Did you buy any electronics this holiday season? If you did, you probably had to spend a lot for them, but you resigned yourself to the fact that they are “big ticket” items. That’s true, but you might be surprised by the reasons that those tickets are quite as big as they are.
According to a piece in the OECD Observer, there are two mains sources of costs when it comes to electronics: Upstream activities (basically the cost of coming up with the idea, and the research and development around it) and downstream activities (marketing, logistics and services). In the middle are the nuts-and-bolts of production, which is typically the cheapest part of the whole thing. If you throw all the costs on a graph, it looks sort of like a smile (high at both ends, lower in the middle) – which is why Acer Inc. founder Stan Shih dubbed it “the Smiling Curve” when he was talking about the problems of information technology manufacturing back in 1992.
Mr. Shih was not so concerned about the amount you paid for that flat-screen at Target or wherever, but rather about the value-added from producing it and who gets the benefits from that. The big bucks are clearly at the front and back ends of the process, which is why countries would most like to get a piece of those activities. The middle part of the curve is what tends to happen in the lowest-cost jurisdictions. In fact, that is the part of the curve that is getting beaten down ever more, which is why the smile looks more and more U-shaped these days.
So what is a country like Canada to take from all of this? Well, even a very casual observation would suggest that we are capturing some of the benefits from the final uptick in the smile. That is, when you picked up that iPhone 5, your price included something for the idea and the manufacturing, but you also paid for the hype (and all those “Geniuses” at the Apple store don’t work for free, you know). Clearly Canada is not going to compete for the middle part of the value-added process, and that makes sense – it is not where the big gains are anyway.
But the first part? It has been a difficult year for Canada on that front, but that does not mean that we should give up on it. The big value in big-ticket items is clearly going to go those countries that excel in innovation and research and development, and all those things that have tended to prove somewhat elusive to Canada.
Perhaps our New Year’s resolution should be to figure out how to get the smiles started when it comes to new ideas.
Linda Nazareth is a Senior Fellow at the Macdonald-Laurier Institute. Her book Economorphics: The Trends Changing Today into Tomorrow will be published by Relentless Press in January. www.economorphics.com