Will Apple Choke on These Expensive iPad Parts?

Apple (Nasdaq: AAPL) doesn't like to talk about what's inside its various iDevices. In fact, the company goes to great lengths to keep its component choices as secret as possible. But that doesn't stop third-party analysts from ripping every new gadget apart to figure out Apple's secrets.

IHS iSuppli has a long-standing habit of taking the next logical step: The company matches its findings with pricing information and then reports on the bill of materials for every Apple device (and many fruit-free smartphones and tablets as well). And the new iPad turns out to cost Apple more than the iPad 2 ever did.

Comparing Granny Smiths to Granny Smiths, the total bill for a 16-gigabyte, Wi-Fi-only iPad 3 comes out to $316. That's 29% more than the $245 tab for making an iPad 2 at today's component prices. iSuppli didn't break down a completely comparable model last year, but the 32 GB 4G version today costs $375 to make, compared with $333 for the Verizon (NYSE: VZ) version of the iPad 2. That's a 13% increase.

So Apple won't make quite the profit margin it was used to. On the other hand, consumers are getting a great deal -- at least on the lower-end models. Quadrupling the new iPad's flash memory from 16 to 64 GB adds $50 to the manufacturing cost but $200 to the retail price tag. Likewise, adding 4G networking boosts the retail price far beyond the actual cost of the upgrade. The fatter your iPad choice, the richer Apple gets.


The biggest price jumps obviously come from that stunning ultra-HD Retina Display, which adds $30 to Apple's costs. The high-powered graphics engine in the new processor nearly doubles the price of the processor to $23, all in the name of feeding the pixel-packed display.

The battery is about 40% more expensive, but that's what it takes to light up all those pixels. In short, nearly every extra penny was spent on the screen, either directly or indirectly.

Until Sharp and LG Display (NYSE: LPL) sort out their high-resolution-display issues to join initial supplier Samsung, Sammy takes the lion's share of Apple's orders. Between the screen, making Apple's custom ARM (Nasdaq: ARMH) processor, supplying some memory chips, and reportedly even making the bigger batteries, Samsung stands for about half of the iPad's costs.

Aside from Samsung, iSupply contends that the biggest winner in the new design is Qualcomm (Nasdaq: QCOM). The communications-chip expert provides the core 4G functionality, and it's significantly more expensive than the old 3G chips.

Will consumers overwhelmingly opt for high-speed data and huge memory configurations, or will they take the sensible route and pick the lower-end, less profitable versions instead? The answer, my friend, is blowing in the wind, but it will make a big difference to Apple's profits in the second quarter onward.

A handful of chip suppliers will pocket their profits no matter which iPad model turns out to be the crowd favorite. Check out these three hidden winners of the iPhone, iPad, and Android revolution, including one stock we already discussed here.

At the time this article was published

Fool contributor Anders Bylund holds no position in any of the companies mentioned. The Motley Fool owns shares of Qualcomm and Apple. Motley Fool newsletter services have recommended buying shares of Apple and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.

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