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The Beginning of NAFTA Renegotiation Talks- Monitor and Be Prepared


Today marks the formal start of re-negotiations concerning the North America Free Trade Agreement (NAFTA) and many industry supply chain teams should be monitoring developments and conducting ongoing analytical analysis and management education.  There is a very narrow window for negotiators representing Canada, Mexico, and the United States to come to a broad consensus of agreement, and there is a risk that the negotiations could drag-on.

The Trump Administration has been the prime catalyst for leading-up to this week’s start of negotiations to fulfill campaign promises related to NAFTA being unfavorable and “unfair” to U.S. trade. The President has threatened that the U.S. would withdraw from NAFTA if a better deal for U.S. businesses and America’s workers is not achieved. Fortunately, key Trump Administration trade advisors and negotiators seem to be taking a more practical stance.  Cont Train 300x200 The Beginning of NAFTA Renegotiation Talks  Monitor and Be Prepared

NAFTA represents a truly inter-connected, regional industry supply chain ecosystem of material flows across and within the region’s borders. By some accounts, Canada, Mexico, and the United States trade some $1.24 trillion annually, nearly $3.3 billion per day on average under the current agreement that has existed for 20 years. Industries such as automotive, apparel, food and agriculture and others have established strong product value-chain linkages spanning the trade region and any significant changes are bound to have some impact.

Many business and Congressional leaders have emphasized the benefits gained from NAFTA, and are calling for modernization vs. overhaul of the trade pact. In late July, U.S. negotiators released a listing of 100 trade objectives which according to many, underscore the complexity and scope of challenges that negotiators must overcome. However, the good news is that many of the U.S. objectives mirror common ground in that they represent trade tenets that were already agreed to during previous negotiations concerning the Trans-Pacific Partnership (TPP). They include labor, environmental, intellectual property protection and trade in digital products which essentially have already been agreed to by all three NAFTA partners. The U.S. elected to formally withdraw its prior-agreement to TPP shortly after President Trump took office.

In today’s highly-charged political climates, the re-negotiation of NAFTA presents many politically focused challenges for all three countries. President Trump’s tough stance to “get a better deal” for the American worker is certainly one political backdrop, especially with the Congressional mid-term election cycle starting in 2018. Similarly, Mexico has its Presidential election scheduled for July of 2018, and the Mexican political climate has been highly charged regarding Trump policies on trade and immigration. Thus, by many published accounts, if the parties cannot come to some consensus of general agreement by the end of this year, existing talks would extend for many more months or even risk suspension, making consensus a far larger challenge.  Even if NAFTA negotiators were to achieve a consensus by the end of 2017, there would remain a series of multilateral negotiations for each specific industry such as automotive.

There are risks that the talks could drag on for many months to-come, adding a lot of supply chain strategy uncertainty regarding rules of origin and tariffs, not to mention increased trade tensions or retaliation among either of the parties. If talks were to fail and the U.S. elected to withdraw from NAFTA, tariffs would revert to the World Trade Organization most-favored nation tariff structures.

There are specific areas of prime contention. The first stated U.S. objective is: “Improve the U.S. trade balance and reduce the trade deficit with NAFTA countries” which strikes experienced trade experts as highly political and one-sided. For Canadian negotiators, a noted deal-breaker are stated U.S. efforts to eliminate Chapter 19, a process that allows Canada and Mexico to appeal trade duties imposed by the U.S. through independent panels rather than litigation through U.S. courts. Entering this week’s talks, Canada’s negotiators have already positioned a stance of Chapter 19 dilution as a non-starter to any broader agreement. The U.S. also seeks to reduce the direct labor wage gap perceived to exist within Mexico, accusing that government of policies to sustain such a gap to make Mexican sourced production more attraction. That appears to be a non-starter for Mexico. The U.S. wants to tighten rules-of-origin measures, used to qualify for duty-free access based on NAFTA content. The current NAFTA rule of origin for automobile manufacturing is 62.5 percent of NAFTA composition. Rules of origin related to the auto industry turned out to be a contentious point for TPP negotiations last year as-well, dragging out consensus to the last minute.

Practical minds would conclude that the total scrapping of NAFTA for the sake of one country’s objectives does harm for the entire region. Major corporations and industry interests have too much already invested in NAFTA wide supply chain material and services flow, and would not tolerate a complete disruption. But, ladies and gentlemen, we exist in highly-charged, geo-political times were logic is sometimes overridden by events.

We submit that for businesses and their supporting industry supply chain teams, a posture of sitting-back and waiting for a clearer sense of policies and direction presents added risk. That includes the risk for not being adequately prepared to deal with any implications of future changes to NAFTA, or to have the ability to seize opportunities to gain added market or financial benefits because of any major trade agreement changes.

As we have emphatically stated in prior blog commentaries, this is a period where industry supply chain and procurement sourcing teams need to be constantly analyzing and educating and advising. This includes maintaining the most accurate up-to-date information regarding multi-tier supply chain flows with the ability to perform multiple scenario and what-if planning and analysis exercises to educate senior management as to potential vulnerabilities as well as market and supply chain sourcing opportunities. It should be little surprise that multi-national as well as small and mid-market manufacturers have already initiated various measures to hedge regional and/or global supply chain risk.

Over the coming weeks, both in online seminar talks and blog commentary, this author will outline what I consider to five specific actions that executives and supply chain teams can and should do to insure your company, larger or small, has the tools and competencies to manage an ongoing era of geo-political trade uncertainties.

Stay tuned.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

The Toyota-Mazda U.S. Manufacturing Plant Announcement Must Factor a Changing Industry and Geo-Political Environment


Toyota Motor and Mazda Motor recently announced joint plans to build a new $1.6 billion auto assembly plant somewhere in the United States. The announcement prompted an immediate tweet from President Trump praising the decision.

Beyond the current industry and or politically motivated speculation as to where this plant will be ultimately sourced and built are today’s new realities of major industry supply chain sourcing decisions, including fundamental power-train value-chain differences.

The plant itself is reported to be of a size capable of producing upwards of 300,000, vehicles per year and employing roughly 4000, an average sizing by today’s industry practices. Production is to be divided between both automakers and the plant has been targeted to be operating in 2021, four years hence.  That timeframe has important significance, both from manufacturing strategy, technology sourcing as well as a geo-political dimension.

Let us explain.

In manufacturing strategy, the plan reportedly calls for the joint production of Toyota’s Corolla sedan and Mazda’s crossover SUV vehicles such as the CX5. In last week’s announcement, reports indicated that the two companies have been exploring various areas of joint manufacturing collaboration. More importantly, both companies recognize the strategic market shift toward vehicles less dependent on internal combustion powered vehicles, and more toward hybrid or electrically-powered vehicles. That has special significance in considering the 2021 timeframe. Mazda is especially in need of development of such vehicles, hence Toyota’s prior experience in its Prius hybrid and all-electric model family provides lots of proven product design and manufacturing experience. Subaru, reportedly also has a strategic partnership with Toyota for electrified vehicles.  Toyota Corolla Emblem 300x169 The Toyota Mazda U.S. Manufacturing Plant Announcement Must Factor a Changing Industry and Geo Political Environment

The fastest selling segment in the U.S. car market remains small to mid-sized crossover vehicles and the Toyota RAV4 stands out as a best-seller. To accommodate future demand, Toyota has linked its new Corolla U.S. sourcing decision with plans to boost RAV4 manufacturing capacity in the Canadian plant that currently produces the Corolla. The automaker will reportedly go-ahead with prior plans to construct the new manufacturing facility in Guanajuato Mexico, however that plant will now be designated to produce the popular selling Toyota Tacoma pick-up truck models, in-essence doubling existing production levels to accommodate rising demand across North America.

Now let’s turn to the geo-political dimension.

Toyota has been producing Corolla branded cars both in Canada and in the United States at a Mississippi production facility. In 2015, the Japanese automaker announced plans to construct a new $1 billion plant facility in Mexico, which was to be the new home of Corolla production. That caught the attention of the U.S. Presidential primary and election process, and specifically candidate Donald Trump who challenged the decision. In January, President Trump again criticized Toyota publicly for importing manufactured cars from Mexico to the United States while threatening to impose added tariffs on such cars. Mazda’s current sole presence in a manufacturing facility in Mexico, with lack of any current U.S. based manufacturing capability, exposes that company to trade and currency risks, given the current geo-political climate.

Let’s now turn to the actual process of U.S. plant site selection.

Reports indicate the eleven U.S. states are currently lobbying to land the new facility in their respective state. The short-listing is speculated to involve the U.S. South, Midwest, and Southwest regions. Many of the reported short-listed states have traditionally voted and elected Republican party candidates, hence another political dimension. Some business media publications point to the U.S. Southeastern region as a leading choice, from the notions of both a robust-network of existing just-in-time production focused automotive suppliers, existing modern transportation, and logistics capabilities, as well as tendencies to offer very attractive incentives to foreign-based manufacturers. The key determinant is noted to be labor force and best government incentives.

Supply Chain Matters hastens to add another determinant, one far more strategic. That of course, is the implied shift in power-train requirements in the 4-5-year timeframe, namely the inclusion of more lithium-ion battery packs in automotive product value-chain, along with lower direct-labor requirements via factory automation.

Current U.S. sourcing of lithium-ion batteries resides in the U.S. Western and Midwest regions, not to mention the flexibility or necessity of having such batteries or components shipped from Asian-based manufacturing. As our automotive industry-focused readers know all too well, batteries are heavy and rather expensive to transport over long distances. Thus, any direct labor or government incentives now need to be factored and balanced with the assumption of a more alternative energy focused product value-chain for Corollas or Mazda SUV’s. The good news is that automotive manufacturers have now matured auto assembly processes to be able to accommodate both predominate internal combustion and alternative energy powered vehicles on the very same assembly line.

From our lens, all the above implies that whichever state ultimately is chosen for siting, a key determinant will be strategic sourcing of battery production coupled with transportation and logistics capability and costs in the plant’s region.

The takeaway is that the tradition notions in automotive manufacturing that direct labor and local government incentives alone determine plant site selection are changing rather quickly with the increasing attraction, pricing and popularity of hybrid and electric-powered vehicles. A further new dimension is a reading of the geo-political environment in an era of increasing global trade tensions, one that features constant uncertainty as to tariff, trade, and intellectual property protection challenges. This week marks the start of talks focused on revisiting the NAFTA (The North America Free Trade Agreement), with the implication of an automotive industry highly dependent of the assumption of free-trade and movement of automotive value-chain components.


Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

More Information Disclosed Relative to Tesla’s Model 3 Ramp-Up

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This Supply Chain Matters blog is a supplemental update which adds additional information to our prior blog commentary- Tesla Conducts Model 3 Customer Handover Event.

It concerns this week’s formal briefing of Q2 2017 financial performance by Tesla’s senior management team, where more information was shared regarding the planned ramp-up of the company’s new and innovative Model 3 sedan.  Tesla model 3 side profile Sized 300x118 More Information Disclosed Relative to Teslas Model 3 Ramp Up

In our prior posting, we stated that we know less about how Tesla will manage the huge planned production and supply chain ramp-up of the Model 3. That question resonated among Wall Street equity analysts to the extent that CEO Elon Musk fielded a lot of questions related to ongoing Model 3 supply chain and manufacturing strategy.

In the briefing, Musk reiterated that when he indicated the term “manufacturing hell,” he really meant it. He further provided an explanation of the manufacturing S curve, a trend quite familiar to our manufacturing and supply chain readers, a curve that essentially depicts the series of plateau constraints that can occur with any product ramp-up. Situations such as supplier shortfalls or production machinery that does not support ramp-up volumes, for example. His message to Wall Street analysts and investors was to not fixate on individual snafu’s but on the target milestone for full production volume levels in 2018.

Nice try- Elon!  Tesla is way-too visible a company to not have multiple eyeballs focused on any snafu.

Further communicated was that Tesla has turned to its major suppliers to assist in achieving both required cash flow and product margin goals. This strategy has a way too familiar ring. However, Musk was quick to praise what he described as the “A-level” collaborative effort and expertise extended by suppliers to prepare for the ongoing production ramp-up.

Tesla has negotiated what the automaker considers better payment terms with suppliers, extending payments out to an average of 60 days. Since the Model 3 consists of less component parts, and can supposedly be manufactured faster than other prior Tesla models, such a goal is the strategy initially adapted by Dell Computer, namely to get paid by the customer before paying all suppliers for the components. Musk’s statement to analysts was on-average, the industry average combined time of production, distribution, and actual sale to end-customer averages 70-90 days. (In today’s sales environment- much higher) Since Tesla owns and controls its own distribution and customer delivery processes, the goal for the Model 3 is an order-to-cash strategy of under 60 days.

From our lens, it’s a great strategy, but as we all know, there are many moving parts to such a strategy, especially in automotive manufacturing that presents a steep production ramp-up phase. This is an area worth monitoring.

Supply Chain Scale-up

CEO Musk acknowledged that Tesla would eventually need to invest in added battery production capacity, particularly for other geographic regions. Acknowledged was the added expense for shipping batteries and completed cars across oceans to fulfill international demand. We believe that this represents a public acknowledgement that Tesla must eventually consider added manufacturing and supply chain presence beyond just the U.S. Musk communicated to equity analysts to expect some further announcements before the end of this year.

Sales Strategy

In our prior blog, we estimated the Model 3 outstanding order reservations to be in the range of 400,000 – 500,000 vehicles, which was candidly an educated guess on our part. In this week’s briefing, Musk clarified the real numbers after queering the automaker’s sales teams. Noted was 518,000 gross reservations and 450,000 existing net reservations for the Model 3 after factoring ongoing customer cancellations. Consider that number for a moment, nearly a half-million customers lined-up with money deposited to secure a Model 3. That is clearly an incredible and enviable position for any automotive or other manufacturer to be in from a customer demand perspective. In fact, Musk noted that his teams can easily drive the current Model 3 customer demand higher with little effort, but cautioned that there would be little point if actual delivery times extend for many additional months. The analogy was waiting an hour-and-a-half for a hamburger to be served. So much for quoting a 2018 delivery date on the Tesla website for new Model 3 orders.

We cannot close without highlighting what we believe was a very positive depiction of cross organizational alignment and collaborative strategy among the extended supply chain management team and senior Tesla management. It concerns the termed Model X, which is the internal depiction of the planned compact SUV iteration of the Model 3.

Musk indicated that his prior communicated goal was to unveil a totally-new architecture for this planned model. The CEO than received council from the executive team (and no doubt product engineering and supply chain focused executives) that incorporating substantial carryover platform features of the Model 3 would facilitate a lower technical and production risk with a faster time-to-market, allowing Tesla to tap a larger existing small SUV market much faster than with a complete new platform.

Musk publicly thanked his team “who reeled me back from the cliffs of insanity


We highlight all the above for readers to reinforce the notions that supply chain and manufacturing strategy does indeed matter in achieving desired business outcomes. In the specific case of Tesla’s Q2 briefing of financial performance, it was the essence of a briefing on detailed manufacturing and supply chain strategies. We observe much more of this occurring in financial performance briefings with every passing quarter.

Supply Chains indeed matter.


Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Tesla Conducts Model 3 Customer Handover Event


Last Friday, Tesla conducted its long-awaited Model 3 customer handover event that unveiled the final production versions of the new entry-level, mass-produced electric car, along with announcing the delivery of the first 30 cars to designated employee customers. Initial deliveries to select employees is an established tradition at Tesla, since these initial completed vehicles will be continually evaluated by employees for performance and reliability metrics.  Tesla model 3 side profile Sized Tesla Conducts Model 3 Customer Handover Event

We now know a lot more about this new vehicle, but at the same time, less about how Tesla will manage the huge production ramp-up.

The Model 3 will feature two different versions including one that extends the electric car’s range to a noteworthy 310-mile range. However, customer will have to pay an extra $9000 for the extended range option. Even more compelling is that if a customer where to add all the available add-on options, including the extended range batteries, enhanced autopilot, premium upgrade package and other options, the total price of the fully loaded Model 3 is just below $60,000.  That perhaps narrows the notions for the mass-produced car for the masses, but it does reinforce the need for Tesla’s quest for profitability.

The more expensive extended battery version has now begun production with the real-wheel drive version. Standard battery Model 3’s is slated to begin production by November.  It is not until the first-half of 2018 that the all-wheel drive versions enter production while international models with right-hand drive commence production and delivery in the second-half of 2018.

Founder and CEO Elon Musk spoke plainly regarding the supply chain and manufacturing challenges currently facing Tesla. He stated: “Frankly, we’re going to be in production hell”. Further stated was that this tough period of Tesla’s production ramp-up will last at least six months, but maybe longer.

From our Supply Chain Matters lens, Musk maybe understating the challenge.

Musk spoke to a delivery schedule of around 100 Model 3’ s in August and just above 1,500 in September. By December, Musk believes that Tesla’s manufacturing and supply chain teams will begin achieving more meaningful production volume rate of upwards of 20,000 Model 3 deliveries monthly. That is roughly the equivalent to the total production volume of all of Tesla model vehicles during Q2 alone.

Once again, such production goals are rather aggressive for any single final assembly manufacturing facility and there can be little tolerance for supply chain or manufacturing snafus.

To add added background to the challenge, Tesla’s web site currently indicates that customers reserving a new Model 3 today can expect a mid-2018 delivery date. While Tesla will not publicly declare the total number of existing customer reservations for the Model 3, some in media and investor channels are speculating that there are upwards of 400,000 – 500,000 existing reservations with customer deposits.

In reporting Tesla’s recently completed Q2 financial performance, Musk pointed a severe production shortfall of 100 kWh lithium-ion batteries packs. According to the earnings release, production of all-important electric battery packs averaged 40 percent below planned supply up until early June. Musk further indicated a need to open as many as three new battery factories as well as active consideration for opening a second automobile production facility, perhaps in China. These are all indicators of scale-up challenges, and imply the use of added capital to fund such investments.

As noted in our Supply Chain Matters commentary related to Tesla’s Q1 operational performance, which each passing quarter, there will be added scrutiny surrounding Tesla’s operational performance as well as the underlying supply chain processes and management systems. While Tesla stock valuations continue to reflect a perception of being a more valuable company than perhaps Ford Motor Company or General Motors, we continue to submit the broader determinant is consistent supply chain performance and scalability.

Up to this point, the sheer dedication, stamina, and creativity of individual Tesla employees has helped to deliver expected performance numbers. At some point, energy levels will succumb to the sheer scale of what remains to be accomplished.

Readers can view video of the entire customer handover event at this YouTube web link.


Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Breaking News- Foxconn Does Indeed Announce a Significant Investment in the United States


As was speculated by The Wall Street Journal and Business Network CNBC, Foxconn, the prime contract manufacturing partner for Apple, has indeed made its announcement regarding a significant manufacturing investment in the U.S.

At a White House ceremony held late this afternoon, Foxconn Chairman and CEO Terry Gau made the announcement flanked by a host of Wisconsin State and U.S. Congressional leaders, and later, President Trump. The new $10 billion factory, to be located and built in Southwest Wisconsin represents an initial investment planned by Foxconn designed to rebuild a high-tech electronics supply chain within the United States.  Foxconn 300x201 Breaking News  Foxconn Does Indeed Announce a Significant Investment in the United States

Wisconsin Governor Scott Walker indicated to the audience that the Foxconn manufacturing campus will span 20 million square feet, which is a considerable footprint. The Governor further coined a new term: “Wisconn Valley”, a new global center for cutting-edge technology.

According to reports, the Wisconsin plant will employ upwards of 3000 people initially and as many as 13,000 people at peak capacity. Further indicated was that upwards of 22, 000 indirect jobs could also come from the new plant at peak. CEO Gau indicated in the White House ceremony that Foxconn, through its new subsidiary, Sharp Corporation, will introduce the latest 8K LCD technology for applications across many industries including automobile displays, medical devices, televisions, and smartphones.

According to various remarks made at the ceremony, upwards of $3 billion in economic incentives were provided to Foxconn to sweeten the decision to locate in Wisconsin. That is also a very significant number.

As noted in our Supply Chain Matters blog update earlier this week, this announcement has a lot of association with Foxconn’s prime customer, Apple. On Tuesday, in an interview with The Wall Street Journal, President Trump disclosed that Apple CEO Tim Cook has committed to build three large manufacturing plants in the U.S., which represents an unprecedented announcement. A White House official further indicated that the Apple plants were in-addition to that of Foxconn. Apple declined to confirm to the WSJ regarding the President’s announcement.

Also this week, LCD manufacturer LG Display announced plans to invest $7 billion on ramping up OLED panel production volume at its South Korean production facility, indicating that some of the funding would come from a “strategic partnership” but declined to name that partner. Speculation in high tech circles is that the partner may be Apple, to lesson dependence on supplier and rival Samsung Electronics.

From our Supply Chain Matters lens, there is no taking away that today’s announcement is incredibly significant from many dimensions, be they high tech electronics and automotive supply chains, transportation, and to little surprise, political dimensions.

High tech and automotive supply chains gain a domestic source of advanced LCD panels without the burden of transportation costs from Asia. In turn, the opportunity for more-timely product design collaboration and time-to-market for new screen designs becomes more viable when working in a local time zone and with the tech center a mere few hours away.

The announcement if a feather in the cap of the Trump Administration’s commitment to revive U.S. manufacturing. There are other political dimensions as-well, namely that the President continues to directly interact with manufacturing company CEO’s to extract promises for added U.S. jobs in return for other legislative priorities. The White House was quick to indicate that corporate tax reform is another important part of the President’s legislative agenda.

There are obviously more announcements forthcoming, many of which could be related to a high-tech electronics supply chain renewal across the United States.

In the realm of global supply chain management, today’s announcement by Foxconn is a big, big, very big deal. (Yes, this is a Trump style descriptors)

Congratulations to all involved.


Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

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