Operations Buzz

The iPhone 4 Supply Chain

November 28th, 2010

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The iPhone 4 Supply Chain

Next time you check email or browse your Facebook page on your iPhone 4, think about this: a symphony of hundreds of parts designed by a multitude of companies from three continents has made it happen.

This post follows the iPhone 4’s supply chain – its part suppliers, fabrication, and assembly. I have included an interactive graphic you can explore and learn more about how your iPhone 4 comes together. Enjoy!

How a phone is designed (See Note 1)

The design and production of a phone is a complex process. Apart from the senior executives who sign off on the final product, phone design is a compromise between the industrial design team, the engineers, and the supply chain team. The industrial design team typically designs the “shell” of the phone – how it looks, the materials used, and how it interacts with the customer. The engineers meanwhile design the “guts” of the phone – the hardware and the software. As you can imagine, there is a lot of back-and-forth between these teams (no points for guessing who wins these battles at Apple) to make certain that the mechanical and electro-mechanical parts in the “guts” work in harmony with the overall design of the phone. After the initial “virtual” design is complete, the engineering team generates a bill of materials. This is where the supply chain team steps in. They evaluate the bill of materials, cost out the product, and working with the designers, engineers, and many of the suppliers, provide input to develop the final design that has the best combination of features and manufacturability.

Many of the design decisions of the iPhone 4 stem from competitive pressures. When Verizon and Motorola’s Driod took a stab at iPhone 3GS for an inferior display, a lower resolution camera, and an inability to run parallel apps, Apple had to respond. Other decisions, like the stainless steel band sandwiched between two panels of engineered glass is the product of the genius of Jonathan Ive, head of Apple’s industrial design team.

I only wish I could be a fly on the wall as these teams argue for their positions. Given Apple and Steve Jobs’ design aesthetic, I suspect Jonathan Ive and his industrial design team weigh in heavily on the final product. For example, the stainless steel housing in the Apple iPhone 4 is completely CNC machined and is much more expensive than any other manufacturing process. My guess is that the Apple supply chain team resisted the CNC machining process (probably recommended the casting process of the previous iPhone 3GS model), but got overruled because the precision-engineered case made the phone lighter and thinner and, yes, its stunning looks trumped any supply chain cost-containment concerns. The supply chain team, however, scored a victory when it comes to sourcing components in the logic boards. Most of the major suppliers for the chips are the same as the iPhone 3GS model, and most of the chips are  “off-the-shelf” making it easier and cheaper to procure them and to execute production. In fact, Apple’s consistently reliable & profitable operations has made their supply chain team led by its COO Tom Cook one of the most envied in the industry — they develop and source from hundreds of suppliers from around the world; manage assembly contractors; set challenging production schedules and deliver better than most in their industry.

The process from design to production typically takes about ten months. Taking the design to market takes up the bulk of this schedule. This includes sourcing the components, testing the phone, getting the phone approved by the FCC, and finally, piloting dry runs in the factory to make sure the phone can be mass-produced. For a typical Christmas delivery, the design & engineering teams start working in January.

Big-ticket items

While Apple does not reveal the components in its products or its suppliers, companies like iSuppli of El Segundo, CA, publish “tear down” reports that reveal the source and the estimated cost of many of the components (see Note 2).

The biggest design change from the iPhone 3GS and the most expensive part of the iPhone 4 is the 326 pixels per inch backlit LCD display which Apple markets as the “Retina Display.” According to Apple, the 326 pixels-per-inch density is so high that the eye cannot distinguish the individual pixels (hence “retina”). It costs $28.50 and is made by LG of Korea. Toshiba, supplier to the previous 3GS model could also be a supplier of the display. It is unlikely that the design of the display will be changed for the next generation of the iPhone – the supply chain team has developed this supply base and large volume orders over multiple years would reduce the cost per display procured.

Apple’s Multi-touch technology lets you interact with the iPhone with your fingers. When you swipe, pinch, or tap, a laminated panel on the iPhone’s surface reads these “gestures” and sends the signals to the Retina Display below it. The touch screen (costing $10) is made by three Taiwanese companies Balda/TPK (See Note 3), Wintek, and Chimei Innolux (45%, 40%, and 15% of the volume respectively). Balda/TPK and Wintek were used before. It is likely Apple is developing multiple sources to keep pace with the demand.

The iPhone’s primary (5 MP with LED flash) and secondary (enabling the Face time application and one-upping the Droid) cameras (costing $10.75) are designed by Santa Clara, CA based OmiVision. The camera lens modules come from Taiwan’s Largan Precision and Genius Electonic.

more text after the graphic…

Multimedia: The iPhone 4 Supply Chain

The following graphic is interactive –click on each of the components and the appropriate suppliers and costs will be highlighted. Mouse over supplier locations on the map to learn more about each of the suppliers. Click the bar chart for competitor pricing. Enjoy! It’s a little slow – it is on another server. For a larger version of the graphic, click here.

The Little Details – The Logic Board

The biggest change in the “guts” of the phone is the Apple designed A4 processor (costing $10.75) which helps run all the software. It is capable of multi-tasking – you can listen to music as you browse the web at the same time. The chip along with the DRAM memory ($13), just like in the previous 3GS model, is made by Samsung of Korea. Samsung is a big winner in the iPhone 4 supply chain — it also makes the flash memory ($27 for 16GB) on which your music, photos, movies, and other data is stored.

When you turn the phone on the side, how do your photos, email, or web page turn with it? How does the iPhone sense a shake, twist, or a jab when you play games (see Steve Jobs play Jenga)?  Apple engineers use an accelerometer coupled with a gyroscope (the gyro is new in iPhone 4) from STMicroelectronics based in Geneva to sense movement. Together, they cost $3.25, not bad for such cool sensors, eh?

Infineon, based in Germany, provides the baseband – chips that help you make voice and data calls (for $14.05). American companies TriQuint, SkyWorks, Intel, and the Japanese manufacturer Murata all provide radio frequency modules (totaling $8.25) to help send and receive data. Broadcom, based in Irvine CA provides the GPS, WiFi, and Bluetooth capabilities of the iPhone ($9.55); and Cirrus Logic of Dallas, TX provides chips that encode and decode audio ($1.15).

The parts may be inexpensive but considering Apple sold 39 million phones in the last year, even small components add up to big numbers for these suppliers. In all, iSuppli’s teardown estimates a total parts cost to be $187.51.

Fab Taiwan

Low costs and backed by a robust national technology policy, Taiwan is a leading center for IC design, fabrication, packaging, and testing. Some iPhone suppliers like Broadcom (the GPS/WiFi/Bluetooth chipset designer) are “fabless” i.e., they design but do not have the facilities to manufacture these chips. They rely on their foundry partner, Taiwan Semiconductor Manufacturing Corporation (TSMC) to fabricate their chips. Even those iPhone suppliers that have their own fabrication facilities like Texas Instruments, Dailog, Infenion, or Skyworks routinely contract chip manufacture to TSMC. Little wonder that TSMC is the largest chip foundry in the world. Even the parts required to assemble the logic board such as the “substrate” and “copper-clad laminates” (these are inputs to the familiar PCBs on which chips are placed) are sourced in Taiwan, an island about twice the size of New Jersey.

They cannot make enough of it

All the parts for the iPhone eventually make their way to Foxconn’s (Apple’s assembly contractor) manufacturing complex in Shenzhen, China. While the major parts of the iPhone 4 — chassis, glass panels, display, touch screen, and logic board fabrication are done by machines, the final assembly is done by hand. Most likely workers are following a precise set of steps (put together by Apple’s design & engineering teams) to assemble the iPhones. Foxconn, a subsidiary of Hon Hai Precision Industry of Taiwan, assembles about 137,000 iPhones a day. That’s about 12.3 million a quarter, not enough to keep up with Apple’s most recent quarterly sales (Q3 of 2010) of 14.1 million iPhones!

Foxconn was in the news all Summer of 2010 for the spate of worker suicides in its Shenzhen facility related to work stress. Workers complained of long work hours and abusive superiors for meager pay (see Gizmodo’s expose with pictures). Since then, Foxconn has responded with program’s to improve worker morale and a 30% increase in pay. Even with the 30% increase, with the average worker makes $176 a month.

Once the phones are put together, the iPhone is distributed via Apple’s own retail network, wholesalers, resellers, and carriers in 89 countries in partnership with 166 carriers.

…and one more thing

Here is a back-of-the-napkin calculation  (see Note 4) of the profits Apple makes on each iPhone:

Revenue per iPhone $629.65
Materials $187.51
Assembly Operations $6.54
Research & Development $17.00
Selling, General, & Administrative $53.52
Misc Costs (Distribution, Licensing, Warranties, etc.) $94.45
Profit before taxes $270.63

Apple sold 39.98 million phones last year. If $270.63 is in the ballpark, then Apple made $10.82 billion profit on the iPhone, 60% of the overall pre-tax profits of $18.38 billion. This is phenomenal considering the iPhone did not exist four years ago!

Steve Jobs was quoted describing the Mac OS X’s Aqua user interface: “We made the buttons on the screen look so good you’ll want to lick them.” It’s better than that. It seems Apple has no trouble having us pay $600 for an iPhone. It’s quality materials, precision manufacturing, and oh, if it adds to your steez, why not?

Contact Ram Ganeshan at ram.ganeshan[at]mason.wm.edu or @RamGaneshan on Twitter
Notes:

1. The content for this section is based on my many interviews with industry insiders.

2. The information on components and their costs come from iSuppli’s teardown reports for the iPhone 4, Blackberry Torch, Motorola Droid, and Nokia N8.

While it is impossible to determine exact manufacturing locations for all the components from public sources, published reports and press briefings (unconfirmed by Apple) identify suppliers in many instances. For example, Taiwan’s Digitimes reports here on details of iPhone 4’s Taiwanese suppliers.

3. Balda is a German company that holds a major stake in TPK. TPK is listed on the Taiwan Stock Exchange (Stock Code 3673) but has manufacturing facilities in Xiamen, China. In all likelihood, the touch screens are made in the Xiamen facilities.

4. For the year ending September 25, 2010, Apple sold 39.98 million iPhones and made $25.179 billion on them – that is $629.65 per phone sold. The cost of parts and assembly are from iSuppli’s estimates from teardown reports. Apple spent 2.7% of Sales on Research and Development and 8.5% on Selling, General, and Administrative Costs. So for every iPhone it averages out to $17 and $53.52 for R & D and SG & A respectively. From my own experience working with firms, I estimate the cost of logistics and distribution, returns management, and warranties, i.e., moving the components to China, phones from China to the stores (“shipping and handling”), paying for inventory, obsolescence, pilferage, fixing phones (given iPhone 4’s antennagate), etc., at about 10-20% of sales. I use 15% to get the $94.95 estimate, although I suspect it is a little bit more than that.

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Comments

  1. MAlar

    February 28th, 2013

    great article on the process flow of apple manufacturing.

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