The iPhone is becoming increasingly expensive for Apple to make

Analysts are growing worried about Apple's long-term profitability in the face of declining iPhone gross margins.
Written by Adrian Kingsley-Hughes, Senior Contributing Editor

Given how much product Apple shifts in a quarter, and the dollars that the company brings in, you'd think analysts would be over the moon. But declining iPhone gross margins have some worried.

See also: How Apple plans to make more money from its cheap iPhone

Back in 2009, the gross margin for the iPhone was 57.7 percent, but over the years it has seen an almost continual decline, and today stands at 40.8 percent, according to analysts at Bernstein Research.

By 2018 iPhone gross margins are expected to sink to 39 percent. While other players in the industry would kill for such healthy margins, analysts see this as a problem for Apple.

The problem is two-fold: it costs more for Apple to manufacture new iPhones, and it's hard for the company to jack up the price without putting buyers off.

Bernstein Research analyst Toni Sacconaghi had this to say:

"We believe that GMs [gross margins] will potentially become a larger issue as we approach the iPhone 8's release, as the devices' new form factor, OLED screen and increased functionality (wireless charging) will invariably drive up iPhone's BOM [bill of materials], either necessitating a further price increase in the device, or potentially pressuring gross margins in FY 18.

Essentially, the cost of manufacturing iPhones is only going to keep rising.

The iPhone is becoming increasingly expensive for Apple to make
Bernstein Research

Additionally. Morgan Stanley's Katy Huberty believes that part of the problem may be down to the iPhone's popularity, as Apple underestimated demand for the iPhone 7:

"10-K data suggests Apple underestimated demand creating a near-term margin headwind as supply ramps. We also see this as a sign Apple approached iPhone 7 forecasts with conservatism. Given better than expected initial demand, Apple has increased orders to suppliers and is incurring expenses to ramp additional production lines, which is creating a headwind in December."

UBS analysts Steven Milunovich and Benjamin Wilson feel that Apple is going to be increasingly squeezed by rising production costs, where the gross margin gap between the iPhone and iPhone Plus will close (traditionally, the larger iPhone has pulled in more cash for Apple):

"Depending on price increases, larger screens could increase ASPs. However, margins might decline if build cost increases outstrip higher prices. Apple could end up selling Plus phones at closer to regular size prices."

A silver lining for Apple is the iPhone SE. Rumor has it that the company isn't planning to make any updates to this device next year, so that will mean gross margins for this handset should rise.

Interesting times ahead.

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