Sofa Analytics №241. Economies of scale in electronics manufacturing

Hey.

Creating any device is always an attempt to stay within budget, but choose the best components, make the devices profitable against the competition. We started a conversation about this in one of the materials, following which we received several letters with a request to continue this topic, to expand the issue. It will not hurt to get acquainted with the first material, since it outlines the logic of creating a specific device and what the development team faces.

Considering the examples for this material, I chose typical techniques to evaluate how companies reduce development costs and device costs. I wanted to focus on a few techniques in the text, but I realized that this would greatly expand the material. Therefore, here we are talking about economies of scale in manufacturing and how it affects development.

Economies of scale, standardization in large and small

A simple rule known to everyone is that the more you buy, the greater the discount or the better unit cost you will get. It is important for companies to scale production, as well as reduce the number of components used to create a particular device. If you disassemble a modern smartphone, it turns out that it consists of several hundred components, there are not only electronics, but also body parts, chassis, screws, the use of chemical components, for example, glue or moisture impregnation. A design rule of thumb is that reducing the number of components results in better device performance over several years. For example, if your smartphone has several cameras, then not only the cost of the device increases, but also the risks of failure of one of these cameras. This could be due to impact during transport or due to manufacturing errors.

Google, knowing for itself the inability to work with iron, removes the risks, so the number of cameras in the Pixel line of smartphones is not drastically increased. This is not the only reason, but one of several. Another flaw for Google is that it has to buy certain volumes of cameras, which is impossible in the absence of successful sales.

Sofa Analytics №241. Economies of scale in electronics manufacturing

Vertically oriented companies are trying to standardize all components, to make their use at scale in order to achieve economic feasibility. Back in the days of push-button phones, Samsung ignored the presence of Bluetooth, competitors have already released their devices with this technology, but Samsung was in no hurry to integrate this standard into its devices. The reason was the economies of scale that the company wanted to achieve. Not to release one or two phones, but to come out with different models at once, that is, to increase the circulation of Bluetooth chips to the maximum. Therefore, when Samsung decided that the time had come, they began to integrate Bluetooth into all products where the use of technology was in principle possible.

As another example, we can recall the GPRS support in Motorola phones, this technology was available in almost all the company’s phones at the time it appeared. And the reason was exactly the same – economies of scale.

In modern history, one can recall the spread of AMOLED screens to almost all price segments in the lineup from Samsung, the cost of such smartphones starts at 15 thousand rubles in retail. The reason is exactly the same – cost reduction for such screens during mass production.

Let’s take a look at the iPhone 12/12 Pro, they are two phones that are exactly the same size. The cases are made of different materials: in the younger model it is aluminum, in the older one – stainless steel.

Sofa Analytics №241. Economies of scale in electronics manufacturing

A breakdown of these models from iFixit revealed that both models use the same 2815mAh battery, but the iPhone 12 has additional room for a larger battery. Why didn’t Apple supply a larger battery? The answer can be given on several levels at once. To begin with, installing a larger battery will give an advantage to the younger model, which doesn’t sound very logical. But the main reason is that the different battery is production restrictions, you cannot use the same SKU to produce different models. You also need to keep different batteries in stock, which comes at a high cost. And the volume of purchase of batteries of different capacities will not allow you to achieve an effective price, or you will have to purchase them in larger quantities than you need.

Note that these two iPhones use the same screen from Samsung Display, the reason is exactly the same – the scale effect. The more Apple buys, the less value it gets. This also explains the lack of AoD in such screens in Apple smartphones, the implementation of the technology requires a different chip that comes with the screen. The cost price does not differ critically, the difference fits into $ 2. But it turns out that these are two different screens in terms of production, two different names. And Apple cannot reach the required volume in order to obtain the minimum cost for displays, which does not allow purchasing more advanced matrices.

A way out of this situation can be the purchase of matrices with support for AoD, but disabling this function in lower models. This is an old technique used by many companies to install components from older models to lower ones, but programmatically restrict the capabilities of devices. We saw this on the example of processors, once, by closing the legs on the board, it was possible to get an older model from the processor of the middle segment and at the same time save a lot. Buyers have always loved to look for these hidden features, buying devices at a lower price, then activate additional functions in them.

Economies of scale are often tied to specific devices, their lifespan, but this is a stereotype that does not take into account the possibility of using the same components for several years. An example of this approach is camera modules that have been used in devices for several years, which expands their production and sales, while simultaneously reducing their cost. Vertically oriented companies are tied to the cost of developing components, they are forced to focus on their sales for at least several years. Sales is understood as sales not only within the company, but also to third-party companies. For example, the 12-megapixel module in Samsung’s flagships has changed little in five years, it will find application in future models, but is gradually shifting to the middle price segment. The new 108-megapixel module came in one form or another for a long time, since only in this case it is possible to write algorithms for it, you can squeeze everything out of this hardware. And this was exactly the situation for the 12-megapixel module.

Sofa Analytics №241. Economies of scale in electronics manufacturing

Let’s take a look at the scale effect from the other side, how the cost of the Galaxy Note20 Ultra differs in bronze and any other. Let me remind you that the difference between these devices is only in one thing: the body is matt in bronze color, satin glass is used.

Sofa Analytics №241. Economies of scale in electronics manufacturing

Glass characteristics, its capabilities – all this is the same for Note20 Ultra in any color scheme. But visually, the bronze color is much more interesting, practical, there are no hand marks on it (and this is the most popular color today). For those who use cases, it doesn’t really matter what the case is in relation to fingerprints.

Why doesn’t Samsung use matte glass on all models? The scale effect does not work here, because earlier we reasoned that the more you buy, the better. But this principle does not work in this case, how did it happen?

To achieve opacity of glass, you can use two technologies – mechanical surface treatment or chemical etching. In fact, the number of glass processing options is much greater, but in practice these two methods are used.

Initially, glass for processing has slightly different characteristics than ordinary glass (different thickness). You need a glass processing line, separate machines and reagents. That is, in fact, it turns out that this is a different type of glass for you and you produce it in small quantities. Here we see a strategy that looks somewhat different – testing new material in practice, gradually increasing production, expanding the number of machines for such processing. You also need to understand that in terms of production, the processing time for glass in matte color is several times higher, which leads to high costs. Let’s take the prime cost of ordinary glass as a base, the price of satin glass will be 20-25% higher than this cost. Will Samsung expand the number of such machines? Certainly. Will matte surfaces dominate? Definitely not, as this increases the cost of the devices and requires more machines for glass processing, and increases the production time. Scaling in this case is practically impossible; it rests on the means of production.

Another example is Apple’s launch of the aluminum MacBook. The company purchased equipment for creating such cases from a single piece of metal, which allows achieving excellent characteristics – lightness, strength, and wear resistance. The flip side of the coin is the need to buy a lot of aluminum processing machines, which Apple did. MacBook production is not as big for Apple as it is for Lenovo, Asus and other companies, so this move was justified.

When competitors tried to replicate Apple’s design success, they simply failed to do so. All machines for metal processing were sold several years in advance, the price for them was prohibitive. Yes, it was possible to collect something of your own, to produce small batches with such cases, but this approach killed the very idea of ​​a mass product. So laptop manufacturers started looking for a way to create durable laptops that look attractive. In the same Surface line from Microsoft, they found a way out in the use of magnesium alloy, this is also a choice of material that is used on a large scale, as it reduces the cost price for the manufacturer.

Theoretically, you can use satin finishing in mass models, this is not a technology that is very expensive. But the logic of production inside Samsung does not allow doing this for mass models of the middle segment. For example, in TCL, on the contrary, they do this, since for them the middle segment is the top models of the line. As you can see, everything in this world is relative.

Sofa Analytics №241. Economies of scale in electronics manufacturing

Standardization is a necessary component of modern production. The above are examples of such standardization, the selection of the same housings, batteries, screens in different models. Taking Apple as an example, we can say that even using the same processor in models of different price groups is the need to maintain economies of scale in the production and procurement of such processors. Apple doesn’t make enough smartphones to incorporate a variety of processors into these devices, as other manufacturers do. Let me remind you that, unlike the same Xiaomi, which does not produce its own processors, Apple develops and orders them at third-party factories. And here economies of scale are important for them, while in Xiaomi the scale is expressed in another, in the volume of business with processor suppliers and the ability to maneuver between them.

At first glance, it seems that production is complex, but the logic behind all decisions is very simple and straightforward. Fewer components, fewer manufacturing steps, simplifying design as much as possible. It is not the best technologies that win in this race, but those that are massively available and allow you to get a good economy. You can create the best battery in the world, but if you can’t manufacture it on the right scale, then no one will use your product in their devices. In addition to the quality of the product, the possibility of scaling up its production comes to the fore, since all companies are focused on economy within the framework of mass production. The time of handicraftsmen and small editions has long passed; rather, it is an exception that emphasizes the general rule.

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