The Smiley Curve Has Lost Its Wisdom Teeth

By James Fallows

By Liam Casey

In 2007, James Fallows wrote a defining article about Shenzhen, which covered PCH's business model and the smiley curve concept.

"The curve is named for the U-shaped arc of the 1970s-era smiley-face icon, and it runs from the beginning to the end of a product's creation and sale. At the beginning is the company's brand... Next comes the idea for the product: an iPod, a new computer, a camera phone. After that is high-level industrial design--the conceiving of how the product will look and work. Then the detailed engineering design for how it will be made. Then the necessary components. Then the actual manufacture and assembly. Then the shipping and distribution. Then retail sales. And, finally, service contracts and sales of parts and accessories.

The significance is that China's activity is in the middle stages--manufacturing, plus some component supply and engineering design--but America's is at the two ends, and those are where the money is. The smiley curve, which shows the profitability or value added at each stage, starts high for branding and product concept, swoops down for manufacturing, and rises again in the retail and servicing stages. The simple way to put this--that the real money is in brand name, plus retail--may sound obvious, but its implications are illuminating."

That was incredibly relevant at the time. The supply chain has evolved since 2007. Today, the smiley curve's enthusiastic grin isn't quite so broad. It has lost its wisdom teeth and evolved into a more satisfied confident smile. This is because the supply chain model has shortened and flattened to such a dramatic extent that the high upper ends of the curve - previously the domain of only the elite brands - is now also accessible to start ups and small companies.

In an earlier post, I talked about the need for better trade finance products for the banks to remain relevant in today's supply chain. The same concept applies here. Previously the smiley curve required large amounts of capital, and long periods of time from one end to the other, which could only be managed by the biggest brands at the top of their game. By using a best practice supply chain partner, with a critical ecosystem in place, a small company with a great idea can now become a very profitable brand in a matter of months.

Entrepreneurs from all over the world can fill this space. Anyone can. The impact on global commerce is huge, and it's making the world of business smaller. Resources around the world are as available as those once only found around the corner. Today, when it comes to hardware manufacturing, if you've got nothing, you've got everything. This is a trend that has emerged in the past three years and will soon become mainstream business. It will cultivate a whole new growth of hardware startups. The timing is great with the emergence of a growing trend of app- enabled hardware. With the dominance of China in the manufacturing of hardware, it has become a real challenge for entrepreneurs in the West to make things themselves. This is now changing and it's going to fuel a whole new era of startups in the hardware space.

Liam Casey (@liamcasey) is the Founder and CEO of PCH International, a global supply chain solutions company headquartered in Ireland with operations in Shenzhen, China.

This article available online at:

http://www.theatlantic.com/personal/archive/2011/03/the-smiley-curve-has-lost-its-wisdom-teeth/72406/