Domestic value addition in manufacturing - iPhone in China

As Patrick McGee has shown in a brilliant new book, the partnership between Apple and Foxconn to make the iPhone may have been a primary contributor to the emergence of China as the factory of the world. It may be no hyperbole to say that China made the iPhone, and the iPhone made China!

This post will highlight some aspects of the domestic value addition of the iPhone in China. 

The value addition chain for any product was described by the founder of Acer Stan Shih in terms of the smile curve. It says that the highest value is at the beginning and end of the value chain, while manufacturing, the middle stage, contributes less value. Yuqing Xing has a very good description of the manufacturing value addition smile curve. Outsourcing starts with the lowest-value assembly and moves to the manufacturing of non-core components, and then to more complex electronic components. The highest value-added activities like design, R&D, and branding remain with the original equipment manufacturers (OEMs). 

Yuqing Xing and Shaopeng Huang tore down and analysed the value-added by country for three mobile handsets assembled in China - Apple iPhone X, Xiaomi MIX 2, and OPPO R11s. They write

We adopt two baselines: production costs and retail prices. In terms of the production costs, it is found that the shares of domestic value-added for the three handsets are 25.4%, 15.5% and 16.7% respectively. For the iPhone X, Chinese firms collectively captured more value-added than the first generation iPhone 3G and performed relatively sophisticated tasks beyond simply assembly. For MIX 2 and OPPO R11s, the teardown analyses further reveal that no indigenous Chinese firms are involved in the manufacturing of components mounted on printed circuit board assembly. In terms of retails prices, the shares of domestic value-added for Xiaomi MIX 2 and OPPO R11s are 41.7% and 45.3% respectively, higher than the corresponding figures for production costs, suggesting that developing indigenous brands before overcoming technology deficiency is an alternative strategy to move up the value ladder along the value chains.

This graphic captures the respective domestic value addition for the three phones.

The high level of value added as a share of retail price in the case of OPPO and Xiaomi arises from branding.

However, using retail price as the benchmark, it is showed that there is strong evidence that Chinese firms have climbed up the ladder of value chains in the smile curve, more by building a strong brand name rather than developing advanced technological capabilities. More specifically, by taking advantage of (1) the size of the Chinese market; (2) their familiarity with the preferences of low- to mid-income customers; (3) the availability of modular production system and technological platforms, Chinese smartphone vendors have pursued a less conventional locus of upgrading, jumping directly to brand development before acquiring sufficient technology capacity. Such a strategy enabled them to overcome technological disadvantage and take a short-cut to catch-up with their foreign rivals.

But even for the Chinese brands, the major components are almost completely sourced from foreign firms. 

The domestic value added as a share of manufacturing cost is 15.5% for Xiaomi (total manufacturing cost of $293.18) and 16.7% for OPPO ($335.98). Even for Huawei, with its in-house chip, the domestic value added is only 38.1%, mainly due to the Kirin processor of HiSilicon, a Huawei subsidiary, and the OLED display made by BOE Technology. 

Xing traces the change in value addition as a share of manufacturing cost and retail price across iPhone 3G (2009) and iPhone X (2010). The table captures the tasks done by Chinese firms for the two models.

And the graphic below captures the respective value added in the two models. 

However, it’s interesting that while manufacturing value added in China has increased, the share of the iPhone’s total cost coming from Chinese firms has remained tiny, even for the latest models. Just 2.5% of the total cost came from Chinese firms, whereas over 80% came from US, Korean, Japanese, and Taiwanese firms. 

This graphic captures the country-wise headquarters of the suppliers of iPhone.

Though the cost-to-retail price ratio for iPhone models has been rising, it was still only 49% and 52% for the 15 Plus and 15 Pro models. This points to the dominant share of value added going to R&D and branding. 

In another paper, using the data for value-added for iPhone X, Xing shows (also this) that the standard trade statistics, which use the gross value of exports, overestimate the US trade deficit with China by attributing all gross value generated to the exporting nation. 

According to that principle, whenever China ships one iPhone X to the US, the current system of trade statistics calculates it as a $409.25 export to the US. The teardown data reveals that the total value of the parts imported from the US for assembly of the iPhone X is $76.5. Hence, importing one iPhone X from China generates a $332.75 ($409.25–$76.5) trade deficit for the US… However, Korea, Japan, and other countries are also involved in the production of the iPhone X and supply more than 45% of the parts and components. In other words, the $332.75 consists of not only value-added originating in China but also that contributed by Korea, Japan, and other non-US countries. It should be considered as a trade deficit between the US and all other countries involved in manufacturing the iPhone X, not just China. 

In terms of value-added, the US deficit with China for the import of one iPhone X is only $104, less than one-third of the figure based on gross value. For every iPhone X imported by the US, current trade statistics mistakenly add $228.75 to its trade deficit with China. In 2017, American consumers bought 42.2 million iPhone units. Using that figure as a reference, the iPhone trade alone exaggerated US trade deficit with China in 2018 by $9.65 billion, about 2.3% of its total deficit with China.

He also shows that, given the high share of foreign value added, China would need to depreciate its currency by a large percentage to offset tariffs by the US. 

The large portion of the foreign value-added embedded in the iPhone X greatly weakens the effectiveness of yuan depreciation in counterbalancing Trump’s tariffs. When the Chinese yuan depreciates against the US dollar, only the $104 Chinese value-added of the iPhone X will be affected. The rest of the iPhone X’s production cost—$305.25, the sum of all parts and components imported for assembling the iPhone X—will remain constant and not be affected whatsoever. However, if President Trump decides to levy a 25% tariff on the iPhone X, the tax base will be $409.25, i.e. the sum of both Chinese and foreign value-added. To offset the tariff burden due to the foreign value-added, the yuan should depreciate much more than 25%.

The horizontal axis denotes the percentage of foreign value-added embedded in Chinese exports.

Farok J Contractor of Rutgers Business School has updates on this analysis of the trade deficit arising purely from value-addition. His value-added numbers are much smaller than those of Xing. 

For a start, he writes that the components of the iPhone 16 may be sourced from as many as 43 countries, and Foxconn receives just $14 for the final assembly. 

He estimates the Chinese value added in the total cost of a finished and assembled iPhone 16 of $563.73 to be just $38.89. Taking the 62 million iPhone 16 imported to the US from China, the US-China trade deficit caused by iPhone comes to $33.6 bn.

The estimates show that the value being added in China is only $2.41 billion annually (for the battery, case, and assembly of each phone). The value added in the US is for the US-sourced components ($1.35 billion), plus the gross margin of Apple Inc. ($22.32 billion) and its distributors and retailers ($9.30 billion), totalling $32.97 billion.

He points to how tariffs on the finished import is deeply distortionary.

We can see in the Apple example how the value added in China amounts to only $38.89 in an iPhone 16. But the US customs department may assess a punitive tariff on the entire $563.73 FOB import value of the phone because all the components were finally assembled in China and shipped to the US from there.

Contractor also draws attention to an important point about how much value is captured by non-manufacturing activities, raising the question of whether the iPhone is predominantly a product or a service. 

Is this gross margin of $359.97 the profit per iPhone? No. The gross margin totaling $22.32 billion is used to pay for Apple’s 80,000 American employees – brilliant R&D scientists, technicians, designers, IT specialists, managers, marketers, supply chain personnel, etc. – who are talented enough to earn a median $127,000 salary annually. Only after paying for its US employees, US domestic transportation, distribution costs, marketing, and other overheads can what is left over be called “profit.” True, the great majority of Apple’s value added in the US is in high-end, valuable services – such as research, design, clever management, and orchestration of international supply chains and marketing – and not manufacturing or production, which is done abroad. Hence the earlier rhetorical question: Is the iPhone a product or a service?

Kun Cai, Zhi Wang, and Shang-Jin Wei have a new paper where they examine the trajectory of domestic value addition (DVA) in Chinese exports disaggregated on several dimensions and finds that industrial policies helped with the increase in DVA. This graphic shows the evolution of DVA of processing exports (those involving the export of goods with imported intermediate inputs, of the kind involving the iPhone) of manufactured goods. 

Direct value addition is that coming from the industry itself and not from other industries. The paper shows that the share of DVA did not increase sharply even over the 13 years of peak Chinese manufacturing growth. 

But the biggest story in value addition is how it has helped in the emergence of Chinese component makers, contract manufacturers, and branded OEMs in the mobile phones industry and beyond. Kyle Chan writes,

Apple’s Chinese suppliers are moving up the value chain. YMTC is the most striking case. State-backed semiconductor firm Yangtze Memory Technologies Co. (YMTC) is China’s most advanced NAND flash memory maker. In 2022, Apple was planning to use YMTC’s NAND chips for its iPhones, which are reportedly 20% cheaper than its competitors’ chips… Sunny Optical… became China’s leading optical parts manufacturers… Apple started using Sunny Optical in recent years to make the main camera lens for its iPhones, which had previously come from Taiwanese companies like Largan Precision and GSEO. Interestingly, one of Sunny Optical’s rising competitors is another Chinese company, AAC Technologies, which already makes acoustic and haptic components for the iPhone… Then there are Chinese companies like Lens Technology that have grown up with Apple over time… The company got its big break making the cover glass for the first iPhones in 2007. Over time, Apple has shared manufacturing technology from foreign firms with Lens Technology, like a new scratch-resistant screen material, to help the Chinese company improve its products. Today, Lens Technology is the world’s largest supplier of touchscreens, not only for most Apple products but also for Samsung, Huawei, Xiaomi, Oppo, and Vivo…

Historically, Apple relied on the big three Taiwanese contract manufacturers to make its products in China: Foxconn, Pegatron, and Wistron. But the past few years have witnessed the rise of homegrown Chinese contract manufacturers, such as Luxshare and Wingtech, which have been taking on a growing share of Apple’s manufacturing… This supplier base, which Apple and Foxconn helped to develop, later empowered China’s own smartphone companies like Huawei, Xiaomi, and Oppo. Apple’s suppliers in China—like Samsung, SK hynix, Sunny Optical, and Lens Technology—supply similar components to its Chinese smartphone competitors. The kicker is that even as companies like Apple try to move away from China, China’s manufacturing ecosystem will continue to be supported and pushed forward by its own homegrown smartphone companies. And now these same Chinese suppliers are already supporting China’s expansion into other industries, like semiconductors and EVs.

This is a good presentation by Yuqing Xing on how China’s role in the Global Value Chains emerged over time and the role of processing exports (those mainly made of imported intermediate inputs) in Chinese exports. 

The short lesson for India is this. Since its launch in 2021, the Production Linked Incentive (PLI) scheme helped create a large ecosystem of surface mount technology-based assembly in India, the starting point in the manufacturing race. But all the electronic components and PCBs, and the vast majority of electromechanical, mechanical, and other components are being imported and then assembled here. The natural next stage is to focus on the domestic manufacture of the purely mechanical non-core and then the other non-electronic components. This will require a PLI 2.0 that focuses exclusively on domestic value addition by targeting a few products and following a realistic pathway as mentioned above. I blogged about it here. 

Some thoughts on reviving manufacturing

Manufacturing has undergone transformational shifts in the last three decades. Technological advances, liberalisation of global trade, the practice of outsourcing manufacturing activities and offshoring them, and the emergence of China as the overwhelmingly dominant offshoring destination, have brought forth a quarter century or more of remarkable economic stability and prosperity. But this has also obscured severe economic damage and serious national security vulnerabilities that are now very evident and are convulsing domestic politics across countries. 

These trends have triggered debates on the future of manufacturing. On the one hand, some argue that reshoring manufacturing activities and reviving manufacturing jobs is a futile pursuit, and countries should instead focus on their services sector jobs. On the other hand, others, notably in the US, favour restoring manufacturing to its old glory. While the former tend to think that outsourcing and offshoring were largely a free lunch and there’s something irreversible about it, the latter see the revival of manufacturing jobs in terms of raising tariffs and making everything domestically. This post will seek to put the ideological debate in its perspective. 

The Economist has a very good fact-filled article which argues that pursuing manufacturing jobs may be futile and inefficient. It shows that the US manufacturing economy remains formidable, traditional manufacturing jobs pay less than others, and thanks to automation and other factors, even if there is a reshoring, the old jobs are unlikely to return.

Manufacturing produces more than in the past with fewer hands—a transformation much like that undergone by agriculture. Accessible, middle-class work of the sort that once drew crowds to the factory gates in America’s Fordist heyday has all but vanished. According to our analysis, the most similar work to the manufacturing jobs of the 1970s is not to be found in factories, which are now automated and capital-intensive, but in employment as an electrician, mechanic or police officer. All offer decent wages to those lacking a degree.

Whereas almost a quarter of American workers were employed in manufacturing in the 1970s, today less than one in ten is. Moreover, half of “manufacturing” jobs are in support roles such as human relations and marketing, or professional ones such as design and engineering. Less than 4% of American workers actually toil on a factory floor. America is not unique. Even Germany, Japan and South Korea, which run large trade surpluses in manufactured goods, have seen steady declines in the share of such employment. China shed over 20m factory jobs from 2013 to 2023—more than the entire American manufacturing workforce. Research from the imf calls this trend “the natural outcome of successful economic development”.

As countries grow richer, automation raises output per worker, consumption shifts from goods to services, and labour-intensive production moves abroad. But this does not mean factory output collapses. In real terms, America’s is over twice as high as in the early 1980s; the country churns out more goods than Japan, Germany and South Korea combined. As the Cato Institute, a think-tank, points out, America’s factories would, on their own, rank as the world’s eighth-largest economy.

Even a heroic reshoring effort eliminating America’s $1.2trn goods-trade deficit would do little for jobs. In the production of that amount of goods, about $630bn of value-added would come from manufacturing (with the rest from raw materials, transport and so on). Robert Lawrence of Harvard University estimates that, with each manufacturing worker generating $230,000 or so in value added, bringing back production to close the deficit would create around 3m jobs, half on the factory floor. That would lift the share of the workforce in manufacturing production by barely a percentage point. Assume this was done by levying an average effective tariff rate of 20% on America’s $3trn of imports, and it could cost an extra $600bn, or $200,000 per manufacturing job “saved”. That is a high price for jobs that are not as attractive as in the past…

Today factory-floor work lags behind non-supervisory roles in services on hourly pay. Even if you control for age, gender, race and more, the manufacturing wage premium has collapsed. Using methods similar to the Department of Commerce and the Economic Policy Institute, we estimate by 2024 the premium had more than halved since the 1980s. For those without a college education, it has gone entirely, even though such workers still enjoy a premium in construction and transport. Productivity growth has fallen, too: output per industrial worker is now rising more slowly than per service-sector worker, suggesting wage growth will be weak as well…

A job in industry is also now harder to attain. Modern factories are high-tech, run by engineers and technicians. In the early 1980s blue-collar assemblers, machine operators and repair workers made up more than half of the manufacturing workforce. Today they account for less than a third. White-collar professionals outnumber blue-collar factory-floor workers by a wide margin. Even once obtained, a factory job is far less likely to be unionised than in previous decades, with membership having fallen from one in four workers in the 1980s to less than one in ten today. 

What are the modern equivalents of factory workers?

What offers decent pay, unionisation, requires no degree and can soak up the male workforce? The result: mechanics, repair technicians, security workers and the skilled trades. Over 7m Americans work as carpenters, electricians, solar-panel installers and in other such trades; almost all are male and lack a degree. The median wage is a solid $25 an hour, unionisation is above average and demand is expected to rise as America upgrades its infrastructure. Another 5m toil as repair and maintenance workers—think HVAC technicians and telecom installers—and mechanics, earning wages well above the factory-floor average. Emergency and security workers also show similarities; over a third are union members.

Still, these jobs differ from manufacturing in one important way: there is no such thing as an hvac company town. Factories once powered whole cities, creating demand for suppliers, logistics and dive bars. The new jobs are more dispersed and, as such, less likely to prop up local economies. Yet although the benefits are more diffuse, they are almost as large. Nearly as many people are employed in such categories as held manufacturing jobs in the 1990s. With better wages, less credentialism and stronger unions, they may look more attractive than modern factory jobs to working-class Americans… Skilled trades and repair workers should see growth of 5% over the next decade, according to official projections; the number of manufacturing jobs is expected to fall. The fastest-growing categories for workers without degrees are in health-care support and personal care, which are expected to grow by 15% and 6%, respectively. These include roles such as nursing assistants and child-care workers, and do not look anything like old manufacturing jobs owing to their low pay.

There’s no disputing the point being made here that it’s a futile pursuit to restore the old manufacturing status in terms of jobs. However, that does not detract from the importance of focusing on manufacturing, especially in specific sectors for economic and strategic reasons. Further, given the circumstances involving China, any attempt to reshore manufacturing requires industrial policy and must be supplemented with protectionist barriers. Finally, no one country can match China's manufacturing dominance, and the only way out is to build within a coalition of allies a broad manufacturing base at a scale that can compete with China. None of these is mutually exclusive. 

Manufacturing is critical for several reasons. Historically, industries such as textiles, footwear, steel, cement, electricity generation, heavy equipment, consumer durables, electronic devices, and automobiles have been the mainstays of job creation and economic growth in both developed and developing countries. The economies of small towns to large regions have been built on these industries. They also tend to create 2-5 (or more) indirect jobs for every direct manufacturing job. An estimate by the Economic Policy Institute in the US shows that the number of indirect jobs lost for every 100 direct jobs lost is 744.1 for durable manufacturing compared to just 122.1 for retail trade. Services sector industries have far lower job multipliers. 

Manufacturing is also unique when compared to other sectors insofar as its industries have spillovers that go beyond job creation. Making things requires more things, which are made elsewhere by others. It spawns ecosystems of suppliers and intermediaries. Manufacturing involves technologies and practices that generate learning spillovers, which enhance productivity. Most importantly, it creates the conditions for innovations and technological progress, which in turn further boost productivity. Finally, manufactured goods are tradeable and therefore subject to the competitive pressures of a world economy, thereby rewarding efficient producers and punishing laggards. As economists like Dani Rodrik and others have written, manufacturing creates multipliers and productivity improvements unlike any other sector. 

Patrick McGee’s new book on Apple brilliantly illustrates how Apple transformed Foxconn by embedding its engineers and building capabilities, which in turn transformed Shenzhen by creating the foundations for an ecosystem of world-class manufacturing, which in turn transformed China itself into the factory of the world. 

The journalist James Fallows, who lived in China in the late 2000s, has argued that Terry Gou ranks second only to Deng Xiaoping in transforming China into an industrial behemoth over the previous fifty years. This is an extraordinary claim, but one backed up even by Gou’s rivals. “The reason Shenzhen is Shenzhen is Terry Gou,” says a high-ranking contract manufacturing executive. “Without his ambition, Shenzhen wouldn’t be the manufacturing power it is.

The book also quotes Intel’s Andrew Grove lamenting the trend of outsourcing of manufacturing work by the US PC makers.

Andrew Grove would later diagnose the problem as “a general undervaluing of manufacturing - the idea that as long as ‘knowledge work’ stays in the US, it doesn’t matter what happens to factory jobs.” But as Grove warned: “our pursuit of our individual businesses, which often involves transferring manufacturing and a great deal of engineering out of the country, has hindered our ability to bring innovations to scale at home. Without scaling, we don’t just lose jobs - we lose our hold on new technologies. Losing the ability to scale will ultimately damage our capacity to innovate.”

Most importantly, and especially so given recent events involving China, there’s a strategic aspect to the reviving manufacturing imperative. The pandemic exposed countries to their extreme dependency on China for everything from face masks to active pharmaceutical ingredients (APIs) and formulations. Such concentrated health risks pose existential challenges, and it’s not in the national security interest that countries expose themselves to such vulnerabilities. Besides, in recent years, countries have come to realise their excessive dependence on China for all kinds of manufacturing, including entire interconnected industries like green technologies. This kind of dependence on one economy has not been seen even when the US was the dominant manufacturing economy.

This dependence becomes a serious national security threat when faced with rising geopolitical tensions and trade wars. In recent years, China has abandoned Deng Xiaoping’s policy of ‘hide your strength and bide your time’ to pursue an aggressive foreign policy and precipitated border conflicts with neighbours. It has shown that it’s not averse to weaponising its dominance in manufacturing to restrict trade with its perceived adversaries, most famously manifest in the country’s policy on the exports of rare earth minerals. 

In December 2024, China announced a ban on the export of dual-use critical minerals like gallium, germanium, antimony, and superhard materials, which are used in the production of semiconductors and batteries as well as communications equipment components and military hardware such as armour-piercing ammunition. The country produces 98% of the global supply of gallium and 60% of germanium. In January 2025, it imposed restrictions on the export of technologies related to lithium extraction and the making of advanced battery materials.

Then, in response to the US reciprocal tariffs of April 2, the Chinese government imposed export restrictions on six heavy rare earth elements that are refined almost entirely in China and magnets made from them, of which 90% are made in China. Their exports are now licensed, and obtaining these licenses has become the point where leverage is being exercised. Further, reaffirming its intent, Beijing has also been cracking down on illegal trade.

More generally, it has also been creating hurdles to exports to certain countries. For example, India has been targeted selectively with several restrictions. Chinese authorities have been making it difficult for Foxconn, the Taiwanese contract manufacturer of Apple, to send machinery and Chinese technical managers to India to help build its supply chain. Customs delays and other obstacles are being raised to impede the flow of components and equipment.

For all these reasons, it’s a legitimate, even essential, requirement for productivity improvements, long-term economic growth, and, most importantly, national security for a country to have a deep and diverse manufacturing base. It’s important to acknowledge this requirement and view it separately from the ongoing debates and controversies about how to address the problem. The challenge should be about developing a strong manufacturing base (and not reviving some bygone labour share in manufacturing) in the least distortionary and inefficient manner.

Economists and experts who point to the beneficial effects of free trade tend to overlook the necessity of a domestic manufacturing base for both economic productivity and national security reasons. They harp on the benefits of free trade by looking at the last three decades. In this period, globalisation and the emergence of China helped expand global economic output at an unprecedented pace for a sustained period. It has enabled the biggest poverty reduction episode in history. Consumers have benefited from the globalised market and cheap Chinese imports, which kept inflation down for over three decades. The goldilocks of low inflation and high growth was achieved during this Great Moderation. In addition, China’s spectacular manufacturing capabilities have been central to the successes of the green transition, especially in the rapid scaling of renewable electricity generation technologies.

It’s therefore only natural that, when seen in isolation, experts see a resounding case for the continuation of the status quo. But they make the mistake of not stepping back and taking into account the unmatched benefits of manufacturing and its central importance for innovation, and the serious national security vulnerabilities that are surfacing amidst the growing geopolitical tensions between China and the US.

Finally, it’s a mistake to view the idea of restoring the manufacturing base as each country trying to bring back all manufacturing. Instead, the objective should be two-pronged. One, independent of the current geopolitical circumstances, all large economies should strive to have a strong manufacturing base, especially with capabilities across all strategically important sectors. This is important not only for economic reasons but also for strategic and security reasons, which are discussed earlier. 

Two, instead of the futile pursuit of each country (read the USA) trying to develop domestic manufacturing capabilities to match China, the objective should be to create the full suite of manufacturing capabilities within a broad coalition of like-minded countries. There are serious limitations to acting alone, and therefore, the necessity to mobilise a coalition of like-minded partners. No one country, even one as powerful and economically dynamic as the US, can break the stranglehold of China’s manufacturing dominance. The only realistic strategy to counter China’s dominance is to develop manufacturing capabilities across major industries within the coalition. 

Kurt Campbell and Rush Doshi (also this) have argued in favour of America forging alliances with like-minded partners to create a meta-economy that can outcompete China and manufacture at scale. 

To achieve scale, Washington must transform its alliance architecture from a collection of managed relationships to a platform for integrated and pooled capacity building across the military, economic, and technological domains. In practical terms, that might mean Japan and Korea help build American ships and Taiwan builds American semiconductor plants while the United States shares its best military technology with allies, and all come together to pool their markets behind a shared tariff or regulatory wall erected against China. This kind of coherent and interoperable bloc, with the United States at its core, would generate aggregate advantages that China cannot match alone...

For Washington, three realities must be central to any serious strategy for long-term competition. First, scale is essential. Second, China’s scale is unlike anything the United States has ever faced, and Beijing’s challenges will not fundamentally change that on any relevant timeline. And third, a new approach to alliances is the only viable way the United States can build sufficient scale of its own. Altogether, this means that Washington needs its allies and partners in ways that it did not in the past. They are not tripwires, distant protectorates, vassals, or markers of status, but providers of capacity needed to achieve great-power scale. For the first time since the end of World War II, the United States’ alliances are not about projecting power, but about preserving it.

During the Cold War, the United States and its allies outclassed the Soviet Union. Today, a slightly expanded configuration would handily outclass China. Together, Australia, Canada, India, Japan, Korea, Mexico, New Zealand, the United States, and the European Union have a combined economy of $60 trillion to China’s $18 trillion, an amount more than three times as large as China’s at market exchange rates and still more than twice as large adjusting for purchasing power. It would account for roughly half of all global manufacturing (to China’s roughly one-third) and for far more active patents and top-cited journal articles than China does. It would account for $1.5 trillion in annual defense spending, roughly twice China’s. And it would displace China as the top trading partner of almost all states. (China is today the top trading partner of 120 states.) In raw terms, this alignment of democracies and market economies outscales China across nearly every dimension. Yet unless its power is coordinated, its advantages will remain largely theoretical. Accordingly, unlocking the potential of this coalition should be the central task of American statecraft in this century.

But unfortunately, the Trump administration’s policies are pulling in exactly the opposite direction in terms of antagonising and decoupling from its traditional alliances.

Any effort to revive manufacturing will be costly. Consumers, businesses, and taxpayers must bear those costs. These costs are an internalisation of the costs of the negative externalities imposed by the practice of outsourcing and offshoring to China. I’ll blog separately on this. 

Weekend reading links

1. Toyota fact of the day

Toyota... the world’s largest auto manufacturer by volume. The company’s annual revenues now account for roughly 8 per cent of Japan’s nominal GDP.

2. AI is supercharging weather forecasting, which has become very accurate over the years.

3. Right to repair

A committee under the Department of Consumer Affairs has designed a Repairability Index for the mobile and electronic sector based on six criteria: Disassembly depth, repair information, availability of spare parts within a reasonable timeline, software updates, tools, and fasteners (types and availability). A scorecard of a product would be asked to be displayed at the sales counter, on the e-commerce platform, or on the package itself. On May 2, Belgium became the second country in Europe after France to implement a Repairability Index. The Belgian index is mandatory for pressure washers and laptops (excluding tablets). It also assigns a score from 1 to 10 to products like dishwashers, vacuums, and lawnmowers, allowing buyers to make a conscious choice based on a product’s repairability. The country is also expected to extend the index to bicycles — especially electric ones — as well as electric scooters in the future.

4. What Tesla stands to lose from the Big Beautiful Bill?

The bill would eliminate tax credits of up to $7,500 for people who buy electric cars. It would quickly phase out subsidies for battery factories and lithium refineries, and end financial support for electric vehicle charging stations. The bill imposes an annual fee of $250 on electric vehicle owners that environmental groups say is punitive. Those measures would hurt all carmakers that sell electric vehicles. But the Trump administration and Republicans in Congress are also trying to kill regulations that are especially beneficial to Tesla. Those rules allow Tesla to sell clean air credits to other carmakers that fail to meet environmental standards. During the first three months of the year, Tesla sold regulatory credits worth $595 million, which was more than the company’s net profit of $409 million. In other words, without the credits, Tesla would have lost money...

The Republican measures would result in sales of 7.7 million fewer electric vehicles by 2030 than would be the case if Biden administration policies remained in place. Tesla would sell 3.4 million fewer electric vehicles, or almost two years’ worth of sales, assuming it maintained its current U.S. market share of 44 percent of all new electric cars sold. Republican legislation would also eliminate programs that subsidize the cost of large battery storage projects, which has been a growth business for Tesla.

More here

5. Vietnam's spectacular manufacturing success is not translating into much value addition and risks the middle income trap. 

Annual foreign direct investment (FDI) reached $19bn in 2023. Foreign enterprises accounted for a fifth of GDP that year, up from 6% in 1995. The biggest is Samsung, whose complex in Pho Yen, a factory town near Hanoi, employs some 160,000 workers, who assemble the bulk of Samsung’s smartphones. The FDI boom, in turn, has produced a surge in exports, which have risen eight-fold since 2007, to $385bn a year. Foreign firms account for just 10% of employment and 16% of investment, but 72% of exports. Samsung alone accounts for 14%. Yet Vietnamese workers are simply assembling parts made, by and large, in China or South Korea. Even as export volumes have ballooned, the average unit value has stagnated. Vietnam adds less value to its exports than do nearby Malaysia and Thailand. Because final assembly is labour-intensive, productivity is low. Vietnam’s output per hour worked is 37% below the average for upper-middle-income countries in Asia. Over 90% of jobs in manufacturing require few or no skills...

Multinationals in Vietnam source the lowest share of local inputs of any country in East and South-East Asia. Despite Samsung Electronics’ huge presence in Vietnam, none of its core suppliers is a homegrown Vietnamese firm, noted a recent article in Guancha, a Chinese news outlet, that was widely read among the Vietnamese elite. The small number of Vietnamese firms that do supply global manufacturers mainly provide simpler materials, such as cardboard and plastics.

Meanwhile, Vietnam has reached the “Lewis turning point”, at which developing economies exhaust their rural labour surpluses and wages begin to rise swiftly. Between 2014 and 2021, over 1m agricultural jobs disappeared each year despite a growing labour force; in 2022-23 the pace decelerated to 200,000. Labour costs in manufacturing are already higher than in India or Thailand and are set to climb by a further 48% by 2029, according to the Economist Intelligence Unit, our sister company. Vietnam could soon end up too expensive for labour-intensive manufacturing yet too technologically unsophisticated to do much else—a classic middle-income trap.

This low value addition is something India should guard against. This sounds impressive reform by President To Lam.

Mr Lam has been boldest. He has abolished five ministries and eliminated an entire layer of the bureaucracy, at the level of Vietnam’s 705 districts. He is reducing the number of provinces from 63 to 34. All this is eliminating 100,000 jobs from the civil service. He has decreed that there should be a 30% reduction in red tape. At the same time Mr Lam wants to build administrative capacity. He has called for higher pay for capable civil servants. Some of his changes seek to reverse the legacy of “blazing furnace”, an anti-corruption campaign initiated by his predecessor. Over 330,000 party members were prosecuted or punished and tens of thousands resigned. The effect was to make bureaucrats drastically risk-averse. Mr Lam has instead sought to engender an atmosphere of tolerance of mistakes.

6. China's EV dominance in two graphics. First, its share of major global markets

Second, the competitiveness gap between its battery manufacturers and the rest of the world. 

7. Important graphic about the changing perceptions about dollar safe haven status.

What we’ve been seeing in recent months, with interest rates and the dollar moving in opposite directions, doesn’t look like what we normally see in the United States, or for that matter advanced nations in general. Instead, it’s the kind of thing one sees in emerging markets, where big market moves often reflect crises of confidence: International investors lose faith, pulling their money out, and capital flight causes both a falling currency and rising interest rates.

8. Reshoring manufacturing to the US faces daunting challenges. For most products, manufacturing in the US is more costly than for its largest trading partners.

Manufacturing costs in the United States are significantly higher.

9. If the tariffs on China were intended to gain leverage in negotiating a trade deal for the US, then it appears to have handed back all that leverage with the two rounds of negotiations that have been held to date. It appears that China has succeeded in linking its restrictions on rare earth exports to the US's restrictions on high technology exports. 

The US has accused China of not honouring its pledge in Geneva to ease restrictions on rare earths exports, which are critical to the defence, car and tech industries, and dragging its feet over approving licences for shipments, which has affected manufacturing supply chains in the US and Europe. Beijing has accused the US of “seriously violating” the Geneva agreement after it announced new restrictions on sales of chip design software to Chinese companies. It has also objected to the US issuing new warnings on global use of Huawei chips, and cancelling visas for Chinese students. On Monday, a senior White House official indicated that Trump could ease restrictions on selling chips to China if Beijing agreed to speed up the export of rare earths. That would amount to a significant policy shift from former president Joe Biden’s administration, which implemented what it called a “small yard, high fence” approach designed to restrict Beijing’s ability to obtain US technology that could be used to help its military.

Instead of building on President Biden's successes in restricting high-technology exports, President Trump appears to have allowed the Chinese to place on the negotiating table their easing in return for similar easing of their recently imposed export controls on rare earths. Here is Hal Brands,

China wants few things more than a relaxation of curbs on its access to high-end semiconductors; so do corporate players and analysts who argue that they do more harm than good. Although the details are hazy, the Trump administration reportedly agreed to lift some recent controls as part of a deal to deescalate the trade war. Let's hope the administration doesn't go much further than that. Ditching or dramatically rolling back the measures that preserve American's technological advantage — and that have been imposed, with bipartisan backing, over the past several years — would be strategic self-sabotage of the highest form.

The export controls at issue pertain to the most advanced computer chips and the inputs, both hardware and software, required to make them. During Trump’s first term, the US hit specific Chinese firms, namely Huawei, with targeted bans. Under President Joe Biden, Washington went big: It intensified the tech war by expanding their application to cover China as a whole. Since then, Washington and Beijing have been playing cat-and-mouse, as China has sought to evade tech controls while the US gradually tightens them... The goal, as then-National Security Adviser Jake Sullivan said in 2022, was to maintain “as large a lead as possible” in key sectors like AI and advanced computing, because those sectors will shape the future economic and military balance... if Trump's deal with Xi entails an agreement not to impose new export controls in the future, it will — thanks to the cat-and-mouse dynamic — severely erode America's ability to keep even its existing restrictions effective and up to date.

10. Samsung appears to have done a better strategy of geopolitical risk diversification than Apple.

A research by S&P Global shows that Samsung’s share of global final assembly volume of smartphones in India in 2024 was at 25 per cent compared to only 15 per cent of the Cupertino-based Apple Inc in the same period. For Samsung, its biggest exposure is smartphone assembly in Vietnam, which is more than double of India at 55 per cent, and Brazil is in the third spot at 12 per cent. These account for the top three assembly markets. In the case of Apple Inc, its exposure to different countries is very different — China still dominates with 83 per cent, a market from where Samsung had withdrawn assembly years ago in phases, preferring to shift to Vietnam and India. And apart from China and India, Apple has a small exposure of 2 per cent in Brazil and some other countries... one commonality in both Samsung and Apple is that they don’t assemble their phones in the US.

11. Are private credit and hedge funds the likely sources for the next financial crisis? TT Rammohan writes

The Economist says, “The five top players in private credit manage $1.9trn of credit assets across funds and insurance balance-sheets. Assets of the five biggest multi-manager hedge funds sit at $1.6trn, including huge leverage.” Moody’s Analytics warns that private credit’s linkages with banks and insurers could make it a “locus of contagion” in the next crisis. It warns that private credit could amplify a future financial crisis even if it’s not the source of one... after the GFC, bank ownership or sponsorship of hedge funds in the US has come to be heavily restricted under the Volcker Rule. Data on bank exposure to hedge funds in the US must be made public... Bank failure during the GFC was pervasive due to the combination of three factors: Excessive leverage, inadequate liquidity and mark-to-market losses on the proprietary trading book (and not losses on loan exposures). All three have come to be addressed by regulation. Banks are better capitalised. The Liquidity Coverage Ratio ensures that banks are better covered for liquidity. Stiffer capital requirements have discouraged proprietary trading. These measures may need to be augmented by bringing systemically important entities among hedge funds and private credit under the ambit of regulation if required. The Financial Stability Oversight Council in the US has the authority to do so.

12. Which is the world's largest packaged food company? JBS, a Brazilian company started in 1953, had revenues of $78 bn in 2024 with half its sales in the US.  

13. The Print has a good article on Gujarat’s potato revolution

The growth of the fast-food industry and increasing consumer cravings for fries, hash browns, and ready-to-cook frozen products kicked off this change. Homegrown companies like HyFun, Falcon Agrifriz, Iscon Balaji, and McCain started investing in processing technologies and an expanding network of high-end cold chain facilities crystallised. Scientists did their part as well. The Central Potato Research Institute (CPRI), under the Indian Council of Agricultural Research (ICAR), developed varieties with low sugar and high dry matter—qualities that make for crispier fries that soak up less oil. Now, India is not only meeting its own demand but shipping frozen potato products internationally.