Mobile handset has been one of the single largest imported high-tech products in many developing countries. For example, Bangladesh spent more than a billion dollar to import almost 34 million handsets in 2017. The obvious question would be-- why doesn't Bangladesh take steps to make those handsets locally?
Certainly, the objective of making these products would be to add local value so that the cost comes down and the bill of imported materials in making those handsets would be far less than the amount spent in importing finished products. To take advantage of this opportunity, Bangladesh government took decision to lower import duties on mobile handset making components. To make local production attractive further, import duties on finished handsets was also increased. To encourage local value addition, the government is insisting that local value addition should rise to 30 per cent. In order to attain so, what are the components to be made locally, and what would be likely implications on the cost as well as quality of assembled products are two important questions to be looked into.
To clarify these two issues, let's review cost components in making flagship handset, iPhone. As reported by macworld, "according to research firm IHS, the iPhone 6s Plus costs Apple $236 to manufacture, while it previously retailed at over three times the price at $749 for the 16GB model." There appears to be a large gap between the retail price and the cost of manufacturing. Such gap should be taken into consideration in defining local value addition. Let's now dissect the cost components of manufacturing. The Atlantic revealed the cost components of iPhone 4. The average sale price of Apple's iPhone 4 was $560. Of that, $7 covered the cost of manufacturing including labour, $178 went to components, $7 was taken by Foxconn, and Apple used to walk away with the rest, or $368. Being an assembler, Foxcon's labour based value addition in making iPhone was just 2.5 per cent of selling price and 7.2 per cent of total cost of manufacturing; which has gone down further due to increasing roles of robotics and automation in assembling. In making iPhone 4, other cost components included battery-$6; accessories-$5.67; mechanicals and electro-mechanicals-$19.97; audio-$0.98; touchscreen control-$0.90; display and touchscreen-$38.50; power management-$1.51; bluetooth and Wi-Fi-$8.
Another point we should also look into, who do make all those components? Does Apple make all of them and ask Foxcon to assemble them? Almost 200 suppliers, including component providers and others, represent at least 98 per cent of procurement expenditures for materials, manufacturing and assembly. Another pertinent question is why doesn't Apple make all of the components instead of sourcing them from suppliers in Asia, Europe and America? Basically, Apple does not make any of the physical components. With the recent US administration's insistence on Apple making in America, Forbes has recently released an estimated figure of making iPhone in America. And the number is "in the $30,000 to $100,000 range… and no, this is not a typo." Such analysis indicates that if Apple were forced to solely manufacture iPhone in America, there is a good argument that it would not be able to manufacture any to sell at all. The policy of making in America would not allow Apple either to offer iPhone at lower cost, or of higher quality.
Historically, developing countries have enjoyed the benefit of labour cost advantage in manufacturing industrial products locally. But over the decades, the labour component in manufacturing has been steadily falling, reaching almost negligible level. For mobile handset, labour value addition in assembling accounts for less than 5 per cent of the total cost of components. Moreover, for each component, there have been specialised producers in the world. Labour portion in producing those components is also very low, even lower than 5 per cent in certain components. Upon having a rough estimate, it could be reasoned that the cost of labour in bill of materials in making a mobile phone handset is no more than 10 to 15 per cent. Such reality of very low contribution of labour in making these products makes it quite challenging to make locally produced handset to be cheaper. If the same amount of duties are applied on both components and finished products, locally assembled mobile handsets are likely to be costlier than imported ones. Now, there could be an argument that Foxcon has been using high-level automation. Developing countries should pursue labour centric approach to make those devices. If such option is undertaken, the quality of those products will likely fall and cost will also increase, as current technology is cheaper as well as better than even least costly skilled labor force of developing countries in making precision devices.
With the given cost structure, role of labour and global supply chain of components in making mobile handsets, it appears that the target of reaching 30 per cent local value addition will likely increase the cost and reduce the quality. Import of highly expensive capital machinery in reaching the 30 per cent value addition mark will drain significant foreign currency. As a result, the total foreign currency spent for capital machinery and components will likely keep increasing with the growth of local value addition. Moreover, some of the global makers like Xiaomi have been pursuing deep subsidy based strategy to capture market share. Such competitive scenario also makes local value addition agenda non competitive for the developing countries. It's to be noted that Xiaomi sells its smartphones almost at half the price of the cost, although China-based suppliers offer many of the components.
The obvious question would be-- how should then developing countries reduce dependence on import and increase local value addition in high-tech products? This is a significant question for developing countries to work on. The labour centric conventional approach of manufacturing is no longer viable to be competitive in high-tech. In addition to developing physical infrastructure and adjusting taxes, attention should be given to local value addition capacity beyond labour. Instead of targeting to produce just few products through tax incentives and labour-based approach, focus should be on holistic planning for national capacity development to continuously advance in local value addition in modern manufacturing through innovation. For example, China has been pursuing re-innovation strategy to develop national capacities in a synergistic manner to maximise local value addition in the innovation space. Scale, scope and externality advantages along with local innovation capacity are critical to succeed to be competitive in modern manufacturing. Knowing how to make is no longer sufficient. To benefit from scale advantage, Apple sources components from even its rival like Samsung. Low cost labour has very little role to play to make locally produced high-tech products to be cheaper. And domestic market is not sufficiently large enough to benefit from scale as well as scope advantages.
The focus should be on innovation aspect as opposed to labour based manufacturing. Instead of trying to be competitive in producing the finished products only, focus should be on the means to be connected with global component supply chains. Instead of imposing local value addition target arbitrarily, there should be thorough analytical work done to set out achievable plan for increasing local value so that the cost of local production keeps decreasing-and preferable quality keeps improving. Otherwise, just labour based local value addition approach runs the risk of producing poorer quality products at higher cost.
M Rokonuzzaman, Ph.D is academic, researcher and activist on Technology, Innovation and Policy.
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