One point that has always puzzled me about the rise of China, and the flight of manufacturing jobs overseas in general, is this: what do Americans actually do anymore? Certainly the United States has suffered in certain areas because of outsourcing, but taken as a whole, it is still the largest economy in the world by a large margin. But we don’t make the products, where does the money come from?
Fortunately, we have James Fallows to explain everything in a fascinating article about China. It’s all about the “smiley curve”:
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.
That makes sense, though to me it was counterintuitive. Transitioning from an industrial economy does involve real loss, but the loss is likely amplified by a psychological bias towards making things and against the more abstract tasks of designing, branding, and retailing.
Much of consumer society is based on fooling ourselves that a brand’s appeal is based on the product itself, and not our preconceived ideas about it as taught by advertising. Instead, as Fallows points out, whichever laptop brand you choose is probably made of the same parts put together in the same factory in China:
I saw a set of high-end Ethernet connecting cables. The cables are sold, with identical specifications but in three different kinds of packaging, in three forms in the United States: as a specialty product, as a house brand in a nationwide office-supply store, and with no brand over eBay. The retail prices are $29.95 for the specialty brand, $19.95 in the chain store, and $15.95 on eBay. The Shenzhen-area company that makes them gets $2 apiece.
For an even stranger example, we have the Life of a Chinese Gold Farmer by Julian Dibbell in the New York Times. All the elements of Chinese factory life described in Fallows story are there, but this time the workers (an estimated 100,000 of them!) are playing the online video game World of Warcraft, killing monsters in 12 hour shifts, 7 days a week, to collect digital gold:
At the end of each shift, Li reports the night’s haul to his supervisor, and at the end of the week, he, like his nine co-workers, will be paid in full. For every 100 gold coins he gathers, Li makes 10 yuan, or about $1.25, earning an effective wage of 30 cents an hour, more or less. The boss, in turn, receives $3 or more when he sells those same coins to an online retailer, who will sell them to the final customer (an American or European player) for as much as $20.
Read the whole article for some amazing anecdotes, including the story of a 40-person squad of elite Chinese players working together to escort one paying American through the most difficult dungeons. And you might be surprised at what some of the workers do in their spare time.