These days, shrinking a product's price tag usually involves cutting the cost of service-related elements, the performance level, or the number of bells and whistles. But these may not be the only options, nor the most viable. Too often, we neglect to scrutinize the bill of materials (BoM). We might assume those costs are already minimal, so there's hardly room for improvement. That could turn into a very expensive mistake, though.
To demonstrate this fundamental precept, let's use a feature-laden cell phone as an example. If it's possible to reduce the cost of goods for this device, it's very likely that the same principles can reap similar rewards for a broad array of designs. This article examines the factors driving the rise of new features in mobile phones, analyzes different approaches to phone design and part selection, and suggests ways to keep costs under control.
Not long ago, a mobile phone was simply a mobile phone. It performed voice communications and a few related tasks, such as displaying caller ID information on a monochrome screen. Today, however, a mobile phone can be a digital still camera, a personal digital assistant (PDA), or a handheld video game system.
Additionally, while mobile phones were once simple devices, almost spartan in their features, they now seem out of date if they don't come with polyphonic ring tones, a built-in camera, and at least one color display—if not two. In the near future, phones that don't sport Bluetooth connectivity, active-matrix thin-film-transistor liquid-crystal displays (AM-TFT LCDs), and 3D graphics accelerators may be relegated to antique status.
Mobile phones are undergoing a feature frenzy, enabled by the evolution of standards and technology and driven by wireless carriers hoping to lure subscribers with flashy new attractions. This feature boom is bringing a veritable explosion in sales (see "New Features Fire Up Mobile-Phone Sales," p. 56).
But this proliferation of features comes at a price. Most new elements require additional transistors, components, and board space, factors that drove up the BoM for mobile phones in 2003. With buyers sensitive to price and with wireless service carriers often selling their handsets at a loss, preventing the BoM from ballooning is key to success in the mobile-phone world.
To remain cost-competitive while simultaneously satisfying demand for exciting new features, makers of mobile phones must reduce the BoM for some of the less glamorous, but no less important, segments of mobile-phone designs, such as the memory and radio-frequency/intermediate-frequency (RF/IF) subsystems. Based on the teardowns and comparative analyses of more than two dozen mobile phones, iSuppli's Teardown Analysis Service identified a number of opportunities for cutting costs in these areas.
THE COST OF INNOVATION
Phone makers know that adding new features pumps up costs. "Features are the main drivers of material costs in mobile phones," says Andrew Rassweiler, who manages the Teardown Analysis Service. "In the phone teardowns we conducted, we've seen products with varying features ranging in manufacturing cost from as little as $40 to almost $200. The addition of new features not only boosts electronic content but increases the overall complexity of mobile phones, requiring more memory and even more programming, assembly, and testing."
The flood of new features in 2003 saw the worldwide factory average selling price (ASP) for mobile phones rise to $160, up from $157 in 2002. This is remarkable, given that factory ASPs declined during every year at least since 1995—even during the boom years of 1999 and 2000, when some component prices soared due to shortages. The main driving force behind the continual decline in phone factory ASPs is none other than Moore's Law, the basic semiconductor dynamic that describes how the cost of semiconductors falls, while functionality rises.
This puts the wireless carriers in a predicament. New features can cause factory ASPs to rise, but simply boosting end-product prices isn't an option in the highly competitive mobile market. In fact, most phones are sold at a discount, and some are even given away for free, to lure buyers.
"There is significant price elasticity in the mobile phone market," says Dale Ford, vice president of market intelligence services for iSuppli. "Time and time again, it has been shown that phones have to be at the right price points to be successful." Also, wireless carriers subsidize the cost of the phones. The more the carriers subsidize, the thinner their profit margins.
Thus, mobile-phone designs are continually affected by two opposing forces: the costly surge of new features and the ebb tide of Moore's Law, which brings greater functionality at lower expense. Yet with the flood of new features outpacing the inexorable progress of Moore's Law, mobile-phone makers will have to take advantage of technological and design innovations to reduce their BoMs and keep costs in check.