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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.


Apple’s iPhone Supply Chain Begins Ramp-up for the Big Release

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Several published reports are indicating that Apple’s supply chain is now gearing-up for the release of the new family of iPhone models later this year.

Asia based DigiTimes recently reported that semiconductor fab producer TSMC has received orders from Apple for production of the next generation 10nm A11 processor chip that will be included in the new models. The report cites sources as indicating that production was once affected by issues involving stacking components in the backend integrated fan-out packaging process, but have subsequently been resolved. The open question is when TSMC will be able to support full-scale chip production. Citi analyst Roland Shu has indicated that volume production is expected by July.

The South China Morning Post reports that Foxconn has been designated by Apple to be the sole contract manufacturer for the planned top-of-line model also due out  later this year. This most expensive and full-featured iPhone Pro model is reported my multiple sources to include a 5.8-inch light-emitting diode (OLED) touch screen, 3D facial recognition, front and back glass casing and augmented reality applications. There are indications that the Pro model could retail in the $1000 range.  According to the report, Foxconn was selected as prime manufacturer for the Pro because of its demonstrated experience in this CM’s ability to ramp-up Apple’s more complex new products.

The MacRumors site features a chronicle of all three of the rumored iPhone 8 models, including features and functions.

Other CM’s mentioned for the other planned model variations are Pegatron and Wistron respectively.  Supply Chain Matters is of the belief that this upcoming iPhone 8 model cycle will the largest test to-date of Apple’s supply chain segmentation strategy, specifically the three CM’s and the suppliers feeding component parts.

Other suppliers mentioned in the report include:

  • Samsung Electronics for the OLED panels.
  • Sharp and JDI for LCD panels.
  • AAC Technologies for miniature acoustic systems.
  • ASM Pacific Technology for the alignment bonding system used on camera modules.
  • Luxshare Precision Industry for wireless charging componentry.
  • Corning for glass screens.

 

Given the current streaming information, it would appear that product design has been solidified and the iPhone supply chain is now engaged for manufacturing ramp-up activities.

From our Supply Chain Matters lens, one thing is certain, Apple’s Sales and Operations and supply chain planning teams are going to be very busy in the coming months. If all goes according to plan, the 10th Anniversary of the iPhone will wow aficionados with one of the most expensive and full-featured devices to-date, along with other models at different price points. If any of the usual hiccups or snafus occur, teams will perform their usual response plans to ensure that global channel available meets plan. The biggest challenge will be in planning the proper model-mix plans among all planned three models.  During the last holiday season, the premium iPhone 7 Plus became supply constrained because planners did not initially plan for the actual demand for the full-featured, more expensive model. This year, the stakes are higher, along with the ability to gage and sense expected consumer demand.

It will all be fascinating to observe.

Bob Ferrari

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


Supply Chain Matters Commentary on Apple’s Fiscal Q2-2017 Performance

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Apple formally reported its fiscal Q2-2017 financial performance this week, and continuing our Supply Chain Matters tradition, we add some supply chain perspectives to this latest performance. The world’s most admired and most watched supply chain warrants continual observation.  Apple Logo Supply Chain Matters Commentary on Apples Fiscal Q2 2017 Performance

Revenues

The Company posted quarterly revenue of $52.9 billion compared to revenue of $50.6 billion in the year-ago quarter. International sales accounted for 65 percent of the quarter’s revenue, which is continued reinforcement of where Apple’s growth markets reside. However, reviewing detailed performance for key growth regions reflects concerns for sales momentum:

Greater China– a 14 percent year-over-year sales decline as well as a 34 percent decline from fiscal Q1.

Rest of Asia Pacific– a 35 percent decline from fiscal Q1

Japan– a 22 percent decline from fiscal Q1

Wall Street research reports such as Seeking Alpha report that China local smartphone manufacturers Oppo and Vivo have had robust sales growth at lower price points which are attributed to Apple’s declining momentum in the country. Some in investment circles question whether Apple has a viable growth strategy for China, given the level and price and performance points among local competitors.

On a positive note, the category of Other Revenue which makes-up the iWatch, AirPods and other hardware grew 31 percent year-over-year. Regarding the latter, indications are that supply remains constrained. Services generated $7 billion in revenues an 18 percent year-over-year increase.

A couple of years ago, this author put forth the premise that Apple’s supply chain serves two primary purposes- one being customer needs, the other being the fuel to sustain the growth of services and content related revenues. That strategy is obviously working.

Unit Volumes

iPhone volumes in the latest quarter were reported as 50.8 million vs. a 51.1 million performance in the year-earlier quarter. Apple reported that during the recent quarter, channel finished goods inventory was reduced by 1.2 million units, compared to a channel reduction of 250,000 units in the year earlier period. That action likely implies that supply chain planners are preparing for the introduction if the highly anticipated 10th Anniversary Edition iPhone later this year, and thus are trying to ensure that channel inventories do not exceed new product introduction targets. Apple reported exiting the quarter well within the target of 5-7 weeks’ channel inventory.

To offset volume declines, average ASP was reported as $655, up from $642 in the year ago quarter. That reflects a sales execution strategy that continues to prioritize margin performance.

In the briefing to analysts, Apple executives further indicated that the product mix planning imbalance involving the iPhone 7 Plus and the iPhone 7 that occurred in the holiday quarter took some weeks to resolve, but balance was restored in the latest quarter.

The other closely watched iPad volume performance reflected 8.9 million units sold vs. 10.2 units sole in the year earlier period. Apple recently made price adjustments to the iPad product line-up to spur added sales volume. In the financial performance update with analysts, Apple indicated that there were some supply constraints with the product during the quarter. Channel inventories were reported as flat during the quarter.

Profitability

Operating income was reported at $14 billion while net Income grew 5 percent year over year to just over $11 billion. The takeaway headline for business and Wall Street media was the overall cash position, which reached $256.8 billion in the recent quarter, a sequential increase of nearly $11 billion. That overall number rivals that of some foreign countries, as well as very large corporations, and continues to fuel lots of speculation regarding Apple’s next strategic move. And, a good majority of this cash sits in overseas accounts, forcing Apple to borrow money to fund existing U.S. investments.

Political and Market Spin

If you have been keeping-up with our various Supply Chain Matters blog commentaries related to Apple over the past few years, you would likely get the impression that the supply chain strategy is to strive to have the lowest cost, yet market to be the premium brand. That includes leveraging its vast unit volumes to continuously extract price concessions from suppliers, and to source all volume manufacturing within China where direct labor costs, although increasing, are still quite attractive over developed market regions.

In this latest quarterly financial report, Apple went out of its way to stress its ongoing investments in the U.S. economy, indicating that the company spent more than $50 billion among U.S. suppliers, developers and partners and supported more than 2 million jobs, including the 80,000 with the Cupertino area. That is a wide swath of data collection. One wonders what the total jobs number is across China and other lower-cost regions.

In a move, likely to placate the current Trump Administration political environment, CEO Tim Cook disclosed shortly after the report of financial results that his company would later this month formally announce the creation of a $1 billion fund to promote advanced manufacturing jobs in the United States. He further indicated that the May announcement will include identity of the first company chosen to invest in.  Do not be surprised if that company turns out to be an existing contract manufacturer.

Let’s also keep this announced investment in some perspective, namely that it represents a rather small percent of existing cash. To draw just one comparison, in the recently completed quarter, the company allocated a total of $10 billion to repurchasing of its stock and on dividend payments. That is just one quarter’s investment. According to a report by The Wall Street Journal, since 2012, Apple has allocated $200 billion of cash to shareholder interests.

Apple further stands to gain if the U.S. Congress passes a corporate tax reform plan that includes an attractive rate to re-patriate cash held overseas.  Perhaps Apple can add to its initial $1 billion investment sometime next year.  Perhaps Apple can buy another manufacturing company such as Tesla, that is also investing in advanced manufacturing techniques.

Above comments aside, we do compliment Apple on its advanced manufacturing investment decision.

Looking Ahead

Turning our lens to the remainder of 2017, all eyes will be turned to product development efforts related to the highly anticipated 10th Anniversary Edition iPhone, with many industry observers anticipating lots of consumer pent-up interest to upgrade to this edition.  That again places more challenges on both product development and the supply chain teams. Product development is likely being influenced to pack as much new innovative technology, such as OLED screens and new software features such as augmented reality into the new models. Supply chain teams want to ensure that product designs were factored for design for supply chain considerations and to avoid the product mix planning snafus that occurred with the introduction and actual sales trending of the iPhone 7 Plus. As we have continually observed, the supply chain has continuously had to overcome initial manufacturing yield challenges with component designs that push the technology envelope. The next three quarters will likely be no different.

Obviously, more chapters to be written in the case study of Apple.

Bob Ferrari


Yet Another Significant Supply Chain Risk Looming

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Here at Supply Chain Matters, we often highlight for our readers’ important areas of industry supply chain risks. That is why recent published reports by Bloomberg Businessweek and by Reuters specifically regarding South Korea caught our attention. Our readers have most likely been reading and hearing of growing tensions between the United States and North Korea over the latter country’s continued development of a missile system.

The Bloomberg Businessweek report, A Korean War Could Cut Pipeline of Vital Technologies to the World (Paid subscription required) indicates that: “If South Korea were to be hit by a missile, all high-tech electronics production will stop.” Noted is that the globe’s premier manufacturing center for advanced organic light-emitting diode (OLED) panels, the LG Display Co. facility in Paju, is in just a 15-minute drive from the Demilitarized Zone that separates North and South Korea, and within easy range of North Korea’s artillery capability. Further reported by Bloomberg is that about 12 percent of Apple’s existing suppliers are from South Korea, with LG Display being one of its largest suppliers. Once more, South Korea’s semiconductor manufacturers, including SK Hynix and Samsung Electronics reportedly supply tw0-thirds of the world’s electronic memory chips. A manufacturing supply disruption here would impact not only high-tech and consumer electronics, but various other equipment sectors as-well.

Reuters concurs that any interruptions could significantly disrupt global manufacturing of smartphones, televisions, computers, and tablets, but further notes that investors continue to pour money into South Korea’s equity markets, despite such risks.

Risks among other industry supply chain sectors are also noted.

Two of South Korea’s most prominent drug makers, Samsung BioLogics and Celltron have facilities located in a special economic zone located about 25 miles from the DMZ.

South Korea also hosts three of the globe’s largest shipbuilding firms, Daewoo Shipbuilding & Marine Engineering, Hyundai Heavy Industries, and Samsung Heavy Industries, and according to the report, two could be likely targets because they produce war ships.

The Bloomberg report raises concerns for South Korea’s logistics and transportation facilities being disrupted, which potentially could impact multinational manufacturers such as Hyundai and Kia Motor.

While businesses in this region have continually be sensitized to business risks because of their specific proximity to North Korea, most firms have forms of supply chain or other risk mitigation plans.  However, as noted from industry experts interviewed by Bloomberg, tensions this time seem far higher, along with the overall scope.

The takeaway from both reports are that a war with North Korea could indeed paralyze the global electronics industry and disrupt vital trade routes in the Pacific. While tensions in the area are not a new phenomenon, and have been accepted for many years, the unanswered question remains if the building escalations are now different, with added concerns.

Supply Chain Matters would additionally add that certain leading-edge high-tech producers have their supply chain risk mitigation teams sensitized to conducting various risk contingency scenario analysis and contingency planning. That would include augmenting some safety stock levels for certain top-line revenue components as well as back-up sourcing scenarios of alternative suppliers of DRAM and other electronics components. In the case of OLED displays, such back-up plans may have limitations due to an inherent shortage of the technology.

Yet other stark reminders of global supply chain risk.

Bob Ferrari

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


Autonomous Driving Technologies for Trucks Takes on Added Interest

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Supply Chain Matters continues to highlight exponential developments in advanced technologies that will eventually impact various industry supply chains with an update on increased investments in autonomous driving technologies for trucks.

In November of 2016, Supply Chain Matters observed why increasingly high-tech and semiconductor technology providers wanted to position themselves in automotive value-chains. There have been quite several significant merger, acquisition and strategic product development announcements involving automotive supply chains and the stakes involve which company will ultimately control and benefit from the movement of more advanced technology being embedded into value-chains of automobiles and transportation. As we noted last year, a lot of M&A and investment monies are being plowed into the automotive and transportation sector to take advantage of the various movements towards on-demand, autonomous and highly intelligent motor vehicles. This movement presents a competitive dynamic among traditional OEM’s who control brands and markets with those of technology companies that know about software and digital transformation.

It is now becoming ever more obvious that value-chains of short and long-haul trucks are another, perhaps more promising area of long-term strategic interest. The reasons are likely obvious to our readership audience. The increased savings in efficiencies, driver productivity, and overall safety make a case for more near-term investment. There is also the other elephant in the room, namely the continual shortage or turnover of qualified long-distance truck drivers. In September of last year, consulting firm McKinsey indicated in a research report- Delivering Change, the transition of commercial transport by 2025, that by this timeframe, at least one in three new heavy duty trucks will contain higher levels of onboard automation technology, including Level 4 autonomous technologies, that will buffer the need for full-time driving.

Another open question is obviously the receptivity of regulators to various forms of autonomous driving technologies applied to trucking and transport. There are some perceptions that European regulators have been more open to considerations of advanced technology, and have become directly involved in ongoing industry demonstrations of various forms of autonomous driving technology. US federal regulators, on the other hand, seem to be taking a more wait and see perspective. In either case, the receptivity by safety regulators will obviously be an important determinant in timing.

Latest Announcements

Semiconductor technology provider Nvidia whom originally developed of the Graphical Processing Unit (GPU) chip in 1999, and that ultimately sparked the growth of the PC gaming market. The company has moved on to redefine modern computer graphics and gaming platforms and has made advancements in parallel computing. More recently, GPU deep learning ignited modern artificial intelligence married with digital visualization— which Nvidia describes the next era of computing, has led to the development of autonomous vehicle technologies.

Thus far, Nvidia has been collaborating with what the company describes as a wide range of automotive partners, including Tesla, Mercedes Benz, Audi, and others. A recent presentation at an investor conference indicates 80+ companies are currently leveraging the company’s self-driving platform and that every Tesla Motors vehicle now comes equipped with DRIVE PX 2 for full self-driving capabilities

In a company blog posting in March, Nvidia announced that it’s working with PACCAR, maker of Kenworth, Peterbilt and DAF truck brands, on developing technology for autonomous vehicles. The same blog posting further announced a partnership with Tier One automotive parts and systems component producer Bosch, for self-driving car technology.

PACCAR has developed a proof-of-concept self-driving truck with SAE Level 4 (full self-driving) capability built on the DRIVE PX 2 technology. It includes elements of adaptive cruise control, the identification of digital objects along with lane-keeping technology to make trucks safer in long-distance hauling.

Convoy Approach

Wall Street is increasingly paying closer attention to autonomous driving technology applied to trucks and truck fleets. Earlier this month, Silicon Valley based software firm Peloton Technology raised $60 million in a second-round of funding for expanding its development and market presence in automating commercial truck fleets.

As its name implies in the field of competitive cycling, Peloton Technology supports the ability of trucks to travel in a convoy with a driver in the lead vehicle controlling various following truck (s). While the value proposition is predicated on higher safety and fuel savings, some in the industry are a bit skeptical on the notions and regulatory approval of an automated convoy of multiple trucks controlled by software. Instead, the software provider is initially focusing on supporting a convoy of two trucks, with the lead driver in full control of both vehicles. Peloton is planning development and deployment of its software for 2018.

Current investors in Peloton include Intel Corporation, Omnitracs LLC, Magna International, United Parcel Service and Volvo AB, all various value-chain players in trucking, transportation, autonomous driving and truck component technology.

Future Technology Leaders

If our readers have been scanning various other business and technology media, you have likely read that the trucking industry has struggled of-late because of the compelling need of fleet owners to want to invest in new, more fuel efficient and technology-laden trucks. The likely solution rests both in hybrid powered technologies and in increased levels of safety, driver productivity and automation.

Thus, over the coming months, a number of both established players and high-tech startups will all be vying to be the future technology innovators and leaders. Startups will bring the usual speed, agility, and advanced technology knowledge – all prerequisites for the majority of new business models. To counter new entrants, OEMs must demonstrate agility to both build their own digital capabilities and enter collaborative efforts with partners around the product value chain.

Established names such as Daimler, PACCAR, Scania, and Volvo will be contrasted with those of Otto (recently acquired by Uber), Nicola Motor Company, others and yes, even Tesla Motors.

Exponential technology developments will eventually impact many industry supply chains, the product value-chains they support, and the tools and technologies utilized to move physical goods. As in all things exponential, the question is timing, and the cycles of that timing are accelerating.

Bob Ferrari

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


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