If supply chain or product management teams overseeing business activities in China had any doubts regarding what impacts that the compounding effects of business complacency, a significant product recall, compounded by social media amplification, can have on a business, then take a moment to read an article published today by the Wall Street Journal.
The article, Yum Brands Details China Missteps (paid subscription or free metered view) details how one of the most successful foreign businesses conducting business in China has stumbled because of certain missteps. Having been one of the first foreign based restaurant chains to invest in China, Yum’s KFC and Pizza Hut outlets were on a roll in China for many years. In 2012, operations in China contributed to half of the chain’s revues and 44 percent of profits.
Yum Brands just reported that its third-quarter profit declined by 68 percent. Sales within its China outlets declined by 11 percent, contributing to a slump that has lasted nearly a year.
Late last year, a Chinese state media report disclosed a government probe on the improper use of antibiotics among chicken suppliers to KFC outlets in the country. Whether this foreign based chain was purposely targeted for the probe is certainly cause for speculation. That incident was followed by an avian flu outbreak in the spring that caused China’s consumers to shy away from chicken. The series of unfortunate events was amplified by social media which kept negative impressions alive. During this same slump period, new and fresh restaurant brands have entered China’s offering broader and newer choices for diners. Again, the amplification of “dull” or “non-healthy” by social media did not apparently help.
By our view, the key takeaway is that of complacency, applied to the firm’s market, its supply chain quality standards, operating facilities, and under estimating the impact that negative social media impressions can have on a firm’s business, especially in China.
Prediction Seven of our Ferrari Consulting and Research Group and Supply Chain Matters 2013 Predictions for Global Supply Chains issued at the end of 2012 stated that Chinese based manufacturing and service firms will markedly increase their presence and influence in global supply chains. The basis of this prediction stemmed from evidence that China held in excess of $3 trillion of foreign exchange reserves and was encouraging companies to buy overseas assets, particularly in securing commodity and other resources.
The most prominent development that reinforced this prediction came in late May with the announced $4.7 billion acquisition of U.S. based pork faming and products producer Smithfield Foods by China based Shuanghui International Holdings. Smithfield brands include Armour, Carrando, Farmland, John Morrel and Health Ones and the combined companies have $20 billion in annual revenues. As was noted in our initial commentary, Chinese consumers have a high consumption of pork products yet remain highly distrusting of Chinese based food supply chains. Thus the attractiveness of U.S. based brand and pork products supply chain has the potential to be quite attractive.
At the time of the announced acquisition there was speculation among business media as to whether U.S. legislators would approve the deal. Four months later, and the acquisition sailed through regulatory approval processes and it is now official.
Last week, the Wall Street Journal reported that both companies have already begun the process of integrating their international sales staffs in an effort to accelerate the global expansion of the Smithfield Brand. Further reported was that Shuanghui has plans to unveil a new line of premium ham, shoulder meat and other muscle cuts of pork products targeted at China are growing middle class consumers, thus wasting little time on reaping the strategic benefits of this acquisition. There are apparently plans to increase global sales to Australia, South Korea and Europe.
However, executives had to again stress that Shuanghui has no plans to export pork from China into Smithfield’s U.S. distribution channels because of landed cost considerations. Also reported was that Smithfield’s workers are much more productive. Executives further acknowledged the challenge for integrating two vastly different corporate cultures but to help in that effort, Smithfield’s current CEO will remain in that role even though he collects a handsome bonus from the acquisition.
Next to Lenovo’s acquisition of IBM’s personal computer business, the Smithfield acquisition will no doubt serve as the newest case study of a Chinese company expanding its global and supply chain presence. It will surely attract lots of attention in the months to come, especially in food related supply chain management circles.
As the world awaits Apple’s long awaited announcement this week’s on new models of iPhones, another report of potential labor rights violations associated with this phone’s production ramp-up has surfaced.
On Thursday, labor rights watchdog group China Labor Watch cast another light on the potential existence of labor rights violations at the contract manufacturing production facility operated by Jabil Circuit in Wuxi China. The labor rights organization conducted an undercover investigation that resulted in alleged infringements involving millions of dollars in unpaid overtime wages, over 100 hours of monthly mandatory overtime, more than 11 hours of standing work with little rest outside of 30 minute meal breaks, along with hiring discrimination and lack of worker pre-training.
A posting on Huffington Post Business reports echoes the China Labor Watch report and points to workers having little time to eat during meal breaks, having to travel to a distant factory cafeteria after being required to pass through mandatory security checkpoints. Workers are also alleged to be sleeping in 8 person dorms where workers assigned to day or night shifts are sharing the same dorm room.
For its part, Apple informed Huffington that it had conducted three audits of Jabil Wuxi over the past three years with some findings, and that Jabil has “an excellent track record of meeting Apple’s high standards.” At publishing, Huffington was unable to secure a comment from Jabil management.
Reviewing the Jabil web site, one can find a rather definite declaration of business conduct, signed by the firm’s CEO, that addresses supply chain transparency, health and safety and other business requirements supported by audit processes. Thus both Apple and Jabil do indeed publish high standards related to social responsibility and worker labor practices. In addition, Apple contracts with the Fair Labor Association to conduct ongoing formal audits of its supply chain across China and other regions and much work is underway in identifying problem areas and corrective plans. To its credit, Foxconn, Apple’s largest contract manufacturer has made some strides in correcting previous labor audit findings.
The timing of this latest China Labor Watch report is a bit suspect since it comes just before Apple’s pending media blitz for new model iPhone announcements. The fact that an undercover investigation has led to these alleged findings should be indicator of practices which factory audit teams are either not discovering, or worker reluctance to identify grievances through formal channels.
As Supply Chain Matters has noted in a previous commentaries related to the Apple supply chain, its transition to a segmented lower-cost supply chain model, in addition to one supporting its higher cost innovative products is still underway, and newer suppliers may be in the midst of adjusting to higher demands for volume and efficiency. None the less, the issues raised by China Labor Watch should warrant additional response from both Jabil and Apple management.
Disclosure: The author is a current holder of Apple stock.
Last week, industry analyst firm Gartner announced its Top 25 Supply Chains Ranking for the Asia Pacific Region, which deserves some commentary on our part.
Supply Chain Matters has in the past been a bit critical of Gartner for not including Asia Pacific based supply chain organizations in its global rankings of Top 25 Supply Chains. Gartner responded by re-positioning its rankings among major global regions, which although has obvious connotations for further client business development in succinct global regions, none the less affords demonstrated supply chains competencies greater recognition when ranked on a regional basis. We praise Gartner for it efforts to provide broader recognition of supply chains in the Asia Pacific region.
According to the Gartner report (free registration required in order to download), supply chain resilience is high on the agenda for most Asia Pacific based supply chains along with rising costs, a shortage of talent and increased regulatory pressures. Volatility in demand, particularly from western based companies, continues to present challenges for these Asia Pacific based teams. According to Gartner, the three year weighted average of revenue growth slowed to 25 percent.
Five new organizations move into the top ranking, while others moved-up in ranking. It should be of no surprise that Samsung was ranked the number one supply chain for Asia Pacific in 2013 because of its efforts in innovation and supply chain talent development. Lenovo was ranked as number two, moving up two spots from 2012, gaining high marks for revenue growth and deployment of a hybrid supply chain model. Supply Chain Matters has featured two previous commentaries of Lenovo’s unique supply chain process capabilities, along with its recent announcement of U.S. manufacturing presence.
The top five further includes Haier (Number #3), Hyundai Motor (Number #4) and Tata Motors (Number #5). Toyota Motor came in at Number #6, jumping 11 positions from its former 2012 ranking based on volume recovery from a series of major supply chain disruptions. Honda Motor was ranked Number #8.
We found it quite interesting to observe four automotive industry supply chains ranked in the Asia Pacific top ten, when no automotive supply chain is ranked in the Gartner global top ten.
We also expected to see more global contract manufacturers appearing in this ranking. Singapore based Flextronics moved into the top ten for the first time, attributed to strong financial results along with advanced planning and risk mitigation capabilities. Remarkably missing from the latest top ten ranking is Foxconn or its parent Hon Hai Precision, which is a prime manufacturing contractor to the 2013 global number #1 ranked supply chain of Apple. That deserves some explanation and we were disappointed that we could not retrieve any explanation from Gartner as to why. Also missing was Jabil and Taiwan Semiconductor Manufacturing Company (TSMC), which by our view, deserve top ten recognition.
Cannon and LG Electronics round out the 2013 Gartner Top Ten, reflecting that High Tech, Consumer Electronics and Automotive are the sole industries represented in the Asia Pacific Top Ten supply chains. Perhaps a future ranking will include recognition of a consumer goods and/or diversified discrete manufacturer or retailer in this region.
Gartner concludes: “The ability to segment supply chains that are aligned to different customer expectations, backed by improved cost-to-serve, will differentiate the leaders from the followers. Supply chain leaders in Asia Pacific must enhance collaboration capabilities to integrate internal functions and key external trading partners across the value network.”
Supply Chain Matters would hasten to add that given the prior history in the region for potential major supply chain disruption brought about by natural catastrophe or extreme weather events, that investments in supply chain risk mitigation, more predictive capabilities and enhanced end-to-end visibility should also be a part of this message for future performance.
What is your view regarding Gartner’s current ranking of Top Asia Pacific Supply Chains? Agree or are there omissions?
Regulatory authorities within China have halted the import of milk powder originating from New Zealand and Australia after bacteria suspected of causing botulism was found in certain batches of the milk powder. Global dairy producer and distributor Fonterra was forced to alert eight of its customers of the potential contaminated whey protein concentrate.
Supply Chain Matters readers may recall our previous commentaries related to Fonterra that span the last four years. One of our very first series of commentaries in 2008 related to the melamine contamination of milk powder and milk products that occurred throughout China. Tragically, six children died and thousands of children were sickened or suffered major health impacts. At the time, one of China’s largest dairy producers, Sanlu was directly involved in the melamine incident and that diary had a global joint partner, that being Fonterra.
Fonterra paid a dire price monetarily, by having to liquidate its entire ownership of Sanlu, while rebuilding its creditability as a major supplier to food companies such as Nestle and Kraft. In 2010, the global dairy producer was resolute to return to China and rebuild its brand creditability, by establishing a network of its own operated dairy farms within that country. It has since been building an integrated milk business through two directly owned dairy farms.
Because of that incident, even today, in spite of massive remediation efforts by China’s agriculture authorities, Chinese consumers have more trust in foreign brands and supply of dairy products than in Chinese brands. The sales of foreign infant formula brands remain as still rationed across China and in Australia because of overwhelming Chinese consumer trust and demand for such brands.
Our last commentary at the end of March of this year noted that New Zealand had been suffering the aftereffects of a major drought, the worst in 30 years. Fonterra was forced to warn of both supply and earnings impacts for the second-half of its fiscal year, has further indicated that the producer had re-initiated plans to move into China’s infant formula market, the same market. This producer was planning to launch its own Anmum brand of infant milk formula later this year along with plans to construct a Chinese plant to process ultra-high temperature (UHT) milk.
This latest incident of contamination may have an impact on those plans.
According to an article published on the CNBC web site, China’s consumer watchdog named four companies that imported the potentially contaminated batches from Fonterra. The four include Dumax Baby Food Company Ltd., a subsidiary of Danone, two subsidiaries of China based Wahaha Group, and the state-owned Shanghai Sugar, Tobacco and Alcohol Company. The article notes that because of domestic production shortages, milk powder supplies across China had already been scarce, and this latest incident could lead to market shortages. The latest incident was reported to have been caused by a dirty pipe at a particular processing plant. Botulism is a potentially fatal disease that affects muscles and the infant intestinal system. CNBC also reports that this is the second contamination incident involving Fonterra this year. The other was a January incident where traces of a toxic chemical were found in some of its products.
Other countries have also responded to the potential contamination, including Australia and Russia, who have each restricted imports of Fonterra products.
All in all, this latest contamination incident will have global impact for the dairy and milk powder related industry, and for China, another added concern that even foreign brands can present risk. Our initially takeaway is that this is yet another reinforcement of how a dirty pipe at a processing facility can have significant quality and brand risk impact. A globally extended food supply chain has multiple risk exposures, and quality monitoring and inspection systems need to have near zero-level tolerance for sub-standard production equipment.
For Fonterra, this incident will most likely be another important brand and supply chain challenge to overcome.
In May, the broader consumer electronics global supply chain community began hearing the plans of Apple to dual-source its contract manufacturing needs with Pegatron. Just last week, Supply Chain Matters again highlighted the supply chain segmentation strategy that Apple was pursuing, introducing Pegatron for high volume contract manufacturing requirements related to the company’s current and future lower-cost product
Today, the Wall Street Journal reported (paid subscription or free metered view) that a new report issued from the non-profit China Labor Watch, the same organization that called attention to wide-scale labor abuses within Apple’s contract manufacturing and supplier factories in 2011, alleges numerous worker-rights abuses at Pegatron.
A press release issued from China Labor Watch on its web site makes note of 86 labor rights violations, in 36 legal and 50 ethical categories. The report alleges: “Pegatron factories are violating a great number of international and Chinese laws and standards as well as the standards of Apple’s own social responsibility code of conduct.” An executive of the labor rights group declares in the press release: “Our investigations have shown that labor conditions at Pegatron factories are even worse than those at Foxconn factories.” The organization indicates that it conducted undercover investigations with nearly 200 interviews with factory workers in the period from March to July 2013.
Supply Chain Matters made a quick review of the report which is titled, Apple’s unkept promises: Cheap iPhones come at high costs to Chinese workers, (Report can be downloaded at this web link). It alleges that workers at Pegatron’s factory near Shanghai are required to perform 11 hour shifts , six days a week at a rate of $1.50 per hour before overtime ($268 per month), compared to a local average rate of $764 per month. It also alleges that workers are forced to sign forms that indicate that their overtime hours are less than actual hours worked while workers recruited by labor contractors are required to work three month mandatory service or wages are deducted from the worker’s pay. The report also alleges over 10,000 underage and student workers (interns) working in crowded production rooms along with 12 person dorm rooms. In short, the report outlines a number of significant alleged labor abuses and contrasts these abuses specifically to 17 of Apple’s supplier code of conduct standards.
In its reporting, the WSJ extracted a statement from Apple indicating that it was committed to providing safe working conditions and that it will investigate the claims outlined by China Labor Watch. The reporting also reveals that Pegatron has hired an additional 20,000 workers in the period from March to present, an indicator in our belief, of the current ramp-up of high volume production prior to the announcement of new lower cost Apple products, rumored to be sometime in October. The hiring of that many workers in a short time period required the contract manufacturer to have large reliance on third-party factory worker recruiting firms. Pegatron officials indicated to the WSJ that they would take stern actions against recruiters who withheld worker pay for not working a defined period.
No doubt, this latest allegation will motivate Apple and Pegatron to revisit current labor practices and perhaps step-up ongoing third-party audits. The Fair Labor Association has been involved in ongoing audits and monitoring of corrective efforts at Apple’s existing contract manufacturing and supplier facilities in China and we speculate that the organization will probably be asked to broaden its audits of Pegatron facilities.
As noted in our earlier commentaries, being named a prime Apple supplier can provide financial and volume benefits, but comes with lots of global visibility and scrutiny. No doubt, some Foxconn executives may be whispering about this latest revelation: Welcome to the Apple ecosystem of high visibility and social responsibility standards despite tight lead times and high volume expectations.
More revelations and developments will surely come.