April 07, 2008 –
Some of the study’s results surprised Dedrick (left) and Kramer.
Grandpa’s radio has grown up. So has its production process.
Electronic devices – and lots of other products as well – are becoming increasingly sophisticated.
In today’s global economy, the manufacturing supply chains that produce them have become equally complex.
CALIT2 academic participant Ken Kraemer and two associates, Jason Dedrick and Greg Linden from the Personal Computing Industry Center at UC Irvine’s Paul Merage School of Business, studied the manufacture and assembly of several electronic products in two categories of innovation: radical and incremental.
Radical innovation includes products that introduce new technologies or new ways to integrate core technology. Apple’s iPods fall into this category.
Incremental innovation refers to products that evolve and improve steadily, without fundamental changes in technology – laptop computers, for example.
The team dissected the manufacturing process and assigned monetary value to the many countries around the globe that participated in making the products.
It used to be that a large company like IBM would design and develop its own merchandise, using internally produced components.
Today, most electronic companies buy parts from other companies around the world, outsource their manufacturing and sell globally through wholesalers and retailers located in major markets.
Multinational Components
The UCI research team, which is part of the Alfred P. Sloan Foundation’s Industry Centers Program, began its look at the global supply chain by examining Apple’s $299 30 GB video iPod. Researchers learned that numerous companies – and countries – profit from the product in varying degrees.
The team based its report on information from Portelligent Inc., a company that dismantled the video iPod and identified the parts’ suppliers. Turns out a variety of U.S. and overseas companies combine technologies to make and assemble the 451 parts in the popular device.
The hard drive and display module were made by Japanese companies, the multimedia processor was designed in the U.S., and the mobile memory chip in Korea. But there’s more: each major part is made up of many smaller pieces, which may or may not have been manufactured in the same country in which the major suppliers are located. Final assembly and intermediate processing also took place overseas – the hard drive in China and the processor in Taiwan or Singapore.
The team found similar results when it studied two other iPod products, as well as notebook PCs from Lenovo and Hewlett Packard.
Measuring Value
The researchers built a framework to measure and map the value captured at each step of the manufacturing process. Using a formula that multiplies the part’s estimated factory price by the supplier’s gross profit margin, the researchers determined the value captured by the supplier and the country in which it is located. For the higher-value components, the researchers also analyzed the estimated value captured by the supplier’s suppliers, especially where cross-border transactions were involved.
Researchers determined that the iPod, which sells for $299 retail, costs about $144 to make. While Apple captures the largest share of the value, netting about $80 per device, the Toshiba hard drive alone costs $73, netting the Japanese manufacturer approximately $20. The display module is also made by Toshiba, netting the company nearly $6. And so it goes, down to low-value components that net their manufacturers a fraction of a cent.
The laptop computer supply chains yielded comparable results.
While the distribution of value captured differed between companies, it did remain consistent at the national level. Researchers were surprised to learn that a very small number of companies capture most of the value in electronic products.
Regional Differences
The study indicated that “countries tend to occupy well-defined spaces in global supply chains,” with innovative countries capturing large shares of value, and developing countries, which provide low-cost manufacturing and assembly, receiving very little value.
Most important, perhaps, in today’s global economy, is the fact that even though many electronic products are “manufactured” in China, only a tiny percent of their value added is captured by that country. “This is important because bilateral trade statistics, which show a U.S. trade deficit with China, can be misleading if most of the value is created elsewhere,” Kraemer says.
“Today, no single country is the source of all innovation and therefore, U.S. companies need to work with international partners to bring new products to market,” the authors write. “This is simply a fact of business in the 21st century, and the good news is that many American companies are winning this game and continuing to bring significant benefits to the U.S. economy.”
