What Is Made in China?
More than 10 years have passed, more and more Chinese companies, Sino-foreign joint ventures (JV) and wholly foreign-owned enterprises (WFOE) are adopting such an approach: raw materials from abroad, the products sold abroad. This time, we gradually found that in an industry value chain, foreign companies took away majority of the profits, while Chinese companies only get a minimum, i.e. the meagre processing fees. More seriously, we are starting to taste the bitter fruit of environmental pollution. Chinese companies are getting into a double whammy situation: earning the least, and polluting the most. Historical origins Back in the 1980s, "two ends abroad, volume in volume out" was once a popular mantra in China. According to this concept, raw materials used by JVs and WFOEs come from abroad, and finished products are also sold abroad. In this way the Chinese companies do not need to pay for the cost of resources, they only need to pay for the cheap and unlimited labour. This was indeed a very attractive concept at that time, and everyone was happy. In fact, this phenomenon has been proved by economists. The modern industry value chain research suggests that the industry chain profitability exhibits a "V" shaped, the so-called smiling curve. In this curve, one end is R & D and design, the other end is sales and services. Intermediate processing and productions are in the middle. Generally, profit margins in the two ends are about 20% to 25%, while the middle functions are only 5%. Profit or loss? Let us look at examples of Chinese companies' positioning in this smiling curve. Barbies sold in American market are often made by OEM in Suzhou of China. The retail price of a Barbie in America is $10, but its FOB price from China is probably $2. But this $2 is not yet a profit, as logistics and management consume $1 and raw materials consume $0.65 respectively. The Chinese company only gets the remaining $0.35 as profits. In another example, a cigarette lighter made from Wenzhou of China can only be sold for |
