Business media including the Financial Times and the Wall Street Journal reported last week that Apple was working on a secret research lab (not so secret anymore) possibly directed at developing a concept electric car. According to these reports, under the code name “Project Titan” Apple has several hundred employees working at this research lab designing a concept vehicle that resembles a minivan.
Apple, of course, has declined comment to any of these publications.
According to the published WSJ report, the size of the project team and the senior executive hires are indications of seriousness, with Apple CEO Tim Cook approving the development project almost a year ago. Once more, the report indicates that Apple executives have flown to Austria to meet with contract manufacturers. The publication names the Magna Steyr unit of Canadian auto parts supplier Magna International as one potential party involved.
The report accurately notes that manufacturing an automobile is enormously expensive with a single plant costing upwards of well over $1 billion. Thus, it should be of little surprise that Apple might be investigating existing contract manufacturing options.
Auto supply chain teams know all too well that sourcing production in any particular country and transporting autos among global regions can be an expensive proposition without volume and market scale. It’s clearly not the same as shipping iPhones and iPads or for that fact, ramping-up new product and supply chain labor resources to coincide with a product development lifecycle. Once more, intellectual property (IP) protection becomes a larger consideration because of the nature of the multiple components and new technologies that may be involved. For electric powered vehicles, the design and production cost of the batteries is the single most important material and product margin component.
Another parallel that these reports bring forward is that if Apple becomes serious in pursuing this foray into electric cars, it will likely be a competitor to Tesla Motors, who has been pursuing a vertical integration strategy including the design and production of its own electric storage batteries for automotive and solar energy storage use. Tesla elected to invest in a former Toyota auto factory located in Fremont California.
Certainly, there will be continued speculation as to what Apple ultimately decides to do. However, in the light of our previous Supply Chain Matters challenge to Apple to invest more in U.S. or North America based production, Project Titan could provide the opportunity to consider such an investment commitment, either contract manufacturing or owned manufacturing investment. North America automotive production plants and their associated supply chains have proven world class competitiveness and indeed are exporting vehicles to global markets.
However, in light of our previous commentary noting excess auto production capacity across China, Apple may elect its familiar new product introduction and contract manufacturing model.
Bloomberg BusinessWeek reports that both domestic and foreign-based auto producers continue to build and subsequently bring online more auto production capacity across China. The report cites a projection that by 2017 there will be 140 auto production plants in China vs. the 123 existing at the end of 2014. The problem, however, is that China’s nationwide domestic auto consumption is far short of this capacity indicating that overcapacity is expected to worsen. Cited is an IHS Automotive chart indicating that China’s excess capacity has jumped 83 percent in the last two years. The article cites a JSC Automotive forecast that by 2017, auto plants across China will be able to produce 11.4 million more cars than are expected to be sold.
The report cites one Shanghai based consultant as indicating that some carmakers are regretting plans to expand plant capacities, but decisions have already been made. Once more, as Supply Chain Matters readers all well aware, China’s domestic market remains an open opportunity for future growth, but the continued battleground pits China’s domestic brands against foreign based nameplates. The obvious consequence is that there is not enough product demand to sustain all manufacturers, and that has the potential for industry consequences.
Production overcapacity is a common problem in China in many industry and commodity sectors and the results have been messy or sometimes ugly consequences. An ongoing overcapacity condition remains for the production of steel. According to Bloomberg, already, car dealerships across China are seeking more financial assistance and lower sales volume targets. China’s domestic consumers will obviously gain more buyer benefits over time.
Europe’s automotive industry has a similar overcapacity challenge since prior to the 2008-2009 global recession, there was already too much industry-wide capacity, and that remains an ongoing challenge.
With China and Europe reflecting overcapacity, global automotive OEM’s must continue efforts to balance global consumption and supply as well as protect margins. Currency headwinds are yet another challenge.
Supply Chain Matters would not at all be surprised by the entry of Chinese produced autos in the U.S. as well as other emerging markets over the next three years.
Throughout the summer and especially in September of 2014, we featured a number of Supply Chain Matters commentaries reflecting on yet another series of Apple supply chain product introduction ramp-ups, and specifically whether the Apple supply chain ecosystem and its internal supply chain teams could yet again pull rabbits out the hat proverbial hat and deliver on business expectations for the all-important holiday fulfillment quarter.
Specifically in our mid-September commentary we noted:
“Over the coming weeks, as the marketing and sales machine cranks-up consumer motivations to buy, the supply chain will deal with the realities of limited supply, production hiccups and product allocation conflicts among various channels that invariably come up in such situations.”
We further declared:
“While some supply chains are challenged with collaborating with sales and marketing on stimulating and shaping product demand, Apple has the current challenge of meeting very high expectations involving an outsourced supply network with many moving parts. They have pulled miracles in the past, and the stakes get even higher.”
Yesterday after the stock market close, Apple announced financial results for its fiscal first quarter ending in December, and the results were staggering, along with the business headlines. The Wall Street Journal headline story today was titled: Apple Delivers Quarter for the Ages.
Apple reported net income of $18 billion for the quarter, was described as more than 435 of the companies within the S&P 500 Index each made in total profits. But the supply chain headline was fulfilling all-time record customer demand for 74.5 million new iPhones. This was up 46 percent from the same holiday fulfillment quarter a year ago, reflecting a lot of pent-up upgrade demand for the new iPhone6 models. In its reporting, the WSJ equated such volume output to more than 34,000 phones per hour, around the clock.
Gross margin was reported as 39.9 percent, nearly two percentage points higher than last year’s similar period. Once more, average sale volume for the iPhone increased to $687, nearly $50 higher than a year ago.
Apple also managed to double its iPhone sales volumes within China during the quarter despite delayed availability slipping to mid-October from the scheduled simultaneous September product launch.
Readers who followed our Apple commentaries should recall that the iPhone6 incurred its own set of production ramp-up challenges including a last-minute design change involving its larger screen displays. There was the usual production yield challenges associated with the fingerprint scanner and with the LCD displays themselves. We called attention to a TechCrunch report that cited sources in September indicating that Apple had already contracted air freight capacity anticipating to flood channels with last-minute shipments.
All was not spectacular news regarding Apple’s latest performance. Sales of the iPad were reported to be down 18 percent from the year ago period. The long-anticipated iWatch availability has now slipped to April of this year. However, these do not take away from the extraordinary performance of the Apple supplier ecosystem, and in particular, its contract manufacturers who had to successfully support the four month production and fulfillment ramp amidst the production challenges.
The Apple supply chain did indeed again pull rabbits out the hat. It performed to enable an expected business outcome, despite operational challenges.
We extend our Supply Chain Matters Tip-of-the Hat recognition for such performance. Let’s hope that the supply chain ecosystem will share in similar financial rewards.
Within our Annual 2015 Predictions for Industry and Global Supply Chains (now available in a full complimentary research report), Prediction Three notes that the momentum for U.S. and North America based manufacturing sourcing resurgence continues but will uncover broader supply chain ecosystem needs or deficiencies. This week, The Wall Street Journal featured a front page article, Companies Tiptoe Back Toward ‘Made in the USA’ (paid subscription required) that reinforces the tenets of our prediction.
The article profiles a select group of various mid-market industry manufacturers located in the United States such as Thorley Industries, K’Nex Brands, PrideSports, Capital Brands LLC and Lasko, that have addressed the option of returning manufacturing to the U.S. Brought forward are the renewed attraction of lower inventory and transportation costs, stable wage rates and the importance of better control and protection of intellectual property. Another attraction was noted as less international travel, teleconference time and distraction among supply chain and product management teams. Having had manufacturing presence already in the U.S. or North America helps in evaluating a nearshoring decision.
However, the interviews of companies do bring forward the current realities that in certain industries: “The U.S. needs to rebuild its supplier base, as well as invest in more efficient manufacturing equipment.” One example cited is small electric motors utilized in consumer or industrial products. The economics involved in the manufacturing of such motors requires manual assembly as well as very high scaled volumes, and China remains the most globally competitive sourcing of smaller motors. Another highlighted drawback is the ability of certain Chinese manufacturers to flex their workforces in large volumes. There are other select component supply examples as well.
Supply Chain Matters readers are certainly aware that Apple’s manufacturing sourcing strategies that favor China are because of the workforce flexibilities of contract manufacturers who came add thousands of workers in a matter of weeks, as well as their ability to respond to frequent product design changes.
In the end, manufacturing sourcing will always be highly dependent on the industry, supply chain ecosystem, product demand sourcing and overall economics involved in landed costs of a product. It requires that procurement teams continue to hone their strategic sourcing skills and have very collaborative relationships with product management and other supply chain focused planning and execution teams. Supply chain leaders themselves need to be deeply immersed in the various tenets of a strategic sourcing decision including the detailed analysis of pros and cons.
Quantitative numbers reflected in U.S. and North America PMI Indices continue to reflect increased manufacturing momentum for U.S. and North America based manufacturing, but in today’s business climate, the economics can often change, and thus sourcing is no longer a static initiative but rather a continual evaluation and assessment process. Such decision processes can greatly benefit from more sophisticated tools and technologies.
In early August, Supply Chain Matters called attention to a tragic explosion and subsequent fire that occurred at a factory belonging to a Tier Two auto parts supplier located in China. The factory belonged to Kunshan Zhongrong Metal Production Co. and was located in a development zone in the Jiangsu provincial city Kunshan City located about 50 kilometers west of Shanghai. The plant performed plating and polishing of metal hubs that include wheel hubs, a pre-production preparation for aluminum car wheels used by automakers. The explosion was initially believed to have been caused by accumulation of metal dust particles within the facility. At the time of this incident, media reports were unclear as to the full extent of deaths or injuries but the government news agency indicated that 75 workers perished as a result of this accident. The accident was China’s worst industrial disaster in nine years and highlighted continuing problems with workplace safety.
Earlier this week, Chinese investigative authorities reported that the blast killed at least 146 workers, nearly double the initial reported death toll. Reports in August indicated that there were upwards of 260 workers in the plant at the time of the explosion, and this revised number amounts to a significant casualty toll. According to various global and business media reports, Chinese authorities indicated this week that they would prosecute three senior executives of Kunshan Zhongrong Metal Production as well as 15 Kunshan governmental officials. China’s government further announced the firing of two top officials within the city of Kunshan.
According a published report by the New York Times, Beijing has been holding local government officials and company executives accountable by handing out harsh penalties for work accidents with high casualties. In Kunshan, the investigation team found that local officials were negligent in enforcing safety regulations and that plant management failed to provide safety training for workers, ignored rules on building spacing, density in manufacturing lines, dust cleanup, and use of anti-explosion equipment.
As noted in our August posting, previous incidents of explosions caused from combustible metal parts involved two different suppliers to Apple. In May of 2011, a significant explosion rocked a Foxconn Technology Group production facility located in Chengdu, China where two workers were reported killed. In December of that same year, an explosion at a manufacturing facility of Ri Teng Computer Accessory Co., a subsidiary of Pegatron Corp, located in Shanghai’s Songjiang Industrial Park, injured upwards of 60 workers.
This latest report is a further indication that China’s governmental leaders are indeed clamping down on factory safety standards by holding individual executives and investigative agencies accountable for enforcing worker safety standards.
Once a year, just before the start of the New Year, the Ferrari Consulting and Research Group and the Supply Chain Matters Blog provide our annual ten predictions concerning industry and global supply chains for the coming year. We have maintained this tradition since the founding of this blog in 2008 and it continues to be quite popular with our readers and clients.
These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, as well as helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the upcoming year. Predictions are sourced from synthesizing developments and trends that are occurring in supply chain business, process and technology dimensions, researching various economic, industry and other forecasting data, along with input from clients, thought leaders and global supply chain observers. We take predictions seriously and align our research and blog commentaries to focus on each specific prediction area throughout the coming year.
Supply Chain Matters will revisit each of our annual predictions at the end of the year to ascertain how close or how far each fared. The report card regarding our 2014 Predictions can be re-visited at the below web links:
We continue to believe that industry analysts should openly state their insight and opinion of what to expect in the coming year without the need for a paid subscription. Readers therefore have the opportunity to compare and contrast various sources of predictions.
As in the past, all ten of these 2015 predictions will be included in a more detailed research report which will be made available for no-cost downloads in our Research Center in January. Readers will be able to register to download a copy or can email us directly. More details regarding that process will come later.
In this Part One posting, we outline our first five predictions for 2015.
Drum roll please …..
2015 Prediction One: More optimistic global economic growth with the usual caveats and uncertainties
Forecasts point to an optimistic global economic outlook for 2015 with continued cautions and unknowns for industry supply chains. The bright spots will continue to be the United States and Mexico.
The October 2014 forecast from the International Monetary Fund (IMF) predicts 3.8 percent global growth vs. 3.3 percent in 2014. Advanced Economies are predicted to grow 2.3 percent vs. 1.8 percent in 2014. World trade growth is expected to expand 5 percent in dollar terms.
The most concern resides for the Eurozone, where tepid growth and deflation remains an identified and concerning risk.
China’s growth is predicted to be 7.1 percent vs projected 7.4 percent in 2014. China’s economic planners will be caught in a difficult balancing act to manage growth but deal with high levels of debt. We have read of more pessimistic forecasts foretelling of broader setbacks ahead for China’s economic growth, with concerns for a stumble. Then again, China’s economic leaders were adroit in avoiding a stumble in 2014.
According to the IMF, developing economies are predicted to grow 5.0 percent vs. 4.4 percent in 2014. A significant surprise will be India which is expected to grow 6.4 percent vs. 5.6 percent in 2014. Growth is expected to accelerate in Latin America with Brazil and Mexico leading the charge. Argentina remains an ongoing concern.
The IMF expects resurgence of U.S. economy to continue at 2.3 percent vs. projected 1.8 percent in 2014. However a poll of 50 economists conducted by The Wall Street Journal in September indicates closer to 3 percent U.S. GDP growth in 2015. For the United States, the ISM PMI Index in November was reported as 58.7, a significant 7.4 percentage points higher than the value recorded in January.
The J.P. Morgan Global Manufacturing PMI Index, a composite index and recognized benchmark of composite global supply chain and production activity provided mixed signals by November of 2014. An overall value of 51.8 was recorded in November reflecting expansion of manufacturing production for the 25th consecutive month, but the rate of expansion eased to its lowest level since August 2013. Growth in new orders was recorded as a 16-month low with the trend in international trade volumes stagnated. North America continues to be reported as a key growth region while concerns were expressed for stagnation in China and further subdued growth for the Eurozone sector.
Another area of concern is fluctuations or shifts in global currency, particularly Asian currencies and the Chinese yuan. As we pen these predictions, the currency of Russia has been impacted by significant de-valuation.
The takeaway for industry supply chains and their sales and operations (S&OP) processes is to anticipate another year of needs to be able to predict supply chain demand and supply needs on an individual geographic region or country basis. Generalized planning no longer suffices and industry supply chain teams will need the means to be able to respond to short-term market opportunities or sudden changing trends.
2015 Prediction Two: General Moderation and Reduction of Commodity Costs with Industry Exceptions
Expect a continued overall moderation trend for the cost of commodities with certain industry specific exceptions. Dramatically lower oil prices in 2015 will be the biggest headline driving commodity and pricing trends in 2015.
As of mid-December, the Standard & Poors GSCI Index of broad based commodities is projecting a 27 percent decrease in overall commodity prices over the next twelve months.
As we pen our 2015 predictions, the prices of crude oil have plunged to their lowest levels in five years after the International Energy Agency (IEA) cut its forecast for global oil demand on the fifth occasion in six months. The news has added volatility among global equity markets as investors become increasingly concerned about the implications. Global oil prices have consequently plunged from the peak of $110 per barrel to a range of $60-$70. Some forecasts now peg 2015 oil prices as low as $50 per barrel.
Global and industry supply chain strategies are driven by the forces related to oil prices and the cost of energy and thus this commodity trend looms large for broader implications in 2015. The open question is whether the trend is permanent or short-lived.
Purchasing and commodity teams can therefore anticipate inbound cost savings in the coming year with the usual exceptions related to unforeseen weather or risk events.
2015 Prediction Three: Momentum for U.S. and North America Based Manufacturing Sourcing Continues but Motivates Broader Needs
We predict that the momentum for U.S. and North America based manufacturing will continue in 2015 with discernable benefits for certain industries. The need to broaden investments in certain industry supply ecosystems and U.S. logistics and transportation infrastructure will continue to dominate business headlines and industry agenda.
Throughout 2014, U.S. and North America based supply chain related activity continued at a steady state. As of October, 16 of the total 18 tracked industries within ISM’s PMI indices were reporting growth momentum.
The continued growth of U.S. and North America manufacturing comes from a number of factors not the least of which have been the ongoing double-digit increases of labor costs in China, increased positive momentum of the U.S. economy and more attractive energy costs throughout North America. Specific efforts by Wal-Mart, other retailers and manufacturers concerning significant long-term commitments for sourcing products in the region have helped immensely.
In August of 2014, the Boston Consulting Group noted in its report, Shifting Economics of Global Manufacturing, that in some cases, the shifts in relative costs of manufacturing among China and North America have placed Mexico as the cheaper low-cost manufacturing alternative.
However, the sourcing of U.S. and North America based manufacturing continues to uncover gaps in globally competitive component supply chain networks, many of which still reside in Asia or China. This is especially the case in high tech and consumer electronics, footwear, apparel and other industries. Continued momentum is thus increasingly dependent on further re-building of global cost competitive North America based supply ecosystems among multi-industry supply chains.
A caveat for 2015 stems from the plunging price of oil and energy outlined in Prediction Two which could influence some manufacturers to remain concentrated in an Asia or Eastern Europe based sourcing strategy.
2015 Prediction Four: Internet of Things (IoT) Continues to Attract Wide Multi-Industry Interest But Certain Challenges Need to be Purposely Addressed
Cross-industry interest levels and momentum surrounding B2B products and services leveraging Internet of Things (IoT) coupling sensor-based based technologies will continue to attract wide multi-industry interest. IoT provides a new era of interconnected and intelligent physical devices and/or machines that will revolutionize supply chain processes related to production, transportation, logistics and service management. We expect more technology vendors to jump into this area along with heightened M&A activity as these vendors position for industry needs and requirements.
IoT will further drive a convergence among product and service focused supply chain planning and execution processes as well as certain product lifecycle management information integration needs. PLM and SLM provider PTC is a current example of this dimension but other vendors will be attracted to this business model.
The realities in the lack of consistent or conflicting global-wide standards, overcoming data security concerns and scalability of networks will provide more visible challenges for broader industry deployments. We have recently indicated a feeling of de-ja -vu for the replay of early RFID efforts, as vendors tended to ignore certain realities of the technology. Vendors will need to step-up efforts to address current challenges and individual industry needs.
2015 Prediction Five: Noted Industry Specific Supply Chain Challenges
Noted industry specific supply chain challenges will remain in B2C-Retail, Aerospace and Consumer Product Goods (CPG) sectors. Automotive manufacturers will have to address continued shifting trends in global market demand and a renewed imperative for corporate-wide product and vehicle platform quality conformance measures.
B2C and Retail
Global retailers continue to be challenged in emerging and traditional markets and in permanent shifts in consumer shopping behaviors. In 2014, retailers encountered the realities of lower margins for online fulfillment, the needs to invest in enhanced inventory management, distrusted fulfillment and order management capabilities, and the perfect-storm presence of developments that resulted in dysfunctional west coast ports.
Retail sales in China, Asia and Australia are expected to surpass that in North America, but China’s efforts in greater scrutiny of foreign-based retailers and service firms will likely continue to impact growth expectations in the coming year. According to industry and business media, retailers are expected to instead target the other so-termed MINI countries (Mexico, Indonesia, Nigeria, Turkey) for growth prospects in 2015.
The accelerating trends and implications of Omni-channel and online fulfillment will impact traditional retailers with more casualties recorded in 2015. Amazon, Google and Alibaba will continue to be industry disruptors, movers and shakers in 2015 and Wal-Mart.com may join that list. We would not be surprised if Alibaba concentrates acquisition efforts toward more U.S. and North America online properties to prepare for a presence.
Consumer Product Goods
CPG companies continued to view emerging markets such as China and India as important regions for future growth but experienced the effects a far more complex and risk-laden supply and regulatory networks. The heightened influence and actions of short-term focused activist equity investors, applying dimensions of financial engineering to one or more CPG companies will continue to have special impacts on consumer goods industry supply chains with added, more troublesome cost reduction and consolidation efforts dominating organizational energy and performance objectives. The new winners in CPG will continue to be smaller, more nimble producers who lead in product, supply chain business process and technology innovation.
Industry dominants Airbus and Boeing and their respective supply ecosystems will continue to be challenged with the needs for dramatically stepping-up to make a dent in multi-year order backlogs and in increasing the delivery pace for completed aircraft. Dramatically lower costs of jet fuel in 2015 will likely present the unique challenges of airline customers easing off on delivery scheduling, but at the same time insuring their competitors do not garner strategic cost advantages in deployment of newer, more fuel efficient and technology laden aircraft. Middle East and Asian based airlines and leasing operators will continue to influence market dynamics and aircraft design needs.
Renewed hostilities involving Ukraine or severe economic or currency crisis within Russia could impact strategic supply of titanium and other metals. The economic malaise that is expected to continue across the Eurozone region along with expected contraction in China will present 2015 challenges for Airbus and Boeing’s supply ecosystems. Boeing will especially be focused on continuing to influence more cost reduction and productivity efforts among its global suppliers while continuing to address identified issues from regulatory investigations in practicing added supplier oversight for design and production process quality.
In the U.S., an unprecedented and overwhelming level of product recall activity spurred by heightened regulatory compliance pressures will drive product quality and compliance as the overarching corporate-wide imperative. Cascading incidents in 2014 pointed to issues of quality lapses among global suppliers and early-warning of potential component defects. Existing product recall campaigns will most likely extend through the first-half of 2015, placing added strains on aftermarket service dealerships. Japan based air bag inflator supplier Takada will continue to deal with its creditability crisis and could lose significant new business if it does not step-up and get-ahead of the airbag quality crisis. OEM General Motors will especially be under the looking glass in 2015.
This concludes Part One of Supply Chain Matters 2015 Predictions for Industry and Global Supply Chains. Part Two in this series will unveil our next five predictions.
We encourage readers to share in the Comments section their own predictions on what to expect in 2015.
In the meantime, we extend best wishes for the holiday season and the New year.
©2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved