Television and LCD display producer Sharp indicated its strongest warning to-date indicating that the company has serious concerns as a going concern without an infusion of new capital. The company forecasted a near doubling of operating loss to $5.63 billion and is struggling to make some form of operating profit to justify a bailout.
According to a report published by Reuters, in order to secure fresh working capital loans, the company has had to mortgage most of its offices and factories in Japan, including the specific factory that is producing LCD displays for Apple’s iPhone and iPad. That particular factory remains challenged in ramping-up production to meet Apple’s high volume requirements.
Readers may recall previous reports in March that indicated that global contract manufacturer parent company Hon Hai Precision Industry Corp. (parent of Foxconn) was prepared to take an equity stake in Sharp’s LCD development and factory operations, with the implications that Hon Hai would become Sharp’s largest shareholder. Those talks continue to drag-on, and in its latest statements, Sharp still expects that deal to close by March of 2013. By delaying its investment, Hon Hai is making a calculated risk that Sharp can prolong the current financial bleeding while fixing its product strategy problems. Then again, will Apple itself be willing to lend financial assistance?
Reuters and other reports quote seasoned industry observers as indicating that Sharp may not have a future given its current rate of decline and either a continued financial infusion or some miraculous blockbuster profitable product.
Then again, Sharp may be yet another example of the rapid declining fortunes of the once powerful Japan-based consumer electronic producers. Panasonic also announced grim news this week, a $9 billion quarterly loss, amounting to a cumulative $19 billion in losses over the past two years.
In its reporting of Panasonic results, The Wall Street Journal noted the following: “Japanese companies can’t match the manufacturing might of South Korea’s Samsung Electronics Co., nor can they replicate the brand cachet of Apple Inc.. The strong yen and a footprint of aging Japanese factories combine to deal another blow to their competitiveness.”
That statement tells all about the current state of many of Japan’s former consumer electronics leaders.
No doubt, this week is turning out to be an incredibly active week in terms of supply chain related news and developments. There are implications to the monster storm that impacted the Eastern Seaboard of the U.S., a major merger announcement involving two best-of-breed supply chain technology providers, and a slew of quarterly earnings announcements that provide supply chain-related consequences. In commentary through the remainder of this week, Supply Chain Matters will touch upon these developments.
A significant earnings announcement involves the world’s largest contract manufacturer, Foxconn. In its first nine months, net profits have risen 24 percent to $1.9 billion, based on a 20 percent revenue increase. Gross margin were reported as an increase to 4.6 percent, vs. a 3.7 percent level a year earlier.
Dwell on that gross margin number for a moment. How many firms can successfully manage that level of margin when physical manufacturing services are concerned?
The answer is obviously making every cost expenditure count and having massive scale and volume to leverage physical assets. Having the globe’s most popular consumer electronics provider, namely Apple, fuel that scale, obviously makes the formula work. Having other large volume customers and global-scale is also essential to grow profitability over the longer term.
In its reporting of Foxconn earnings, the Financial Times discloses (paid subscription or free metered view) the impact that Apple actually has. While Foxconn does not dare disclose anything related to Apple for obvious reasons, FT quotes equity analysts as indicating that Apple represents 40 to 50 percent of Foxconn’s current revenues. We believe that that number is probably highly conservative.
In our Supply Chain Matters previous commentary related to Apple’s latest quarterly earnings we noted the total volume of quarterly unit output as well as the signs of constrained supply. Yet in spite of ongoing Apple supply constraints and a number of troubling workforce-related incidents, Foxconn marches on and defies classic business case thinking. The FT article is quick to also point out that with the two most recent Apple product introductions, the new iPhone 5 and iPad Mini, and the holiday buying season yet to unfold, the prospects for continued volume growth look good for Foxconn.
Longer-term, however, Foxconn must focus on its broader strategic plan. Worker demands for higher pay and better working conditions obviously lead toward the need for increased automation of repetitive and monotonous production tasks, which imply increased capital costs. The trick is influencing primary customers like Apple to share the bulk of that burden. Then again, Apple needs to put some of its hoards of foreign-based cash to good use.
Apple has also begun to exercise its own supply chain risk mitigation strategy by dual sourcing of the assembly production of the iPad Mini among two contract manufacturers, the other being Pegatron. Foxconn must therefore seek to offset continued needs for added margin with increased scale, further supply chain vertical integration while recruiting additional customers.
In the end, however, we believe that the contract manufacturing business model will have to significantly change, since sustaining single-digit margins, while bearing the brunt of labor, capital and social responsibility burdens is not sustainable over the long-term.
On Tuesday, Supply Chain Matters commented that something was up at supply chain planning technology provider JDA Software, and that an announcement could come soon.
This morning features breaking news indicating that privately held supply chain execution technology provider RedPrairie and JDA Software will merge into a combined supply chain planning and execution powerhouse with revenues extending beyond $1 billion.
According to the press announcement a cash tender offer of $45 per share, representing a 33 percent premium to JDA’s stock price on October 23, will be extended. The total value is estimated to be $1.9 billion, and there are certain conditions that must be met to complete this deal. RedPrairie itself was acquired in 2010 by New Mountain Capital, and has since completed a number of other acquisitions to include cloud-based WMS provider SmartTurn, SofTechnics Shippers Commonwealth, Escalate, and Vortex Connect. The JDA merger, however, is far more significant.
The announcement also indicates that current JDA CEO Hamish Brewer will lead the combined companies while existing RedPrairie CEO Michael Mayoras will remain on the board of the combined companies.
Obviously, this deal, if consummated provides significant implications for both management of the combined companies and for the supply chain best-of-breed technology market as a whole. Supply Chain Matters has often reinforced the fact that in today’s new normal of highly dynamic global supply chains, where time is ever more critical, supply chain planning and execution processes have been compelled to morph as one contiguous process. This announcement is a significant testimonial to that trend.
There will be an industry analyst briefing later today and Supply Chain Matters will reserve further commentary until more information is gleamed.
In the meantime, existing customers from both companies should be patient and await the full picture of the implications in terms of timing, resource impacts and product implications.