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Major Automotive Supplier Component Safety Snafu is Another Supplier’s Strategic Gain

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As far back as 2014, Supply Chain Matters provided commentaries relative to the defective air bag inflator crisis that was impacting multiple global automotive brands. Even then, the product recalls involving airbag inflators supplied by Takata Corp. of Japan were estimated to be in the millions.

In an October 2014 posting, Supply Chain Matters echoed business media reports that brands such as Honda, were undertaking steps to seek out alternative suppliers, not only to provide augmented supplies of air bag inflators required to retrofit millions of recalled vehicles, but also to become a replacement supplier for current and future production needs. We noted that rival air bag suppliers that could benefit from the ongoing crisis included Autoliv, DaicelKey Safety Systems and TRW Automotive Holdings, which at the time was being acquired by German based ZF Friedrichshafen. We further pointed out that switching suppliers that support one or several global product platforms is somewhat more challenging from a timing perspective.

Flash forward to today and specifically a recent Bloomberg Businessweek report titled: The Company That Came out on Top After Takata’s Air Bag Mess. The report indicates that largest automotive-safety parts company in the world has successfully been able to step in and respond to the Takata focused crisis. This supplier actually began supplying air bags as far back as 1980. Amid the current wave of product recalls, Autoliv produced inflators are noted as emerging relatively unscathed in the crisis.

The overall scope of the defective air bag inflators is massive, with upwards of 60 million recalled vehicles on a worldwide basis. Noted is that about 28 million Takata air bag inflators have been recalled in the U.S. alone.

Autoliv expects to produce 20 million replacement inflators since alternate production began in 2015, and extends through 2017. Once more, the supplier indicated to Bloomberg that it had won about half of all frontal air bag orders for newer cars last year. This supplier is forecasting sales growth of 7 percent annually, a fairly healthy rate for a lower-tiered automotive supplier.

Once more, Bloomberg points to Autoliv’s newer focus on the supply of more sophisticated safety components for autonomous vehicles such as radar, vision sensors and other crash avoidance safety systems ranging from standard sedans to luxury vehicles.  According to a recent Boston Consulting Group study, within the next decade, one in eight cars sold around the world will have autonomous features. Bloomberg reports that Autoliv components are contributing to autonomy features in cars like Daimler’s new Mercedes-Benz E-Class, which can steer itself in auto-pilot mode, brake in emergencies and evade obstructions. The company is also reportedly partnering with Volvo AB in a project called Drive Me that aims to have 100 self-driving cars on the roads in Gothenburg, Sweden next year.

In essence, this alternative supplier is not only benefitting from its abilities to step-up and respond to an immediate industry defective component crisis, but indeed, positioning from a product design strategy perspective to be a preferred supplier for future safety systems in multiple branded global vehicle platforms.

We have called reader attention to the ongoing Autoliv case study because it provides an ongoing example of how a major supply crisis and safety snafu can indeed lead to another supplier’s opportunistic gain. More importantly, thinking beyond the tactical crisis window at-hand with a focus on what will be the alternative technology.


U.S. Automotive Producers With Ongoing Bad Habits

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Supply Chain Matters has been observing how U.S. automotive producers continue to fall back on what we view as a bad habit- a reliance on big-ticket, larger margin trucks and SUV’s for profitability and hence manufacturing strategy.  Perhaps you have noticed this same trend.

These past few days have featured troubling news that points to the same tendencies. It is like an unhealthy habit that does not seem to abate and it reflects on both product demand as well as supply strategy aspects of the automotive supply chain.

These past months of an unprecedented global oil glut has led to sub two dollar per gallon pricing for gasoline, although that trend is changing with the spring fuel composition conversion.  As reflected in past history, it has apparently motivated many U.S. consumers to once again buy shiny new automobiles and trucks at a very healthy pace. According to The Wall Street Journal, nearly 57 percent of vehicles sold in the U.S. were classified in the light truck category. Many of these consumers are seeking out the biggest and most feature laden pick-up trucks and luxury SUV’s. Why not! With the occurrence of such low prices of gasoline, it’s like suddenly reverting back to a bygone era, and doing so before it is too late.  Perhaps we can choke that up to short-term memory loss.

At the same time, other consumers (we will keep the term generic), foresee the continuing overwhelming implications of climate change and the need for the global economy to substantially reduce dependence on fossil fuels. They perhaps have the insight that the era of sub $2 per gallon gasoline is temporary and much more dependent on ongoing geopolitics among oil producing and consuming nations.

As noted in a prior commentary, last week Tesla Motors unveiled its latest Model 3 all electric powered SUV with a declaration that the vehicle achieves 215 miles of operating range per charge, delivering superior performance with a starting price of $35,000 before incentives. Immediately, the Model 3 has garnered over 200,000 customer reservations, and yes, it will produced in Tesla’s California assembly facility with the now infamous gigafactory producing lithium-ion batteries in Nevada.

A glance of this week’s business headlines indicates a confirmation from Ford Motor on investing $1.6 billion for a new auto assembly facility in Mexico to produce the Ford Focus and other smaller sized vehicles. This is incremental to prior announcements to invest $2.5 billion in other Mexican based factory and supply chain facilities.

Fiat Chrysler Automobiles, which previously touted that it could competitively produce smaller cars in U.S. factories, indicated it plans to cut upwards of 1600 jobs this summer at its existing Michigan based auto assembly facility which produces smaller vehicles. Overall, Fiat Chrysler is reportedly investing upwards of $1 billion to re-align manufacturing capacity towards larger vehicles.

Conversely, General Motors indicates that it will continue to build its smaller car models in the U.S. including the newly designed 2017 Chevrolet Bolt with an estimated 200 plus mile range and $40,000 price tag. That is in addition to the current hybrid powered Chevrolet Volt that provides 420 miles of driving range for a base price of $35,000. The Volt is assembled at GM’s Detroit Hamtramck production facility.

Beyond the current rhetoric of these announcements reverberating in the current U.S. Presidential Election cycle, it is important to focus on what is occurring. These are not, from our lens, solely temporary adjustments in existing manufacturing capacity to reflect near-term changes in product demand brought about from consumer buying euphoria from dramatically lower fuel prices.  Instead, the level of new investments implies strategic shifts in manufacturing capabilities towards non U.S. sites, perhaps a reflection of pending new global trade agreements such as the Trans Pacific Partnership and NAFTA that view North America as a contiguous trading, supplier and production zone.

Business strategy pragmatists will probably view these events as smart moves to insure larger margins on smaller, lower-margin vehicles. This is the consistent strategy of lowest cost direct labor but the tradeoff is often in product design and management more than likely residing a plane ride away. The counter-argument is that with so much of the production process now highly automated with robotics and additive manufacturing techniques, shouldn’t direct labor costs be manageable regardless of location?

Organized labor likely views these moves as a betrayal of prior agreements made during the 2008-2009 bankruptcy crisis that surrounded the bulk of U.S. automotive OEM’s. Chrysler and GM subsequently sought government bailout funding with assurances that there would be a continued U.S. manufacturing presence in small and larger car production alike.

From the sustainability strategy lens, we submit it is yet another fallback to an old and troubling habit, trading-off direct labor savings with added logistics and transportation costs.

Larger vehicles with higher fossil fuel consumption are added to the nation’s byways while added surface transportation movements are required to transport smaller vehicles from Mexican supplier and final assembly facilities to various U.S. and Canadian consumption regions. The net result is more greenhouse gas emissions and an industry where certain producers view product strategy solely as a facilitator of near-term financial results vs. integrated product strategy and regionally based manufacturing flexibility that can produce either small or large vehicle models in any plant.

And so the habit of certain producers lives on, along with the overall implications. Short-term memory loss perhaps applies to certain consumers and producers.

Praise to Tesla and GM for continuing efforts toward broader strategy that insures sustainability for both the business and the planet.

Bob Ferrari

© 2016 The Ferrari Consulting and Research Group and the Supply chain Matters® blog. All rights reserved.


Candid Admission from Tesla Provides the Importance of Design for Supply Chain Practices

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Supply Chain Matters provides an additional update relative to our previous commentary regarding the Tesla Motors Model 3 Product Unveil that occurred several days ago.

Yesterday, Tesla delivered an update relative to its Q1 FY16 operational and delivery performance.  The update indicates, among other items that the electric powered automotive provider delivered a total of 14,820 completed vehicles in Q1 consisting of 12,420 Model S and 2,400 Model X automobiles. While the statement indicates that Q1 operational performance was almost 50 percent more than the year earlier period, equity analysts were expecting an output number of upwards of 16000 vehicles. Tesla Model X SUV

Tesla further indicates that it is on-track to deliver 80,000 to 90,000 new vehicles in 2016.

The statement further indicates that deliveries were impacted by severe Model X supplier parts shortages in January and February that extended longer than planned. According to the update, build rates for the Model X in March rose to 750 vehicles per week once the parts shortages were resolved, but many of the vehicles were built too late to be delivered to owners before the end of the quarter.

Of more interest was a candid admission that the root causes of the parts shortages was:

Tesla’s hubris in adding far too much new technology to the Model X in version 1, insufficient supplier capability validation, and Tesla not having broad enough internal capability to manufacture the parts in-house.”

First and foremost, Supply Chain Matters applauds Tesla for its direct candor.

There are very few automotive manufacturers, and for that sake, other industry manufacturers that would publically state such candor even though internal operations was well aware of the challenges that were encountered and the efforts required to make the numbers. Tesla clearly indicates that the operational details disclosed for Q1 were provided because of: “unusual circumstances of this quarter and will not typically be provided in quarterly delivery releases going forward.”

We none the less, applaud this action because it provides the broader industry supply chain community another important learning relative to the importance of design for supply chain practices, where product design and product management teams work collaboratively with supplier sourcing, procurement and manufacturing operations teams to insure that product design and manufacturing specifications can adequately meet production volume scalability requirements. Obviously there is learning relative to supply chain risk mitigation, having back-up contingency plans in-place to account for supplier snafus or shortcomings.

Supply Chain Matters continues to admire Tesla’s boldness and embrace of modern supply chain and manufacturing practices and such public lessons are indeed learning that even the best can encounter a snafu.

When product design boldness outpaces the realities of the current supply chain, something will give. Apple, among other supply chain leaders, have previously stumbled in new product releases because of design for supply chain factors not addressed in the initial product launch and release cycle.

Tesla indicates that it is addressing root causes to insure that these mistakes are not repeated in the Model 3 launch. We raised that possibility in our prior commentary.

Time will eventually tell the final outcome.

Earlier this week, Tesla indicated that customer reservation orders for the new Model 3 had surpassed 276,000 orders. At current production rates of the Model X of 750 vehicles per week, that order backlog is the equivalent of 368 weeks or roughly 7.36 years of production at current volumes. That gap alone represents the critical tensions of elegant or leading-edge product design contrasted to customer delivery and experience expectations. The end-to-end supply chain becomes the important difference in meeting such expectations.

Bob Ferrari

© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Tesla Motors Model 3 Unveil- Product Marketing Meets Supply Chain Realities

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Today marks a product milestone for Tesla Motors, namely the public debut and availability of the new Model 3 SUV targeted for a broader customer base. In shades of Apple product availability events, Tesla’s PR team insures that photos of prospective customers camped out overnight at Tesla outlets are spread throughout media channels.  Tesla Model X

The hype cycle is on but the real test will be Tesla’s supply chain and product management flawless execution in the coming months.

In a prior Tesla commentary published in January, Supply Chain Matters noted that while Tesla met its internal goal to deliver more than 50,000 total vehicles in 2015, customers who made deposits as far back as three years ago to secure the new Model 3 remained disappointed. The model, which was supposedly designed to be built for a lower price point and with higher output volumes, has undergone a series of repeated delays making the overall program almost two years later than originally planned for market availability. Of course, such a delay has provided industry competitors such as General Motors ad Toyota the opportunity to bring to market electric powered models that can compete with the Model 3.

Tesla’s founder Elon Musk has characterized the Model 3 as “The hardest car to build in the world.” We interpreted that statement to mean the most sophisticated engineered vehicle but not necessarily one designed for higher volume manufacturing. Its falcon wing doors and air filtering system are examples of noteworthy engineering accomplishments but call into question needs related to design for higher volume manufacturing. Luxury seat manufacturing was recently moved from a supplier, in-house to Tesla’s production facilities because of quality and volume needs. Another ongoing open question is whether the planned Gigafactory designed to produce lithium-ion batteries in-volume will be ready to meet production ramp-up needs.

According to the latest update on the Tesla web site, general reservations begin today on a worldwide basis with a different order queue planned for each geographic region. Existing Tesla customers will also get a priority in the queue, which at first blush, somewhat defeats the objective of a car produced for new customers. Volume production of the new model is noted as beginning in late 2017 with deliveries initially targeted for North America. While those expectations might change during tonight’s scheduled Model 3 unveil, it does set muted expectations as to when large numbers of global consumers can expect to be driving the new Model 3.

It would appear that this is another classic case of product marketing meets the hard realities of supply chain ramp-up execution of a product in high demand. As in the case of Apple, be careful as to marketing hype when supply chain is the real determinant of customer fulfillment.

Bob Ferrari

© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Foxconn Acquisition of Sharp Off Again- Maybe or Likely Not

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The on again, off again proposed acquisition of Japan based Sharp Corporation by Foxconn Technology Group is as of today, reported as off again. Thus, a multi-year saga continues.

Yesterday, Sharp’s board of directors reportedly approved the acquisition plan which made headlines in social and traditional business media. Today, however, Foxconn indicated it is delaying the signing of the definitive agreement because of last minute disclosures by Sharp of a 100 item list of “contingent liabilities”. A published report in today’s edition of The Wall Street Journal cites informed sources as indicating that Foxconn received this contingent liabilities list consisting of ¥350 billion yen of costs that the company might face in the future related to either outstanding lawsuits, accounting changes, supply contracts or other uncertainties.

In a prepared statement to the WSJ, Foxconn indicated it hopes to clarify the newly disclosed information quickly and bring the proposed acquisition to a successful conclusion. Sharp has reportedly declined to comment to the WSJ and other publications on Foxconn’s latest statement.

The stakes are obviously high in this proposed acquisition. As noted in our most recent posting, LCD screen suppliers such as Sharp have extraordinary challenges. The need for production innovation is relentless, the cost of capital is expensive and yet supply often exceeds demand, eroding abilities to maintain prices that insure adequate profitability as well as new investment needs. LCD screens account for a considerable amount of COGS not only in smartphones and tablets, but increasingly in other products that want to cater to needs for enhanced user interaction.

Customers such as Apple exercise bargaining power by multi-sourcing component supply contracts. In the specific case of Apple, Sharp represents one of three other suppliers of LCD screens.  The other reported bidder for Sharp was the state-directed Innovation Network Corp of Japan, which controls one of the four Apple LCD suppliers, Japan Display. In its reporting today, The WSJ quotes an academic professor at Waseda Business School opining that Apple would likely not desire that Sharp and Japan Display join forces because it will diminish bargaining leverage on price and other supply conditions.

There are other more strategic far reaching implications for Foxconn as well. A recent commentary published by The Economist (Paid subscription required) observes: “At face value, there is little sense in the $5.6 billion proposal by Foxconn, the world’s largest contract electronics manufacturer, owned by Hon Hai of Taiwan, to buy Sharp of Japan.” While the commentary also cites the increased bargaining power with Apple to the advantage of Foxconn, it cites a broader strategy implication, a risky attempt to reinvent a business model.

If Foxconn could design and sell its own devices under Sharp’s globally recognized name, it could at least keep the brand owner’s margin for itself.”

The commentary further points out that in acquiring Sharp, Chairman Terry Gau gets the opportunity to exercise his grand “eleven screens” strategy, which opens the possibility that Foxconn assumes the dominant supplier position of advanced high-tech displays of broader industry products from computers, to automobiles to industrial devices or smart watches.

That ladies and gents is the mother lode insight- the ability of the world’s largest contract manufacturer that continues to have to deal with the slimmest of margins from high tech and consumer electronics equipment OEM’s , having the opportunity to diversify both up and down the value chain. This author wrote of that possibility several years ago and since then, others have joined in predicting the inevitable, namely that the CMS model could evolve into the designing and selling of owned products under a recognized brand, or in becoming the leading-edge, preferred supplier of advanced LCD screens.

Our sense, for what’s it’s worth, is that Foxconn will go-forward with its acquisition despite last-minute financial concerns because the strategic high tech value-chain opportunities are bold and reflect the visions of industry icon Terry Gau.

Time will tell how the saga of Sharp and Foxconn transpires and what it eventually leads to

Industry supply chain strategists should obviously continue to monitor events such as these since the traditional contract manufacturing business model is about to change.

It is inevitable, and OEM’s need to be prepared to deal with the potential consequences.

Bob Ferrari

© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


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