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More Definitive News on Pending Foxconn Investment in the United States

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In late January, we alerted our Supply Chain Matters blog readers of a published report from The Wall Street Journal indicating that global contract manufacturer Foxconn, (Hon Hai Precision Corp.) new parent of Sharp Corp. was evaluating a $7 billion in new LCD manufacturing facility in the United States. Our takeaway from this report was that if this investment did indeed occur, it would represent a significant milestone for the high-tech and consumer electronics supply chains. We believed that the plant investment would further have a linkage to Apple’s production needs.  Foxconn 300x201 More Definitive News on Pending Foxconn Investment in the United States

Since that time, there have been various reports indicating on and off again negotiations with individual U.S. states. Last week, the Associated Press, citing an informed source, indicated that Foxconn’s proposed U.S. factory might have a Wisconsin address and that active negotiations with state officials was occurring. The report indicated that the state of Michigan was also a possibility.

Today, the investment advisory site Seeking Alpha, Reuters and other news outlets are now indicating that a final decision is expected in July.

According to Seeking Alpha, the total investment is $10 billion across the United States, beginning with a $7 billion LCD factory. The July decision will likely determine whether Wisconsin or Michigan are the likely site for the factory.

Foxconn CEO Terry Gou has indicated that five other states are under consideration for Foxconn investments including Ohio, Pennsylvania, Illinois, Indiana, and Texas.

Reuters reports that Gau indicated to shareholders:

This time we go to America, it’s not just to build a factory, but to move our entire supply chain there.

Prior reports were indicating that Gau was playing hardball in his ongoing negotiations with individual states, in-essence threatening to continue the process until favorable terms to Foxconn were evident. In the latest Reuters report, Cau is now quoted as indicating he has been favorably impressed, beyond imagination, with the sincerity and confidence by individual state governors to attract investment.

If readers are noting a subtle political tone to these events, you are not alone. Many of the states noted under consideration, including the two finalists voted favorably for President Trump is the last election. The final announcement, when made, will resonate well with “Make America Great Again” voters.

Politics aside, make no mistake that this is a very big deal for high-tech and consumer electronics supply chains, specifically Apple’s supply chain, along with that of U.S. Based automotive brand owners that increasingly feature more high-tech electronics, autonomous driving features and visual displays in future automobile models.

A very big deal indeed.

 

Bob Ferrari

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


Can Automotive Industry Supply Chain Strategy Undergo Disruption- Perhaps Yes?

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To state the obvious, this has been a week of significant industry developments mostly all pointing to implications for industry supply chain structural change. Having just published our initial commentary on the thunderbolt developments in traditional grocery retailing, we now add more evidence of building disruption, in this case, for automotive supply chains.

Tim Cook has finally publicly acknowledged that Apple has a formal development effort underway focused on Autonomous Driving Systems. In a published interview on Bloomberg Television, Cook indicated: “It’s a core technology that we view as very important.He likened the effort to “the mother of all AI projects,” saying it’s “probably one of the most difficult AI projects to work on.” Tesla Mod3 Sized 450 Can Automotive Industry Supply Chain Strategy Undergo Disruption  Perhaps Yes?

As Supply Chain Matters and other business focused social media outlets have all previously noted months ago, Apple’s efforts in either autonomous driving or electric vehicle manufacturing, under the umbrella of Project Titan, were an open secret. While the effort itself has had its share of fits, starts and scope changes, Cook’s public acknowledgement is an obvious indication of a purposeful and meaningful business initiative that could soon lead to further announcements. With all things related to Apple, timing of announcements is always a prelude to an evolving marketing or pre-planned corporate communications plan to boost brand and investor interest.

In its summary of the interview, Bloomberg notes that Apple has had upwards of a half-dozen vehicles testing autonomous technology on public roads in and around the San Francisco Bay area for at least a year, citing a source familiar with Project Titan. Of course, Apple itself declined to comment on how long the company has been conducting road tests.

Always having a focus on industry supply chain implications, this Editor searched for other opinion and commentary, and found just that.  In fact, we found an opinion commentary that provides powerful arguments for a pending disruption of automotive industry supply chain, and in notions of automotive and electronics contract manufacturing.

An opinion commentary penned by EnerTuition, and hosted on the Seeking Alpha financial investor platform addressed the question: Can Apple Disrupt Automotive Manufacturing?  Without fringing on content rights, the arguments presented for the affirmative are by our view, powerful and dead-on.

The content makes a strong case that there is little doubt that Apple will enter autonomous car manufacturing, with the primary reason being that Apple never considers itself as just an IP or software components company. There is always the full branding strategy of products and related services.

Further challenged is the conventional industry thinking that “the auto industry cannot be disrupted” because of the capital-intensive nature of this industry. While the statement has meaning for traditional automotive manufacturing that is hardware, metal and sheet metal intensive, the counter argument presented is that autonomous electric vehicles provide a far different product value supply chain profile. That includes batteries as the highest cost-of-goods sold (CAGS) component, followed by vehicle sensors and software systems. The assumption presented, although somewhat future focused by our view, is that there will be no need for human factors such as steering wheel placements and instruments, which opens consideration for a singular global product design and manufacturing process.

The most interesting and profound opportunity for disruption is within the core area of manufacturing.

The argument made is that with most of the value-added of electric powered cars consisting of electronics vs. sheet-metal, and with the change coming so rapidly, manufacturers or industry disruptors will have little choice but to adopt a contract manufacturing strategy. With such a strategy, EnerTuition argues that the supply chain dominants will become emerging automotive component sub-systems and electronics providers, augmented with existing high-tech electronics contract manufacturers. Names such as Foxconn, Flextronics and Jabil are argued to grow more share of contract automotive manufacturing.

The above, ladies and gents, is a rather strong argument to support how Apple can indeed move directly into automotive manufacturing, because of its intimate knowledge and proven capabilities to understand the tenets of supply chain strategy and utilization of contract manufacturing. And, if you tend to dismiss any parts of the above arguments, consider that Apple, with its obscene cash balance, could acquire an electric automobile manufacturer itself. Guess which one- it starts with a “T”.

The reason we are highlighting this Seeking Alpha commentary for our readers is because this Editor and independent supply chain management industry analyst has been observing new and emerging positioning and capability among contract manufacturers and the industry that points toward such technology-driven changes.  Recall that just recently, Ford Motor elected to undergo a CEO change because of the stated need to move faster in technology innovation and in development efforts in autonomous vehicles.

There is ample evidence that disruption is indeed on the horizon soon, and traditional auto manufacturers and their key suppliers may be the deer in headlights if they do not move fast enough with an integrated product development and supply chain support strategy

Bob Ferrari

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


For Smartphones- Integrated Product Design, Supply Chain and Manufacturing Capabilities Matter

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A growing tenet in what is today’s broad supply chain management capability umbrella is the ability to be able to integrate product and manufacturing process design with global-wide production capabilities, faster and cheaper than existing competitors. The notions of responding to local customer needs and desires are now often manifested by co-locating or virtually connecting product design with supply chain process capabilities and continue to become important differentiators for industry supply chains, and for industry disruptors.

These notions are now playing out in the global smartphone market with recent revelations that China based industry disruptors are gaining more global market-share by a strategy of a keen focus on local and regional consumer needs, and on a keen dependency on an integrated and demonstrated agile manufacturing region in China.

Information technology and consumer electronics quantitative market analysis firm IDC recently disclosed that a collection of Chinese smartphone manufacturers have now secured more than 40 percent of global smartphone market-share in the first quarter of this year, nearly double the number of five years earlier. That is a remarkable achievement.  A recent published report by The Wall Street Journal (Paid subscription required) brings forward two significant reasons for this achievement.

The first is the willingness of brand providers such as Transsion Holdings, maker of branded Tecno, itel, and Infinix phones, along with BBK Electronics, maker of branded Oppo and Vivo smartphones, to engineer product features of specific interest within local and regional markets. Localized features include dual SIM card slots, differing camera and imaging features that cater to local norms or demographics.

The second noted reason for success was a common dependence on China’s coastal Pearl River Delta high-tech manufacturing region, the original home to many electronics focused contract manufacturers, for deep supply chain process and manufacturing capabilities. More than 20 Chinese smartphone producers now have manufacturing and engineering dependence within this region.

The WSJ report declares: “The fight (among smartphone producers) is all about staying competitive in pricing and features, and Shenzhen is the battleground. Once known as a little more than a hub of contract manufacturing for Western technology giants, the region has given birth to an array of domestic upstarts by marrying low-cost production and high-tech engineering.

In other words, the region has now developed a collection of integrated product value-chain capabilities that are able to respond to market needs in a far quicker manner, and a more competitive product

Interesting enough, as our Supply Chain Matters readers are often aware, Apple has had a similar reliance on the Pearl River region, specifically Foxconn and other contract manufacturers for manufacturing engineering and production capability as well as new product time-to-market needs. Apple elected early on to maintain product design engineering in Cupertino, and to engineer its smartphones for general global user needs. The same could be stated for Samsung, which relies on China and Vietnam as manufacturing centers, but maintains centralized engineering. Both producers have since added local and regional engineering centers to identify local product functionality needs.

Once again, the name chosen as blog nameplate was purposeful, that indeed, supply chain capabilities do matter for successful business outcomes, and in today’s global markets, supply chain represents a far broader collection of functions and capabilities spanning the product value-chain.

Bob Ferrari

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

 


NAND Chip Supply Challenges Looming Across Consumer Electronics Supply Chains

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Supply chain management professionals are often attuned to the weakest link that may develop among various tiers of the product value-chain. There are now building concerns that consumer electronics supply chains may be dealing with a potential industry-wide shortage of a key component during its most critical product demand period.

The Wall Street Journal recently called attention to a looming battle between electronic game console producer Nintendo against high-volume consumer electronics producers such as Apple. (Paid subscription required)

Component supply challenges include liquid-crystal displays (LCD’s), miniature motors and NAND flash-memory chips. The latter specifically points to NAND supplier Toshiba, which has become the second largest supplier of more advanced NAND memory chips.

For Nintendo, enthusiastic consumer demand for its newly released Switch gaming console is leading to aggressive planning for console output for its current fiscal year that ends in March 2018. According to the report, while Nintendo’s official sales target is 10 million units, the producer is reportedly pursuing plans to produce as many as 20 million units, double the official amount.  Nintendo Switch 425 NAND Chip Supply Challenges Looming Across Consumer Electronics Supply Chains

As supply chain planners are acutely aware, that is a considerable variance to hedge for.  A Toshiba spokesperson indicated to the WSJ that demand for NAND has been overwhelmingly greater than existing supply and the situation is expected to remain the same through the end of the current year. Compounding the component challenge are the realities of high-volume smartphone producers such as Apple, who can garner a heck of a lot of NAND memory supplier influence based on shear buying volume.

Companies such as Nintendo therefore must factor such realities and find more ways to garner added influence with Toshiba as well as other NAND suppliers.  A further, and likely more dynamic situation involves a building significant financial crisis surrounding Toshiba itself.

The supplier’s U.S. focused Westinghouse Electric nuclear reactor construction business unit has incurred significant financial losses forcing that unit to file for bankruptcy in March, leading to concerns for Toshiba’s financial survival as well.   In March, in what was reported as an acrimonious annual shareholder meeting, Toshiba shareholders agreed to split off the prized NAND flash memory unit in hopes of raising at least $9 billion to cover U.S. nuclear unit losses.

According to various reports, Toshiba’s NAND chip business includes a venture originally contracted with memory producer SanDisk, and that company was since acquired by Western Digital, which in-essence took ownership of the SanDisk stake in Toshiba’s memory operations.  Toshiba began making overtures that it would sell its attractive memory chip business to raise immediate cash.  Upon learning of that move, Western Digital threatened to block such a sale, based on its stake in the business. The latest reported iteration is that Toshiba has made a legal concession, in-essence keeping part of the memory unit in-house to appease Western Digital. However, the reality is that there are many active bidders for the prized memory business, including Western Digital.  Other reported bidders are industry leader SK Hynix, Broadcom as well as contract manufacturing services provider Foxconn. The latter, to little surprise, has sought the influence of Apple in helping to leverage its financial offer for the NAND business. As has been the case with Japan’s high-tech producers, the government of Japan, in the presence of Innovation Network Corp. of Japan,  remains active behind the scenes to ensure that any sale address concerns for intellectual and advance technology protection.

Where all this maneuvering ends-up is the purview of lawyers and industry-watchers.  A recent published report by The Financial Times concludes that negotiations are likely to be complex and subject to further delay, which adds more pressure on Toshiba’s need to stem overwhelming red ink. The length and overall outcome adds to the obvious uncertainties as to Toshiba’s plans to continue to be able to meet overall customer demand for NAND chips, not to mention the overall industry’s capacity availability.  With Apple planning to ramp-up production for the 10th anniversary editions of the iPhone, along with other global smartphone producers hoping to outdo Apple in second-half consumer demand, supplier influence and bargaining power are likely to be important determinants as to which producers garner the bulk of capacity-constrained supply.

Supplier contingency planning, along with the adherence to business and product-margin objectives will be a further challenge for industry supply chain teams, once-again placing an emphasis on more informed and data-driven planning and decision-making capabilities, not to mention supply chain risk mitigation as-well.

Approaching the mid-point of the year, with keen awareness that the second-half is most critical for business results, consumer electronics and high-tech supply chains have likely awareness to a difficult period ahead, one where agility, built-up supplier relationships and overall planning and execution capabilities will again be put to the test.

Stay tuned.

Bob Ferrari

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


Report Indicating the Assembly of the First iPhone in India

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In late January, we alerted our Supply Chain Matters readers to a report indicating that global smartphone and consumer electronics provider Apple was nearing a deal to manufacture its products locally in India. In March, we updated readers to a report from The Wall Street Journal that production could begin in a matter of 4-6 weeksiPhone 6 und 6 Plus 324 267 300x253 Report Indicating the Assembly of the First iPhone in India

The WSJ reports today that initial trail-run pilot production of the Apple iPhone SE model has now begun in Bangalore. (Paid subscription required) with devices scheduled to ship to customers across India this month.

Taiwanese contract manufacturing services provider Wistron is reportedly managing local manufacturing of iPhone6 and 6S smartphones from an existing production facility located in Bangalore, and longer-term plans include a production facility to be in the southern state of Karnataka. The report cites market research data indicating the smartphone ships across India grew 18 percent annually compared to 3 percent globally, thus making the country a very attractive growth market.

According to the latest report, domestic pricing for the iPhone SE still remains unclear, with speculation that Apple would want to maintain its gross margins.  Government officials in India are apparently pressuring for a lower domestic price.

The report again notes that the government of India is very supportive of an Apple manufacturing presence in the country, noting that it represents a sense of great pride for its citizens. Officials in the state of Karnataka are reported as eagerly cooperating to ensure that the future domestic manufacturing site means Apple’s needs.

We view Apple’s manufacturing strategy concerning India to be quite savvy, one that when completed, can provide a lot of market and supply chain benefits down the road. The key however, as always, will be Apple’s pricing and distribution strategy for smartphones managed in this country.

Bob Ferrari

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


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