The Post-American World - Fareed Zakaria [88]
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.”12 A vivid example of this is the iPhone: it is manufactured mostly outside the United States, but the majority of value added is captured by Apple, Inc. in California. The electronics research firm iSuppli took apart the iPhone 4 released in mid-2010. After analyzing the components, they concluded that the manufacturing costs amounted to $187.51. The unsubsidized price is about $600, meaning Apple made a gross profit margin of nearly 70 percent on each iPhone sold. Chinese manufacturers, by contrast, have margins of a few percent on their products. As Pietra Rivoli, professor of international business at Georgetown University, told the New York Times, “the value goes to where the knowledge is.”
America’s Best Industry
“Ah yes,” say those who are more worried, “but you’re looking at a snapshot of today. America’s advantages are rapidly eroding as the country loses its scientific and technological base.” For some, the decline of science is symptomatic of a larger cultural decay. A country that once adhered to a Puritan ethic of delayed gratification has become one that revels in instant pleasures. We’re losing interest in the basics—math, manufacturing, hard work, savings—and becoming a postindustrial society that specializes in consumption and leisure. “More people will graduate in the United States in 2006 with sports-exercise degrees than electrical-engineering degrees,” the CEO of General Electric, Jeffrey Immelt, said a few years ago. “So, if we want to be the massage capital of the world, we’re well on our way.”13
No statistic seems to capture this anxiety better than those showing the decline of engineering. In 2005, the National Academy of Sciences released a report warning that the United States could soon lose its privileged position as the world’s science leader. In 2004, the report said, China graduated 600,000 engineers, India 350,000, and the United States 70,000. These numbers were repeated in hundreds of articles, books, and blogs, including a Fortune cover story, the Congressional Record, and speeches by technology titans like Bill Gates. And indeed, the figure does seem like cause for despair. What hope does the United States have if for every qualified American engineer there are 11 Chinese and Indian ones? For the cost of one chemist or engineer in the United States, the report pointed out, a company could hire 5 well-trained and eager chemists in China or 11 engineers in India.
The only problem is that the numbers are wildly off the mark. A journalist, Carl Bialik of the Wall Street Journal, and several academics investigated