What is a "Smiley Curve"?

China is said to be at the flat middle portion of the smiley curve.

But what is this "Smiley Curve"?

The curve is named for the U-shaped arc of the 1970s-era smiley-face icon, and it runs from the beginning to the end of a product’s creation and sale. At the beginning is the company’s brand: HP, Siemens, Dell, Nokia, Apple. Next comes the idea for the product: an iPod, a new computer, a camera phone. After that is high-level industrial design—the conceiving of how the product will look and work. Then the detailed engineering design for how it will be made. Then the necessary components. Then the actual manufacture and assembly. Then the shipping and distribution. Then retail sales. And, finally, service contracts and sales of parts and accessories.

The significance is that China’s activity is in the middle stages—manufacturing, plus some component supply and engineering design—but America’s is at the two ends, and those are where the money is. The smiley curve, which shows the profitability or value added at each stage, starts high for branding and product concept, swoops down for manufacturing, and rises again in the retail and servicing stages. The simple way to put this—that the real money is in brand name, plus retail—may sound obvious, but its implications are illuminating.

The implication of this is that although Americans import huge volumes of manufactured goods from China, most of the money spent on those imports stays in American hands. For e.g. not much of Apple's iPod is manufactured in the United States, but the majority of value added is captured by Apple... Apple made $80 in gross profit on a 30-gigabyte video iPod that retails for $299. Its profit is 36 percent of the estimated wholesale price of $224. [Not to mention the retail profit, if it is sold in an Apple store.] The total cost of parts was $144.

References:
The Personal Computing Industry Center at the University of California
More on the "smiley curve": China makes, Apple takes