How China manufacturing has actually created American jobs

Low cost manufacturing in China has taken manufacturing jobs from this country, but that doesn’t tell the real story of its economic impact. It misses one of the great benefits of China manufacturing: by being able to have China produce products at lower costs, it has given U.S. companies the ability to grow their businesses and create millions of high paying jobs in research, engineering, marketing and sales.

Consumer electronic products are built using components from specialized suppliers, such as chip fabs, plastic molders, PCB manufacturers, and display companies. The product company does not have the capabilities to build everything in-house, and rarely does it makes sense economically.

Instead, they use a network of specialty companies, each doing what they do best. These specialty companies provide their components to a wide number of customers. Every company benefits from their economy of scale. The chip company makes the same product for multiple customers, so each customer benefits from the volume of the others. This is the way manufacturing always works in the free world.

If we think of manufacturing as one of the components of a product, then it makes sense to manufacture where the cost is most affordable. China, as a result of decades of investment by its government, has created one of the most efficient and effective manufacturing centers in the world for consumer tech products. It’s not just about low cost workers, but about being close to the component manufacturers and working on much smaller profit margins than U.S. manufacturers. Typically the manufacturing cost of a consumer tech product coming from China is about 10 percent of the total cost and most of the remaining is parts cost.

As Chinese companies have built and opened up their factories to the companies of all sizes, it’s become a resource that is now being used by tens of thousands of companies from the rest of the world to build their products. Prior to this, U.S. companies needed to build their own manufacturing capabilities or use expensive U.S. contractors that rarely worked with small companies.

By allowing China to build their products, companies are able to focus on the product areas that require the most talent: design, invention, engineering, marketing, and sales.

As an example, Bose invented the noise reducing headphone popular with business travelers and music fans. When I examined their cost model in 2009, their flagship product cost them $30 when built in China. ($23 in parts, $3 in labor, $4 in profit to the manufacturer). The product retailed for $350, and they sold it to retailers for $195.

While the Chinese manufacturer made $4 per unit, Bose grossed $192 that went toward profit, engineering, marketing and sales. In other words, the U.S. might have lost some lower-paying manufacturing jobs, but gained better paying professional jobs.

This effect is called the smile curve, where at the beginning of the product cycle, a company spends heavily on high paying jobs for development and research. In the middle of the cycle they spend much less money for manufacturing jobs, and at the end of the cycle they spend more for sales and marketing positions. This has been a model that has brought incredible wealth to many U.S. businesses and created millions of jobs in this country.

There are tens of thousands of companies from large ones such as Bose to small businesses that will seriously be affected by tariffs. Tariffs are inappropriate for restoring U.S. manufacturing jobs, but they are great for killing professional jobs.