We are all looking for high value-added products even if we don’t want to admit it. I’m not necessarily referring to the transactional products we need every day – food, clothes, etc. Here, price is often the deciding factor. I’m really referring to the meaningful products we value as extensions of ourselves – our phones, our cars, our entertainment systems – these relational products are where we crave high value-add.
If we look at the example of the value created in the production of the iPhone 3G – a product that was assembled in China, but that had many other countries provide input into its manufacture – see Table 1.
Table 1: Apple iPhone 3G’s major components and cost drivers - 2009*
While the iPhone is seen as a significant Chinese export to the US, the actual Chinese contribution to the product was only $6.50 or 3.6%. Contributions by other countries like Japan (34%), Germany (17%), Korea (13%) and even the US itself (6%) is higher. So the high value-add here comes from several other countries and not necessarily the country from where the final product is shipped.
With manufacturing costs rising, China is under pressure to high value-add and will soon pass on the baton of low-cost manufacturing to Mexico or a similar nation. Business in Australia, has been under the same pressures since the GFC where Australia has become more a high-cost competitive environment. The businesses that will do well in this environment are those that recognise the limited value of low-value add activities and to get serious about what particular strategies need to be employed - e.g R&D, innovative supply chains, collaborations – so they can shift to a high value-add offering.
*Yuqing Xing, 10/04/2011, How the iPhone widens the US trade deficit with China.
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Steve Bryant, Industry leadership at QMI Solutions
Thanks Phil and Ling. It is the important perennial question for any business owner - "how can you add value for your customer?" I think history has shown how low-cost competitors, such as; Japan, Taiwan, India and China (to name only a few) have passed the mantle over time onto the next low-cost competitor. When a country's wealth increases, so does the desire of the population to have higher living standards meaning It is essentially unsustainable in the long-term to remain a low-cost competitor. Listening to customers and prospective customers about what they need, is a fundamental first step to understanding how your business can create value. Continue to do this to outsmart the low-cost competitors and you're well on your way.
Phil Khor, Founder at SavvySME
Wow this is really interesting insight - esp how China even with only 3.6% contribution in this example is trying to move up the food chain to offer higher value add. The question then is are we local businesses ready for such a shift which seems now more critical than ever to remain competitive? If not, what do we need to do?