Why Can't China Climb Up the Value Chain?

I-Pod Assembly line in China

August 05, 2010

By Liang Jun

People's Daily Online

China is to a large extent at the bottom of the value chain. Though its high GDP and export figures have aroused world envy, it is the huge multinational corporations like Apple and Toshiba that make more handsome profits.
A U.S. market research firm deconstructed an Apple iPod and studied the manufacturers, costs and profits of each of the parts and components. The final results show that for every 299 U.S. dollars made from the sale of an iPod sold in the United States, Apple makes 80 U.S. dollars, the costs of distribution and retail sales stand at 75 U.S. dollars and the other costs altogether total 144 U.S. dollars.

Out of the 144 U.S. dollars costs, for hard disk and display screen alone, added value of Japanese enterprises reached 93.39 U.S. dollars, with Toshiba accounting for the major part. The other costs include the fees of parts and components made by enterprises of the United States, Japan and South Korea as well as patent fees.
But China, which was actually responsible for the assembly of this iPod, earns a few dollars through processing.
Recently, most Chinese people felt proud upon hearing reports that China may have overtaken Japan as the world's second largest economy. But if we carefully analyze the figures of GDP and trade, we will find China is to a large extent at the bottom of the value chain.

We do not intend to inspire the public's anger toward companies like Apple and Toshiba, but a rational reader should reflect on why Apple had the lion's share of the big cake created by the iPod, while China only got the crumbs. In the context of globalization, there is no conspiracy of imperialism and no coercion of vessels and cannons. However, it is differences of status among countries in the international division of labor that cause the placement along the value chain.

In other words, Apple and Toshiba "eat meat" because they have the core technology, design and brands. We have to "eat soup," because we provide only cheap labor in the entire value chain.

Sure enough, "eating soup" is a kind of progress. Before China carried out reforms in 1978 and became the "world factory," we were isolated from the international division of labor and could not eat soup some times. Even now, many developing countries could not eat soup because they have no advantages like China in costs, size, efficiency and infrastructure.

But for China, a country with a population of 1.3 billion, which may have become the "world's second largest economy," eating soup is obviously not our ultimate goal. That's why we have to restructure and transform growth in the context of globalization. China must have its own ability to innovate, core technology and world-renowned fist-class brands.