The current waves of industry acquisition frenzy continue as cheap money remains available, and as usual, industry supply chains are impacted.
Today’s business headlines include a massive deal involving two global automobile systems, components and parts suppliers. ZF Friedrichshafen AG announced its intent to acquire TRW Automotive Holdings in a reported all-cash deal that is estimated to be in excess of $11 billion. According to reports, this deal would form an industry supplier with combined annual revenues near $41 billion, rivaling the size of other major global industry suppliers Robert Bosch and Denso. Under the deal, TRW would become an integrated but separate operating unit of ZF. The combined research and development investment portfolio exceeds $2 billion. This transaction requires several closing conditions and the approval of TRW stockholders, and is expected to close in the first-half of 2015.
According to the press release and statements from ZF’s CEO, the prime motivation for this combination is combining of product innovation resources applied to markets in electro-mobility and autonomous driving. TRW Automotive is a supplier of automotive integrated safety electronics, sensors, steering, suspension and integrated braking systems. TRW’s production and supply chain resources are global in scope and include support for major automotive production regions of United States, Europe, Asia and Latin America. ZF is a closely-held global supplier in transmission driveline, axle and chassis technology with 122 facilities in 26 countries and is a major supplier to German based mainline and premium model OEMS’s including Volkswagen. Combined, both suppliers will more than double revenues in support of major regions of China and the United States, and be able to support a fairly broad area of automotive and truck component system supply needs. With its combination with TRW, ZF has the opportunity to significantly increase its revenues and presence in the U.S. market.
The talks between these two automotive industry suppliers have been percolating for some time, and according to a published report from The Wall Street Journal, other suppliers such as Delphi Automotive, BorgWarner and AutoLiv have each expressed interest in “bulking up through acquisitions” in order to have sufficient scale to further stay ahead of product innovation needs to support various global automotive OEM’s. OEM’s have a desire to move forward in electric drivetrains and autonomous driving systems but prefer that system component innovation come from Tier One and other suppliers.
This wave of acquisitions involves other industry as well. Business headlines today include reports of a percolating massive mega-deal between Anheuser-Busch InBev and SAB Miller that could involve upwards of $122 billion. That would involve the combination of two of the world’s largest brewers and according to the WSJ, put control of nearly one-third of global beer supply under one company, and a wide range of brands.
The beat goes on and industry supply chains will have to continue to deal with the opportunities and/or consequences.
This week, Gartner unveiled its annual regional listing of what the analyst firm considers to be fifteen of the best supply chains in the European region. Gartner conducts this ranking as a supplement to its Top 25 Global Supply Chain rankings that are traditionally announced in the fall. According to Gartner, the top three European supply chains, Unilever,Inditex and H&M, remain unchanged and continue to lead in supply chain excellence while Seagate Technology made its debut in the number four ranking. Three new company supply chains also made a presence in the Gartner Europe ranking.
The published ranking for Europe Top 15 supply chains were noted as:
- Unilever (ranked 4th in 2014 Top 25 global ranking)
- Inditex (ranked 11th in 2014 Top 25 global ranking)
- H&M (ranked 13th in 2014 Top 25 global ranking)
- Seagate Technology (ranked 20th in 2014 Top 25 ranking)
- Nestle (ranked 25th in 2014 Top 25 ranking)
- Delphi Automotive
- Reckitt Benckiser
Similar to our view of this week’s Gartner’s Asia-Pacific rankings, Supply Chain Matters believes that this ranking reflects how we would have voted if we were part of the external or peer voting panel. Unilever is indeed a great supply chain competing in a very challenging CPG industry group. As we noted in our commentary associated with Gartner’s Top 25 ranking, Unilever has made steady progress over the past three years and deserves special recognition. Inditex has long been an icon when describing a top retail focused supply chain that is extraordinary in sensing and responding to fashion and customer demand. Seagate Technology as well, has bounced back from the near disaster of disruption and supply shortages caused by the 2011 floods in Thailand. L’Oreal has made great strides in integrating supply chain planning and execution across its supply chain business network. Nestle deserves its recognition especially in leading with industry-leading supply chain sustainability initiatives.
Three of the Gartner European Top 15 reside in the automotive industry sector which has been an industry segment not previously noted for consistent supply chain excellence. Both BMW and Volkswagen have been deploying a global based product platform strategy and have weathered the European economic crisis through a focus on international markets.
Also noteworthy is the appearance of two pharmaceutical supply chains, Glaxo and Reckitt in Gartner’s Europe ranking.
We believe that a ranking of the top Europe supply chains has even more significance given the ongoing challenges related to the severe economic conditions that have impacted Europe. These are supply chains that had to demonstrate various aspects of resiliency to insure required business and product outcomes.
Supply Chain Matters again extends its congratulations and recognition to each of the named supply chain organizations for achieving such recognition. There is obviously hard work that goes into achieving such recognition and citation and it should be acknowledged.
Today, Gartner published its annual regional listing of what the analyst firm considers to be ten of the best supply chains in the Asia-Pacific region. Gartner conducts this ranking as a supplement to its Top 25 Global Supply Chain Rankings that are traditionally announced in the fall. According to Gartner, while most of these regionally-based supply chains still need to elevate their supply chain capabilities to compete on a global level, many have dramatically improved their position.
The published ranking for Asia-Pacific Top Ten supply chains were noted as:
- Samsung Electronics (ranked 6th in 2014 Top 25 global ranking)
- Lenovo Group (ranked 16th in 2014 Top 25 global ranking)
- Toyota (reported to have moved up three places in the top ten Asia-Pacific and up 22 places in global ranking but not in current 2014 Top 25 global ranking)
- LG Electronics
Overall, Supply Chain Matters believes that this ranking reflects how we would have voted if we were part of the external or peer voting panel. Samsung is especially noteworthy since by many accounts its supply chain is supporting more product and perhaps process innovation than that of its arch competitor, Apple. It is quite interesting to note the appearance of three automotive OEM’s in the Asia Pacific ranking while there are no automotive OEM’s ranked in the global Top 25 rankings. We have been especially impressed with Honda’s global manufacturing sourcing strategies that have helped the company overcome currency challenges and better service global product demand.
At least three of the Gartner Asia-Pacific top ten, namely Samsung, Lenovo and Hyundai practice some form of supply chain vertical integration strategies.
However we were somewhat quite taken-back by the appearance of Sony’s in this top ten ranking, given its profitability challenges in the past few years. Sony has also been aggressively outsourcing parts of its television and certain parts of its consumer electronics supply chain to contract manufacturers in order to aggressively reduce costs. Gartner’s own admission is that Sony is lagging behind some of major competitors.
Again, we are shocked with the lack of recognition toward Foxconn Technology (Hon- Hai Precision), the world’s largest contract manufacturer by revenue and output volume. Foxconn is a major supplier and serves as the lead contract manufacturer for Gartner’s consistently ranked number one global supply chain of Apple. This CMS’s ability to respond to Apple’s intense product innovation requirements as well as rapidly scale volume production is highly noteworthy. We remain highly curious as to why Flextronics does not appear in this top ten regional ranking, let alone the global ranking, but then again, social responsibility strategies concerning workers may be a weighting factor. Another supply chain worthy of consideration is that of TSMC, the world’s largest semiconductor manufacturer.
Supply Chain Matters has featured commentaries on many of Gartner’s ranked top ten Asia Pacific supply chains. They can be accessed by utilizing our Search box: i.e. Samsung supply chain.
Supply Chain Matters has featured many ongoing commentaries regarding electric powered automotive manufacturer Tesla Motors and its bold “gigafactory” strategic supply strategy. Our last commentary published in mid-August on this topic reflected on the high frenzy of lobbying and proposed incentives among various U.S. states to be designated as the designated site for this massive factory, but the betting for the final site was leaning heavily towards a particular site, that being Nevada.
This afternoon, the formal announcement regarding the chosen site for this massive $5 billion supply facility will be made but business and general media has already running stories concerning disclosed the site, which is an industrial complex near Reno Nevada.
Let’s re-visit the four strategic objectives outlined in our mid-August commentary in light of today’s expected announcement:
Bold supply chain vertical integration
As more information comes to light, there is no doubt in the lens of Supply Chain Matters that Tesla has elected a bold vertical integration strategy. The massive scale of this facility is targeted at reducing the unit costs of lithium-ion batteries by 30 percent. Current reports now cite the statistic that at total capacity, capable of supplying up to 500,000 electric vehicles per year, the plant capacity exceeds than all of the entire automotive industry’s current lithium-ion battery supply needs. However, other information now coming to light indicates that Tesla’s supply strategy extends beyond current automotive industry needs, and could include electric storage needs for public utility, alternative energy or other industry needs.
There are new reports that the Nevada site selection has considerations for being powered by solar, wind and/or geothermal energy methods. as well as being a potential supplier of electrical storage to Las Vegas casinos and entertainment complexes.
Proximity to key commodity supply and transport networks
The site itself is rather close to supplies of the all-important raw material of lithium supply. A report posted on SiliconValley.com observes that Rockwood Lithium, the only operating bulk lithium supplier in the United States could easily supply needed raw material. The sire itself, to be located within the Tahoe Reno Industrial Center is approximately a four hour drive from Tesla’s primary Fremont assembly facility, and does provide for rail services.
A well trained and technically savvy workforce
Currently, Nevada has one of the highest unemployment rates in the United States. No doubt, the State of Nevada probably included workforce training incentives to staff the new facility. This facility is expected to be highly automated, but previous estimates pegged overall employment at 6500 at full capacity.
Subsidies that may well defray the overall cost burden.
In its reporting of the Tesla Nevada site selection, the Wall Street Journal noted: “Nevada likely offered Tesla one of the largest incentive packages in the history of the U.S. automotive industry.” Reports reinforce Tesla’s prior statements indicating expectations that the designated states would defray upwards of $500 million of this facility’s total $5 billion costs. The Governor of Nevada is expected to convene a special session of that state’s legislature to finalize details of the overall incentives package. We’ll know in the coming days the details of such subsidies, but as noted above, early indicators point to a substantial package.
Tesla is a company whose boldness extends across its entire value-chain. Today’s announcement of Reno Nevada as the site as one of the largest single factories ever constructed in the United States is a testament to such boldness and initiative. The race to a 2017 volume production now begins.
In a previous Supply Chain Matters commentary in early July, we noted a rising tide of production sourcing investments in Mexico among global based automotive OEM’s. Automotive OEM’s BMW, Honda, Mazda,Volkswagen’s Audi Group, and a partnership among Nissan and Daimler had each announced Mexican production sourcing decisions that amounted to billions of dollars of investment. In our commentary, we pointed to significantly more attractive direct labor rates, tariff-free access to markets, foreign currency challenges and global logistics as all contributing to the attractiveness of Mexico as a prime product export center.
This week featured news of yet another global based automotive producer electing to source production in Mexico. South Korea based Kia Motors, an operating division of Hyundai Motor, announced its intention to also invest in a $1 billion automotive assembly plant in Mexico with capacity to produce upwards of 300,000 vehicles.
Obviously, such a trend implies that a global production strategy is at-play within these moves. Despite a large amount of excess production capacity across Europe, European automotive OEM’s elected to invest. We can now observe that Asia based OEM’s, are joining the sourcing tide for electing Mexico. Additionally, when a concentrated group of OEM’s make such significant investments in a particular geographic region, the supply chain supplier ecosystem follows, creating the basis of a self-contained value-chain ecosystem that further contributes to cost and supply chain efficiencies for the region.
As noted in July, with the current strategic sourcing attraction of Mexico, global automotive OEM’s gain even more flexibility in determining the most profitable supply chain sourcing and production paths to support global demand or offset currency fluctuations. Mexico itself has the opportunity to evolve as a major global hub of automotive exports beyond North America.
The obvious loser in this tide is expansion of U.S. based automotive production. While U.S. based OEM’s such as Ford and General Motors balance their production investments among the specific global region supporting a consumer market, they have not tended to position U.S. manufacturing capability as an export weapon. Global based OEM’s have attracted to the U.S. southern region where local governments and their political leaders have provided very attractive monetary incentives and promises of right-to-work laws that inhibit organized labor unions.
The current wave of announcements targeting Mexico is now a clear sign of a far broader wave of strategy unfolding, since such sourcing spans previous smaller, low-margin models and now includes a broader range of production sourcing that include mid-range and luxury models. Thus U.S. manufacturing resurgence concerning automotive production is tempered by the rising tide of Mexico which will become a far larger global production and export presence. Cudo’s to Mexico’s leaders in providing the incentives and infrastructure to fuel such attractiveness.
Do not misconstrue that in this commentary, our intent is to not advocate pro or con organized labor, or legislative incentives that lure automotive OEM’s to certain regions, but rather to point out how such considerations can and do motivate sourcing decisions.
There is obviously a lot of learning to be gained for U.S. and local state legislative leaders and perhaps that learning is too late when it comes to global automotive supply chain capability.
This is a follow-up commentary related to Tesla Motors, specifically this electric powered automotive manufacturer’s efforts in supply in deploying a broader supply chain vertical integration strategy. In our Supply Chain Matters commentary in February, we noted Tesla’s announcement to build its own $5 billion electric battery supply facility which is termed the “gigafactory”, capable of supplying up to 500,000 electric vehicles per year. That level of supply commitment exceeds Tesla’s current planned output and implies providing a U.S. based manufacturing presence for electric batteries that would be available to other automotive and vehicle producers. Tesla currently supplies batteries for the ToyotaRAV4 EV and the Mercedes B-Class electric.
We noted that the strategy savvy, given that when one reflects on the entire value-chain and cost-of-goods sold (COGS) for an electric Tesla Motors Model S powered automobile, the batteries are indeed the highest portion of material cost. Tesla expects that the new factory would reduce its current battery costs by 30 percent in its first year,
In late July, during its second-quarter earnings report, Tesla executives made a side announcement indicating that the company had reached a final agreement with Panasonic Corp. as the supplier partner in the construction and operation of the planned gigafactory. Five western U.S. states continue to be cited as potential sites for either one or two linked supply facilities, although site work has actually begun in an area near Reno Nevada. Other potential U.S. states in the running are Arizona, California, New Mexico and Texas. The western portion of the U.S. is an obvious choice because of its proximity to the supply of lithium carbonate, a key raw material for lithium-ion batteries.
Journalist Michelle Quinn pens in a report posted by the San Jose Mercury News that the potential for landing this new battery factory with upwards of 6500 manufacturing continues to fuel a massive wooing and lobbying effort among each of the potential states. State legislatures are rushing through incentive packages to sweeten prospects in their individual states and Governors and city mayors have resorted to novel efforts in demonstrating enthusiasm and keen interest. One example, Texas Governor Rick Perry drove a Tesla Model S to California and taunted California officials about the overwhelming advantages of locating manufacturing in the Lone Star State. Quinn describes these lobbying efforts as a ‘beauty pageant” and: “if a song and dance could help (California), let’s do it.”
Readers should recall that Boeing launched a nationwide RFP bidding effort among potential U.S. states for selection of component and final assembly facilities for its new announced 777x commercial aircraft program. In our January posting, Collaboration According to Boeing, we noted that Boeing’s ultimate objective was to secure the most lucrative economic incentives related to production sourcing. Boeing was in-essence conducting a reverse auction, seeking the lowest economic bidder. In the end, a package of incentives described as the largest of its kind in U.S. history assured that new generation 777 production would remain in the OEM’s current Seattle area.
One of the learnings from the deep economic recession of 2008-2009 is that state, local and provincial governments will do all that is required to secure needed jobs and an economic future in times of uncertain economic growth. If that requires massive incentives in tax breaks, site location subsidies, workforce training and infrastructure developments, so be it. Current efforts among local and state governments to top one another only adds to the reality that manufacturers can hold out for the sweetest deal available with lucrative benefits. Appearances, stunts and lobbying add more leveraging power for the manufacturer.
In the specific case of Tesla, a company well known for its innovative and bold thinking. When the company announced that it would manufacture autos in California, many auto industry observers scoffed at that decision. California is not known as a low-cost manufacturing region.
The ultimate selection of its U.S. based battery gigafactory will accomplish four objectives:
- Bold supply chain vertical integration
- Proximity to key commodity supply and transport networks
- A well trained and technically savvy workforce
- Subsidies that may well defray the overall cost burden.
At this point, Tesla has more than likely honed its selection list based on the above objectives. The thinking is bold and timing is exquisite. It’s time to move beyond the politics and to the objective at-hand.