Supply Chain Matters has provided a number of previous commentaries regarding when is it appropriate to execute a more vertical integration strategy within a specific industry supply chain. Our commentaries on this strategy focused on General Electric in aerospace engines, Delta Airlines in airline service operations, Hon-Hai Precision in high-tech contract manufacturing services and Hyundai Motors in automotive manufacturing.
This week, general, business and social media as abuzz with the announcement that electric automobile maker Telsa Motors has announced audacious plans to build its own $5 billion electric battery “gigafactory” capable of supplying up to 500,000 electric vehicles per year. This strategy is fairly savvy, given that when one reflects on the entire value-chain and cost-of-goods sold (COGS) for an electric powered automobile, the batteries are indeed the highest portion of cost. The location of this factory is stated as somewhere within the U.S. Southwest, with locations in Arizona, New Mexico, Nevada and Texas all being explored. The area 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. Another neat aspect to the proposed 10 million square foot production facility are plans to have the factory green and sustainable, including solar and wind farms for supporting internal power needs. Telsa’s blog features a presentation that describes the conceptual plans for the proposed “gigafactory”.
According to published reports, the total cost of the plant is estimated in a range of $4-$5 billion, with $1.6 billion raised through a convertible bond issue and a $2 billion investment from Telsa. Panasonic is the current primary supplier for Telsa’s lithium-ion batteries and in its reporting, the Wall Street Journal indicated the possibility that Panasonic and other unnamed Japanese suppliers could contemplating a $1 billion investment in this proposed facility. Reports caution, however, that Panasonic’s plans are still fluid.
Telsa currently supplies batteries for the Toyota RAV4 EV and the Mercedes B-Class electric. In its reporting, the San Jose Mercury Times notes that Telsa’s prime assembly facility in Fremont California is directly located on a Union Pacific railway spur line and that the “gigafactory” will more than likely be serviced by rail as well, to control transportation costs in shipping batteries to the final assembly point.
Telsa expects that the new factory would reduce its current battery costs by 30 percent in its first year, which as we all know, is a significant contribution to COGS, and further opens up opportunities to produce electric cars for the mass market. The WSJ further reported that Telsa is attempting to break through the $200 per kilowatt hour cost point which affords the opportunity for these types of batteries to be economical as backup power supplies for electric utilities along with other forms of static energy storage. Telsa CEO and principal owner Elon Musk also is chairmen of SolarCity Corp., a solar energy provider, and that is fueling additional speculation among certain Wall Street analysts that Telsa could morph to become a power storage company.
From an industry value-chain perspective, reports that that the proposed facility will produce more lithium-ion batteries than the entire global supply for 2013 has incredible meaning with the implication for establishing a highly significant alternative energy value chain capability within the United States. It is obviously an attempt to provide a more competitive lithium battery sourcing strategy from current areas such as China, South Korea and other countries. By our view, is a rather exciting and bold announcement, one that has the potential to add more to U.S. manufacturing and value-chain momentum for alternative energy, high-tech, consumer electronics and other industries.
Investors seem also impressed since Telsa stock has shot-up since the announcement.
Forms of vertical integration or closed supply chain strategies do indeed have their applicability and seem to be garnering additional favor.
Over the weekend and again this week, business media has provided amplification of the labor union representation vote held at the Volkswagen manufacturing facility located in Chattanooga, Tennessee. It was obviously a significant development concerning labor organizing efforts across the U.S. and the implications for management and labor relationships.
For readers who are not familiar with the events leading up to this election, they involve Volkswagen’s sanctioning of a union representation vote. Many of Germany’s large and small manufacturing and services enterprises embrace the concept of a “Works Council”, where direct representation from labor at the highest levels of management incorporates labor’s input on policies and practices related to work conditions, employee grievances or other matters related to compensation and benefits. Enterprise software provider SAP AG, incorporates the Works Council structure along with many other German firms. They are very much the fabric of encouragement of management and labor collaboration and shared benefits for companies.
The Chattanooga production facility was one of a very few Volkswagen global based facilities not having a formal Works Council and thus the German based IG Metall labor union advocated to Volkswagen’s senior management to encourage the formation of such a structure in the U.S. It so happens that this same facility is located in the heart of the U.S. Southeast region where multiple automotive OEM’s have located their facilities because of the “right-to-work” non-union environment fostered across this region. Certain politicians across the South were not that pleased with the concept of a foreign based manufacturer actively supporting a unionization election. Thus, a large-scale lobbying effort began to unfold for fears that a union vote in Chattanooga would lead to other organizing efforts in this region.
The ultimate vote concerning the United Auto Workers (UAW) union attempts to represent Volkswagen’s Chattanooga’s workers failed to win a majority, but the vote was close, with a final reported tally of 712 to 626 indicating rejection of labor union organization.
Prior to the vote, the highly conservative leaning Wall Street Journal featured an Editorial striking fear for workers and other automotive manufacturers if the UAW was successful in its recruiting efforts. Elements of Republican Party led conservatives including anti-everything activist Grover Norquist, Tennessee U.S. Senator Bob Corker and Tennessee Governor Bill Haslam mounted a strong anti-union campaign including fears that future work at the plant would be suspended or at-risk if the plant voted for UAW representation. Vocal factions among Volkswagen’s production workforce added their own voices as well, mostly anti-union, with accusations that these factions were supported by outside interests.
With the election results now recorded, Supply Chain Matters wanted to weigh-in in an argument for civility and objectivity on both sides. First and foremost, our intent is not to take bias to either side, but rather to point out some observations that we believe need reflection and consideration.
On the anti-union side, it seems that we all tend to suffer from long-term memory loss. Reflect back to 2008-2009 when two of the largest automotive OEM’s in the United States, General Motors and Chrysler, were forced into bankruptcy. The situation was dire and there was a need for significant business re-structuring, to include finding an alternative to a significant industry burden of high direct labor, pension and healthcare costs. During that crisis, the UAW worked with both OEM’s and U.S. government re-structuring teams to grant tiered wage concessions, reform pension programs and develop the creative solution for forming and funding a separate Healthcare Trust entity under the umbrella of the UAW, which allowed the industry to shift its legacy burdens to this trust. The trust itself was funded by one-time payments from individual OEM’s and from granted OEM stock ownership to the UAW which has its own value for the Trust. Today, both GM and Chrysler are again competitive and better able to compete in global and domestic markets.
During the same global economic crisis that severely impacted the Eurozone region, Works Councils across Germany collaborated with manufacturers large and specialized to avoid outright layoffs by agreeing to modify compensation structures and allow workers to keep their jobs. The solution was for labor to work somewhat less hours, with additional subsidies from the government of Germany provided to maintain adequate wage levels. It is a recognized fact that these same German manufacturers were able to bounce back from the recession much more quickly because workers were not permanently displaced and skill levels were maintained. That by our lens, was evidence that Works Councils can be a positive force in business and labor collaboration and mutual gain sharing.
Certain labor unions are obviously not without fault. Polls continue to indicate that non-unionized workers across the southern region of the U.S. generally are not favorable to unionization because workers do not perceive some of the value outlined above. Workers have also voiced displeasure on being burdened with union dues that do not provide perceived continuous value. Thus, U.S. labor unions need to continue with efforts to target the needs of workers and substantiate their value. Yet, across the U.S., there is mounting evidence that the income gap among the wealthiest and the rest of the working population grows ever wider.
When either of these factions begins what are perceived as heavy-handed tactics or threats, the other faction cries fowl. Some manufacturers threaten to withdraw, suspend or not source work to a unionized facility. Local politicians provide manufacturers incentives to locate in specific U.S. states that will foster right-to-work laws. National politicians advocate for less regulation, particularly when it concerns rights to organize and card check campaigns. Certain labor unions evangelize the evils of management, top-heavy management and the declared rights of workers to maintain a living wage.
What is missing is a level playing field where workers can determine in their own wisdom and judgment, whether their rights and welfare are being well served or whether they desire to be more represented directly at the management table.
The need for skilled manufacturing talent remains critical across multiple industry supply chains yet candidates are not attracted by perceived low current compensation levels for entry-level workers. Securing experienced talent that incorporates the voice and collaboration of direct labor workers remains a critical need for innovative, industry leading manufacturers. Whether that voice is obtained by small work groups, Works Councils or a unionized work force should be the purview of both parties, and without the need for threats and heavy-handed tactics.
In either case, supply chain leaders should have the leadership and collaboration skills to be able to manage in either environment.
In late August of 2012, Supply Chain Matters raised awareness to Japan based automotive OEM Honda and its plans to shift a major portion of its export production capability from North America instead of from Japan. We updated readers on the interim results this strategy in a July 2013 posting.
The motivations for Honda were the continued appreciation of the Japanese yen and the risk implications of the 2011 devastating earthquake and tsunami that stuck Northern Japan. Honda’s long-term plans included the ability to ship 200,000 to 300,000 autos from North America to global export markets in addition to satisfying U.S. domestic demand.
This week, business media is reporting an update from Honda indicating that its U.S. vehicle production export activity exceeded its rate of Japanese imports for the first time. Honda exported 108,705 U.S. made vehicles to 50 countries in 2013. That compared to importing 88,537 vehicles produced in Japan for U.S. consumer fulfillment. Overall, Honda produced 1.3 million vehicles across seven production facilities in the U.S. This milestone indicates good progress toward the ultimate goal for exporting upwards of 300,000 vehicles.
As reinforcement to this U.S. export strategy, Nissan indicated that it exported 100,608 vehicles from its U.S. based factories in 2013, an increase of 37 percent from 2012. The Japan based OEM is also in the process of moving additional production of models to the U.S. including the Murano sport utility model.
As we have previously noted, the implication in these shifting manufacturing export trends is that U.S. automotive supply chains must now cater to the product-unique needs of certain export markets and there lies the importance of global product platform development strategies. However, there is a stark need to dynamically plan and respond to constantly changing and different geographic market scenarios. An industry that traditionally does not have tendencies to invest in more sophisticated business planning, end-to-end supply chain visibility, control tower and more predictive capabilities has the most to benefit from these capabilities.
Earlier this week the Detroit Auto Show occurred, an annual event that provides industry players and business media the opportunity to feature multitudes of commentaries regarding the state of the industry and the state of automotive supply chains.
The year 2013 was a good one for the U.S. automotive market as sales rose 7.6 percent to 15.6 million vehicles. That is quite a comeback from the levels of 2009-2010 when severe recession all but forced the bankruptcy of both Chrysler and General Motors and caused many other automakers severe cutbacks in revenue and profits, not to mention jobs.
As we begin 2014, the U.S. market is now the target for most of the globe’s auto makers as the U.S. economy continues its steady rebound and U.S. consumers are much more inclined to replace or buy a new vehicle. The latest estimates for auto sales in 2014 hover in the 16 million vehicle range, a slight improvement.
Yet, in reading certain news reports, we wonder aloud if the industry has learned some operational lessons regarding inventory management, specifically finished goods inventories management.
On Wednesday, the Wall Street Journal published two articles on the industry. One of the articles made note that many automotive OEM’s are now considering even more investments in added capacity. Yet, some seasoned CEO’s such as Sergio Marchionne, CEO of Chrysler and Fiat openly states his constant concern regarding excess inventories. He was quoted as indicating that he watches inventory like a hawk. He should know, since he has been responding to that problem in the European market. Auto makers are augmenting North America production capacity not only to serve the domestic market but export markets as well. Today’s more prevalent common platform design strategies coupled with more sophisticated levels of factory automation allow auto makers to exercise far more flexibility in production options from any given plant.
What did catch our attention were reports of current finished goods inventories across various U.S. automotive retailers. According to Autodata Corporation, auto dealers had 3.45 million cars and trucks in inventory at the end of 2013, which is reported as the equivalent of 63 days of finished goods inventory at roughly $100 billion in value. That number is reported as being considered “optimal” by the industry. Keep in mind that automotive OEM’s book revenue credit at point of shipment to dealers, thus their metrics of revenue are fulfilled, but dealer metrics of unsold vehicles being financed is a different story.
The WSJ published a sidebar article indicating that Mike Jackson, the CEO of AutoNation, one of the largest retail auto dealers in the U.S. was indeed concerned about finished goods inventory levels. Jackson is of the opinion that inventories are much higher, closer to 90 to 120 days of supplies if cars sold to fleets is excluded from the selling rate equation. Thus the value of sales rate is combined for fleet sales and private sales which skews the specific type of product demand.
We applaud Mr. Jackson for his candor. It strikes us that since 2009, the industry should have learned some very important lessons regarding unsold inventories and conflict of metrics among OEM’s and retail dealers.
Today more than ever, auto markets are driven by a B2C online presence. Consumers can literally shop and price any make or model vehicle and view current inventory levels from the majority of OEM online sites. Auto dealers can now view finished goods inventory across wide geographic regions and can electronically swap inventory with other dealers. Some of the luxury OEM’s such as BMW or Mercedes allow consumers to actually order a vehicle to be built at the factory and then arrange to pick up that vehicle when completed.
Now more than ever before, OEM’s and their retail dealers have information available as to what models and options consumers are most interested in and from what specific geographic regions product demand is coming from. They also have the ability to select and utilize a wide variety of advanced software applications directed at item-level inventory management and optimization that are delivering bottom-line savings in more efficient overall management of inventories. Technology should not be an issue.
Why then is 60 days of unsold inventory viewed as an acceptable norm?
We obviously suspect it has more to do with conflicting metrics, namely revenue recognition or output performance. If OEM’s receive some revenue recognition at every shipment, they consequently only care when the pipeline gets bloated. They then turnaround and offer retail dealer’s additional cash selling incentives to motivate them to sell unsold inventory more aggressively. Our household bought a brand new Honda in 2013 and it was very clear that the salesperson was highly motivated to offer the most attractive price if we opted for a vehicle in dealer inventory.
This problem has been the bane of the industry and it is shocking that it continues with so many other options in product demand and inventory management now available.
Supply Chain Matters is therefore seeking input from those within the industry- why does this situation continue? Is the adage of “push it down the pipeline” still an acceptable norm with so many other alternatives now available? It seems to us that there has got to be a better way of channel distribution.
What are your observations?
A significant shoutout is in order regarding today’s announcement on the appointment of Mary Barra as the new CEO of General Motors. This appointment represents a milestone of the first senior female executive ever to lead a global automobile manufacturer, and the significance is not unnoticed.
The appointment is part of a far-reaching re-organization of GM management and includes the announcement that current CEO Dan Akerson will exit the company next month due to personal reasons. Akerson advanced his succession plan by several months after his wife was recently diagnosed with an advanced stage of cancer.
Ms. Barra has spent her entire working career at GM. The daughter of a tool and die maker at the Pontiac division, she starting in 1980 as a co-op student and risen through the ranks in roles in manufacturing, engineering and other leadership positions. Her most senior roles include Vice President of Human Resources and most recently Vice President for Global Product Development. As head of global development, additional responsibilities were added as global director of procurement. According to GM’s announcement along with other business media reporting, Ms. Barra is credited with the bulk of the current turnaround in company’s line up of new vehicles.
News reports indicate that Ms. Barra has demonstrated a bias for action and for getting things done. Under her product development leadership, GM introduced the new Chevrolet Cruze and Chevrolet Impala models, both of which have had market success. In its reporting, the Wall Street Journal characterized Ms. Barra has “having a reputation for speaking her mind, a trait that hasn’t always been appreciated in GM’s executive suite.”
Supply Chain Matters views that as a positive connotation, one that has the potential to move GM into an even bolder direction. Her grounding in manufacturing operations and procurement would indicate an awareness to global supply chain needs, including how the supply chain contributes to strategic business outcomes.
Much more will be written and spoken regarding this landmark announcement, along with GM’s other new leadership appointments. For the time being, due recognition is warranted to GM’s Board and to Dan Akerson for this bold and landmark appointment.
On Friday, ThyssenKrupp AG announced that it would sell its troubled but state-of-the art Calvert Alabama steel finishing plant to the 50-50 joint venture of ArcelorMittal and Nippon Steel & Sumitomo Metal Corp. for $1.55 billion. The announcement concluded an 18 month effort to sell two packaged facilities, in essence a vertical integrated supply proposal. The price garnered in this sale was considerably lower than the $5 billion that Germany based Thyssen originally invested in the Alabama steel rolling facility.
Three years ago, the Calvert plant was paired with Thyssen’s other raw steel producing plant in Brazil in an effort to provide auto manufacturers located in the southern region of the United States a more technology laden supply of fabricated rolled steel for product design and supply purposes. It was an effort to benefit from the resurgence of auto manufacturing in the U.S., but ran astray because of the rising production costs involved in the Brazil facility, and lower than expected global steel demand. Thyssen initial attempts for sale involved both the Brazil and Alabama plants as a package, but that resulted in lack of attractive bids. Thyssen later agreed to sell the Alabama facility itself, and managed to garner five different bids for the facility, including U.S. based Nucor.
For the potential new owners is the ability to utilize raw steel supplies from other U.S. or Mexico based steel fabrication facilities. However, the deal reportedly includes a pledge to annually procure a minimum of two million tons of raw steel from Tyson’s Brazil facility over a 6 year horizon. The new owners can further leverage the higher capacity and productivity that the Alabama plant provides along with a shorter logistics chain for manufacturers with plants in the southeast U.S. region.
The deal itself is still subject to regulatory approvals. According to reports published in business media, AccelorMittal currently accounts for roughly 40 percent of the steel supplied to the North American market and that may be a sticking point for regulators. Nippon-Sumitomo currently operates a 2.9 million square foot finishing facility in Indiana that supplies U.S. Midwest auto and appliance manufacturers with rolled steel products.
Because of possible concerns, reports now indicate that the review process is not expected to be completed until at least July of next year. One would hope that regulators would have a strategic sourcing perspective for insuring that the current resurgence of auto, appliance and other steel focused manufacturing in the southeastern United States continues with an Alabama plant that now has other options for vertical integration.