As someone with an interest in plans and data, I’m interested in the Smiley Curve. Ever heard of it?

Liam Casey—the 40-year-old Irishman who coined it—explained to me (and my EMBA cohorts) how it works. We met him in the Guangdong Province city of Shenzhen, which is about two hours northwest of Hong Kong.

Casey's Smiley Curve for a $1000 laptop.

Don’t let the proximity to Hong Kong fool you, though. Shenzhen is very much Mainland China, starting and ending with the can-do attitude of the most wild-west place you can imagine.

Casey—a red-faced man with a Chinese-size frame and explosive energy with lots of reserves—wanted a way to explain what he was seeing from inside China, where he’s spent twelve years building the company that supplies Apple—and many other global firms—with soup-to-nuts services around designing, sourcing, manufacturing, packaging, and distributing products made in China and being shipped and sold anywhere on the globe.

China’s not the cheapest place in the world for labor any more, but it is one of the best places to find a business-friendly environment, a highly developed supply chain, sophisticated infrastructure, and a network of companies that can design and make anything, rapidly, and at competitive cost.

Separately, these pieces are good, not great. Together, they become a formidable source of competitive advantage for China, and any business that chooses to leverage them. Just ask Apple (whose 2009 end-of-year revenue growth is over 12% and whose stock price increased by over 100%—this year!)—All their products state it clearly on the packaging: “Designed in the US. Made in China.”

Which brings us to the Smiley Curve.

As business people and economists, we want to understand where, why, and how value is created along the life-cycle of a product—“from the beginning to the end of [its] creation and sale.”

If we know this, we can plan any number of things: If you lead a company, you can figure out how to shift the value from one part of the curve to another to your advantage; if you’re head of a government agency in charge of distributing Stimulus Funds, you can use it to determine where to best distribute funds to stimulate growth in value-add skills and services; and if you lead a federal government, you can use it to craft your strategy of diplomacy with a country of interest.

Today the Smiley Curve shows that the biggest chunks of value/profits are generated in the brand, the concept and design, and at the retail counter back in the US—especially if it’s a high-end product, where a retailer might keep as much as half of the profits. This makes sense, because the consumer market (the U.S.) knows what it wants (U.S. tastes) and knows how to market (think Proctor and Gamble, Apple, or your favorite) to itself (think fast food, if you want a rather grotesque example).

The parts of the curve that produce less value/profits along the life-cycle are in the middle of the curve, toward the bottom, and are performed in China (in this example). These are activities like sourcing the parts and components, assembling the product, testing it, packing it, and shipping it.

Casey knows something about this, and he shared with us something revealing about how companies in China—his included—want to shift their activities to the curve’s “dimples”—toward the Design and Retail ends.

Chinese companies are building up expertise in design as they become exposed to Western designs and brands. So much so, in fact, that Casey’s firm now offers design services as an integrated value-add to his Western customers. All you have to bring is the idea—his firm will take it from there.

But companies are not the only organizations in China that are evolving. Universities are, too. For example, Hong Kong’s seven universities are all transitioning from their legacy 3-year curricula to Western-style 4-year programs. They have to be careful though, because a poorly implemented strategy can be worse than a bad strategy itself. They must ensure the 4-year programs have the right mix of courses, which result in graduates with the right set of skills to help lead their country forward at a pace the country can accommodate given its enormous size and proportions.

On the other side of the curve—the Retail dimple is being pinched as well.

Today, China runs a market economy, much like ours, but with some significant differences. For one thing, most Chinese are not consumers, and China certainly does not have a consumer economy and society, like we have here at home. Not yet. But that’s the idea—at least to some extent. It’s not difficult to imagine a day when Chinese develop the concept for a product (for Chinese), design it (for Chinese), manufacture it (for Chinese), and then consume it themselves. They might even off-shore the “manufacture it” part of the life-cycle to a smaller economy somewhere else in Asia.

Also, they’re still operating a centralized Communist government, but they’ve adapted that as well. Chinese “5-year plans,” now officially called “5-year guidelines” (to acknowledge the distancing from its Soviet-style roots), are in their 11th cycle since their inception in 1953 by Mao Zedong. The current 5-year guidelines provide insight into China’s goals and aspirations:

  1. Secure economic growth and economic structure
  2. Urbanize the population
  3. Conserve energy and national resources
  4. Encourage sound environmental practices
  5. Improve education
  6. Increase access to employment and medical care
  7. Improve pensions for the elderly

We should not fear these guidelines—we should strive to understand them, contribute to their development, and embrace ones that make sense for us.

If you listen at Thanksgiving next week, you might hear friends and family ask, Why does China still burn coal—don’t they know it contributes to global warming? And such things.

We need to understand that China does know, and that China and her people have a plan.

Do you know what our plans are?

Do they include universal health care (like Canada and most of the civilized world have, in one form or another, or are we going to continue to have the most expensive, least effective system in the civilized world?)?

Do they include a viable pension plan for our elderly (or will we just see what happens?)?

Do they include a plan to improve our education system (or are we leaving the plan for our children’s minds to a few high-net-worth individuals with good intentions?)?

A good strategy will fail if it is not implemented well, but failure to have a strategy will certainly meet a swift, predictable end.

Do we have a plan? Do we know how we’re going to implement it?

We can learn some things from our friends in China, if we’re willing to listen.

And we can also learn something right here at home. If we look at the Smiley Curve, maybe it will tell us something about where we want to go.

© 2009 John Dila