Apple Inc. (NASDAQ: AAPL) CEO Tim Cook told the world on Monday, April 27 that the gross margins for the Apple Watch were likely to drag the margins of the whole company down. According to the executive the margins on the Watch would come in lower than the 40.8% gross margin the Cupertino, California company recorded in the first quarter.
IHS Technology took the Apple Watch apart and made a good estimation of the cost of making the entire device.
The conclusion was clear, according to Kevin Keller, the IHS principal analyst for materials and production, “The ratio for the Apple Watch is lower than what we saw for the iPhone 6 Plus and other new Apple products, and could be of great benefit to Apple’s bottom line if sales match the interest the Apple Watch has generated.”
Apple Watch costs just $83
The teardown was done on a 38mm Sport Watch and found that the materials and labor needed to make the device cost just 24% of the retail price of $349. The bill of parts comes to $81.20 according to the report from IHS Technology. That plus labor comes to $83.70. The margins for the more expensive versions of the Watch are likely larger, particularly for the very expensive Gold Edition units.
According to the research firm’s teardown of the iPhone 6, that smartphone cost between $200 and $247 to make, giving it a comparable ratio of close to 30%. The Apple Watch should, by all rights, have a higher associated gross margin as many analysts believed before Tim Cook burst that particular bubble.
Apple eats manufacturing costs
The Wall Street Journal reported in recent days that Apple had trouble manufacturing the Taptic Engine, a key component for the function of the Watch. Depending on how Apple accounted for the higher manufacturing costs involved in that production problem, the gross margin that Tim Cook was talking about might include pieces that never made it into the Apple Watch.
It’s possible that if Apple decided to switch production of the Taptic engine from AAC Technology Holdings to another business, most likely partner Nidec Corp. from Japan, that the Taptic Engine ended up significantly more expensive than would otherwise be estimated.
If either of those are true, the lower gross margin that Tim Cook promised might be temporary and may only apply to units of the Watch made this year. The executive has instructed CFO Luca Maestri to hide the numbers in Apple’s earnings reports going forward, so it’s unlikely that any concrete answer will appear.
Regardless, it’s clear that Apple is excellent at increasing the gross margin of its devices as the move from generation to generation. The original iPhone carried a gross margin of around 55% according to Andrew Rassweiler, the IHS analyst in charge of the iPhone 6 teardown. The latest smartphone has a margin of around 70%, depending on the model chosen.
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