The U.S. Can’t Manufacture the Kindle and That’s a Problem
Amazon’s Kindle e-reader cannot be manufactured in the U.S. and that’s a cause for concern.
Even though the Kindle’s key innovation — its electronic ink — was invented and is being made, at least for now, in the U.S., Asian manufacturers are capturing the vast majority of the value added by manufacturing the e-reader itself. Even more worrisome, the U.S. is almost certain to lose control of the e-paper display technology and the future innovations that spring from it.
Amazon designed the Kindle in California and one of its key components, its “ink” (the tiny microcapsule beads used in its electrophoretic display), were designed and are being manufactured by E Ink, a company based in Cambridge, Massachusetts. But the majority of the value added in manufacturing the rest of the unit is being captured in Asia.
The market research firm iSuppli estimates that the Kindle’s total manufacturing cost is $185. The most expensive single component is the $60 display, which Taiwan’s Prime View International is manufacturing. The display consists of E Ink’s special beads and a sheet of glass that has a patterned layer of silicon transistors on it that turn the beads black or white when a voltage is applied.
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E Ink had to have the glass made in Asia because the companies there are the only ones that can deposit patterned silicon on sheets of glass. That capability left U.S. shores when American companies failed to keep up in the LCD flat-panel-display industry.
How is the $60 value of the display divided among the electronic ink, the glass/silicon substrate, and all the processing? That information is not public, so I don’t really know. But I do know that a sheet of low-temperature polysilicon with transistors costs $20 to $30, and other processing steps, including the application of the beads to the glass, cost something as well.
All this suggests that E Ink’s beads account for no more than half of the value of the display, which raises the question of whether E ink could earn a sufficient profit from manufacturing just the beads to cover its R&D costs for developing the whole display. E Ink’s ongoing effort to sell itself to Prime View suggest that the answer is no.
The next most valuable component of the Kindle is the wireless broadband data module, which is supplied by San Diego-based Novatel Wireless and is made in Korea. iSuppli estimates its value is $39.50, an amount that includes a $13 Qualcomm CDMA chip that is also manufactured in Asia. Though chips like this are still designed in the U.S., the vast majority of them are manufactured in chip foundries in Taiwan, Singapore, and China, and then packaged somewhere in the region. Probably about $20 of the $39.50 goes to the U.S. companies.
The Kindle contains a microprocessor chip supplied by Austin, Texas-based Freescale Semiconductor whose cost is $8.64, according to iSuppli. I don’t know where that chip is being made, but all the other electronic components, including the lithium-polymer battery, were designed and are being manufactured in Asia, where the capabilities reside thanks to its strong consumer-electronics industry.
Of the total cost of $185, perhaps $40 to $50 is captured in the U.S. Is that a problem? After all, Amazon seems well-positioned to capture most of the value of the Kindle (the difference between the product’s wholesale cost and retail price) and a healthy portion of the profits generated by sales of e-books to Kindle owners. In addition, the Kindle’s wireless data service, which uses Sprint’s data network, resides in the U.S.
So why does it matter if the Kindle can’t be manufactured in the U.S.?
One reason is importing products like the Kindle will contribute to the U.S. trade deficit. Manufactured goods, especially high tech products, have a high value-add. I suppose we can export soybeans and oranges, but it takes a lot of soybeans and oranges to pay for a Kindle.
But a more substantive cause for concern is when innovations can’t be manufactured in the U.S., the locus of innovation in that area frequently shifts to the countries that can manufacture them.
Even though the electrophoretic beads were the central innovation in the Kindle, E Ink’s inability to control the low temperature polysilicon and the fabrication of the display meant that it could not perform the system integration required for it capture the majority of the value add. This inability undoubtedly is one reason E Ink couldn’t remain independent. Assuming the deal with Prime View goes through, I will not be surprised if Prime View ultimately moves E Ink’s bead production and R&D to Asia.
The more worrying thing to me, though, is the likelihood that by not manufacturing the electrophoretic display, the U.S. will miss out on the future industries that spring from it — things like large flexible displays, future generations of electronic signage, and plastic electronics. Those technologies could, in turn, spawn other innovations and new industries.
Years ago the U.S. lost the vast majority of its infrastructure, or “commons,” in precision optics to Japan. The Japanese used those capabilities to grab the lead in producing lithography tools for semiconductor manufacturing, which, in turn, drove most American semiconductor manufacturers out of the DRAM business. The Japanese also employed those capabilities to expand into lithographic tools needed to manufacture flat panel displays. This same story has played out in high tech industry after high tech industry.
The lesson: Sometimes when you let your capabilities get away, you give up not only one industry but all its progeny.
Willy C. Shih
Professor of Managment Practice
Harvard Business School
The U.S. Can’t Manufacture the Kindle and That’s a Problem
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