What determines the cost of a product?
A scrap dealer knows it the best. Surprised at how a person who breaks down things can be right about making things?
If you scrap a car, it is broken into its basic components and segregated. Metal comprising of sheet metal and solid steel according to their physical and chemical attributes; plastic according to their color and grade; wires for their copper sans the sheath; rubber from the tires etc.
All these are valued using the basic unit of measure – weight. A price assigned to the weight yields the total value.
There is no ‘value addition’ .
So the price of a crank shaft is its weight multiplied by the price of steel and not burdened by its machining costs or the labor or overheads or profit or the cost of technology involved in making it or the cost of the R&D involved in developing it.
Hence a used soda can is more valuable than a computer because when a computer is broken down all you get is some plastic and very little metal.
So the less a scrap dealer offers, the more the technology cost. ( For the sake of this example let us club all the additional costs except the cost of raw material and call them technology cost). But even at this stage we have not totally done away with technology cost. For example the steel has used technology to become steel from iron ore and the iron ore itself used technology to be mined. But for this example we can start at the level of the scrap dealer and divide the basic components of a car into metal, plastic, copper aka ‘raw material’ and a technology cost to make these components into a car. And we will be calculating the cost of raw material only by weight. It is now safe to assume that where ever man intervenes there is value addition and hence a cost involved.
So what is the cost of technology? If the cost of the raw material is 25% of the cost of a car or 5% of the cost of a computer, then it is safe to assume that the balance 75% and 95% respectively are the cost of technology. He who makes the technology, controls the price and reaps the maximum benefit.
Is this fair? Should the reverse be true? That is, can we use this methodology in reverse to make and price a car? In reality we can.
The more we indigenously develop things, at all levels of development, the lesser the technology costs and hence the lesser the final cost of any product