From smile curve to wicked smile? The reconstructing of the value chain in the platform economy era in China

Abstract

The concept of the smile curve was first proposed around 1992 by Stan Shih, the founder of Acer, a computer company based in Taiwan (Shih, 1996). The curve is often used to illustrate the value added at different segments of the production process of a product or service. According to this hypothesis, there is a significant difference in the potential for value added throughout the entire value chain, with the production stage being the least promising stage concerning value creation in the whole process. This hypothesis suggests that companies should focus more on research and development and innovation to achieve value chain upgrading, rather than just focusing on production efficiency. At the same time, it also implies that emerging economies specializing in being the “factory” may produce relatively less value added, whereas industrialized economies with advanced talent and high-end technology generally generate greater value added.

Although the platform does not produce any products, it cannot only control the interaction between users, workers, capital, and information (Graham, 2020), but it can also change the structure of social and market interaction and redistribute resources through “multi-sides markets” (Langley & Leyshon, 2017; Grabher & van Tuijl, 2020).

A recently published article in The Economist, “The next big thing in retail comes with Chinese characteristics”, claims that “Chinese apps are to 21st-century shopping what American malls were to last century’s” (The Economist, 2021). It introduces a currently e-commerce phenomena in China, namely the “multi-platform matrix operation”, which combines traditional e-commerce platform and “half-e-commerce platform” (Chu et al., 2022). This phenomenon mixes the virtual and physical, and soared especially during and after the Covid-19 pandemic. In fact, the platform does not only change the form of shopping, but it also reconstructs products’ entire value chains.

Against this backdrop, our study aims to analyze the impact of platforms, especially shopping platforms, on traditional value chains and the deep mechanisms that influence them focusing on the case of the Chinese furniture industry. Specifically, our study includes two cases furniture industry clusters, Nankang and Suining. The former is a cluster that already had a strong furniture manufacturing base before the prevalence of Taobao platforms. The latter case is a furniture industry cluster that was built from scratch in the region based on its platform-based status of an Alibaba’s Taobao Village. First, with the help of a comparison of these two cases can we will show how platforms create value and how they can provide lagging regions with a window of opportunity and a place in the existing value chain. Secondly, we will use these two cases to explore how the platform economy reconstructs different segments of the industrial smile curve, actually leading to a wicked smile due to a “race to the bottom”.