Published
Smiling curve shows how value is created
The value of a product is not just created in the manufacturing stage – research and development, as well as marketing and design, are also crucial components in today's increasingly globalized value chains.
Throughout the journey from initial idea to finished product, the value of a product gradually increases, which is ultimately reflected in the price of the finished product. What, exactly, lies behind this increase in value?
At the same time, the value added during the manufacturing of a product has gradually decreased, whereas the initial stage of, for example, research and development and the final stages of marketing and brand building have become increasingly important to a company.
Retaining value-creating stages in the country
“Visualized in a graph with a Y-axis for value-added and an X-axis for value chain or stage of production, the resulting curve appears like a smile,” says Stefan Karlsson, Head Analyst at EKN. “This pattern is particularly relevant to highly developed economies, as the lowering of trade barriers has enabled the outsourcing of manufacturing to other countries, while the value-adding parts of the production process are often kept in Sweden.”
EKN is able to testify to this development, which sees companies in industries such as telecom, automotive and engineering restructuring their value chains by locating different activities to those regions that are best suited for the task.
The belief that you cannot turn to EKN for support if manufacturing takes place abroad is a common misconception, but that’s wrong.
”The belief that you cannot turn to EKN for support if manufacturing takes place abroad is a common misconception,” says Karlsson, ”but that’s wrong. For a deal to be eligible for support from EKN, it has to benefit Swedish business interests, which may refer to a certain stage of the value-adding process even as other production stages have been outsourced abroad.”
Difficult to measure Swedish exports
Around 900,000 of 3.2 million jobs in the private sector in Sweden are connected to global value chains. Of those jobs, the share related to manufacturing and assembly has decreased, while research and development, sales and marketing, logistics, technology and process development have increased their shares. This makes it more difficult to assess the actual value of the Swedish export.
”You cannot rely solely on numbers when seeking to comprehend Sweden’s export, instead you have to use a value-added approach in measuring the value that is being created in Sweden and contributes to our GDP,” says Karlsson.
The transition, however, is important to bear in mind and we need to understand the underlying dynamics in order to reap the full benefits. Lately, it has become more common for Swedish suppliers to act as subcontractors in large EPC projects in Africa and elsewhere. These projects present EKN with opportunities to support foreign buyers of Swedish exports, since the transaction contributes to the amount of Swedish value-added in international contracts.
”It is important to Sweden that we safeguard jobs that contribute a high amount of value-added. They bring positive effects to the country as a whole and strengthen our ability to compete in the global markets for talent and entrepreneurship,” concludes Karlsson.