Coevolving Innovations

… in Business Organizations and Information Technologies

Value capture in a global innovation network

With the primaries in the United States making headlines, Americans have been making noises about revisiting NAFTA. Michael Hart and William Dymond provided a Canadian perspective1, with a global perspective on the larger trends.

If our neighbours elect a Democratic president, Senate and House on Nov. 4, things could get ugly, as a falling U.S. dollar, the credit crunch and serious troubles in the housing market add to recession anxieties.

The target for much of that ugliness will be China and other low-cost suppliers to the U.S. consumer market. Most Americans do not have much understanding of the role of these suppliers in maintaining U.S. economic activity. Both politicians and the public fail to realize the benefit of Chinese manufacturing goods produced to U.S. design and using U.S. technology. A recent University of California study found that, of an Apple iPod sold in the U.S. for $299, $160 goes to American companies that design, transport and retail iPods. Only $4 stays in China with the firms that assemble the devices.

I was curious about that $4, and tracked down the report to the Personal Computer Industry Center (PCIC), part of the Alfred P. Sloan Foundation. The paper by Dedrick, Kramer and Linden2 has some interesting tables. Here’s a breakdown from the $299 retail price of the iPod.

Table 5. Derivation of Apple’s Gross Margin on 30GB Video iPod

Retail Price $299  
Distributor Discount
(10%)
($30)  
Retailer Discount
(15%)
($45)  
Sub-Total (estimated
wholesale price)
  $224
Factory Cost ($148)  
Remaining Balance
(estimated Apple gross margin)
  $76

Source: Authors’ calculations; see text

From the above table, follow the $76 estimated gross margin for Apple. The $190 of captured value (profit margin by various participants in the value network) is constructed from the bottom, up.

Table 7. The Distribution of $190 of Captured Value in a Single 30GB Video iPod

  Sales in the U.S Sales outside U.S.
Value Chain Segment Apple All other firms Apple All other firms
Apple Gross Margin
(development, software, marketing
$76   $76  
Parts Suppliers (key
inputs only, Table A-2)
  $35   $35
Manufacturing
(assembly, test)
  $4   $4
Distribution   $30   $30
Retail* $23 $22 $11 $34
TOTAL VALUE CAPTURE $99 $91 $87 $103

*”Retail is split between Apple and other firms based on our estimate that one-half of retail sales in the U.S. and one-quarter of retail sales outside the U.S. are by Apple through its stores and online website. Source: Author’s calculations, see text

The affordability of an iPod to middle class consumers is related to low manufacturing costs (i.e. $4). In the total price of $299, though, there’s a lot of profit that is captured.

For policy makers, here’s how the $190 of captured value breaks out by country of origin.

Table 8. The Geography of $190 of Captured Value in a 30GB Video iPod for a Unit Sold in the U.S.

  U.S. Japan Korea Taiwan Total
Apple Gross Margin
(development, software, marketing
$76       $76
Parts Suppliers (key
inputs only, Table A-2)
$7 $27 $1   $35
Manufacturing
(assembly, test)
      $4 $4
Distribution $30       $30
Retail $45       $45
TOTAL VALUE CAPTURE $158 $27 $1 $4 $190

Note: for this table it is assumed that the unit is sold in the U.S. Source: Authors’ calculations.

Of the $299 price of the iPod, Apple (and the United States) gets $76 as the lead firm in the value chain, plus a potential $45 if the unit is sold directly through its retail channel. Value capture for parts gives $7 to the U.S. (e.g. video/multimedia processor, controller chip), and $27 to Japan (e.g. hard drive, display). Manufacturing (as assembly and test of the unit) results only in $4 of value capture for Taiwan.

This analysis supports advocates of investments in human capital for design and engineering expertise — i.e. university level skills — as opposed to lower-cost manufacturing facilities and roles. Given a choice between value capture in services (i.e. $30 for distribution, $45 for retailing) and manufacturing(i.e. $4), services win. In the global economy, it’s the investment using brainpower, not manual labour, that provides the larger and enduring value capture.


1Michael Hart and William Dymond, “The sabre-rattling on NAFTA is worrying, but take it as an opportunity”, Globe & Mail, March 15, 2008, accessed online at globeandmail.com.2Jason Dedrick, Kenneth L. Kraemer and Greg Linden, “Capturing Value in a Global Innovation Network: A Comparison of Radical and Incremental Innovation”, Personal Computing Industry Center (University of California, Irvine), Paper 407, 2077, accessed online at pcic.merage.uci.edu. There’s a contradiction with the September 2007 “draft” advising not to cite or distribute, while the document has officially been published on the PCIC web site.

1 Comment


Leave a Reply

Your email address will not be published. Required fields are marked *

  • RSS qoto.org/@daviding (Mastodon)

  • RSS on IngBrief

    • 1969, 1981 Emery, System Thinking: Selected Readings
      Social Systems Science graduate students in 1970s-1980s with #RussellAckoff, #EricTrist + #HasanOzbehkhan at U. Pennsylvania Wharton School were assigned the Penguin paperback #SystemsThinking reader edited by #FredEEmery, with updated editions evolving contents.
    • 1968 Buckley, “Modern Systems Research for the Behavioral Scientist: A Sourcebook”
      Resurfacing 1968 Buckley, “Modern Systems Research for the Behavioral Scientist: A Sourcebook” for interests in #SystemsThinking #SocioCybernetics #GeneralSystemsTheory #OrganizationScience . Republication in 2017 hardcopy may be more complete.
    • Wholism, reductionism (Francois, 2004)
      Proponents of #SystemsThinking often espouse holism to counter over-emphasis on reductionism. Reading some definitions from an encyclopedia positions one in the context of the other (François 2004).
    • It matters (word use)
      Saying “it doesn’t matter” or “it matters” is a common expression in everyday English. For scholarly work, I want to “keep using that word“, while ensuring it means what I want it to mean. The Oxford English Dictionary (third edition, March 2001) has three entries for “matter”. The first two entries for a noun. The […]
    • Systemic Change, Systematic Change, Systems Change (Reynolds, 2011)
      It's been challenging to find sources that specifically define two-word phrases -- i.e. "systemic change", "systematic change", "systems change" -- as opposed to loosely inferring reductively from one-word definitions in recombination. MartinReynolds @OpenUniversity clarifies uses of the phrases, with a critical eye into motives for choosing a specific label, as well as associated risks and […]
    • Environmental c.f. ecological (Francois, 2004; Allen, Giampietro Little 2003)
      The term "environmental" can be mixed up with "ecological", when the meanings are different. We can look at the encyclopedia definitions (François 2004), and then compare the two in terms of applied science (i.e. engineering with (#TimothyFHAllen @MarioGiampietro and #AmandaMLittle, 2003).
  • Recent Posts

  • Archives

  • RSS on daviding.com

    • 2020/11 Moments November 2020
      Day shortening and temperatures dropping meant bundling up for bicycling.
    • 2020/10 Moments October 2020
      Clear autumn near home in Toronto, extended with a family vacation within Canada to Vancouver, where the Covid rates are more favourable
    • 2020/09 Moments September 2020
      Discovering more of the neighbourhood, bicycling mostly in the mornings.
    • 2020/08 Moments August 2020
      Moderate summer temperatures in a city normally overheated with activity, residents gradually emerging as public venues opened cautiously.
    • 2020/07 Moments July 2020
      Daytimes full of new work assignment and training, evenings and weekends bicycling around downtown Toronto as it slowly reopens from pandemic.
    • 2020/06 Moments June 2020
      Most of month in Covid-19 shutdown Phase 1, so every photograph is an exterior shot. Bicycling around downtown Toronto, often exercising after sunset.
  • RSS on Media Queue

  • Meta

  • Creative Commons License
    This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License
    Theme modified from DevDmBootstrap4 by Danny Machal