Image Courtesy: MKBHD
There’s been so much already written about smartphones that a sense of redundancy creeps in even while contemplating such a post. However, what made our team come up with this idea is in response to the oft-asked question of what a smartphone actually costs and how much of it could we save in case they’re made in India.
Of the latter part, we are still not very sure given that most of the smartphone parts come from China, be it for the iPhone or the OnePlus or Vivo that are assembled in India. So, for now that can be parked aside. Instead, let’s focus on how much the smartphone actually costs to make and in this process we have an able ally in OnePlus co-founder Carl Pei.
In a chat with YouTuber Marques Brownlee, Carl Pei not only unveiled the OnePlus Nord, its upcoming mid-priced phone, but also answered questions around its costs and how the latest offering from his company has managed to save some dollars.
According to Carl Pei, there are four key prices that OEMs care about – BOM (Bills of Materials), COGS (Cost of goods sold), Sell-in price and Retail price. “You sometimes see headlines like $999 iPhone only costs $400 to make. Generally these are from calculating the cost of all individual components, which makes up a significant part of the BOM but there’s other stuff,” he says.
In the video, which you can watch by clicking on this link, Brownlee asks Pei questions about costs and the OnePlus executive clarifies that the NFC costs $4 dollars per device while the IP certification takes away $15. A 3.5mm headphone jack is not pricey but has been left out more as an opportunity of saving space for other stuff.
In a series of tweets Carl Pei lists out labour costs during assembly and points out that if there is a high-end AR feature, each phone would require an additional calibration step which could go to either BOM or COGS. He also reminded us that there are overall costs that aren’t calculated per device. Some OEMs put it in the BOM while others account for it as COGS.
He refers to tooling such as plastic injection moulds that costs money as does licensing. It costs money to use other’s IP such as access to an SoC platform, he says adding that these costs are generally spread out across a forecasted volume or the tool’s projected lifetime.
Carl Pei reminds us that COGS includes lots of operational costs such as shipping whereby a device gets freighted several times before it lands in your hands. “Usually factory to local warehouse is by sea and it can take over a month,” he says adding when it gets there, it has to go to a retailer or direct-to-customer if purchased through an OEM. Then there is shipping insurance, tariffs and handling, certifications etc. that add to the cost.
There are other mandatory certifications like GCF that are required for some carriers besides pre-launch engineering samples and in-lab tests. R&D costs usually get clubbed in here, for both software and hardware. Warranty costs are another head. “Once an OEM’s tested the product’s various failure rates over its lifetime, they will add replacement, repairs, repair components, reverse logistics and customer care ops & labour costs. And there’s fraud costs also.”
And finally, there are operational costs that include headcount, offices, marketing budgets that includes promotional activities and channel margins which is where the retailer makes money. The prices also include local taxes such as the 18% GST in India or the 15-25% VAT in the EU.
So, all in all it appears as though the cost of a smartphone isn’t all that much higher than what it costs to make. Next time when you buy one, remember that there is less reason to rant. Of course, you may choose to disbelieve Carl Pei, but then who else is giving you such break-ups?