple does not manufacture its own products. The company employs Taiwanese manufacturers to procure the components from local vendors and provide assembly.

Apple deals with vendors for some of the major components such as flat panel displays and microprocessors, but these vendors have to deliver the parts to assembling houses or contract electronics manufacturing services (EMS) companies.

Apple does not waste any of its energy to produce leading edge technologies for manufacturing processes that are usually unstable and difficult to use in high process yields. Apple creates the value of the new products with its concepts and software ideas.

One tear down market researcher report I read analyzed the cost analysis for the iPad.

According to this report, the total cost of all components was just over 50% of the iPad’s retail price.

I do not want to agree with this number.

Generally, the manufacturing costs for consumer electronics products from the factory have to be less than 33% of the product’s retail price. This is because of large distribution and marketing costs.

Therefore, the total cost for components must be less than 25% of the product’s retail price so that manufacturers can maintain a high enough margin to cover their labor, overhead, and profit targets.

Another reason I am skeptical about the cost breakdown for the iPad is the credibility of the components prices.

The analyst who gathered all of the component costs may have used a list price or market price for these items.

Typically, consumer electronics manufacturers do not pay retail price for components since they purchase such components in large volumes.

Additionally, much of this type of information must remain confidential and inside companies for obvious reasons.

It’s still too early to tell if Apple hit another one out of the ballpark with this new product. The iPad may be the greatest thing since slice bread, but during hard economic times, the purchase of luxury items moves farther down the list for households struggling financially.

Source: EPT Newsletter, VentureOutsource.com, April 2010

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