At the Computex Fair held in Taipei this week, Samsung unveiled two new versions of both its 8 inch and new 10 inch Galaxy Tab 3 tablet devices.  Beyond the product release headline was a supply chain milestone, that being the first use of an Intel sourced processor in a Samsung mobile based product. Samsung had previously sourced processor chips from ARM Holdings. The 10 inch Galaxy will utilize Intel’s Atom chip that leverages the Clovertrail+ architecture

As noted in a posting on All Things Digital, Intel has been touting the suitability of its chips for Android phones and tablets, but has struggled to get many design wins. Most devices use rival chips from ARM, Qualcomm and Nvidia, while Samsung also has its own line of Exynos processors that have made their way into many Galaxy products. The announcement from Samsung is touted as a significant new design win for Intel.  At the same Computer Fair, Intel also presented a reference design for a proposed Merrifield processor for use in mobile smartphones.

What is most interesting regarding this announcement were previous industry rumors that Apple was possibly evaluating the use of Intel processors in its tablet products. Obviously, Intel was looking to make a presence in one or two of the most recognized and highest scale supply chains in consumer electronics, not to mention having to compensate for a declining trend in shipments involving personal computers. However, as other business media has pointed out, a partnership with Samsung is no guarantee, given Samsung’s abilities to design its own line of mobile based processors.

In any case, what seems apparent is that Intel is on a mission to have its processor components designed in more tablets and smartphones, but the landscape of players and potential competitiveness is far different than the more gentile PC industry. Intel cannot just offer big marketing bucks to gain a foothold.  Getting one’s product design adopted into a major product is always a challenge anchored in collaboration, even for a giant such as Intel.

Sourcing professionals should keep an eye on this evolving mobile industry scenario since it has the potential to be rather interesting.

Bob Ferrari

At the All Things Digital conference held this week, Motorola, now part of Google, confirmed that it will introduce a high-end smartphone to be named Moto X and that it will be produced in the United States. The company will manufacture this device at a facility near Fort Worth Texas, but many essential supply chain components will be sourced overseas. The Texas facility will employ upwards of 2000 people by August.

Our readers are probably aware that the competition between Google and Apple has heated-up, of late. We therefore found this announcement from Motorola to be both significant and “in your face.”

Apple garnered lots of media headlines regarding its December announcement that the company would move some manufacturing back to the U.S…  In a previous Supply Chain Matters commentary we viewed the announcement that Apple will have some Mac production in the U.S. this year as one of political expediency. Apple had been feeling lots of attention regarding the incidents of labor unrest among Foxconn plants in China along with the numerous traditional and social media discussion focused on why the company has stashed hoards of its cash across foreign entities to avoid U.S. taxation.  Apple was also a topic in the past U.S. Presidential debates, with the direct question; “What will you do to encourage companies like Apple to shift more jobs to the U.S.?”  Apple expeditiously responded with its U.S. sourcing announcement, indicating that it would invest $100 million in this effort.  As we approach the mid-way point in 2013, very little detail has come forward regarding Apple’s U.S. production plans.

By our view, the Motorola’s announcement is far more significant because it involves a line of smartphones, one that manufacturing industry interests openly declare can never be competitively manufactured in the United States.  While Motorola has not disclosed specific detail on the features and pricing of the Moto X, the decision to source final assembly in the U.S. is a bold one and far upstages that of Apple.

Motorola may not garner all the media eyeballs that Apple can garner but its bold decision to return some smartphone production to the U.S. is the one to watch in the coming months.

Bob Ferrari

In November of 2012 Supply Chain Matters made the observation that Apple had begun to actively pursue its own supply chain risk mitigation and supply chain segmentation plan. Apple elected to dual source some of its contract manufacturing needs with the use of Pegatron, one of Taiwan’s largest contract manufacturers, as a second assembler of the iPad Mini, along with the iPhone 4.

Today, the Wall Street Journal is reporting (paid subscription or free metered view) the same premise, that Apple has elected to dual source its contract manufacturing needs.  In essence, Apple is exercising its own supply chain segmentation and risk diversification strategy electing to source production and assembly of a low-cost iPhone expected to be offered later this year, along with the current production requirements of the iPad mini. The WSJ declares that this is the end of the monopoly that Foxconn Technology Group has held in the production of the bulk of Apple’s products.

Of more interest, the WSJ reports that Pegatron was willing to accept thinner profit margins in courting Apple’s massive business. Pegatron’s revenues are a mere one-third the size of Foxconn. While Foxconn has been forced to deal with rising tensions concerning supplier responsibility audits related to factory working conditions and wage rates, driving-up its costs to serve Apple, Pegatron has been able to escape much of that visibility, at least up to this point.  There was an explosion incident at a Pegatron subsidiary in December of 2011 that was related to production of Apple components. All of that may change rather quickly in the coming months. In its reporting, the WSJ revealed that Pegatron experienced a challenging learning curve in meeting the volume production requirements of the iPad mini last year and that Foxconn ended up producing the bulk of volume. Those of you with constant supplier management challenges can take some comfort that the leading recognized supply chain also experiences similar challenges.

Also reported was that Foxconn was becoming increasingly frustrated with the growing complexity of Apple’s product designs which were adding to the challenges of high volume production.  We all tend to know that Apple does not tend toward design for supply chain practices, opting instead for the most innovative design and coolest functionality.  In the past, the personality of a Steve Jobs tended to dominate such frictions, but that was before the current explosions in output volumes and need to service broader global distribution channels. The WSJ states that CEO Cook is “placing a higher premium on risk diversification.” The timing is important since other sources across Wall Street equity analysts have noted recent Apple product patent applications pointing to new consumer electronics gadgets such as an iWatch or iPen. If Apple again makes a market splash in innovative but smaller consumer electronics products, its supply chain will need a segmentation strategy to manage volume ramps, changing distribution channels and needs to maintain higher product margins.

We may now know the real reason as to why Foxconn declared in February that it was freezing all further hiring in China. At the time, business media attributed this hiring freeze as an indication of weakening demand for Apple products. Some of that may have been true, given that the next wave of Apple mobile products is due out later this year.  However, WSJ reported that Pegatron now plans to increase its China based workforce by about 40 percent as a result of the enhanced Apple relationship and the need to produce higher volumes of lower-cost iPhones. This is an indication of a workforce shift among contract manufacturers. Market research firm IDC just increased it global forecast for electronic tablet market consumption by an additional 39 million units in 2013.  Much of this, in our view, we be consummated by the attraction of lower-cost tablets.

It will be interesting to track the fortunes of both Pegatron and Foxconn as they each reach a crossroads in business strategy.  Current speculation is that Foxconn could well pursue branding and production of its own line of Apple accessories or other related electronic components as it frees-up dedicated capacity for Apple. Pegratron, on the other hand, has an enhanced learning curve and ramp-up phase in dealing with the challenges of Apple and its product design requirements.

Both should be interesting supply chain team hallway conversations in the months to come.

Bob Ferrari

Last week, in conjunction with its Supply Chain Executive Conference, Gartner announced its annual Top 25 Supply Chains rankings for 2013. As has been our tradition, Supply Chain Matters provides our readers with some of our perceptions in the context of both this year and previous year’s rankings, along what we have observed in multiple industry settings.  We do this not in the context of positioning our own proprietary ranking process or flattering potential or existing clients, but as the voice of an experienced global supply chain industry observer and influencer.

We begin with the listing of Gartner’s 2013 ranked supply chains coupled with previous history.

For the fourth year in a row, Apple again topped this year’s ranking.  While not a surprise, Wall Street moguls and the investment community have not been all that flattering towards Apple in 2013, driving a perception that Apple may have peaked. This year, Gartner added more transparency by providing the detailed scoring results that make-up the composite ranking score.  Notice that Apple garnered an overwhelming #1 from Gartner’s peer group panel voters but it company not gain the highest ranking score among Gartner analyst opinion.  The highest Gartner analyst score was garnered by Unilever, and Supply Chain Matters applauds that view. More than many consumer goods supply chains, Unilever has demonstrated agility in supporting expanded revenue growth tapping emerging global markets and agility in managing its extended value-chains.

This year’s top five ranking from included three from last year, Apple, McDonald’s and Amazon. We continue to question how a restaurant services firm such as McDonald’s can be consistently ranked in the top five given a far different supply chain services model that is less asset intensive. While Samsung Electronics re-entered the top ten, its performance in global supply chain scale and product innovation, by our view, merits a top five ranking.

We were pleased to observe the addition of Lenovo and Qualcomm to this year’s Gartner rankings, with each well deserved.  In last year’s Supply Chain Matters commentary related to the Top 25, we cited Lenovo as the best turnaround candidate. We were surprised to observe the addition of Ford, given that the company has incurred quality prone new product introductions among key models, as well as being rather late to invest in production capacity in China’s exploding auto market. We continue to be disappointed by the lack of recognition toward Hyundai, who continues to make notable strides in product introduction and  market share gains, supported by a supply chain vertical integration strategy.

This year, along with Amazon, three other global retailers, Inditex, Wal-Mart Stores and Hennes & Mauritz (H&M) made the top 25 ranking as opposed to six in the 2012 ranking. Wal-Mart, a previous supply chain icon, has slipped from the number 4 ranking in 2010 to number 13 in 2013. While it still garnered a rather high peer group ranking, the Gartner analyst vote and business results paint a different picture.  The Amazon effect is very real and very concerning.

Dropped from the Top 25 ranking this year was Hewlett Packard, Kimberly-Clark and Research in Motion. Just making the number 25 ranking was Johnson & Johnson, which slipped an additional three ranking spots.  As was the case in our observation last year, we again believe that J&J has not demonstrated a capability to be ranked in any Top 25.

The unfortunate aspect of Gartner’s Top 25 ranking remains the relatively high threshold of corporate revenues, too much of a dependency on Return on Assets which favors firms who elect to outsource the bulk of their supply chain activities. Supply Chain Matters does not subscribe to an opinion that financial metrics should be the majority driver for recognizing supply chain performance. It precludes noteworthy turnarounds in performance, overall supply chain process innovation and abilities to rise to a challenge in rather difficult industry settings. Privately-held companies and those from emerging markets are often precluded from rankings that place the majority of emphasis on financial metrics.

Bob Ferrari

Today’s edition of the Financial Times features a headline article on the growing threat of organized cyber threats on corporate systems.  (paid subscription required or free metered view) It outlines how criminal networks have increasingly been stealing information and extorting money not to release that information.

One of the examples cited was a 2008 hacking attack directed at today’s global leader in contract manufacturing, Foxconn, who happens to be Apple’s predominant manufacturing services provider. The same contract manufacturer performs manufacturing for some of the world’s premiere high tech companies including Dell, HP, IBM and others. FT cites sources with direct knowledge as indicating that hackers breached the contract manufacturer’s email system to exploit Foxconn’s then head-to-head rivalry with battery maker BYD. Both companies at the time were intensely competing in the design and manufacturing of alternative energy components. The plan was apparently to blackmail both parties with the threat of releasing the hacked information, but was aborted. Both companies declined FT’s requests to confirm this attack.

The article also cites reports late last year that heavy machinery producer Sany hired hackers to spy on its industry rival Zoomilion.  Three Sany executives were arrested as a result of this case.

A supply chain risk mitigation plan needs to umbrella, among other areas, the increased threat of cyber information attacks.  As is often the case, the weakest links in global supply chains, namely supplier networks, can sometimes be the target of such attacks. Insure that your supplier audits involving strategic suppliers include some basis of insuring that adequate information security measures are in-place.

The All Things Digital blog recently featured a summary of a teardown analysis of Samsung’s newest S4 Galaxy smartphone. This teardown analysis was performed by research firm IHS which pegged the total material cost of the U.S, version at slightly above $237 contrasted to a market entry price of $639 without carrier subsidies.

IHS and All Things Digital again confirm what we at Supply Chain Matters have observed for some time, the advantages that Samsung gains from sourcing many of its key Galaxy S4 components from Samsung’s internal component businesses to include the LCD display touch screen components, camera and wireless broadband chips.

The latest teardown also uncovered that Samsung is producing four different phone variants to support worldwide consumer fulfillment. The IHS teardown noted specific sourcing difference among both the Korea and U.S. model variations.  The U.S. version sourced the main applications processor chip with Qualcomm while the Korea and other geographic versions contain Samsung’s processor chip. In the graphics imaging processing chip, the U.S. version features a Fujitsu chip, while the Korea model relies on functions embedded in the Samsung sourced applications processor.  Supply Chain Matters believes that both of these are examples of risk aware sourcing strategy, insuring that there is more than one strategic supplier for important key components.

Samsung’s recent report of quarterly earnings indicates that over 70 percent of current operating profits stem from its mobile business, which includes smartphones, electronic tablets as well as conventional mobile phones.  Its component businesses such as semiconductor chips, LCD displays and components contributed the remaining profit.  Equity analysts are astute to note that three years ago, the contributions were reversed.  With product margins steadily decreasing in the lower tiers of consumer electronics value-chains, the supply chain vertical integration strategy undertaken by Samsung has paid a handsome return to date while providing the cash to fund more innovation in components.

The Wall Street Journal recently pointed out that while other companies cut-back on production related capital expenditures during the past market turndown, Samsung boldly continued investing in product, value-chain and factory innovation. That strategy has allowed Samsung to now become a peer level competitor to Apple, and in some cases, lead in overall global volume output.

Supply chain vertical integration may or may not apply to various industry or company strategic plans.  But, where it is being applied in Korea based firms such as Samsung, General Electic and Hyundai, it is contributing to positive business outcomes.

Bob Ferrari