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.
Volkswagen announced today that the company plans to add a long awaited 7 passenger mid-sized SUV to the U.S. auto market in late 2016 and that the design and production of this vehicle will originate from VW’s current facility in Chattanooga Tennessee.
The German based automaker indicated that it plans to invest $600 million to both establish a new research center to be named National Research& Development and Planning Center to help design this new SUV and expand the existing Chattanooga to accommodate a new SUV production line. The new research center is expected to employ upwards of 200 engineers while an additional 538,000 square feet of capacity and an incremental 2000 factory jobs will be added to the U.S. facility. With this new incremental investment, annual production volumes at Chattanooga would rise to 250,000 vehicles.
The company re-iterated that from 2014-2018, it will be investing more than $7 billion in capital resources in both the U.S. and Mexico in order to fulfill its goal to deliver 800,000 vehicles in U.S. and North America sales volume.
This new model is to be based on the CrossBlue concept, developed specifically for the North American market and unveiled last year at the Detroit Auto Show. According to a posting by Car and Driver, the model is designed to compete with the likes of the Honda Pilot, Ford ExplorerJeep Grand Cherokee, Nissan Pathfinder and Toyota Highlander. Emphasis is on style and very high fuel economy including a diesel powered version. This Car and Driver article published in January 2013 declared that it was almost a certainty that the SUV would be produced in Chattanooga. So much for hype, drama and speculation.
Business media has widely reported that efforts by VW to broaden its penetration of the U.S. auto market continue to stall. According to a published report from Bloomberg regarding the latest announcement, VW’s U.S. sales declined 22 percent in June, accelerating an overall annual decline of 13 percent for the first-half of 2014. That is counter to a reported 4.2 percent increase in the overall U.S. market during the same period.
Readers may recall that in mid-February an effort to have workers at Chattanooga represented by the United Auto Workers union was narrowly defeated. 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. The ultimate vote 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. Leading up to the vote, a highly charged campaign by local legislators and activists alleging that union representation would jeopardize any future work being sourced at the plant, including the pending SUV model. Today’s VW announcement includes statements from many of the same politicians echoing the positive implications for the local economy.
However, VW may also be addressing the need for more open worker input to decisions. Today’s VW announcement additionally indicates that Bernd Osterloh, head of VW’s General and Works Council will join the Board of Directors of Volkswagen Group of America “to play a more concentrated role in shaping our U.S. strategy in the future.” In the press release, Osterioh indicates that he is “determined to uphold the interests of Volkswagen employees in Chattanooga. Previous media reports have quoted Osterloh as indicating that having a Works Council was an important factor that would play into whether another product would be made in the U.S. facility. Of more interest, four days ago, the UAW also announced that it will open a branch office close to the Tennessee facility.
Obviously, VW is late to the party in introducing a U.S. model SUV, and two years is a long time in today’s consumer’s markets. This is a high stakes effort that requires total collaboration and succinct decision-making. Engineering, product management, supply chain and production teams will have to highly synchronize efforts to assure the 2016 milestone will happen. For its part, VW corporate will have to shed its centralized decision-making model and let the new North America based research center carry the ball.
According to media reports, BMW is expected to announce sometime today that the German luxury automotive producer will invest upwards of $1 billion to build its first auto assembly plant in Mexico. Informed sources are being cited as indicating that the proposed new facility, BMW’s second in North America, will be designed to produce upwards of 150,000 vehicles per year. Speculation is that the plant will be located in San Luis Potosi, about 250 miles northwest of Mexico City. An announcement is expected from a ceremony being planned today with the President of Mexico. The Mexican plant investment follows an earlier announcement to invest $1 billion to increase production capacity by 50 percent at the automaker’s existing production facility in the U.S., raising capacity to upwards of 450,000 vehicles annually.
With this announcement, the automaker will join other global based OEM’s that have announced major investments within Mexico. Last week, Daimler and Nissan jointly announced a $1.4 billion investment in a proposed shared auto assembly plant to produce smaller luxury vehicles. The plant, planned for upwards of 300,000 vehicles per year, will be built nearby an existing Nissan factory. Plans currently call for an initial Nissan Infiniti model to be rolled off the new assembly line by 2017, followed by a yet to be named Mercedes-Benz model in 2018.
The news follows last-year’s announcement by Volkswagen’s Audi division in building a $1.3 billion plant in Mexico. Volkswagen is also working on a design for a new smaller SUV model for the U.S. market, and with that model, will have to make an additional decision regarding augmenting North America based production. The Wall Street Journal further indicates that Hyundai is also expected to unveil plans for its first auto assembly plant in Mexico.
Why the attraction to Mexico as a North America automotive production hub?
The first and foremost answer is direct labor costs. Media is quoting a recent study conducted by KPMG indicating that labor costs are currently 60 percent lower than those in the United States. This week, the Wall Street Journal made reference to a study conducted by automotive industry consultancy AlixPartners indicating that 57 percent of the top 100 Europe based automotive assembly plants are operating at less than 75 percent capacity. This is the obvious overhang from the recent severe recession that impacted Europe, where auto sales declined rapidly. Yet, in the midst of this excess capacity, European OEM’s are augmenting capacity in other lower cost regions.
The second factor involves other costs. Under NAFTA, factories in Mexico have tariff-free access to U.S. and Canadian consumer markets, while having the ability to leverage lower costs in other areas such as domestic transportation. Mexico also provides a considerable currency and labor cost advantage over European based auto plants. That leads to the third factor, global logistics. Mexico has invested in both its Gulf and Pacific west coast ports which provide added opportunities to export auto production to other global markets including Europe, Latin America or even Asia.
From our Supply Chain Matters lens, European automotive OEM’s are exercising the same strategies that major Japanese OEM’s Honda and Toyota had previously embarked on, investing in North America production as a platform to support evolving export markets. Honda exported 108,705 U.S. made vehicles to 50 countries in 2013.
With the new attraction of Mexico, global 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.
In the end, U.S. manufacturing resurgence is not a lock-in as OEM’s continue to discover other lower-cost options.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain matters blog. All rights reserved.