The Land of the Smiling Curve ?

Thailand has made a name for itself over the last decades for efficient manufacturing, in particular in electronics and automotive assembly. The country is known for a dedicated and attention-to-detail workforce. Most if not all of industrial activities today are manufacturing or assembly. AEC 2015 is offering exciting opportunities and serious challenges. What should Thai manufacturers do in this context ?

Smiling curve, downloaded from rieti.go.jp

The concept of the smiling curve was developed in 1992 by Stan Shih, the founder of ACER (Taiwan). He highlighted the fact that margins in manufacturing were getting squuezed and that manufacturers need to move out of pure assembly and look for more added value if they want to remain profitable. A company can either go for the R&D and innovate in developing components that other companies need (think Samsung selling to Apple), moving towards the left on the curve. Or they can focus on service and product design (think Apple), at the right hand side.

The total "cost" of an iPhone assembled by FOXCONN for Apple is 179 US$. Out of this, 6.5 US$ is the cost of labor, the Chinese added value. The rest, 172.5 US$ is made up of raw material and compenents, all of which are imported from other countries (Korea, Japan, Germany, the USA and other countries). The iPhone's real added value is in the hands of the component designers and suppliers (172.5 US$) and the dealers, retailers and Apple itself (equivalent to 321 US$ for an iPhone sold at 500 US$) (info from presentation at KMAP 2012 by Prof Jay Lee, based on Xing and Detert, 2010).

With neigbouring countries, with significantly lower labor costs, opening up, pure assemblers will clearly be challenged. Not in the short term, because established supply chains, economies of scale and experience will continue to provide an advantage over new and smaller startup operations. But if the Thai assemblers stay with their current business model, they will definitely lose their competitive edge in the 5 coming years.

Thailand is known as the land of smiles but maybe the challenge, with AEC 2015 around the corner, will be more about the dangers of remaining stuck at the bottom of the "smiling curve" ...