Fareed Zakaria explains:
The Atlantic Monthly writer James Fallows spent a year in China watching that manufacturing juggernaut up close, and he provides a persuasive explanation—one well understood by Chinese businessmen—of how outsourcing has strengthened American competitiveness. Most Americans, even management experts, have not heard of the "smiley curve." But Chinese manufacturers know it well. Named for the U-shaped smile on the simple 1970s cartoon of a happy face, ☺, the curve illustrates the development of a product, from conception to sale. At the top left of the curve one starts with the idea and high-level industrial design—how the product will look and work. Lower down on the curve comes the detailed engineering plan. At the bottom of the U is the actual manufacturing, assembly, and shipping. Then rising up on the right of the curve are distribution, marketing, retail sales, service contracts, and sales of parts and accessories. Fallows observes that, in almost all manufacturing, China takes care of the bottom of the curve and America the top—the two ends of the U—which is where the money is. "The simple way to put this—that the real money is in the brand name, plus retail—may sound obvious," he writes, "but its implications are illuminating." A vivid example of this is the iPod: it is manufactured solely outside the United States, but the majority of valued added is captured by Apple, Inc. in California. The company made $80 is gross profit on a 30-gigabyte video iPod that retailed [in late 2007] for $299. Its profit was 36 percent of the estimated wholesale price of $224. [Add that to the retail profit if it was sold in an Apple store.] The total cost of parts was $144. Chinese manufacturers, by contrast, have margins of a few percent on their products.
The Post-American World, p.186
