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.