2023-06-11 06:00:00
High tech companies dominate the American stock market to the same extent that European luxury firms are at the top of the continent’s markets. A contrast that sends mixed signals about the future of Europe.
Photographs by Tony Ray-Jones of the United Kingdom of the 1960s
Stan Chen-Jung (Stan Shih to Westerners) was a key figure in the golden years of Asian microelectronics. An electronic engineer, he founded Acer, a computer and other electronic device company that became the best-known Taiwanese brand abroad. Stan Shih was also a man fond of diagrams. He was the author of The Smile Curve.
There are curves that history has made popular. The Philips Curve, which relates unemployment and inflation, has been a reference for economic policies for years. The Laffer Curve, less taxes, higher collection, became famous for contributing to the neoliberal triumph, not so much for its content, never contrasted. From the Smile Curve ( Smiling Curve ), on the other hand, very little has been said. Probably because the author of it was an Asian engineer and because it was in Asia where it was discussed the most.
The Smile Curve is U-shaped and is a graphic representation of the added value in each of the manufacturing phases of a product. The first and most profitable vertex is occupied by the conception and design. The second vertex, also very profitable, is the final phase of the product: marketing and distribution. The least profitable part is the “base” of the U, the manufacturing itself. The assembly.
The curve was a wonderful description of what was happening in the global industry, of the creation of the great supply chains. Manufacturing was fragmented. The companies retained the most profitable departments (concept and design, after-sales) and subcontracted manufacturing to subsidiaries in third countries.
The curve was hotly disputed by Chinese economists. They thought that with assembly lines alone, China would not go very far. But practice has shown that assembling does not mean just copying, and that mastery of manufacturing can lead to innovation. Around the establishments of multinationals such as General Electric, Tesla or Caterpillar, China created industrial clusters. Shenzen has been a good example of this. The Iphone began to be assembled there in 2007. Today the area is a leader in the manufacture of consumer drones and other electronic innovations. Huawei is another symbol of the success of that strategy, which has also allowed them to dominate entire sectors, such as car batteries or solar energy.
It will never be the same to make bags, however beautiful they may be, than to conceive and produce a smartphone
As the Smile Curve explained, large companies in the United States and Europe divested from unprofitable manufacturing (and the millions of jobs it created) to invest in R&D and after-sales. But Europe probably lost something along the way.
Europe still has a position of global strength. But the foundations of his power are perceived today as fragile in the face of the storm unleashed by the confrontation between China and the United States. Joschka Fischer, a trusted man of German corporations, has told in Project Syndicate that Europe has to lose in this game. He gives the automotive industry as an example, which Germany and Japan have dominated for decades and which is undergoing a profound reorganization due to the arrival of the electric car. China is now in first position. And the United States seeks the same with the subsidies it distributes among its companies through the Inflation Reduction Act.
Europe is not a poor region. It is a symbol of wealth for other regions and world powers. But part of that wealth has to do with the past. In the last year, large companies high tech Americans have contributed 65% of the profits on Wall Street. In Europe, however, the big news is the companies in the luxury sector, which account for 30% of the profits on the European stock market. Of the top ten European companies by capitalization, four are from the luxury sector.
China’s strength in the electric car places Germany as a loser in the sector’s readjustment
The rise of luxury is the result of many circumstances. Sales have skyrocketed during the pandemic. The increase in the number of rich has contributed enormously to this. Its success is the combination of the almost artisanal work of medium-sized Italian firms and the strategy of French corporations (LVMH, Hermes, L’Oreal, Christian Dior). That said, as analyst Ruchir Sharma reasoned this week in Financial Times it is still shocking that one of the most prosperous European sectors is the result of the application of techniques and working methods that date back to the 17th century.
The contrast between the strength of the high tech Americana and European luxury suggests that the continent may become something of the world’s spa. Europe is the place where all the privileged want to spend a season. It has the historical cities that everyone wants to visit. The restaurants that gastronomy lovers want to frequent. Make the things they want to own, be it Ferraris or Ferragamo shoes. But spas have their limitations: except for the manager and two others, salaries will always be low, commensurate with the productivity of the services provided there.
Because manufacturing bags and shoes, no matter how beautiful and well finished they may be, will never be the same as conceiving and manufacturing a smartphone.
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