How Apple could make a truly cheap iPhone 5C

A report on abusive working conditions at Chinese manufacturer Pegatron Systems, which makes products for Apple and other tech firms, may have outed the so-called iPhone 5C, the long-rumored cheap iPhone that supposedly features a plastic case and is supposed to combat the bargain-basement Android smartphones that sell so incredibly well throughout Asia and other poor regions.

A cheap device is not Apple’s standard approach for hardware, whether for MP3 players, computers, peripherals, tablets, or smartphones. In addition, Apple’s premium strategy means it takes most of the industry profits for both mobile devices and PCs. But many analysts say Apple needs more market share to not get shut out by the very popular Android, so it requires a cheaper device. (The discounted iPhone 4 sold in the United States may look cheap, but that’s because it’s subsidized by the carriers, a practice that’s rare internationally.)

Regardless of the right business strategy for Apple, what would it take to make a truly cheap iPhone? According to data from IHS iSuppli, today’s 16GB iPhone 5 has about $200 of components and the 16GB iPhone 4‘s cost about $160. (By comparison, a Samsung Galaxy S 4’s materials cost about $233.) Labor costs are about $25 to $35, and Apple’s overhead — marketing, product development, sales costs, distribution, and so on — adds perhaps $50 more. The rest — about half — is profit margin. To get to a price close to, say, $100 means dramatically reducing the component cost and cutting margins drastically.

How would Apple do that? Using a plastic case instead of the steel and glass in today’s models certainly won’t save that kind of money — today’s iPhone case and related components cost about $33, about a third of which covers the buttons, rockers, and related internals. The iPhone 5’s screen and touch sensors cost about $44, and the iPhone 4’s about $34. The cellular components cost about $34 for the LTE-capable iPhone 5 and $24 for the non-LTE iPhone 4; the Wi-Fi circuitry adds $5 more. The 1GB of RAM on the iPhone 5 is just $10, and the 512MB on the iPhone 4 costs only about 50 cents less; the 16GB of flash memory on both models also costs about $10. The processor costs about $17 for the iPhone 5 and $14 for the iPhone 4. The cameras cost about $18, and the battery and power management components together cost about $13.

Notice how the iPhone 4’s costs are not that much lower than the iPhone 5’s. That shows how the older tech isn’t much cheaper to make. That’s one reason making a cheap iPhone is easier said than done — at least if it’s a device you would want to use.

But there are devices that sell for $100 without carrier subsidies, such as Nokia’s Asha 501, a very low-end touchscreen smartphone that works only on 3G networks and has a minimal 128MB of RAM, 4GB of flash storage, and a very small screen (3 inches diagonally). It’s essentially an old-style cellphone with a modern touchscreen front end, sold in poor countries where labor and overhead costs are also lower. To get to the $100 price, the Asha 501C uses components costing about $60 to $70.

Here are some changes that might get Apple closer, without making the iPhone 5C unsatisfying to use — we all saw a few years ago how too-cheap netbooks fell quickly out of favor even with budget-conscious buyers because they were, well, cheaply made and poor performers.

• Cheapen the case, buttons, and other electromechanical components, using cellphone-quality components. That could save at least $20 in materials.
• Cheapen the touchscreen’s components, using screens that are less bright, less color-accurate, and less responsive, to save $15 off of the iPhone 4’s costs. That may mean forsaking the Retina display, but given that high-density displays are now used by Google, Samsung, and others, I bet their costs are now only slightly more than the older screens. The quality edge may be worth a $5 increase in the price to keep it.
• Cheapen the cameras, and drop the LED and optical-enhancement circuitry, to save about $8.
• Use country-specific cellular components, rather than the pricier multiband ones now used to cover multiple carrier networks. The cellular world is very fragmented, so making a single chip set to handle all the frequencies and technology variants is out of reach, which is why there are different iPhone and Android models for different carriers and regions. But those are still too pricey for a cheap iPhone, so Apple would need to use increasingly specific circuitry, with more country-specific models and no support for lower-tier carriers. This could drop the cost in half, saving $12 or so.
• Drop Siri, to allow use of a less powerful processor; also ditch the high-end 3D graphics coprocessor. These compromises could shave off $3 or $4.

Here are the compromises I suspect Apple would not make in the name of cost, and why:

• Rather than lowering the flash storage to 4GB or 8GB, the iPhone 5C would retain 16GB, so there’s enough capacity for music, video, documents, and apps — all the stuff that Apple sells through iTunes and iCloud, and one of the key advantages of an iPhone. Likewise, it would pay the extra 50 cents for having 1GB of RAM, which iOS really benefits from — iOS 6 and, from all indications, iOS 7 hit the limits of the iPhone 4’s 512MB.
• If sold in North America, Japan, Korea, Taiwan, and Europe, the iPhone 5C would support LTE networks, even thought that adds $10 to the materials cost. The “rich nation” version would need to cost $25 more to support that.

Here are the major costs compared side by side:

My proposed cost savings would save $60 over the cost of an iPhone 4, bringing the iPhone 5C’s component cost to about $110 — to resemble an iPhone 3G S. A simpler phone should be accordingly simpler to manufacture — and Apple would need to redesign the iPhone 5C for straightforward, highly automated assembly — to get the cost down to $15, saving another $10. That brings the total manufacturing cost to $125.

You then have an iPhone 5C that still costs more than an Asha 501 but would feel like a real smartphone. That iPhone 5C’s $125 device cost would leave little profit for Apple or its carriers, even factoring in shared profits from cellular plans and Apple’s cut of apps and iTunes revenue generated by users — there are still distribution, sales, marketing, and overhead costs to factor in, never mind profits. But it is possible to get an iPhone 5C that would retail for $125.

The question then becomes whether Apple would be robbing rich Peter to pay poor Paul, hurting its premium brand and perhaps the sales that make it so much profit. But that’s an issue for Apple’s financial strategists.

This article, “How Apple could make a truly cheap iPhone 5C,” was originally published at InfoWorld.com. Read more of Galen Gruman’s Mobile Edge blog and follow the latest developments in mobile technology at InfoWorld.com. Follow Galen’s mobile musings on Twitter at MobileGalen. For the latest business technology news, follow InfoWorld.com on Twitter.