I think the analysis is a little off in a recent posting by Dominique Numakura about the cost of a product like the iPad.

Numakura states: “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.”

In a teardown analysis performed for Dartmouth by my colleague Jim Hall of ITM, Jim used cost metrics similar to Numakura’s, for a hairdryer. The hairdryer cost $20 at a CVS drugstore. The same model is manufactured overseas for CVS and other stores, like Walgreen’s, with perhaps a different label. After manufacture, the hairdryer is shipped to a distributor. From the distributor, it was then shipped to the drugstore. So assuming that the manufacturer has to make it for 33% of $20, or about $6.70, the distributor needs to get $3 dollars or so, shipping several times adds another few dollars and it gets to the drug store for $13-$16 or so. Many hands have touched it by now, all adding cost.

For something more expensive and complex like the iPad or a laptop, this analysis is considerably off. There is no distributor, the number of hands touching these devices is minimized by the parent company. Less shipping is involved. I’m sure folks that make these products wish the margins were like Numakura suggests.

Recent analysis performed by iSuppli, which I think Numakura takes issue with, is closer to the mark, I think. iSuppli suggests that the BoM (bill of material) for the entry level iPad ($499 retail) is about $250 or 50% of the sales price. I actually think iSupply’s estimate of the assembly cost ($9.00) is too low.

In the past, Prismark had suggested that assembly and test is in the 10 to 15% range of total price, indicating something like $50 for our iPad. From another assembly cost perspective, a rule-of-thumb is that it costs between $0.05-$0.10 per component to assemble and test an electronic device. It is hard to imagine that the iPad has only 200 total components (including passives!), that a $9 assembly cost would require. Hence, I think the assembly cost would be more than $25. If so, this suggests a total cost of about $275 for the $499 iPad, still leaving a quite healthy gross margin of 45%. Commodity type electronics in the multiple hundred dollar range (e.g., a “vanilla” laptop or a 32” flat panel TV) almost certainly don’t enjoy these levels of gross margins; probably more like 10 to 20%.

While preparing to write this post, I shopped at a BJs. I saw a 32″ flat panel TV for $379. It is hard to image that the BoM for this TV would be $95 as Numakura suggests.

Cheers,

Dr. Ron