Recently I read up an
article titled “Capturing value in global networks” It was truly amazing and
eye opener. When Apple used to sell the basic version of iPhone for $200 nearly
$116 of that goes to Apple alone. Supply chain management is a long and arduous
process with players being involved from across the globe. But with China
emerging as a low-cost destination for much of the American producers, I was
imagining that a reasonable shift in value chain was happening in favor of
China to a large extent and India to a lesser extent.
But take a look at the
charts again. While iPhone is assembled in China, Chinese labor makes only
about $3.5 in the $200 pie. Japan is even worse at just under a $1 in the $200
value chain of producing and selling iPhone. After Apple, the next biggest
beneficiaries happen to be Koreans (LG and Samsung) that provides the display
and memory chips. Even here their gross profits of the sale price of iPhone is
just 5%.
According to the
study, there are no known Chinese suppliers to the iPhone or iPad. The iPhone
and iPad are assembled in mainland China factories owned by Foxconn, a
Taiwan-based firm. This is true for most of the name-brand products from US
firms.
In short, Apple’s
success does tremendously benefit its shareholders, workers and the US economy
in general than China or Korea . It is clear that in the global innovation
network, advanced economies capture significant value compared to developing
countries. Being lead firms, they have total domination over global suppliers
in the global value chain. (Intel is a rare exception!). This is due to very
high levels of investment in the research and development for a sustained long
period. Asian economies focus and
emphasis on low-cost prevents them from committing substantial amount in
research and development. Investors will
invest in “value creators” than “value assemblers”. China and India should look
to encourage creation of lead firms that
can afford to keep product design, software development, product management,
marketing and other high-wage function within its shores (like Apple) in a rapidly globalized economy.
This cannot be a miracle and it is a long journey that they should start sooner
than later. If they start today, they can create one in the next ten years but
it is worth the effort.
If not, they will
remain as players that just pick up the nickels.
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