Research Fellow Tatsuya Kimura
The smile-curve hypothesis describes a phenomenon in the assembly-type manufacturing industry in which the profits or the added values of the processes in the middle of the value chain - manufacturing and assembly - go down while that of the processes at the ends of the value chain - parts and raw materials on one end and sales and services on the other - increase. According to the hypothesis, this change has been caused by high global competition brought about by the increased standardization and modularity of assembly parts.
Though the idea of the smile-curve was first proposed with respect to personal computers, the theory has come to be applied to a broader range of products so that now it is used even in reference to the whole manufacturing industry. Moreover, while the value chain was first conceived of in terms of the manufacturing stages that one unit of a product goes through, it is now more broadly thought of in terms of all the independent industries - from raw materials to customer services - that are involved in the creation of the product. The indices used to compare the different sections of the value chain have also multiplied. Though the index was initially the distribution of added value, now such figures as ratio of added value, profit distribution, and profit ratio are also used.
Yet, despite the considerable evolution of this hypothesis, it still has little empirical support. The following report investigates the actual existence of the smile curve in the value chain of the assembly-type manufacturing industry. It adopts the broader conception of the value chain as all the industrial processes that go into the creation of the product, and uses the profit ratio as the index of comparison. The data from sources including the Input-Output Tables and the Financial Statements Statistics of Corporations by Industry (yearly report) were used to calculate the rate of gross asset operating surplus (operating surplus / total assets) for each of the 184 sectors in the 'aggregated small classification' of the Input-Output Tables. Furthermore, the profit ratios (or the profit curve) for each stage of the value chain were measured in each of the years '85, '90, '95, '97, and '99. While the assembly-type manufacturing industry was examined as a whole, it was also analyzed through the following six sectors: 1) household electronic appliances, 2) household electric appliances, 3) electronic computing equipment and accessory devices, 4) communications equipment, 5) passenger motor cars, and 6) trucks, buses and other vehicles. In this investigation, the smile curve was observed in the three sectors of household electronic appliances, electronic computing equipment and accessory devices, and trucks, buses and other vehicles. However, the smile curve was not seen at all in the other three sectors, nor was it salient when looking at the assembly-type manufacturing industry as a whole.
Thus, for those sectors in which the smile curve actually occurred as a result of the heightened competition brought about by increased modularity - e.g. the electronic computing equipment sector - moving up and down the value chain is essential in order to improve profits. For the other sectors, however, more important for recovering profits is the reduction of labor distribution ratios through a shift toward a merit based wage system and a focus on refining the payroll.
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