iPhone 4S supply chain explained: The winners and losers

As has been the case with every new iPhone, the arrival of iPhone 4S marked re-shuffling on the supply chain end as some parts makers fell out of favor with Apple’s management and new ones surfaced to pledge allegiance to the Cupertino, California consumer electronics powerhouse. Partnering with Apple is good business for far-flung suppliers, most of whom are based in Taiwan and China. It’s also a one-of-a-kind privilege to work with the world’s leading technology company notorious for pushing the envelope with advanced manufacturing techniques that have not been tried before. The winners and losers, call it what you will, here’s an overview of the enabling vendors helping Apple manufacture iPhone 4S in the millions.

As you know by now, the handset is being assembled by Taiwan-based contract manufacturers Pegatron (an Asustek spin-off) and Hon Hai Precision Industry. The latter – also known under the Western moniker Foxconn – will be churning out iPhone 4 units this year, to be joined by Pegatron in 2012. Pegatron is reportedly tasked with building approximately one in seven iPhone 4S units. Tapping the economies of scale and long-term supply contracts, Apple is able to build iPhone 4S cheaper than its competitors while preserving traditionally high margins which are the envy of the industry.

Deutsche Bank analyst Chris Whitmore estimated in a note to clients Monday the iPhone 4S bill of materials in the $170-$220 range, depending on capacity. The figure translates to manufacturing margins between 71 and 73 percent, roughly in line with manufacturing margins for the previous-generation iPhone 4. Note that bill of materials excludes other costs associated with assembly, packaging, distribution, sales, marketing, licensing, research and development and more. As for sales potential and profitability, Asymco’s Horace Dediu praised the current iPhone family price matrix, seen right below.

The current iPhone family price matrix, courtesy of Asymco.

The analyst observed that “there is now an iPhone for every budget”, ranging from the free of charge iPhone 3GS to the $99 8GB iPhone 4 to the 16GB/32GB/64GB iPhone 4S costing $199/$299/$399 and all the way up to the unlocked 64GB iPhone 4S priced at $849. Estimating the price of a contract-free, unlocked iPhone 4S ($649/$749/$849 for the 16GB/32GB/64GB version), Dediu concludes it is “very nearly the price that operators themselves pay (excluding any volume discount)”. No surprises here, folks, the iPhone 4S remains a money-making machine. In fact, it’s more profitable than 4G Droids.

While dudes over at iPhoneItalia have taken a peek under the iPhone 4S’s hood, a thorough X-ray and teardown analysis by Chipworks and iFixit is needed to understand how Apple engineered the product. Early benchmarks confirm that iPhone 4S is twice as fast with seven times faster graphics, indicating a clock frequency of 800MHz (versus 1GHz in iPad 2). Meanwhile, UBS Research put together a list of potential key suppliers of components for the iPhone 4S (seen after the break).

Corning Glass, TPK Holdings and Wintek are being listed as touch screen suppliers. DIGITIMES thinks Apple shifted its touch panel orders among suppliers “due to a product flaw found at Wintek’s panels”. As a result, TPK Holdings’ September revenues spiked 53.7 sequentially and 139.7 percent annually while Wintek’s revenues declined 18.4 monthly and 4.5 percent annually “as Apple rejected a batch of defective touch panels for iPhone 4S”.

Sony supplies Apple with the eight-megapixel CMOS sensor for iPhone 4S, while Largan Precision is being credited with all-new optics.

Providers of the iPhone 4S’s improved camera system include CMOS supplier Sony (confirming a 9to5Mac report from April), camera modules from Sharp and LG Innotek and all-new optics with five lens instead of four, courtesy of Largan Precision and Genius Electronic Optical. It’s also possible that OmniVision joined Sony as a backup CMOS sensor supplier as they announced a thin 1080p camera sensor back in May. Most notably, however, Samsung has remained the manufacturer of Apple’s custom-designed A5 chip, arguably the iPhone’s most important hardware component…

Samsung’s declining semiconductor operations, which contributed to their weak second-quarter earnings, indicated Apple might have taken a significant portion of their business elsewhere in the face of the legal woes plaguing the long-standing partnership between the two companies. Samsung supplies Apple with A4/A5 processors, NAND flash chips and other components for their mobile devices. The Apple account was worth an estimated $5.7 billion last year, or four percent of Samsung’s total sales. Orders grew to a cool 5.8 percent in the first quarter of this year and Apple was projected to take $7.8 billion in parts from Samsung in 2011.

iPhone 4S bill of materials estimate by UBS Research

EETimes first reported back in March that Apple had shifted production of the then unreleased A5 chip for iPad 2 from Samsung to Taiwan Semiconductor Manufacturing Company (TSMC), which failed to materialize at the time. The report asserted the two companies had entered into a foundry relationship (here and here). Reuters followed up in July with the news that TSMC began a test production run of A6 chips on its newest 28-nanometer process and 3D stacking technologies, corroborated by the Taiwan Economic Times.

As yield rates improved, DIGITIMES wrote early August that TSMC received a “rushed order” from an unknown partner last minute. Two weeks later, the publication cited sources saying that Apple had recently signed a foundry partnership agreement for the next-generation CPUs on 28nm and 20nm process technologies. Although all of this seemingly points to a TSMC-manufactured A6 chip for next year’s iPhone and iPad, switching silicon providers usually takes months, if not years. Therefore, we’re not expecting TSMC to take over Apple’s chip biz from Samsung until late next year at the earnest.

In spite of its legal clash with Apple, Samsung manufactured the iPhone 4S’s A5 processor.