On the eve of Apple’s report of quarterly earnings, its supply chain is leaking all sorts of information regarding the upcoming new production ramp-up of Apple’s new iPhone models in preparation for all important the holiday buying surge period that comes later this year.
Our Supply Chain Matters information alerts regarding Apple have been active for the past five weeks but the trigger point arrived today when the Wall Street Journal featured a front-page article regarding ongoing production plans.
According to the WSJ, Apple’s supply chain planners have placed orders for between 70 million and 80 million iPhones in both 4.7 inch and 5.5 inch screen configurations to be completed by the end of this calendar year. That compares to production orders of between 50-60 million phones for the same period last year as Apple ramped-up for the introduction of the iPhone5 model series. That is an obvious indication that Apple is making big-bets on the expected popularity of the new iPhone models. Apple also does not want to encounter a situation of being short on inventory for the most popular iPhone 5s model, as was the case during last year’s holiday season.
The WSJ report generally correlates with reports from Taiwan media several weeks ago. Where the reports differ is when volume production is scheduled to start. Media outlets in Taiwan reported that the 4.7 inch model would begin volume production this month, while the 5.5 inch would begin production in mid-August. Today’s WSJ report indicates the larger screen version production would begin in September. Previous Taiwan and Chinese reports indicated that contract manufacturer Foxconn was in the process of hiring an additional 100,000 workers to accommodate the cyclical production increase while secondary contract manufacturer Pegatron was in the process of hiring an incremental 10,000 workers. All of this data provides a sense of the sheer scale and flexibility that Apple requires from its supply chain partners.
What is remarkable is that a reading of today’s report gives a true sense of the complexity and variability challenges that Apple’s supply chain planners must manage. The new larger screen is again, as in prior years, presenting production ramp-up and yield challenges due to more advanced in-call technology and a rumored sapphire based screen. The WSJ report indicates that orders for upwards of 120 million displays have been placed to compensate for yield challenges. If that number is accurate, it would imply that planners are factoring a 60 percent yield factor. The report further validates that Apple planners will make production adjustments based on early demand history, which was again demonstrated last year when production volumes for the iPhone 5c were scaled-back based on initial demand from consumers. Last month, China Times reported that global semiconductor chip producer TSMC was expected to produce 120 million touch ID fingerprint sensors for Apple, which is three times the volume produced last year, and a further indication of production yield factors and ramp-up scale.
Then there is the celebration of the Lunar New Year, which next year, arrives in February, when most production grinds to a halt as workers take time to return to their families. Apple planners must insure that adequate inventories remain to compensate for a lull in production, or that contract manufacturers make assurances that some production will continue during the period of the Lunar New Year celebration. Multi-tiered inventory visibility is an obvious necessity.
As was the case last year, Apple’s upcoming new product launches will place its supply chain with even more challenges. The competitive stakes for Apple are far higher this year as market dynamics and overall competition in emerging markets intensifies. Rival Samsung has already felt the effects of intensified competition from lower-price producers Lenovo and Xiaomi in China and Micromax and Karbonn in India.
Pricing strategy will be critical and some reports indicate that Apple is seeking higher list prices from carriers for its upcoming new models. The government of China recently raised media-wide concerns regarding the overall security of Apple smartphones in the midst of ongoing global spying scandals, which could place additional pressures on China Mobile to feature other brands. Android powered phones continue to gain more overall market share while Microsoft and other tech players are providing more incentives for lower-cost providers to adopt Windows based phones.
These are all variables that will drive Apple’s supply chain planning in the coming weeks, one that will again have to demonstrate responsiveness to increased market dynamics, synchronization of NPI and ramp-up plans and resiliency to unplanned disruptions or material shortages.
Then again, Apple continues to be rated by Gartner as the number one supply chain.
It’s the end of the calendar work and this commentary is our running news capsule of developments related to previous Supply Chain Matters posted commentaries or news.
In this capsule commentary, we include the following topics:
- UPS Memphis Facility Expansion
- Foxconn Plans for New Plant in China’s Guizhou Province
- Mondelez Continued Re-Structuring,
- A New SCRM Standard,
- Typhoon Impacts the Philippines
UPS Kicks Off Expansion of Memphis Facility
Global transportation and parcel giant UPS indicated this week that the services provider has kicked off construction related to the expansion of its Memphis Tennessee package distribution facility. According to the announcement, the expansion will add an additional 140,000 square-feet of building space with an estimated cost of $70 million. The UPS Memphis facility controls processing of air and ground gateway hub operations processing and reports further indicate that UPS is leasing upwards of 27 acres from the Memphis Airport Authority to support an 80 percent expansion in package processing. Early improvements are expected to be operational by November, to accommodate expected holiday peak shipment volumes.
Readers will recall that on the day before last year’s Christmas holiday, UPS was thrown under the bus for its admission that its network was overwhelmed and unable to deliver all of parcels in time for the holiday. While the Worldport facility was the prime focus at the time, the announced expansion in Memphis is an obvious response to have more capacity in place for the upcoming peak holiday shipping period.
Foxconn to Build New Environmentally Friendly Production Facility in Interior China
Global contract manufacturer Foxconn Technology has disclosed plans to build a new environmentally friendly production complex in one of China’s most rural and pristine provinces. According to a published Bloomberg BusinessWeek report, a 500 acre park will be built in the province of Guizhou, on the outskirts of the provincial capital, Guiyang.
Plans call for an environmentally focused facility to produce smartphones, large-screen televisions and other products that will employ upwards of 12,000 workers. Production processes within this new plant will include new methods for mold based painting, carbon nanotube film for touchscreens and other innovations. The facility will also include a 2160 square-meter state-of-the-art data center that will be cooled by prevailing natural winds. Bloomberg makes no mention of advanced robotics for assembly but we suspect that may also be included.
This facility will also be constructed from 100 percent recycled steel and include patent protected heat-reflective glass that was designed by Foxconn. The plant is scheduled to be operational by March of 2015.
Mondelez to Separate European Cheese and Grocery Unit
In late January, we noted in a commentary that an activist investor was granted a board seat a global snacks and foods provider Mondelez. The Wall Street Journal reported at that time that Mondelez management agreed to this move to quell public criticism of the company as well as avoid a public proxy fight. Having a board seat, activist investor Nelson Peltz could escalate his calls for added profit margins.
Last Friday, the company announced that it would separate its European cheese and grocery products groups into separate business units as it prepares to jettison its coffee business into a new company. Rumors among the Wall Street community reflected on eventual sale of the European grocery and cheese businesses as well. According to reports, both European groups represented 3.9 percent of total sales.
ASIS Releases New Supply Chain Risk Management Standard
ASIS International, a society of global security professionals released a new supply chain risk management standard to assist organizations to address operational risks within their supply chains. This standard was developed by a global cross-disciplinary team in partnership with the Supply Chain Security Council. An Executive Summary of this new standard can be viewed at this web link.
Typhoon Strikes the Philippines
Typhoon Rammasun barreled across the Philippines this week, killing at least 38 people and leaving the capital city of Manila without power most of Thursday. The eye of the storm passed just south of Manila after impacting the island of Luzon. The storm was reported to have destroyed about 7,000 houses and damaged 19,000, with more than 530,000 being evacuated. Offices and commerce were expected to reopen by late week.
Meanwhile, southern China and Northern Vietnam are bracing for the arrival of the Typhoon on Friday, with wind gusts expected to surpass 140 kilometres per hour.
A new dynamic is occurring within the global E-tablet market, one that is being orchestrated by some key suppliers. This dynamic provides a reminder to the crucial importance of supplier intelligence strategies.
The Wall Street Journal recently observed that global microprocessor chip maker Intel, in response to being shut out as a key supplier for the Apple iPad and iPhone as well as Samsung models, is wooing smaller electronic tablet providers within China. The strategic objective is sub $250 tablet markets that are attractive to consumers within emerging market economies.
Intel has been calling on the likes of Shenzhen Hampoo Science & Technology Co., Shenzhen Ramos Digital Technology and select other China based mid-sized consumer electronics providers. These companies were previously learning towards existing ARM-based chip producers as well as Google’s Android operating system. According to the WSJ: “Among other tactics, Intel has taken a cue from Chinese chip makers and last year began offering “reference designs”- essentially ready-made tablet designs that allow manufacturers to create a product in as little as one month.” Intel has further sped-up its chip product development cycles in China.
This week provides another related development. Microsoft announced that it would expand its subsidies to vendors for Windows-based tablets and sub 9 inch models priced below $250, in essence receiving free Windows licenses. Microsoft is betting that tablets featuring full Windows functionality, in combination with lower-cost processors, have a good chance of capturing added market-share from Android devices. A posting by Digitimes reports that with this new strategy, China white-box, private brand manufacturers have quickly raised their proportion of Windows based tablets.
Two major, influential suppliers are thus in the process of altering existing market dynamics and the stakes are high. The sub-$250 electronic tablet market could lead to larger production volumes and subsequently, leverage existing electronic content distribution strategies.
As Supply Chain Matters has noted in previous commentaries, within today’s highly dynamic high tech and consumer electronics supply chains, key component suppliers can serve as either a strategic partner or a potential market disruptor by shifting product and market development strategies. The takeaway is that supply chain and procurement sourcing leaders need to fully understand the markets they serve and the key strategic suppliers within that market. Supplier intelligence has never been as crucial as it is today. A key sourcing decision made for certain business outcome purposes can have ramifications when deep pocket suppliers elect to counter that strategy.
Global contract manufacturer Foxconn (Hon Hai Precision Corp) conducted its annual meeting of shareholders last week and continued to reinforce a business transformation strategy. The company’s chairmen indicated to shareholders that revenues and profits will grow 10 percent this year.
According to the Wall Street Journal, Foxconn’s $130 billion in revenues for 2013 were but a one percent increase over 2012 levels, while operating margins have flattened to 2.76 percent. The contract manufacturer’s direct labor costs have more than doubled since 2009, compelling the company to accelerate initiatives directed at robotics and factory automation.
Founder and CEO Terry Gou indicated to the company’s shareholders: “Business transformation is crucial for Foxconn’s sustainable growth in the next ten years.” That is the similar message delivered at last year’s stockholder event. Mr. Gou indicated that the contract manufacturer will continue to test new business models that integrate hardware, software and services initially in Taiwan, and then in global markets. According to a published report by China Post, the current investment plan reflects the company’s determination to go beyond its status as the world’s biggest contract electronics manufacturer and move into new generation businesses. Gou indicated a strategic focus on development in four key areas — smart grid networks, smart broadband networks, smart Information networks and cloud computing-based artificial intelligence networks.
Initiatives underway include the offering of mobile accessories under the Coverbank brand name, a Bluetooth headset branded under the name of Candyard along with smartphone related distribution and inventory management services including local distribution of Blackberry smartphones.
A recent posting by PC World indicates that earlier this month, Japanese tech company Softbank unveiled Pepper, a personal robot that Foxconn helped develop. Pepper is designed to interact with humans, and can talk and even read people’s emotions: “I believe it will become a huge platform for human companionship” Gou indicated, noting that additional software services could be bundled with the robot. According to PC World, Foxconn is already a partner with U.S.-based Tesla Motors, having built the touchscreen found inside the company’s vehicles. But last week, Foxconn’s CEO revealed that his company is developing its own electric cars, with a target price of less than $15,000.
However, the company continues to indicate that it has no plans to enter the smartphone market as a branded competitor since over half of current revenues come from being a key contract manufacturer for Apple. In a recent Supply Chain Matters commentary, we noted rumors that Foxconn is being tapped as the lead manufacturer for Apple’s next release of the iPhone.
As Foxconn , the most dominant global contract manufacturer continues at its efforts towards business diversification, the implications for other contract manufacturers are also evident. Contract manufacturing is a low margin business without product diversification or increased investments in factory automation. The China advantage for direct labor savings is fast evaporating.
The world of contract manufacturing is rapidly changing and so will the manufacturing outsourcing dynamic. Supply Chain Matters has noted in prior commentaries, a new model of manufacturing will evolve over the next five years, one with different regional manufacturing capabilities and perhaps different global players. The inter-relationships will be dynamic and so will the notion of brands, products and services. OEM’s will have increased pressures for opening up more customer value-chain opportunities to key suppliers, or else, suffer the consequences.
High tech and consumer OEM’s can no longer lean on past assumptions related to outsourced manufacturing business models.
Wall Street insiders and the financial press are hard at work extracting tidbits of information from elements of Apple’s supply chain. The buzz and interest centers squarely on what can be anticipated for Apple’s Fall new product introduction (NPI) pipeline. Obviously there is a lot at-stake.
We at Supply Chain Matters have featured prior commentaries related to information leaks from the Apple supply chain ecosystem. But we put that aside in this commentary. Rather, let’s focus on Apple’s new product ramp-up, overall planning and supplier management strategies that are evolving in this current phase.
The current two areas of focus are on the rumored introduction of Apple’s next iteration of the iPhone along with the so termed, iWatch, a smartwatch that is rumored to have rather mind blowing functionality and characteristics.
Earlier this week, the Wall Street Journal published an article, Can Apple Crack the Smartphone Code? (paid subscription required) The article indicates that Apple will join other consumer electronics firms, namely Samsung, Sony, Intel and a host of start-ups who have already released versions of a smartwatch into the market. We recently called Supply Chain Matters reader attention to reports that Google was ramping-up volume production for a smartwatch product as well. According to the WSJ article authors, thus far the market has been lukewarm in sales volumes. Thus, Apple does not have its usual first-mover advantage, and is compelled to provide more attractive product innovation to differentiate from existing competitors. The publication cites one market research firm as indicating that shipments of so-termed wearable devices amounted to roughly 3 million units in the first quarter of 2014, not a lot in the context of previous Apple product releases.
Regarding supply chain related insights, the WSJ cites a source indicating that Apple’s past ability to integrate both hardware and software design concurrently give it a leg-up in the market. Another source from a component supplier is quoted as indicating that Apple is planning for 2014 shipments ranging from 10-15 million production units this year.
A separate published report by Reuters , citing a source familiar with the matter, indicates Taiwan’s Quanta Computer will begin mass smartwatch production in July, with the planned product launch coming as early as October. Thus, we can surmise that in 3 months, Apple is planning to ship three to four times the market volumes that occurred in Q1. That’s Apple’s big bet on more attractive production innovation. The cited source further indicates that Apple expects to ship 50 million units within the first year of the product’s release, although these types of initial estimates can be subject to change or later adjustment. Further noted is that LG Display Co is the exclusive supplier of the screen for the gadget’s initial batch of production. LG Display has become Apple’s preferred go-to supplier for next generation display technology, that which requires difficult challenges in overcoming initial production yields. Two other sources of Reuters indicated that the subject smartwatch is rumored to also contain a sensor that monitors the user’s pulse. Singapore-based imaging and sensor maker Heptagon is cited as being on the supplier list for that feature, a rather new player in the Apple ecosystem.
Now let’s turn attention to the rumored new iPhone6.
A published advisory on Seeking Alpha cites Taiwan’s Economic Daily News report indicating that global contract manufacturer Foxconn is being tapped to be the prime contract manufacturer and is in the midst of hiring 100,000 workers to help ramp up iPhone 6 production. Fellow ODMPegatron is also said to be ramping iPhone-related hiring. Further noted is the rumor that Apple is targeting a price hike for carriers regarding the new phone model, which perhaps implies a bigger margin. Yesterday, a published report from Bloomberg indicates that production for the new model iPhone will begin in July and include two different models. One model will have a 4.7-inch display, compared to the 4-inch screen of the current iPhone 5s and may be available to ship to retailers around September. A 5.5-inch version is also being prepared for manufacturing and may be available at the same time according to the Bloomberg sources. The new iPhones will also be rounder and thinner than previous models, and include curved glass. Production of the 5.5-inch model is more complicated than the smaller version, resulting in lower production efficiency that must be overcome before manufacturing volume can be increased.
That news concerning Foxconn is incredibly interesting because the CMS was previously transitioning away from Apple’s volume business. Foxconn actually declared in February 2013 that it would freeze all hiring in China. Supply Chain Matters featured a past commentary related to Foxconn’s annual meeting of shareholders that communicated that having Apple as one of your prime customers is probably both a blessing and a curse, because the Apple way requires maximum flexibility with a magnification of the principle that the customer is always right, even when that customer abuses planning norms. In that stockholder event just about one year ago, Foxconn management indicated the intent to lighten its high exposure to Apple related production contracts in favor of both moving downstream in the consumer electronics supply chain and developing its own line of devices and software. At the time we opined that we would not be at all surprised that one day, there will be a number of consumer electronics devices branded by Foxconn, probably in the China market. If the rumors that Foxconn will be the prime manufacturer for the upcoming iPhone 6 turn out to be accurate, that would place a new or different perspective, namely that Apple is leaning on its most trusted and experienced contract manufacturer to insure that innovative design can meet high volume production requirements in a more-timely manner.
Apple is obviously deep into two major new production introduction ramp-ups with entirely new product designs, over the next several months. Notice that the windows are shorter, production start in July with possible global product launches in September or October. Usually, these NPI ramp-up phases start earlier in the year, perhaps May or June.
A brand new product area, namely a wearable device, far different iPhone design functionality (bendable glass, touch fingerprint sensor, wireless charging to name but a few rumors) blended among dynamic connections among product design, management and contract manufacturing partners. No doubt, this is an intense effort, with high stakes. Apple’s information connections from product management to the manufacturing shop floor, its inventory positioning and overall S&OP coordination are all dynamically at-play. We would not be all that surprised to hear that product designers are still making changes. That is the Apple way.
Yet, if any supply chain is up to the task, it certainly will be that of Apple.
We all await the results that come over the coming months.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
This commentary is an update concerning our prior Supply Chain Matters coverage of the acquisition of U.S. pork producer Smithfield Foods. In May 0f 2013, China based Shuanghui International announced its $5.7 billion acquisition of this U.S. based producer. Smithfield food brands include Armour, Carrando, Farmland, John Morrel and Health Ones among others. This acquisition was primarily about access to a more trusted U.S. brand and food-focused supply chain since China’s consumers remain distrustful of Chinese-based food supply chains. Since the acquisition announcement, Shuanghui International has now been renamed to WH Group.
As noted in our October 2013 commentary, both companies had already begun the process of integrating their international sales staffs in an effort to accelerate the global expansion of Smithfield brands. Further reported at that time 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’s growing middle class consumers, thus wasting little time on reaping the strategic benefits of this acquisition.
This month, Smithfield Foods reported its financial results for its first fiscal quarter and those results were record-breaking. Overall profitability increased nearly sixfold as the combination of dramatically higher pork prices in the U.S. coupled to increased international based revenues led to Smithfield’s CFO declaring: “We’ve never had a better January to march period.” Overall revenues increased 3 percent to $3.4 billion while international operating profit increased over 157 percent to $36.9 million. Export sales volume increased by 17 percent. A recent merger of two previous independent operating entities, Smithfield Packing Company and Farmland Foods has further contributed to decreased costs.
Industry supply shortfalls attributed to the porcine epidemic diarrhea (PED) virus that affected young pigs caused live hog prices to increase by 16 percent during the period which also helped to boost results. The earnings press announcement notes: “The strategic merger with WH Group yielded synergies with exports up double-digits on significantly higher volumes to China, among other markets.“
Going forward, Smithfield’s outlook currently calls for reduced hog and pork supplies coupled with organic growth to fuel significantly year over year results. Plans call for as many as four new production plants to be constructed in China over the next 18-24 months that will produce branded pork products from animal products sourced in the U.S. farm supply chain. According to a published report from Tidewater Daily Press, the company has made overtures to restaurant chains such as McDonald’s, Subway and Yum Brands to help these chains grow their revenues and supply sources for China based outlets. This year, Smithfield additionally plans to open more than 20 branded stores across China, many to be operated in kiosks within larger stores.
Thus, a somewhat “perfect storm” of reduced pork supply, higher yield, coupled with a huge China consumer market potential are already beginning to bear positive momentum. Supply Chain Matters will continue to monitor Smithfield’s efforts to ascertain how the rest of this year’s financial results stack-up in the light of industry forces.