We came across an interesting example of how historic and now changing  joint-partnership arrangements within China, coupled with the power of consumer preferences, drive rather interesting  global supply and value-chain requirements.

Wahaha is reported to be China’s third-largest and most innovative soft drinks and beverages provider. The company name represents the sound of a laughing child, and its founder and current chairmen, Zong Qinghou, is noted as one of China’s wealthiest entrepreneurs.

The company had a previous joint-partnership arrangement with French company Danone which helped to develop many of its current top brands, but that partnership has been dissolved because of previous legal disputes involving alleged copycat products under the Wahaha trademark.  The dispute was settled in an out of court settlement in 2009.

An article appearing in the print and online Financial Times (preview sign-up or paid subscription may be required) features highlights of an interview with Mr. Zong where he states that Chinese consumers, long after the previous 2008 incidents of tainted milk and milk powder, still remain highly concerned about the safety of local infant formula with ingredients sourced from Chinese farms.  That has motivated these consumers to be more attentive to non-Chinese brands or milk sources. Readers can review two of our previous commentaries concerning these changing Chinese consumer perceptions by clicking here and here.

Wahaha has introduced a new upmarket infant formula with the brand name of Edison. The company elected to source the milk powder from an unnamed Dutch provider, which packages the product in Holland within Wahaha branded tins.

Mr. Zong is now in search of a new joint-partners who can provide other input material product sourcing external to China, where consumer and brand perception is more positive for China’s consumers. In the interview, Mr. Zong notes that: ”…foreign companies need markets and we need good products.”

He further reinforces that goals for China’s resident corporate joint-partnerships with non-Chinese companies has now shifted toward mutual technology-based partnerships vs. previous market access based partnerships.  The implication is that foreign companies should be prepared to share both technology and external value-chain arrangements. Mr. Zong adds in the FT interview that while Wahaha has plans for further export product growth, it does not seek to build factories overseas. He has also not ruled out an acquisition of a foreign brand.

There has been much concern expressed from multinational companies on the new rules for market access to China, especially when it now requires technology-transfer conditions.  In the specific case of Wahaha, consumers are influencing a rather different dynamic in value-chain requirements, one that will be interesting to observe in the coming months.

Bob Ferrari

The following commentary can also be viewed and commented upon on the Supply Chain Expert Community web site.

As I pen this commentary our global community is approaching five days since the tragic earthquake and tsunami tragically occurred in Japan on Friday, March 11.  Compounding this unimaginable tragedy is widespread human tragedy and powerful images we may not soon forget. An evolving nuclear-related crisis involving four, and possibly six separate nuclear reactors located at the Fukushima power complex can add all sorts of other crisis implications. We should all take notice of the courage, resilience and resolve of the people of Japan as they deal with the aftereffects of this tragedy.  The word “resilient” is often an over used term but in the context of this ongoing tragedy, it takes on a new significance.

For expert community readers in semiconductor, high tech and consumer electronics value-chains, and perhaps others as well, the situation in Japan presents significant current and longer-term value-chain challenges as events continue to unfold.  Initial supplier assessments are still a work-in-progress, and further patience will be required, given the magnitude of this tragedy.  There are media and industry analyst reports already noting the potential implications on high-tech value-chains.

A Reuters news story notes that the prospects of prolonged supply disruptions, particularly in NAND flash memory, DRAM memory, Microcontrollers, LCD displays and other electronic components such as capacitors are already flaming spot market prices. Texas Instruments has warned that its two Japan based chip plants would be down until July, and is in the process of re-directing 60 percent of output to other sites.

Potential shortages of needed parts are a strong possibility. While value-chains generally have a few weeks of safety stock supplies, business continuity plans will need to concern themselves with different forms of scenarios, ranging from alternative suppliers, shifting production, or spot market buys. Already there is industry speculation that major supply influencers such as Apple, HP or others will fare better in this pending crisis because of inherent market buying influence among impacted suppliers.  The implication is that other buyers may be more impacted, perhaps having to tap secondary sources to make-up any future temporary supply shortages.

We at Supply Chain Matters would suggest that it is very important for planning and S&OP teams to focus on various aspects of scenario and contingency planning. Consider the following as three potential near-term assumptions:

The current situation in the impacted areas in northern Japan is described as a “logistical nightmare”.  Roads are blocked, port and air cargo facilities are severely damaged. As we observed in the earthquake that occurred in Haiti, the priority for transportation will initially focus on getting food, water, fuel to those impacted.  Concerning the evolving situation, one could further speculate that evacuation of large numbers of people may also become a transportation priority.  Thus it may be wise to assume that it may take additional time for transportation assets in northern and other parts of Japan to resume to normal status, and further transport delays should be factored into inventory and supply planning.

Due to the current loss of power generation capacity brought upon by these compounding catastrophes, most of Japan is operating under rolling blackout conditions.  The open question is how long this condition will continue, since many of the high tech production facilities need reliable and uniform power to sustain production levels. Thus, assumptions regarding normal shipping and fulfillment schedules of component or finished parts will remain uncertain, at least in the coming days. Plan accordingly, and conduct scenarios with conservative supplier output assumptions.

Moving to secondary markets as a means to buffer parts shortfalls may become a reality, especially if targeted secondary suppliers in China, Korea, and the U.S. are quickly sold-out of their available inventory or near-term capacity. If this becomes the scenario for your organization, teams should be very diligent to be on the lookout for counterfeit parts.  When markets are imbalanced, counterfeiting activities increase, especially in suspect countries.  Redouble your efforts for detecting non-conforming parts.

Community members, especially those residing in Japan and other high-tech manufacturing sectors may well have other recommendations or considerations and are welcomed to share them.

Many industry supply chains will again be challenged in the coming days and weeks.  Conducting assessments, planning for various scenarios and incorporating contingency plans for risk mitigation are important priorities at this point.

In the meantime, our hearts and sympathies continue to be focused on all the people and community members in Japan.

Bob Ferrari