Tim Cook: Component Cost Breakdowns on Apple Products Are Nowhere Close to Being Accurate

[ZCT]

So I would imagine that these cost breakdowns are fairly accurate, and even if they are in the realm of $200 less then the actual costs, Apple is still enjoying a profit margin that on average nearly doubles the unit costs to manufacture the product.

So based on absolutely no facts or information, you think you know the numbers better than the CEO of Apple?

While part costs are not the only thing to factor into the actual cost of a product, Apple is not the most profitable company in the world right now because they are barely squeaking by on profit margins.

Wow, in half a sentence you ignore the millions of dollars of R&D, prototyping, staff training, manufacture, tooling, quality control, advertising, in-store displays, logistics, shipping, infrastructure, software engineering, and so on?

I actually believe Tim Cook when he says they are making less margin on the Apple Watch right now than other products. For every unit sold, some percentage of that is having to offset the millions of dollars it took to arrive at this point in time.

For the product to actually be successful, it has to pay for itself and then make a profit.

Apple has ALWAYS charged an APPLE TAX on every product they have ever sold. Tim Cook claiming that these estimates are "way off" and that the price is justified by how "amazing" something is is disingenuous. As the CEO of one of the greediest companies in history, he has a responsibility to downplay these numbers and make it seem like Apple is bringing forward a more value conscious product, all to get people to throw money at them for something that is 2 or 3 times cheaper to make then its retail costs.

You could argue that about any company who makes a good product. Bose. Bang & Olufsen. Mercedes.

There will always be companies that mass produce cheap products, and those that produce higher end products and charge a premium for them.

Since you lack some fundamental understanding of how business works, you might want to watch Shark Tank or The Profit on TV. Both shows often talk manufacture costs, margin, wholesale, retail etc. It might give you a better understanding.

You think Apple could even hope to cover their costs if they made a watch for $200 and sold it to consumers for $249?

Case in point, there is not ONE watch band that costs more then $50 in parts. Looking on Apple's website I am seeing a watch bands that cost up to $10,000 more then the Gold Edition watch, for a piece of plastic or leather. That is just ****ing criminal, period!

I beg to differ. Although in any case what have parts got to do with anything whatsoever? It's about ALL the costs.

The stainless bracelet Apple claims to spend nine hours just cutting the 100 or so parts to make it. It has to be hand polished to create that brushed look. You're telling me that they can buy a block of 316L steel, and have machines spend nine hours cutting it to the right shapes, then hand finish it for $50? You including the cost of going from initial concept to final retail quality in that?

As for the gold, I've already explained this elsewhere on this forum. Apple had to invest all the same money that they did inventing the aluminum and stainless models, but they are using a precious metal which is always going to reduce the number of buyers. So not only do you have the cost of buying the gold, you have all the R&D and prototyping and the obvious reality that sales of this product will be a tiny fraction of sales overall.

Built into the cost of the gold Edition is the enhanced buying experience, the extra training the Edition specialists needed, and all the logistics of selling that kind of watch (extra security, increased shipping costs, increased loss prevention measures and so on). All for a niche product that will sell in small numbers.

 

[Dub1ous]

What is there to defend? You made a completely false implication.

Haven't you heard? Unless you're calling Apple greedy and putting them down for everything around here, you're automatically labeled an "Apple apologist".

 

[ZCT]

Yes, the silicon bands must have an insane margin... Molded silicon like that could cost less than a dollar, so in total, the bands cost maybe a couple dollars to make. Don't understand why apple didn't make them cheaper so they could be 'collectable' and spark more sales.

Also, I really don't want to see (for $ sake) an Apple watch band with an embedded battery becauseu that'd cost more than the watch itself. And then I'd have to buy one.

You can't really take a single item like the silicon band and talk about 'insane margin.'

It is one component of a multi year multi million dollar development for Apple.

Everything that Apple sell relating to that Watch, be it bands, chargers, bracelets and so on, all have to contribute back to whether ultimately this entire project is a success or failure.

I'm sure that now Apple have the design for the Sport band, they can make them fairly cheap. But it would have cost a fortune to create that design, choose the materials, the colors, torture test them, prototype and all that stuff.

Why would they have to gain to sell them for $9.99 only to cheapen the entire product line?

I just priced a rubber band for my watch. A cheap knock off is $24.90. A genuine branded one is $200. And the buckle is extra, and probably more expensive than the band.

In fact I just spotted two tiny branded rubber 'keepers' that you can put on the band with an eBay buy it now price of $68.

So yeah, I don't really accept that Apple's $49 is outrageous. If you can't afford to spend $49 on a spare band, maybe you should not have bought the Apple Watch in the first place.

Also in case you hadn't noticed, Apple can't even keep up with the demand at this price. Where would the logic be in slashing the prices and have even more orders they could not fulfill?

 

[whatos]

This article isn't just about the Apple watch. Apple makes huge margins. Fact. How do you find that to be a ridiculous statement?

It's your intelligently presented points that they fear.

The voice of logic and reason is destabilizing their deep emotional connection to the company that defines them.

I happen to find your honesty and accuracy very refreshing...

 

[ZCT]

unless you (CooK) wants to actually release your material cost break down, I advice you to shut the hell up.

Don't give misleading information like that and then not backing it up with actual number. With profit margin at close to 40% (Including R&D and ridiculous amount paid to Angela), it's almost like Bill Gates talking about how much taxes he has to pay... NOBODY CARES

Perhaps the CEO of Apple does not want or need your advice?

Fact is they made a good product. I've been impressed with how well they put it together. I don't care if they figured out how to make it for $1 and sell it to me for $500. And I don't understand why some blowhards on the Internet are so obsessed with precisely how Apple chooses to price their products, or their perceived profit margin (a term that seems to confuse many on here).

Apple have made a product, it is for sale, you can choose to buy it or not buy it. But your opinions of whether Tim is lying or what you think he pays Angela have no merit.

 

[laurim]

It's your intelligently presented points that they fear.

The voice of logic and reason is destabilizing their deep emotional connection to the company that defines them.

I happen to find your honesty and accuracy very refreshing...

OMG- thanks for the early morning laugh! Is this what passes for intelligence now? People on here obviously don't know what things like R&D and contract manufacturing costs so they need to stop talking about it and embarrassing themselves. We get it. You have an irrational hate for Apple that blinds you to logical thinking.

 

[Dub1ous]

Apple is greedy, they shouldn't try to make money!! They should give away everything for free!!!

Am I doing it right?

If you think they're screwing you, vote with your dollar and don't buy the product.

 

[2457282]

For as long as I can remember, people seem to think R&D is free.

Look at it from the top line. Apple stated in the earnings call that they are in 40% profit range accross all their products. That is all in I assume, including R&D. Clearly, just the physical materials is not the total cost, as you have marketing, packaging, R&D, software, overhead, etc.

However, there are very few industries or companies that make 40% profit. So it certainly would not be fair to say that they are thin or small margins. I have worked in multiple industries where the margins were in the single digits. The amount of cash reserves and net profit shows that they could give back a lot. They are to investors through dividends and stock repurchase. They are also in some ways doing that to consumers by giving away the software which once used to cost. But it would not hurt to lower the cost of the prodcuts a little either, would it?

 

[ZCT]

like Apple's executive compensation? For Tim, Angela and co?

This has nothing to do with Apple.

All over this country there are CEOs and board members getting paid hundreds of times what the average worker gets paid. This is not uncommon.

What's disturbing is that there are companies like Sears out there paying their board members millions as the company crashes and burns.

At least the management team at Apple are running a successful company.

 

[winston1236]

For as long as I can remember, people seem to think R&D is free.

Exactly, and with most products updated continually it's a never ending background process.

 

[DynaFXD]

This is not how contract manufacturing usually works. In Apple's case, I really don't know.

Uh....doesn't it kinda end there?

 

[mdelvecchio]

I'm amazed at the lengths people go to defend anything Apple says or does...even when it's deflecting the fact they make ridiculous margins on their stuff.

Meanwhile insurance companies, big pharma and the oil industry get crucified if they dare to be profitable.

Guess that's one of the perks of making electronic toys everybody loves...

that isnt why people hate certain companies, like insurance companies. people hate insurance companies because they make huge profit not delivering a product or service most of the time; then, when you actually need them to deliver, the companies try to worm out of it and deny your claim. example, insurance companies made massive profit in the south for decades; then, after hurricane katrina they tried to get out of paying as many honest claims as possible. that doesnt win fans with us long-time payers.

 

[SirCheese]

http://store.apple.com/uk/product/MJ5J2/42mm-link-bracelet £379 and:

"… nearly nine hours to cut the links for a single strap. …"​

I haven't sought detailed information about that cutting process. Is it:

a) each cutting machine limited to no more than one link at a time; or

b) each machine capable of concurrently cutting multiple links of a single width?

For economy and other reasons, I hope that (b) is true.

Either way, I would not find £379 appealing.

You believe that? I don't.

 

[gnasher729]

Look at it from the top line. Apple stated in the earnings call that they are in 40% profit range accross all their products. That is all in I assume, including R&D. Clearly, just the physical materials is not the total cost, as you have marketing, packaging, R&D, software, overhead, etc.

It's not, because the 40% are gross margin. The gross margin is how much Apple is better off if you buy that Apple Watch / iPod / iPad / iPhone / Mac. It is the difference between what you pay to Apple, and all the cost that Apple has because you are buying that one device. Cost that Apple has whether you buy the device or not are not included in gross margin. R&D cost would not be included. Software cost would not be included, unless Apple has licensed some software with a contract to pay $x dollar per Apple Watch shipping with the software, for example. Warranty repairs and replacements affect gross margin. Returns affect gross margin.

For a more extreme example with higher gross margins, take a hairdresser who has to spent lots of money for rent, heating, staff etc. even if no single customer comes in. But once a customer comes in, the cost of giving that customer a haircut is close to zero. You have huge gross margin. But you need that to cover the cost of running your business. The hairdresser can go bankrupt with 90% gross margin if the rent is too high.

 

[gnasher729]

I think that gets at a key point. they are doing incredibly well. it's just that people see their cash pile and start saying it's because of all these ridiculous percentages are being added to their products. I don't doubt that apple makes a higher margin than most.. 'Apple tax' or whatever.

but it's not some crazy additional percent like 20-40-60%...maybe 1-2% higher than competitors.

1-2% on 200billion revenue equals $2-4billion extra per year.. when selling at the volume these huge corps sell at, it doesn't take much extra per item to equal giant wads of cash.

but don't doubt for a minute Samsung etc wouldn't add that 'tax' to their product if the could get away with it.

It's actually more than 1-2%. It's just not the ridiculous numbers that are quoted.

The ridiculous number is comparing retail price and cost of parts, getting a 70% number and calling it "profit margin", which is a meaningless word in itself.

The slightly misleading number is Apple's "gross margin". That one is around 40%, sometimes a bit less, sometimes a bit more. It's just not profit.

The real numbers that count are $58 billion revenue and net profit of $13.6 billion in the last quarter (Jan - Mar 2015). That's about 23% net profit. Which is a lot more than 1-2%. It's also a lot more than 1-2% better than the rest. It's just not 40%, and not 70%. And out of the $13.6 billion, taxes have to be paid.

So what I'm saying is: Apple does indeed make tons of money. Apple just doesn't make the totally ridiculous amount of money that some people claim.

 

[2457282]

It's not, because the 40% are gross margin. The gross margin is how much Apple is better off if you buy that Apple Watch / iPod / iPad / iPhone / Mac. It is the difference between what you pay to Apple, and all the cost that Apple has because you are buying that one device. Cost that Apple has whether you buy the device or not are not included in gross margin. R&D cost would not be included. Software cost would not be included, unless Apple has licensed some software with a contract to pay $x dollar per Apple Watch shipping with the software, for example. Warranty repairs and replacements affect gross margin. Returns affect gross margin.

For a more extreme example with higher gross margins, take a hairdresser who has to spent lots of money for rent, heating, staff etc. even if no single customer comes in. But once a customer comes in, the cost of giving that customer a haircut is close to zero. You have huge gross margin. But you need that to cover the cost of running your business. The hairdresser can go bankrupt with 90% gross margin if the rent is too high.

Okay, you caught me with my shorts down. Please do not stare.

you are correct on all points. I would add that after missing the fact that the 40% was gross and not net profit I went back and looked it up. Net profits of $13b on $58b in revenue. Not 40%, but 22%. Still a huge number in almost any industry where the average is in the single digits and some industries are in the teens.

Edit: I see the post above this has this covered as well.

 

[Tech198]

only $199 cost component for the iPhone 5s ?

bloody hell!!... Apple richer than I thought No wonder they can bring out flashy gizmos...

 

[anomie]

Most likely the cost of an iPhone is even lower than estimated

 

[ebouwman]

All you need to do is not be blind. iPhones and iPads looked like nothing before them, and after them all other smart phones and tablets looked like them

The Apple Watch already looks like what's been available by other manufacturers.

There's no "to be fair" argument here. Just you know... Look at them.

They still had to do R&D for all the components like the custom SOC and.... pretty well every single compontent in the thing + the software.

I really don't think there are many off the shelf parts in the apple watch, it's not like they looked at the current offerings (which I'm sure were al released to the public after Apple started working on theirs) and just copied them and their components.

What exactly do you think think putting a product like this together entails? Are you so naive to think they can slap stuff like this together with little of no R&D?

 

[AppleScruff1]

What do you expect from the most successful company in the world? A charity?

Not at all. What do you expect?

 

[kdarling]

Cook did NOT say " Component Cost Breakdowns on Apple Products Are Nowhere Close to Being Accurate," as the thread title claims.

"Component" was not part of it. He simply said "cost breakdowns".

And he's right, if people just use the build cost. Everything else has to be accounted for, as well.

--

Now, by examining Apple's financial reports and previous secret info revealed during trial testimony, I do think the rest of it can be estimated pretty well. A couple of years ago, I did such an analysis for the iPhone. I'll repeat it here:

At the time, Apple made an average 53% gross profit margin ($340) on iPhones. That's their raw revenue after paying for the parts, manufacturing, packaging, shipping, and IP royalties per device.

Of that $340 gross per phone, about $20 goes to R&D, $50 to support Apple employees and buildings and sales and ads, and $70 is put aside for taxes... leaving a net profit of $200 (30% net margin) per phone.

Note that the R&D portion allocated here is probably high. Perhaps double or more. iPhone revenue is so much higher than other devices, it undoubtedly subsidizes R&D for lower margin devices like the iPad, iPod, Apple TV, etc.

Summary: Out of the $640 Apple sells each iPhone for, I think that $300 goes to making it, $140 goes to corporate costs, leaving $200 or more clear profit to stick in the bank.

AFAIK, the only other phone maker who used to get 30% net was RIM back in the heyday of Blackberries.

Contrary analyses welcome.

 

[clibinarius]

Sure. It's not like Apple did anything like release a 64-bit processor or fingerprint sensor that took Samsung 18 months to match.

My Nintendo 64 has a 64-bit processor of sorts. The technology exists, naturally, the question is in feasibility and profitability. While there's certainly nothing wrong with releasing them, I am not sure they're as "innovative" compared to a bigger screen; after all, I bought an AMD K well over a decade ago when it first came out and it was a sweet chip at the time. Innovative? Well, manufacturing techniques by AMD made it possible. But the things were sitting on AMD and Intel's drawing boards for years...

And Apple didn't invent TouchID. They bought a company that made them. Prior implementations were left wanting. Also I'm not convinced that TouchID is particularly safe for a concerned thief, but for what it does, its fine.

I don't care how many Apple products you own or if you're a fanboy, you may have the gumption to rise above that and come out against Apple on something but you're doing it unnecessarily. Samsung does not invent technology, they invent ways to refine manufacturing of that technology. They usually don't even come up with the original method of manufacturing. Samsung doesn't create ARM processors, ARM does. Samsung makes a variation...and Apple has been making their own variation of ARM, by contracting Samsung to manufacture it. Samsung didn't invent storage or RAM, they didn't invent LED or OLED, they didn't invent Flexible OLED or Transparent OLED. There's virtually nothing you can point to that Samsung pushed into the current technology world.

I believe their amount of FRAND patents (versus Apple's) would strongly disagree with you. But hey, who needs facts when you have opinions. Apple didn't invent LCD, Fingerprint censors, 64 bit processing, ARM processors...nothing you say puts them in a league above Samsung. What makes Apple great in my view is that they're often first on marketing a new product. They're not always the best, and they're not always first, but they have a way of selling technology that gets people on board well. I use Apple Products because I simply don't have to think about them. That's a great thing! But no, that isn't to misuse the Jobs quote. I'm a composer-I get what he's saying. As John Lennon said, it isn't a rip-off, it is a love-in. But come on, Apple routinely accuses its competitors of a lack of innovation. And I've used PalmOS and WebOS for longer than I've used iOS. I've used Apple IIs and IBM Tandy. What you say...its just not true that Apple is any more inventive than others. What standards has Apple invented that have really caught on? Answer: None. And I don't care if they invent any, so long as their products are, for me, good.

 

[KPOM]

My Nintendo 64 has a 64-bit processor of sorts. The technology exists, naturally, the question is in feasibility and profitability. While there's certainly nothing wrong with releasing them, I am not sure they're as "innovative" compared to a bigger screen; after all, I bought an AMD K well over a decade ago when it first came out and it was a sweet chip at the time. Innovative? Well, manufacturing techniques by AMD made it possible. But the things were sitting on AMD and Intel's drawing boards for years...

And Apple didn't invent TouchID. They bought a company that made them. Prior implementations were left wanting. Also I'm not convinced that TouchID is particularly safe for a concerned thief, but for what it does, its fine.

The difference was that by switching to ARM v8 Apple was able to leapfrog everyone else in terms of performance, and enable a lot more powerful applications for mobile devices, particularly games. As for buying technology, it was there for the taking. They saw an opportunity that others passed on.

 

[2IS]

They still had to do R&D for all the components like the custom SOC and.... pretty well every single compontent in the thing + the software.

I really don't think there are many off the shelf parts in the apple watch, it's not like they looked at the current offerings (which I'm sure were al released to the public after Apple started working on theirs) and just copied them and their components.

What exactly do you think think putting a product like this together entails? Are you so naive to think they can slap stuff like this together with little of no R&D?

I didn't say there isn't any R&D, i'm saying they already had a not so rough template to follow. Approximate size, shape, screen/battery type where in large part already known factors. They took what was out there and made it their own. That takes a lot less R&D than doing something that hasn't been done. The OS is a modified version of iOS, not something built completely from scratch.

Why do such simple concepts elude the apple fans around here? It's like you lose 100 IQ points when you read something you don't want to read. What I said was hardly confusing, but hopefully this more elementary reply clears it up for you.

 

[s2mikey]

This has nothing to do with Apple.

All over this country there are CEOs and board members getting paid hundreds of times what the average worker gets paid. This is not uncommon.

What's disturbing is that there are companies like Sears out there paying their board members millions as the company crashes and burns.

At least the management team at Apple are running a successful company.

Yeah, extremely successful yet they still use ultra cheap, almost slave labor when they could easily provide thousands upon thousands of great jobs right here in the USA which we desperately need. But, the psychopathic, never happy big shareholders are eternally miserable so it can't happen.

No one cares what the bosses or CEOs make when the workforce is taken care of properly. Like it used to be in this country. Oh well.