Apple's Tim Cook pans supply chain cost 'guesstimators'

Posted:
in General Discussion edited April 2015
During the company's quarterly earnings call on Monday, Apple CEO Tim Cook slammed third-party firms that routinely provide estimated bill of materials breakdowns for new Apple products, saying they are usually far off base.


iPhone 6 Plus teardown. | Source: iFixit


"I've never seen one that's even close to accurate," Cook said of the oft-quoted estimates. His relatively strong reaction was prompted by a question regarding perceived weakness in launch margins for the Apple Watch.

This is not the first time Apple has attacked supply chain analysis services over inaccurate costing. In 2010, then-CFO Peter Oppenheimer took them to task on an earnings call after one such firm, iSuppli, reported that the iPhone 4 cost Apple just $188 to build.

"Let me begin by suggesting that you don't put a lot of credence in these third-party reports that you see," Oppenheimer said. "It's always amazing to me the cost categories and the components that never seem to make it into the reports."

iSuppli's analysis of the iPhone 6, for example, concluded that the handset costs Apple just $216 for the 16-gigabyte model, much lower than its $649 starting price. This analysis does include labor, but does not appear to take into account marketing or other costs.

Most estimates consider the raw cost of components only, and underestimate or ignore ancillary costs like marketing, software development, logistics, or patent royalties that can quickly add up.
«13

Comments

  • Reply 1 of 45
    vfx2k4vfx2k4 Posts: 43member
    Yeah I always read this with a chuckle. It's like- sure go ahead and make your own from scratch at that price if it's so simple. With no existing model to copy from...
  • Reply 2 of 45
    Yeah, they never include the considerable CapEx and R&D.
  • Reply 3 of 45
    cornchipcornchip Posts: 1,942member
    Not to mention the cost of employing hundreds of designers and engineers to design & prototype & test the things, and so much more.
  • Reply 4 of 45
    Why doesn't iSuppli ever break down the cost of a car? Any car.

    They have automotive reports, but don't dare report on costs.
  • Reply 5 of 45
    sockrolidsockrolid Posts: 2,789member

    Originally Posted by AppleInsider View Post

    His relatively strong reaction was prompted by a question regarding perceived weakness in launch margins for the Apple Watch.

     

    The Apple-is-doomed crowd is running out of spin.

    Making up supply chain and margin numbers is just about their last resort.

  • Reply 6 of 45
    SpamSandwichSpamSandwich Posts: 33,407member
    Quote:

    Originally Posted by SockRolid View Post

     

     

    The Apple-is-doomed crowd is running out of spin.

    Making up supply chain and margin numbers is just about their last resort.




    And they'll continue to lie. After all, they have to make a living somehow. LOL!

  • Reply 7 of 45
    sockrolidsockrolid Posts: 2,789member

    Originally Posted by sog35 View Post



    Just like a couple people here who thought Apple makes 50% gross margins on ipods.



    These idiots firms also thing restuarants have 90% margins since cows only eat corn so they are cheap.



    These firms are just trying to spread Googles lies that Apple is charging consumers too much.

     

    “We’re not in the business of collecting your data.”

    - Eddie Cue, 9/9/2014 (iPhone 6 / ?Watch / ? Pay event)

     

    Lookin' at YOU, Google.

    ;-)

  • Reply 8 of 45
    wizard69wizard69 Posts: 13,377member
    vfx2k4 wrote: »
    Yeah I always read this with a chuckle. It's like- sure go ahead and make your own from scratch at that price if it's so simple. With no existing model to copy from...

    cornchip wrote: »
    Not to mention the cost of employing hundreds of designers and engineers to design & prototype & test the things, and so much more.

    Yeah, they never include the considerable CapEx and R&D.

    Why doesn't iSuppli ever break down the cost of a car? Any car.

    They have automotive reports, but don't dare report on costs.

    I think you guys mis the point of such reports. They are an estimate that covers the production of a piece. Think of it as the cost of a bag of parts that goes into an iPhone. R&D, overhead, marketing and other stuff doesn't come into play here. The only thing wrong with these estimates is that so few understand them that it is a pretty pathetic example of Americas educational systems.

    As for Tim Cooks comments - executives say a lot when they don't want to say much. The actual cost to produce each iPhone is most certainly a closely guarded secret at Apple and I'm certain they have no desire to hint at or confirm anybody else numbers.
  • Reply 9 of 45
    mr. hmr. h Posts: 4,870member
    wizard69 wrote: »
    vfx2k4 wrote: »
    Yeah I always read this with a chuckle. It's like- sure go ahead and make your own from scratch at that price if it's so simple. With no existing model to copy from...

    cornchip wrote: »
    Not to mention the cost of employing hundreds of designers and engineers to design & prototype & test the things, and so much more.

    Yeah, they never include the considerable CapEx and R&D.

    Why doesn't iSuppli ever break down the cost of a car? Any car.

    They have automotive reports, but don't dare report on costs.

    I think you guys mis the point of such reports. They are an estimate that covers the production of a piece. Think of it as the cost of a bag of parts that goes into an iPhone. R&D, overhead, marketing and other stuff doesn't come into play here.

    Exactly. None of these numbers factor into the gross margin on a product. A product’s gross margin is equal to the difference in sell price vs. price of parts + manufacturing + shipping, and that’s it. All this other stuff contributes to Apple’s operating costs and it’s why operating margins are always significantly lower than gross margins.

    What Tim Cook was saying, is that even the estimates of the parts costs are totally wrong. I’m not surprised. How on earth can iSuppli possibly know, for example, how much Apple pays for its screens and SoCs, given that these are not industry-standard parts? Answer - they can’t and just pull numbers out of their bum.
  • Reply 10 of 45
    konqerrorkonqerror Posts: 685member
    Quote:

    Originally Posted by Mr. H View Post



    What Tim Cook was saying, is that even the estimates of the parts costs are totally wrong. I’m not surprised. How on earth can iSuppli possibly know, for example, how much Apple pays for its screens and SoCs, given that these are not industry-standard parts? Answer - they can’t and just pull numbers out of their bum.

     

    Screens maybe, but SoCs and the commodity chips like flash are all standard parts. For SoCs, fabs like TSMC/Samsung don't charge based on the design, they charge based on the die area and process. That's all that matters for them.

     

    The difference, I suspect is that Apple pays for far more stuff as capital costs than their competitors, so their unit costs are far less. For example, Apple makes their own processor core. So ton of capital costs, but no per-chip licensing fees. Likewise, I think Apple outright buys the CNC machines for their casings for their suppliers, so that cost is not reflected in unit costs. 

  • Reply 11 of 45
    mr. hmr. h Posts: 4,870member
    konqerror wrote: »
    mr. h wrote: »
    What Tim Cook was saying, is that even the estimates of the parts costs are totally wrong. I’m not surprised. How on earth can iSuppli possibly know, for example, how much Apple pays for its screens and SoCs, given that these are not industry-standard parts? Answer - they can’t and just pull numbers out of their bum.

    For SoCs, fabs like TSMC/Samsung don't charge based on the design, they charge based on the die area and process.

    This is certainly true, but do you really think that TSMC/Samsung charge the same rate to all customers? It’s clear that Apple are playing TSMC and Samsumg off against each other - how can iSuppli possibly know, legally, what TSMC/Samsung charge Apple?
  • Reply 12 of 45
    Quote:

    Originally Posted by sog35 View Post



    These idiots firms also thing restuarants have 90% margins since cows only eat corn so they are cheap.

    Cows eat corn?

     

    Not here in NZ they don't. They might have corn feed as a supplement but we feed our cows on grass here.

  • Reply 13 of 45
    stourquestourque Posts: 364member
    These are the marginal costs - the cost to produce 1 more. Accuracy? Who knows, but it's a starting point.
  • Reply 14 of 45
    The tear-down shops acknowledge that they don't know the details of Apple's deals with components suppliers, so they make no pretense of being accurate.

    Clearly the numbers don't measure the full cost of manufacturing an iPhone, but they provide a reasonably good measure of the marginal cost of production and they also provide a basis for making comparisons between iPhone and other phones -- not only Android phones, but iPhones from the past. The problem lies not in the data, but in the way it is interpreted or applied.

    As for Cook, it is to his (Apple's) advantage to include overhead costs in the discussion to minimize ill will toward the company. However, when he mentions the "leverage" achieved by producing larger unit volumes in the first half of the model year, he is referring to higher profit margins achieved because management and other overhead costs are independent of unit production figures.

    If everyone stopped releasing imprecise figures and guesses, the Apple-watching business would grind to a halt.
  • Reply 15 of 45
    gtbuzzgtbuzz Posts: 129member
    Well . . . the writers have to write about something . What a bunch of total baloney they write and the editors are not any better. No one knows Apple's cost for anything. One can only imagine what it costs to conceive, design, produce, test, ship, market, etc. a product. The costs change with each order and by the time the R&D is amortized across all the products produced, the next product launch is on the way. These products are insanely expensive or everyone would be making them. Each product builds on the previous one - including the watch. And if the analysts were right, they would not have to continuously revise the estimates - they make a living doing this and do you ever hear them say they were wrong - Nope.
  • Reply 16 of 45

    iFixIt: Clueless as ever and now berated by Tim Cook. I can't stand iFixIt and their simplistic view of technology and progress. I hope their business folds soon.

  • Reply 17 of 45
    Quote:

    Originally Posted by ElectroTech View Post

     

    iFixIt: Clueless as ever and now berated by Tim Cook. I can't stand iFixIt and their simplistic view of technology and progress. I hope their business folds soon.




    I just wish AI and the rest of the tech websites would stop paying attention to them, but their teardown are free publicity, and sites like AI get clicks for linking to them. It doesn't even matter whether their BOM estimates are accurate or not.

  • Reply 18 of 45
    maestro64maestro64 Posts: 5,043member
    Every time these companies come out with their cost estimates I have said they are completely wrong. Glad to see cook slamming these idiot. I personally know the cost of many of these parts and I can not believe how wrong these supply chain analyst are. Not sure where they get their cost from but unless your buying from these suppliers the suppliers will not tell you the costs.
  • Reply 19 of 45
    mac'em xmac'em x Posts: 108member
    Quote:

    Originally Posted by ElectroTech View Post

     

    iFixIt: Clueless as ever and now berated by Tim Cook. I can't stand iFixIt and their simplistic view of technology and progress. I hope their business folds soon.




    iFixIt? The nice people who publish how-to repair guides? 

     

    The "research" company referenced in the article is iSuppli, not iFixIt.

  • Reply 20 of 45
    v900v900 Posts: 101member
    vfx2k4 wrote: »
    Yeah I always read this with a chuckle. It's like- sure go ahead and make your own from scratch at that price if it's so simple. With no existing model to copy from...

    Ehm ok... I suppose
    That could be an interesting exercise. But that has nothing to do with what isupply et. al are trying to do. They're trying to estimate how much it would cost Apple to make one.

    The price of many of the parts are well known, the biggest factor is what kind of discounts Apple is able to get, what kind of royalties they're paying and those kinds of finer details.

    We more or less know what profit margin they have on their products, so we know that an iPhone costs somewhere around 300$ to build. Plus/minus around 80$ depending on the actual model. isupply's 218$ estimate may be 10-20% off the mark but not more than that.
    Yeah, they never include the considerable CapEx and R&D.

    Except that Apple doesn't have much of either of those, since that cost for the most part is passed on the manufacturers. Compared to other tech companies Apple doesn't spend much on R&D.

    And nowhere near the billions of dollars a new processor node may cost, or the hundreds of millions of dollars a new screen technology may cost.
    cornchip wrote: »
    Not to mention the cost of employing hundreds of designers and engineers to design & prototype & test the things, and so much more.

    Peanuts. Mere peanuts with the kind of volume we're talking about. Even if Apple had a thousand engineers each earning a million dollars a year, (assumptions that are too generous by several hundred percent) the total cost to each iPhone sold would be less than 4 dollars.
    Why doesn't iSuppli ever break down the cost of a car? Any car.

    That's like saying "So you can run, big deal, let's see if you can play chess!" To an Olympic medal winning marathon runner.

    It's a completely different business, with completely different factors in play, where the kind of price teardowns that are done with cellphones are impossible. (For one thing because car manufacturers produce lost parts themselves, whereas cellphones are made largely of "off the shelf" components. I could call Qualcomm tomorrow and get a quote for the same kind of radio chips that Apple puts in their iPhones, but you can't call Fords engine factory, and have them build you some Ford engines for a competing car company.)
    sog35 wrote: »
    Just like a couple people here who thought Apple makes 50% gross margins on ipods.

    Are you seriously claiming, that after all these years, Apple isn't making 50% margins on any of their iPods? Or that they didn't the last year they were in production?

    Just the iPod shuffle easily gets Apple a profit margin of several hundred percent...
    These firms are just trying to spread Googles lies that Apple is charging consumers too much.

    Why would Google spread lies about Apple? They're an advertising company. They don't really care whether they earn their profits from people watching ads on an iPhone or an Android device.
Sign In or Register to comment.