Create Value, But Capture It Too!

In the world of manufacturing if you are to listen to all the media hype, you would be likely to come to the view that China is where all the action happens these days. To some extent that is true, but it is not the full story. This was brought home by an article published in Forbes (forbes.com) at the back end of last year, which gives a breakdown of who makes what from two of the world’s powerhouse brands, the iPhone and the iPad.

 

Both are made in China from locally sourced components but are Chinese companies and employees getting rich on the back of their global success? Not so it would seem. Chinese labour accounts for a mere 1.8 per cent of the final price of an iPhone while a further 22 per cent is accounted for by the cost of inputs and materials. But contrast these numbers with Apple's profits which reach 30 per cent for the iPad and soar to almost double that for the iPhone.

These numbers demonstrate the very important distinction between value creation and value capture. Through the use of good, reliable materials which are well put together, Apple's products are functionally strong and do the jobs that they are supposed to do. High levels of performance value are being created but the companies that are creating it are making relatively little money. Apple controls product design, software development, marketing and retailing and this is where the money is! The lesson in this is clear. Always examine the full supply chain and figure out where the value is being added and where the costs are being incurred. If you are operating in a high cost, low value part of the industry life is not going to be easy!