The mystery behind why the new iPhone is so cheap may be solved, with market researcher iSuppli saying it costs just US$173 to make.

Apple caused a stir earlier this month when it launched the new 3G (third generation mobile telecommunications) iPhone with a $199 price tag. Similar products from rivals cost much more. Taiwan's High Tech Computer (HTC), for example, has priced the Touch Diamond at NT$23,900 (AUD$795) for its home market, while Nokia estimates its new N96 smartphone will retail for Euro 550 (AUD$895).

All three handsets are due on store shelves soon.

There are two main reasons Apple can charge so little for the new iPhone, iSuppli said Tuesday. First, mobile phone service providers will subsidize the handsets by paying Apple about US$300 per unit, iSuppli estimates. The other reason is the low cost of materials going into the handset.

Apple did such a good job choosing components for the new 3G iPhone that it costs less to make than the old version, despite significant improvements, iSuppli said. The old iPhone cost $226 to make and did not include 3G nor GPS (global positioning system). Yet Apple sold the original iPhone for $499 initially.

The most expensive component on the 3G iPhone is the 8G bytes of NAND flash memory storage, at $22.80, followed by the touchscreen at $20, iSuppli estimates.

In all, the chips and other components in the handset add up to $164, and then iSuppli estimates Apple is paying another $9 for assembly of the device, for a total of $173.

Taiwan's Hon Hai Precision Industry, the world's largest contract electronics manufacturer, is making the new iPhone at factories in China.

The market researcher calls its estimate a preliminary one based on a "virtual teardown" of the new iPhone. The estimate is based on information available about the new handset. Once the 3G iPhone is on the market, iSuppli plans to open one up to figure out the make and model of each component inside, to more exactly determine the cost of the handset.

The initial estimate also does not include the cost of software development, shipping, distribution, packaging and accessories included with each iPhone.