Few management theories have wielded as much influence—and controversy—as the Smile Curve. Proposed by Stanley Shih, founder of Taiwan’s Acer Inc., in 1992, the Smile Curve has guided the strategic direction of global corporations for over three decades. However, its focus on maximizing shareholder value may have inadvertently led to the deindustrialization and deskilling of the American economy.
The Smile Curve posits that the highest value in a product’s lifecycle is captured at the ends: research and development (R&D) and branding on one end, and marketing and services on the other. Manufacturing, situated at the curve’s bottom, is deemed low-value due to its compressed margins and capital expenditure demands. This framework encouraged companies to divest from manufacturing and focus on more lucrative aspects of the value chain.
The Impact of Globalization
The globalization wave, particularly after China’s accession to the World Trade Organization in 2001, accelerated the adoption of the Smile Curve. Western corporations, including giants from Japan and Korea, rushed to become asset-light and “move up the value curve.” Manufacturing was outsourced to countries with cheaper labor, such as China, where companies like Foxconn took over the production of high-tech goods.
Apple Inc. is a prime example of this shift. The tech giant does not manufacture its products; instead, it relies on original equipment manufacturers (OEMs) like Foxconn. The real work, as perceived by many, occurs in Apple’s Cupertino headquarters, where high-paid engineers and marketers create and sell the brand’s innovative image.
“A 256GB iPhone 16 Pro Max sold for $1,199 with a 59.5% gross margin. Its total build of materials was $485 – $428 in parts and $57 in assembly costs.”
Reassessing the Value of Manufacturing
Despite the Smile Curve’s emphasis on R&D and marketing, recent calls for US re-industrialization highlight the strategic importance of manufacturing. Critics argue that America’s dependence on Chinese manufacturing poses national security risks and has eroded essential industrial skills.
Elon Musk, CEO of Tesla and SpaceX, has repeatedly emphasized the complexity of manufacturing, describing it as “two to three orders of magnitude more difficult than design.” This sentiment is echoed by old-school engineers who understand the intricacies of production processes.
“The value of manufacturing only appears low on the Smile Curve because the sell-off of American assets has distorted value capture.”
Historical Parallels and Economic Theories
The current scenario mirrors the economic phenomenon known as Dutch disease, where a country experiences deindustrialization following a resource boom. In the 1950s, the Netherlands’ economy suffered after discovering natural gas, as capital shifted towards the energy sector, weakening manufacturing competitiveness.
Baumol’s law also plays a role in this narrative. It explains why wages in low-productivity sectors rise with the overall economy, even without productivity gains. This law has been skewed by globalization, benchmarking the compensation of roles like software engineering and marketing to the inflated value of American asset sales.
“Outsourced manufacturing was not the easy, low-end part of the value chain. It was, in fact, the hardest, highest-skilled and most difficult to replicate part of the value chain.”
The Path Forward
Re-industrializing the US will not be a straightforward task. The country must rebuild its manufacturing capabilities and address the economic distortions caused by Dutch disease and Baumol’s law. This transformation could mean recalibrating the perceived value of jobs in tech and finance, aligning them more closely with global manufacturing standards.
As America grapples with these challenges, the Smile Curve remains a useful tool for companies aiming to maximize shareholder value. However, it must be used with caution, recognizing its limitations in measuring the true complexity and skill required in manufacturing.
Ultimately, the Smile Curve’s legacy is a cautionary tale of how strategic frameworks can shape, and sometimes undermine, an economy’s industrial foundation. The road to re-industrialization will require a balanced approach, valuing both innovation and the critical role of manufacturing in sustaining economic resilience.
