In our prior Supply Chain Matters commentary we touched upon the huge benefits for being a supplier of a strategic component for Apple’s products. In prior commentaries, we have also highlighted the drawbacks. Such drawbacks include not being on the leading edge of technology or not flexible or agile enough to meet Apple’s constantly changing product development and time-to-market requirements.
One such supplier has been Sharp Corporation, one of three current LCD screen suppliers for Apple. LCD screens are highly strategic for Apple, and consumer electronics giant has elected to initiate strategic supply agreement among all three to insure both leading-edge technologies, the ability to scale to Apple’s flexible volume requirements and as a mitigation of supply risk.
Sharp has a track record of innovation in LCD technology but a rather rocky financial history as well. One such innovation was in early 2013 with the application of high resolution indium gallium zinc oxide screen technology (IGZO) that is thinner and less power consuming than conventional displays. In a March 2013 commentary we highlighted that Sharp ran into initial production ramp-up difficulties with this new technology, causing some drag to Apple’s supply chain momentum in Q4 of 2012. A report in September indicated that a shortage of the new and larger LCD displays, and the lack of contribution from specific supplier Sharp, may have cost Apple a million or more in initial sales.
On the financial side, Sharp reached the precipice of imminent bankruptcy in early 2012 before a rescue came forward. In order to secure fresh working capital loans at the time, Sharp was compelled to mortgage most of its offices and factories in Japan, including the specific factory producing LCD displays for Apple’s iPhone and iPad. In late 2012, Qualcomm, whom produces communications microchips for Apple’s mobility products agreed to invest $120 million in Sharp that included ownership of up to 5 percent of Sharp stock. The second progress payment of $53 million of that investment was held back by Qualcomm in March of 2013 because of reported non-performance. In March of 2013, we highlighted a report that Apple competitive rival Samsung would provide a $110 million lifeline investment, reportedly the first time Samsung had ever taken an equity investment in a Japanese based rival. That fueled speculation at that time from business media that Sharp could become a more strategic partner for Samsung. Reports now indicate that the soon to be released Samsung Galaxy S6 smartphone will feature a curved LCD screen being produced by LG Display, a rival to Sharp.
Earlier this week, The Wall Street Journal reported that Sharp was now moving to spin-off a portion of its LCD panel business unit with intent to seek a new capital injection from Innovation Network Corp. of Japan, a governmental entity overseen by Japan’s Ministry of Economic Trade and Industry. This funding unit previously invested in Japan Display, which was created from the remnants of three other Japan based LCD producers with declining output and troubled finances. However, a Sharp spokesperson indicated to the WSJ that various restructuring options for the LCD business are being explored and no final decision has been made. According to this report, banks currently hold in excess of $5 billion of Sharp debt. In February, Sharp indicated it would report a significant loss instead of a previously expected profit for its fiscal year that ended March 31. The WSJ report hints that with the involvement of Innovation Network Corp. LCD industrywide supply consolidation may yet occur.
Sharp is turning out to be yet another example of the risk and reward aspects for being a strategic supplier to Apple when being on the cusp of leading-edge product and manufacturing based technology clashes with the dynamics of supplier relationships. Eventually, lifelines can run the course.
A published Bloomberg report citing sources with direct knowledge has disclosed that Samsung Electronics will produce the main processor chip related to Apple’s next iPhone model, replacing TSMC, the supplier of the iPhone 6 A8 processor chip.
According to the report, Samsung will start making the new processor chip at its Giheung South Korea plant, with additional orders going to Samsung’s production partner, Globalfoundaries Inc. Neither Apple nor Samsung were willing to confirm such news.
Make no mistake, the competition for being the prime source of Apple’s processor chips is a big deal with implications for billions in revenues. If this report turns out to be accurate, than the fact that Apple has returned to arch competitor Samsung for sourcing of its processor chips is a significant announcement. It is a further testimony of the high-stakes involved in being on the leader-edge of the latest chip fabrication technologies. The report quotes Gartner numbers indicating that Apple spent a whopping $25.8 billion on chip processors in 2014, accounting for nearly 8 percent of industry demand.
Further noted was that Samsung and TSMC both indicated intent to invest more in advanced production capabilities in order to attract Apple’s business. TSMC alone reportedly budgeted $12 billion for plant and equipment investments this year in order to compete with Samsung.
As we have noted in many of our high tech and consumer electronics focused supply chain commentaries, the purchasing influence of Apple looms very large for many industry suppliers. The scale and sheer volume scale can make a break a supplier’s business plan, and that influence alone causes continued information leaks across the high tech supply chain ecosystem. It can further motivate fierce competitors to put differences aside when manufacturing technology and functionality are at stake.
We are often reminded that one of the most common traits of industry disruptors is that they think differently. They challenge the notions of industry norms, current practices and business processes or the leveraged use of technology in product and service delivery.
Over the coming weeks, Supply Chain Matters will feature a series commentaries focused on industry disruptors and their implications to existing customer fulfillment.
Fast becoming one of the icons of disruptive thinking approaches is Elon Musk with his current ventures in the automotive and space exploration and aerospace sectors. The two companies he leads, Tesla Motors and Space Exploration Technologies have each challenged legacy industry practices.
Supply Chain Matters has featured a number of prior commentaries specifically focused on Tesla and how this automotive producer has challenged existing norms in is driving re- thinking in supply chain vertical integration, advanced manufacturing practices, service and distribution strategy. Tesla’s fundamental approach is that an automobile serves as a transportation device that is primarily powered by computer intelligence and the user experience. There is little need for intermediaries or after-market providers.
This week, Tesla has invigorated both social and business media on the news of its latest series of software upgrades planned for the Tesla Model S. At a recent automotive industry conference, Musk declared that it will soon become illegal for humans to take the wheel once the technology of self-driving cars have proven themselves. If you sit in a Tesla vehicle, it’s visually striking that the huge 17 inch LCD screen takes-up more driver attention than a traditional automobile dashboard. It was designed as such.
Last October, IHS reported on its initial analysis of a teardown of the components of the Tesla Model S with the headline: Is it a Car or an iPad? The article is impressive and worth a read.
What is extraordinarily impressive is that Tesla’s software upgrades are delivered wirelessly to individual owned consumer vehicles in the truest form of cloud delivery. There is no need for the traditional automotive industry dealer visit. Musk views such upgrades in the same context as updating a laptop computer or a smartphone. He further categories autonomous driving as a “solved-problem”. Last year, Tesla began equipping its Model S with on-board cameras and sensors to be powered by a sophisticated system termed “autopilot”.
Over the coming weeks and months planned upgrades will include functionality that completely puts the driver at-ease regarding the existing range of the car’s battery power. The software analyzes the current driving route, road conditions, topography and location of available battery charging stations. If the car is going to exceed the range and distance to the nearest charging station, a real-time warning is issued along with GPS coordinates to the charging facility. According to Musk, “it makes it almost impossible to run out unless you do it intentionally.”
In an upcoming release 7.0, a new user interface will provide the ability of the car to operate with complete autonomy on highways when the driver lets go of the steering wheel.
In the context of the consumer experience, like Apple, Tesla delivers on design elegance and the interactive user experience. The car you may have purchased one or two years ago, has newer functionality and user experience features delivered by the cloud than when you purchased that vehicle.
For the remainder of automotive related industry, a disruptor such as Tesla will elicit more accelerated innovation in applied technology and the driver experience. Suppliers are already working on more sophisticated processors, sensors, embedded systems and driving aides.
Is it any wonder that when news broke that Apple was working on its own secret development of an electric vehicle, that social media lit-up like fireworks and the automotive industry shuttered.
In today’s industries, change is constant and the termed clock speeds of product innovation are indeed accelerating. Supply chain teams will invariably be either on-board facilitators or unfortunate obstacles to these changes.
Note: This author is not a current owner of a Tesla automobile nor a stockholder, rather an observer and enthusiast of automobiles.
In October of 2014, there was a report that the leading global contract manufacturer Foxconn, had entered into preliminary talks to build a high-end LCD display factory within China’s northern city of Zhengzhou. According to that report, Foxconn and Hon Hai Precision Chairmen Terry Gou visited Zhengzhou in August and met with government officials to discuss an investment proposal estimated to be upwards of $5.59 billion.
Earlier this week, The Wall Street journal cited a statement from a local development agency and reported that discussions concerning the Zhengzhou facility are progressing and may be nearing finalization stages.
This announcement is significant since it would represent Foxconn’s largest investment in component manufacturing thus far and would be an additional sign of further diversification within key downstream strategic components of high tech and consumer electronics supply chains. The Zhengzhou region is also the home of an Apple iPhone assembly facility. Both represent the high tech supply chain ecosystem’s movement into far more interior regions of China.
In its reporting in October, the WSJ stated that it remains unclear as to whether Apple or other investors are being approached to invest in the proposed display plant.
In July, Foxconn disclosed plans to build a new environmentally friendly production complex in one of China’s most rural and pristine provinces. According to a published Bloomberg BusinessWeek at the time, a 500 acre park would be built in the province of Guizhou, on the outskirts of the provincial capital, Guiyang. Plans called for an environmentally focused facility to produce smartphones, large-screen televisions and other products employing upwards of 12,000 workers. Production processes within this new plant were to include new methods for mold based painting, carbon nanotube film for touchscreens and other innovations. The Guizhou plant was slated to be operational this month.
These developments indicate Foxconn’s continued investment in downstream electronics supply chain component manufacturing capabilities as well as this CMS’s continued commitment toward China based production presence. Being Apple’s and other high tech OEM’s prime contract manufacturer, that is an indicator of potential future strategic sourcing strategy.
Missing however, is any announcement of a substantial manufacturing investment in North America.
In July of 2014 two former competitive rivals, Apple and IBM announced a strategic alliance targeted to provide more mobile-based apps and other applications for business enterprises. At the time, Apple CEO Tim Cook indicated: “This is really a landmark deal”. Over 100,000 IBM consultants would be positioned to promote new mobility based business applications, and the alliance was billed as a potential win-win for both firms.
The apps themselves were to draw on IBM’s computing services including security, device management and big-data analytics. The alliance called for Apple and IBM engineers to jointly develop more than 100 new business applications tailored for specific industry needs.
In December, both companies jointly announced an initial set of 10 IBM MobileFirst apps for use with Apple iPhone and iPad products, targeted for specialized needs in air travel, banking, insurance, field service, law enforcement and retail settings.
The July alliance announcement further called for Apple to release a larger, business enterprise version of its iPad tablet, one with a larger screen size with potentially PC-like features. The timetable for the release of the larger iPad at the time was hinted to be in Q1 of this year.
The Wall Street Journal, citing supplier and other familiar sources, reported that the larger 12.9-inch iPad, originally slated for production ramp-up this quarter, will now have volume production pushed back to the second-half of this year. According to this report, design teams are still considering additional product design changes that could possibly include higher capacity USB 3.0 ports for data synchronization between the tablet and other computing devices, along with keyboard and mouse ports. Apple, of course, declined to respond to the WSJ regarding its report.
From our Supply Chain Matters lens, the types of design changes described do not seem to correlate with such a shift in the overall time-to-volume milestone. We suspect that there are other design, line-of-business or functionality issues being worked. In past NPI cycles, design and volume yield of a new, larger LCD display have tended to be challenges for suppliers. With the presence of an alliance partner with its own vested interests, we all know that program politics can come to the fore.
Apple’s overall iPad sales and market share continue to decline. Sales were down 18 percent in the December-ending quarter. Thus, it is rather important that Apple provides availability of the larger version as quickly as possible, especially in the light of the pent-up consumer demand that was demonstrated by the availability of the larger iPhone 6. But, there is consideration for the counter strategy, namely allowing the iPhone6 to continue to gain consumer market interest without the existence of another alternative option.
We wonder aloud if this is a market opportunity potentially lost. New product introduction and supply chain time-to-volume are super critical in the highly competitive smartphone and electronic tablet segment. When such delays are coupled with new mobile-based business applications, the stakes grow higher for both companies. Apple has traditionally catered to its loyal consumer market, where major product releases are time for the latter holiday buying quarter. Business applications reflect a different buying cycle, more attuned to solving painful business and personal productivity challenges. Catering to both segments implies different priorities and milestones in product lifecycle management, especially when two alliance partners are inserted into the NPI process.
This week, IT media publications are running the headline that in the last quarter of 2014, Apple edged out Samsung in smartphone sales. While the Q4 smartphone numbers would indicate such an obvious eye-grapping headline, both of these smartphone producers, along with their respective supply chain ecosystems, should be more concerned with the implications of the total unit sales volumes in 2014.
Media is actually reporting the latest shipment numbers provided by research firm Gartner. While Apple sold 74.8 million smartphones in Q4, vs. the 73 million sold by Samsung, a review of the full 2014 data provided in a Giga posting provides more concerning trending. According to Gartner’s analysis, 1.24 billion smartphones were sold to consumers in 2014. That represents a lot of production, supply chain, LCD and semiconductor component capability.
Both Samsung and Apple lost market share in 2014 by Gartner’s estimates, albeit Samsung took the brunt with a 6.2 point drop in market share. However in overall unit volumes for all of 2014, Samsung sold over 307 million smartphones, far outpacing Apple’s 191 million. From a supply chain scale and volume perspective, Samsung appears to stand tall, and yet, its supply chain does not garner the accolades that Apple garners.
Market share gains came from Lenovo, Huawei and a broad category grouped as “Others”. Readers might recall that Lenovo recently acquired the Motorola brand of smartphones and that Lenovo has strong market share within China. That “Others” category, which supposedly consists of brands such as China based Xiaomi as well as India based producers, gained over 5 points in global market share. These producers are garnering increased consumer attention across emerging and developing markets, offering far more cost affordable features and options. Their momentum is collectively rising.
As consumer electronics and telecommunications focused supply chains know very well, the most important trend to focus on is overall scale, namely how many installed smartphones exist to generate more profitable and recurring electronic content sales. The 1.2 billion added smartphones in 2014 provides ample evidence of that potential.
From our lens, the most staggering statistical trend for global product development and supply chain teams to dwell on is that according to Gartner, Google’s Andriod operating system now powers upwards of a billion phones, up from 761 million recorded in 2013.
The takeaway is one that many a supply chain or product management planner should know all too well. Rather than a shorter-term focus on the latest quarter, the more meaningful analysis is to focus on bigger picture market insights and individual geographic country data reflecting on market shifting.
The desired business outcome for smartphone focused supply chains is not so much the profitability and margin of the hardware, but rather the time-to-market and scale of installed devices.