In an earlier Supply Chain Matters posting, we noted that this week, Apple provided a huge thud across Silicon Valley and global equity markets. The globe’s richest and most profitable company delivered a huge financial disappointment resulting in the first quarterly sales drop in 13 years. Executives pointed to macroeconomic headwinds and a far more competitive and challenging smartphone market. Yesterday, the Dow Jones Industrial Average suffered its biggest drop since February, fueled by the recent financial performance news from Apple, along with sharp declines provided by IBM and Cisco Systems.
However, this is a global world of industry competition and it is important to reflect on other players and other product, market, pricing and supply chain trends in similar industries and markets.
This week Samsung Electronics reported what was billed as the fastest profit growth in its core mobile business in nearly three years, attributed to strong initial sales for its Samsung Galaxy S7 model smartphones. Overall revenue rose 5.7 percent. The company’s mobile business operating profit for the March ending quarter rose 42 percent from the year-earlier period, noted as the largest year-over-year improvement in mobile profits since the second quarter of 2014.
Business media reports cite analyst’s estimates that Samsung shipped 10-12 million units of the new Galaxy S7 series phones in the past quarter. Keep in mind that Samsung elected to push-up the scheduled launch of this new S7 models to Q1, which may have led to the improvement in financial performance. Once more, Samsung’s guidance to investors reflected a continued optimistic sales growth forecast for S7 devices in the current operating quarter. In its reporting, global business network broadcaster CNBC quoted market research firm TrendForce as forecasting that S7 unit shipments will reach 52 million by year-end, surpassing a previous record of 47 million for the Galaxy S4 model. While that number does not equate to iPhone sales in a single quarter, keep in mind that Samsung offers abroad variety of other smartphone models in various competitive price ranges. One estimate indicates over 79 million total Samsung produced smartphones sold in Q1.
Thus, while the overall global smartphone market may be shrinking or turning toward a replacement cycle, there are pockets of provider growth. Among the current rankings of top five global producers of smartphones, besides Samsung and Apple, three are China based, offering price competitive models, especially for larger China and Asia based markets.
Operating margins for Samsung are noted to have risen to 14.1 percent from 10.6 percent from a year ago amid a streamlining of product line offerings and reductions in manufacturing costs. Keep that number in perspective and recall that Apple’s current operating margin was noted as close to 28 percent in its most recent quarter, twice that of Samsung. That may be an indicator of price performance and sensitivity reflected in today’s global smartphone markets. It also counters Apple’s claim of macroeconomic headwinds in current regions, since Samsung competes in similar geographies.
Readers should recall that Samsung is both a competitor as well as a major supplier to Apple in the form of proprietary processor chips as well as general memory chips produced by Samsung’s semiconductor operations. In the latest quarter, this chip business recorded its first year-over-year decline in more than three years, due to what was termed as a supply glut and cooling demand for processor and memory chips.
We have previously noted the importance of Samsung’s vertical supply chain integration strategy reflected by its chips business as both an internal and external industry supplier. From an advanced technology perspective, Samsung gains the benefit for first mover advantage in leveraging the most advanced chip based technologies. From a broader key strategic industry component supplier perspective, the risk is that when supply chain dominants such as Apple financially sneeze, the implication flows down to the component supplier, even large key suppliers. These reverberations will likely continue over the coming months.
Thus there are different sides to any coin and it is important for high tech and consumer electronics supply chain S&OP teams to focus on the core sales, pricing and product trends reflected in the overall market, not just certain players. Another key takeaway is the ongoing critical importance of responsive and timely product design and new product introduction.
This week marked a rather significant milestone and a rather huge thump within Silicon Valley and global equity markets. The globe’s richest and most profitable company along with the most highly recognized supply chain delivered a huge if not somewhat expected disappointment. Note your calendars for reference, as this week; Apple did indeed report the company’s first quarterly sales drop in 13 years.
The growth streak has temporarily paused and the question is now what comes next.
The financial numbers are somewhat ugly by Apple standards- second fiscal quarter revenues declined 13 percent while profitability fell over 22 percent. Then again, how many companies would envy a quarter that resulted in over $50 billion in sales and over 10 billion in net income?
Revenues across global regions were consistently down- a 10 percent reduction for Americas; a 5 percent reduction in Europe; a 26 percent reduction in the all-important Greater China region. Once more, Apple has issued lower sales forecasts for the current quarter. The impact of a strong U.S. dollar was somewhat a factor in global revenues with Apple indicating that revenue declines would have narrowed by 4 percentage points without such an impact.
For the past year, Apple’s shares have declined 20 percent and according to a commentary by The Wall Street Journal: “The decline erased more than $46 billion of the company’s market capitalization, more than the total value of Caterpillar Inc. or Netflix Inc.”
The unit volume picture was concerning- All important iPhone sales volume was reported as 51.2 million, down 16 percent from year earlier period. The firm’s iPad sales volumes declined 19 percent, continuing in a two-year long sales slump despite efforts to boost sales and a strategic alliance with IBM for more iPad focused business applications. Supply Chain Matters highlighted a number of ongoing published reports emanating from supplier information leaks indicating that Apple’s S&OP team has been consistently reducing iPhone production volumes since the beginning of the year. While inventories did increase, the situation would have likely been a lot worse since Apple had plans at one time to support an 80 million iPhone sales rate. Apple CEO Tim Cook indicated that the company plans to reduce inventories by $2 billion because of what he describes as the current challenging global economy. Gross margin for the current quarter is forecasted to be in a range of 37.5 to 38 percent, again below margin rates in the 40 percent range in prior years.
One bright spot was the introduction of the lower cost Apple iPhone SE that started shipping at the end of March. Apple CEO Tim Cook described current demand for this model as exceeding current supply, but too late to make any difference in second quarter performance.
The obvious question that reverberates across financial networks is when Apple, if ever will, return to growth. Some would point to the need for an acquisition, some point to the need for the next “cool” product, perhaps electric cars or televisions.
Within the supply chain umbrella, one can anticipate a number of ongoing challenges.
Apple’s product design and product management teams are now under enormous pressure to develop the next successful groundbreaking product. The all-important design completion milestone date is mid-summer, since the global supply chain needs time to build supply and production to meet the traditional September new product announcement period and the critical October-December holiday sales period. Apple’s product design culture has always shown a tendency to push design changes to the very last minute.
Another reality is how long Apple can continue to support a premium price and margin point given an overall slump in global smartphone sales. Emerging consumer regions where sales growth continues to exist are battlegrounds for price vs. performance, with lower price winning the majority of the time. If the iPhone SE turns out to be a sales volume success, it will have to be supported by a lower-cost supply chain channel.
Apple’s global direct materials procurement teams must continue to practice active supplier management since many of Apple’s suppliers have pinned their own financial performance outcomes on the large output volumes expected from Apple. When Apple sneezes, suppliers tend to catch pneumonia. Challenges will manifest themselves at annual supply contract reviews when volume expectations are clarified. With Apple practicing active segmentation, dual sourcing and key commodity risk mitigation, the role of supplier sourcing management should be very active.
Finally, Apple S&OP team must continue to be the arbitrator between sales and marketing teams who live in a hyped atmosphere of ever optimistic sales growth, a financial community now razor focused on margins and profitability goals, and supply chain operational teams that has not previously found themselves under an overt cost control looking glass.
A final open question is what if Apple elects to execute a large or complex acquisition. Perhaps an existing electric car or up and coming consumer electronics company?
There’s been an evitable thud in Cupertino, and the coming months will indicate whether this is indeed a temporary setback, or another turnaround milestone for the legacy and history of Apple.
© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Nikkei Asian Review, citing component supplier based sources, reports that Apple will continue to reduce production levels of iPhones for the April-June time period. The latest adjustment comes after forecast volumes were lowered in the January-March quarter.
According to the report, the continued slowdown stems from slowing sales of the iPhone 6s and iPhone 6s Plus models, while the recently announced iPhone SE does not have enough demand volume to offset volume declines of the former two models.
The implication will obviously be an impact on component suppliers of LCD displays, memory chips and image sensors who rely on the iPhone’s huge volumes for their own revenue and profitability expectations. The Nikkei report comes after an EBN report published in in early February indicating earlier cutbacks.
From our Supply Chain Matters lens, this news has broader implications. Other product areas such as the iPad continue to experience declining demand, while Apple has been very reluctant to disclose any volume numbers related to its Apple Watch products, which can be interpreted to mean either exceeding or declining expectations.
For the globe’s most admired product development and supply chain organization, the pressure for coming-up the next big market disruptive product has to enormous. It’s no secret that the iPhone product lineup is the soul of Apple’s ongoing healthy levels of profitability, and thus the beast needs to be fed a constant high-calorie diet. Thus as we enter mid-year, we can expect that something had better be churning on the product front since suppliers are obviously jittery.
Perhaps the speculation that Apple will enter the electric car business may be closer than we think, else, something else may be brewing on the acquisition screen.
It has been two days since our Supply Chain Matters breaking news alert published on Friday on the occurrence of multiple severe earthquakes impacting southern Japan. While the major focus continues toward tending to the injured and missing, along with the assessment of the impacted region’s major infrastructure, the supply chain disruption implications are indeed evident and potentially include multi-industry dimensions.
Numerous incidents of aftershocks continue to impact the area which is hampering efforts by companies to assess damage to facilities and supply chain operations. Reports that we are monitoring indicate that Toyota will gradually halt automobile production across Japan because of a shortage of components. The Toyota Lexus production plant in Fukuoka prefecture remains in production halt for the remainder of this week. The Tustsumi plant which produces the Toyota Prius will halt production from Tuesday thru Saturday of this week.
Toyota supplier Aisin Seiki has acknowledged the discovery of broken walls, windows and assembly equipment at its facilities in the quake area but has indicated that plans are underway to shift the production of door and engine parts to other owned facilities located in other parts of Japan as well as other external plants. The open question is how much additional time will be required to implement this shifting of production.
Other automakers such as Honda and Nissan have also halted operations within factories within the impacted region. Honda has a motorcycle manufacturing plant near the city of Kumamoto.
Sony is assessing damage to its smartphone image sensor plant in Kumamoto indicating that that plant operations are unlikely to re-start soon. Sony’s camera image sensors are included in the Apple iPhone but the supplier has indicated that full operations remain at its plants in Nagasaki and Oita which also produce sensors used in smartphone cameras.
Semiconductor producer Renesas Electronics confirms it has sustained damage to equipment at its plant in Kumamoto which produces microcontroller chips for automobiles. Further assessment of damage remains to be completed before deciding when to resume production at this particular facility.
In addition, on Saturday, a more powerful magnitude 7.8 quake struck Ecuador, about 17 miles from the northwestern coastal city of Muisne, near the border with Colombia. What makes this incident so concerning is that this earthquake lies on the same geological “Ring of Fire” plates that surround the Pacific Ocean. Thus far, more than 200 deaths have been confirmed and there are reports of significant damage to the region’s infrastructure.
The top exports of Ecuador are crude petroleum, bananas, crustaceans, processed fish and cut flowers.
Such considerable natural disaster events occurring over a short period of time should cause ongoing concern for multi-industry supply chain professionals since there is a lot of strategic component, commodity and finished goods production located in various regions along the “Ring of Fire.” These incidents continue to remind all that the North America west coast region including California, Washington State and Oregon remain vulnerable to a major earthquake. As geologists constantly remind regarding the U.S. west coast region, it is not a matter of possibilities, but rather a matter of when a rather significant seismic event occurs.
Another aspect already being raised by business media has been what learning came from the 2011 major earthquake and subsequent divesting tsunami that struck northern Japan regarding supply chain disruption and business continuity planning, and how that will come into play over the coming days and weeks.
Our thoughts and prayers remain with the numerous victims of these disasters along with the impacted families. These tragic natural disaster events provide constant reminders that are planet remains fragile to devastating seismic and climate related events.
Supply Chain Matters has been continuously updating our readers regarding the on-again, off-again acquisition of Japan based advanced electronic display provider Sharp Corp. by Foxconn Technology. Today, The Wall Street Journal and other news outlets report the approval of this takeover deal, but at a lower price than originally planned.
This ongoing deal has special significance for high tech and consumer electronics focused supply chains.
First, both of these players are major players within Apple’s value-chain of products and product development. As noted in our earlier commentaries, 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 because of overcapacity, 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, most notably automobiles and other transport or user-centric equipment.
There were business cultural implications to this deal as noted in our January commentary. Sharp was also evaluating a counter bid from Innovation Network Corp. of Japan for roughly the same stake that was announced today. The issue of concern behind this investment option was having Japan based Sharp come under foreign control. Innovation Network already has controlling stake in the remnants of three other Japan based LCD producers.
Finally, the deal itself represents another step by Foxconn toward vertical integration of the value-chain of high tech and consumer electronics devices. A February published commentary in The Economist pointed 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.
According to today’s reports, the boards of both Sharp and Foxconn have now approved the takeover plan but at a value of $3.5 billion, considerably less than the estimated $5.5 billion deal size that was originally pursued. The terms reported today call for Sharp to issue new equity to Foxconn in exchange for a cash infusion of ¥389 billion, representing a 66 percent stake in Sharp, somewhat lower than the prior offer of ¥489 billion of cash infusion. The definitive agreement for this deal is expected to be signed on Saturday, followed by a news conference.
Foxconn’s plans for Sharp reportedly include investment in organic light emitting or OLED screen technology. Samsung Electronics is the current supply leader in this technology.
More details of this deal and its implications with obviously unfold in the coming weeks. However, the deal itself is by our lens, no slam dunk for either of these suppliers and will provide some noteworthy challenges moving forward. This case study will continue, along with the various financial, product development, branding and business cultural implications.
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.