Low cost manufacturing in China has taken manufacturing jobs from this country, but that does not tell the entire story about the economic impact it has had. (Why it happened and what can be done about it is a column in itself.)
That viewpoint misses one of the great benefits of China manufacturing: By being able to have China produce products at lower costs, it has given U.S. companies the ability to grow their businesses and create millions of high paying jobs in research, engineering, marketing and sales in the U.S.
Consumer electronic products are built using components from specialized suppliers, such as chip companies, plastic molders, PCB manufacturers, and display companies. The product company does not have the capabilities to build everything in-house, and rarely does it makes sense economically.
Instead they use a network of companies, each doing what they do best and providing their components to a wide number of product companies. Every company benefits from their supplier’s scale. The chip company makes the same product for multiple customers, so each customer benefits from the volume of the others. This is simply the way the free world works.
If we think of manufacturing as one of the important components of a product, then it makes sense to manufacture where the cost is most affordable. China, through decades of investment by its government, has created one of the most efficient and effective manufacturing centers in the world for consumer tech products (among other products families as well).
It’s not just about low cost workers, but about being near to the component manufacturers, and taking much smaller margins that keep costs low. Typically the manufacturing cost of a consumer tech product coming from China is about 10 percent of the total cost and the rest is the parts cost.
China’s low cost of manufacturing has become a resource that has been used by tens of thousands of companies over the past three decades to deliver many high value products, as Chinese companies have built and opened up their factories to the world. Prior to this, U.S. companies needed to build their own manufacturing capabilities or use expensive U.S. contractors that rarely worked with small companies.Now these product companies can focus on the areas that require the most talent, design, invention, risk, engineering, marketing, and sales.
By example, Bose invented the noise reducing headphone popular with business travelers and music fans. When I examined their cost model in 2009, their flagship product cost them $30 to manufacture in China. The product retailed for $350, and they sold it to retailers for $194. While the Chinese manufacturer made about 10% or $3 per unit, Bose brought in $191 that went toward profit, engineering, marketing and sales. In other words, we might have lost a few lower paying manufacturing jobs, but we gained much higher paying jobs.
This effect is called the smile curve, where at the beginning of the product cycle, a company spends money for high paying jobs for development and research, in the middle they spend much less money for manufacturing jobs, and at the end of the cycle they spend more for sales and marketing positions. This has been a model that has brought incredible wealth to many businesses and created millions of jobs.
By imposing tariffs on these products, you’re also imposing tariffs on all of the intellectual work being done in the U.S. by these professionals. A tariff might make more sense on the $30 of the product cost, but not on the entire cost, which is the result of the huge costs spent in the U.S.
Beyond a Bose type of company, there are thousands of companies in U.S. companies that will seriously be affected by tariffs. And none of their suffering will lead to new manufacturing jobs in the U.S. To believe so is naive, and to quote the Wall Street Journal, “stupid.”