We’re Talking the Smiley Face Economy Here…

President Trump is intent on bringing manufacturing jobs back to the U.S. He is convinced that “making things” is the Holy Grail to making America Great Again.

It is true manufacturing has declined as a percentage of the economy. Back 50 years ago a quarter of America’s production was manufacturing. Today it is 12%. But America still makes a lot of things. The value of America’s manufacturing is bigger than that of Germany and Japan combined. We are manufacturing more and more today, it’s just that we are doing it with fewer and fewer people.

Stan Shih, the founder of Acer, a Taiwanese maker of computer components and laptops, once said that manufacturing is a little like the Smiley Face. You make your money at both edges of the “Smile Curve.” The left edge is where you design the product. The right edge is where you brand and market. The middle is where you actually manufacture but it is also where you make the least money.

Apple is a good example. The company’s profit margin is over 20% versus the average US manufacturer of 5%-8%. Apple makes virtually none of its own products but it does the crucial things; it designs the phones and laptops and then it creates the sizzle, branding and marketing them superbly.

Much of Apple’s manufacturing is done by the Taiwanese company Hon Hai/Foxconn, which employs a million people in China. The chart below shows what happened when it moved into Zhengzhou, an inland city in China with lower wages than the main Hon Hai factories on the coast. The Zhengzhou facility has gone from zero employees in 2010 to 250,000 today.

So Hon Hai must be making a ton of money, right? Well actually Hon Hai’s profit margin is only 3.5%. Remember, Apple’s profit margin is over 20%. The process of assembling Apple phones in China accounts for only 3.6% of total iPhone costs.

The lesson here is that the big money in making things is not in making things, but in the design and branding. Instead of worrying so much about bringing manufacturing jobs back we should be focusing on how to create a climate which will lead to the development of new products and new markets. We should be focusing on education and on encouraging foreign talent to come here or stay here after college to develop their best ideas.

Companies that bring manufacturing jobs back will bring fewer jobs than the original factories employed. The reason is robots and automation, which are the way of the future. Apple has pledged to grow US manufacturing. Its first venture is with Corning Glass to make world beating Gorilla Glass even more innovative.  But all these new jobs require advanced skills. Part of the Smiley Face Economy is about manufacturing, but not the manufacturing your grandfather would recognize.