More on the "smiley curve": China makes, Apple takes

My current Atlantic article about the Chinese factory-world of Shenzen talks about the famous-in-China concept of the "smiley curve." This is a way of expressing the principle that although Americans import huge volumes of manufactured goods from China, most of the money spent on those imports stays in American hands. (Quote from the article, explaining the smiley curve, after the jump.)

An academic study I had heard about during my reporting, but which wasn't ready in time for my article, sets out a detailed and dramatic illustration of "smiley curve" principles. It involves the Apple iPod (which I have seen manufactured in China).

According to a summary of the report, in the new issue of Richard McCormack's Manufacturing News:

Not much of Apple's iPod is manufactured in the United States, but the majority of value added is captured by Apple... Apple made $80 in gross profit on a 30-gigabyte video iPod that retails for $299. Its profit is 36 percent of the estimated wholesale price of $224. [Not to mention the retail profit, if it is sold in an Apple store.] The total cost of parts was $144.

Many more dollars-and-cents details in the Manufacturing News story and the original academic study, from the Personal Computing Industry Center at the University of California, Irvine, here.

Defining the smiley curve, from the article:

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: HP, Siemens, Dell, Nokia, Apple. 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.