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

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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.


Additional Reaction to the Foxconn U.S. Investment Announcement

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Supply Chain Matters provides a brief update on Foxconn’s formal announcement of a significant investment in a U.S. manufacturing facility.  At a White House ceremony held on July 26, 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.  Foxconn 300x201 Additional Reaction to the Foxconn U.S. Investment Announcement

The new $10 billion factory, to be located and built in Southwest Wisconsin represents employment of 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 capacity. 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. This initial investment planned by Foxconn designed to rebuild a high-tech electronics supply chain within the United States and there are already reports of a pending announcement for an additional electronics production facility in the State of Michigan.

Roughly three weeks since this announcement and there are already differing views and stated skepticism regarding the viability of this announcement.

First, the overall impact and magnitude of the announcement was somewhat muted by the kaleidoscope of conflicting Trump Administration events consuming the news cycle that week. Not lost by social media and cable news was the irony of the States in the short-list, all being those that predominantly voted for Mr. Trump, something that this blog pointed-to as-well. The final selection being in the home state of the Speaker of the House of Representatives comes with its own political irony.

Coverage by general media such as the New York Times and the Washington Post was quick to note that Foxconn has in the past, demonstrated a track-record of not following-thru in its multi-billion-dollar plant commitments. In other regions such as Brazil, India, Indonesia and Vietnam, investments have fallen far short of expectations, as well as a $30 million commitment to build a factory in Pennsylvania four years ago.

Then there is the magnitude of the overall $3 billion in incentives to be provided by the State of Wisconsin and its taxpayers, reported to average $15,000 to $19,000 per job, annually. One expert at a nonpartisan non-profit research firm in Washington classified the Foxconn deal as the fourth-largest incentive deal in the United States.

A report from a Milwaukee newspaper indicates that taxpayers would have to wait upwards of 25 years, until the year 2043, to be able to recoup the payments to be made to Foxconn. Reported was that a state fiscal bureau found that over the next 15 years, state taxpayers would pay upwards of $1 billion more to Foxconn than the additional taxes that would be generated. A spokesperson for the State’s Governor indicated that such a trade amounts to an excellent investment for the State of Wisconsin.

Then, we have the “tweet” by President Trump, two days before the Foxconn announcement, indicating that Apple CEO Tim Cook informed him that Apple would have forthcoming announcements of significant announcements in building three manufacturing plants in the U.S. During Apple’s recent financial performance briefing last week, CEO Tim Cook seemed to dampen such expectations, indicating that Apple remains committed to creating jobs through payments to applications developers and orders to U.S. suppliers. Such statements beg the question of where did President Trump get his information or is there some quid-pro-quo negotiations underway behind the scenes.

The bottom-line, from our lens, is that Foxconn cannot afford to short-change its stated commitments to a U.S. Manufacturing presence.  The announcement represents a business decision with wide-ranging benefits to Foxconn as well as its major customers, including Apple and others. It also represents a politically-charged decision, where Foxconn obviously played to the various dimensions of local, state, and national politics. If one plays with fire, best that one continues to monitor the overall temperature. Especially in an environment where the risk of bi-lateral trade wars could break-out at any time.

Bob Ferrari

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


Added Information Leaks from Apple’s Supply Chain Clarify New iPhone Production Plans

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This week, there is an indication that rumors about a potential product introduction delay for the speculated Apple “iPhone8” model may be unfounded. Then again, we have seen this movie before.  Apple Logo Added Information Leaks from Apples Supply Chain Clarify New iPhone Production Plans

The statement emanates from KGI Securities analyst Ming-Chi Kuo, and amplified by a posting appearing on Apple Insider. Kuo’s supply chain monitoring has been frequently cited by Apple followers, and he is noted as being insightful in predicting Apple’s product and supply chain plans.

According to the analyst’s latest report, three iPhone models are to be announced simultaneously in September. However, the so-termed 50th Anniversary Model “iPhone8”, rumored to be priced in excess of $1000, will reportedly be in short supply at time of announcement.

According to Kuo’s estimates, the supply chain is expected to support the production of between 2 to 4 million units in the September-ending quarter, ramping-up to an estimated 45-50 million units by the end of this year. That is obviously a significant production ramp-up in a matter of three months, implying that multiple production lines will be operating around the clock pumping out these smartphones.

That notion is supported by a separate Korean media report, and cited by 9 to 5 Mac, that indicates that OLED LCD producer Samsung Electronics Samsung has been building the world’s largest OLED production plant as it chases further Apple orders. That report indicates that Samsung will by the end of this month, operationalize seven simultaneous production lines to increase capacity output to a reported 700 percent in order to support the model’s ramp-up requirements.

Earlier reports indicate that Apple is reportedly paying LG Electronics, another current LCD supplier, $2.7B for OLED production lines exclusively dedicated to iPhone screens.

Apple is one of few global manufacturers that can support the funding of such an extreme supply chain and manufacturing response.

According to the latest Apple Insider report, the other two models planned for announcement and unveiling in September, the termed “iPhone 7s” and “iPhone 7s Plus” are noted as already in volume production with three color options. The KGI Securities analyst is forecasting that planning for the 4.7 inch “iPhone7s” supports production of between 35-38 million units, and 18-20 million units for the 5.5 inch “iPhone 7s Plus” phones.

Given all of these current production forecasts, Apple product management along with Sales and Operations Planning teams are placing a special emphasis on more anticipating far higher channel and consumer demand for the higher priced “50th Anniversary” model. Recall that during last year’s holiday fulfillment quarter, Apple reported that the supply chain was supply-constrained in meeting consumer holiday orders for the iPhone 7 Plus model, which later recovered in the first-half of this year.

Again, we have seen this movie before. Apple’s marketing and PR teams are masters at creating market hype prior to new releases of iPhones. But 2017 provides a significant added challenge, promoting and managing the correct demand mix among three simultaneously released models, in addition to demand for any existing or phase-out models. Competition among other global-wide smartphone manufacturers such as China local smartphone manufacturers Oppo, Vivo, and Xiomi, along with global manufacturer Samsung which has already released its newest Galaxy 8 model that includes new OLED screen technology.

In the next several months, we all get to observe Apple’s supply chain response and agility in-action.

Bob Ferrari

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


U.S. Border Adjustment Tax Seems Off the Table But Remain Vigilant

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As we entered 2017, Prediction Four of our 2017 Predictions for Industry and Global Supply Chains was that major developments surrounding global trade policies and corporate tax reform would occupy the attention of many industry supply chain teams during the year. Our premise was that a climate of uncertain or volatile geo-political developments coupled with an aggressive political and trade agenda of the incoming Trump Administration in the United States would potentially have near or longer-term effects.

One specific element of that prediction were Trump Administration and U.S. Congressional proposals being discussed that would impose forms of border adjustment taxes as part of a major corporate tax reform proposal. Essentially the proposals amounted to taxing corporate revenues and profits based on location of product consumption, essentially resulting in the taxing of imports with a form of a border adjustment tax, while businesses would have their export revenues exempted from corporate tax consideration. Needless to state, businesses whose supply chains had high dependency on importing higher-value finished goods and components would incur significant supply chain cost impacts. We were specifically addressing significant impacts to retail, consumer electronics, apparel and shoe, toys, and other industry supply chains.

This week, Congressional Republicans and the Trump Administration essentially abandoned the border adjustment tax approach amid a heavy amount of lobbying by various impacted industries. According to published reports, political leaders agreed to take the border tax off the table in name of party unity in formulating a workable U.S. corporate tax reform package.

On Thursday, news of this compromise approach sent retail stocks into growth numbers.

Potentially impacted industry supply chains can take a deep breath regarding this latest news.

But, we continue to advise caution for industry supply chain and procurement sourcing teams, including the need to remain diligent in continual analysis and scrutiny of global sourcing strategies in relation to changing sourcing and/or landed cost scenarios.

The current political environment in the U.S. reflects that of constant policy turmoil and continued uncertainty. While approaches to global trade and tax policy show more positive signs toward more rational approaches, anything can happen in this environment of confrontational politics in many dimensions. While the global business front remains optimistic, the geo-political environment is far different and subject to added shocks in the coming weeks and months. In seems that rational thinking has been replaced by the President’s mood of the day and public declarations and that is a clear indication that assumptions related to business as usual remain unwise.

We therefore continue to advise teams to remain vigilant in a detailed understanding all the elements that make up the supply chain network and remain prepared to be able to assess any geo-political or global trade impacts. This remains a time of continual scenario-based planning and what-if analysis, and insure that resources remain allocated for active planning.

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

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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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