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Significant Winds of Change Blow Across the High Tech Industry


July has not brought necessarily good news to certain high tech and consumer electronic producers and their respective businesses focused on industry supply chains.

Business headlines have included Microsoft reporting its biggest quarterly loss ever, fueled by a nearly 5 percent decrease in revenues, as well as writing-off 80 percent of its $9.4 billion investment in Nokia’s handset business and the shedding of 6 percent of its global workforce. The providers cloud-based software businesses were up 88 percent from the year-earlier period but reflected a slowdown from prior 100 percent plus gains in prior quarters.  Within Microsoft’s consumer hardware revenues, revenues for the Surface tablet nearly doubled to $888 million while sales of the XBox gaming console rose 27 percent, but both hardware lines could not generate enough margin to offset performance of the broader Consumer division.

Under pressure from an activist investor, Qualcomm, one of the largest producers of semiconductor ships utilized in mobile phones, is expected to conduct a strategic review that will explore a potential breakup of that company.  Financial media speculates that a breakup would possibly involve a separation of chip production from its lucrative patent-licensing businesses.

Speaking of mobile devices, who would have envisioned that Apple’s latest quarterly performance that included a 35 percent increase in iPhone related revenues and a 38 percent boost in profits, would disappoint Wall Street. Our Supply Chain Matters Commentary will tell you why.

IBM reported its 13th consecutive quarter of revenue declines as this technology provider continues to reinvent itself in the light of the accelerating movements toward mobile and cloud based computing.  In the latest June-ending quarter, revenue fell 13.5 percent and IBM reported year-over-year declines among nearly all of it major business lines. While its cloud-computing business has reached $8.7 billion in revenues, it was not enough to overcome shortfalls in other business units.

As Supply Chain Matters previously noted, Hewlett Packard remains in the final preparation stages in splitting into two separate corporate entities, one, Hewlett Packard Enterprise Company will oversee operations of the now HP Enterprise division. The other, HP Inc., will oversee operations of the now HP Printer and PC divisions. That split is scheduled to take effect on November 1st, with potential implications to individual supply chains and supporting software applications.

Other well-recognized names such as AMD, Cisco Systems, EMC, Intel and others have struggled with fast-changing shifts in customer technology needs and requirements along with the increasing impacts of mobile and cloud-based computing.

The lifeblood of high-tech and consumer electronics supply chains, and increasingly automotive supply chains,  has been the semiconductor industry. Of-late, there has been a slew of acquisitions among key suppliers that will likely result in consolidation among a smaller group of global players.  The San Jose Mercury Times recently observed that “half a dozen chipmakers in Silicon Valley, including a few storied names, have changed hands in less than two years in nearly $12 billion in mergers and acquisitions affecting thousands of employees and costing some their jobs.” The latest was Intel’s acquisition of programmable chip producer Altera. Silicon Valley speculation is whether Qualcomm will be either be the next acquirer or the next target. This industry consolidation remains of great concern to industry supply chain senior operations and procurement executives.

One of the iconic Don Henley and Eagles tunes was “ A New York Minute”.  Originally released in 1989, it features the following verse:

In a New York minute

Everything can change

In a New York minute

Things can get pretty strange

In a New York minute

Everything can change

In a New York minute


Thus is our observation of iconic players in high-tech and consumer electronics.  The Third Wave of computing described by industry analyst firm IDC in 2013 has indeed made its sobering presence and the industry is changing at the pace of “A New York Minute”.

Events, change and uncertainty seem to be a constant, and that will continue to spill over into various supply chain related dimensions.

Bob Ferrari


WTO Moves Closer to Tariff-Free Classification of IT Products: Supply Chain Opportunities and Impacts


Late last week, the World Trade Organization (WTO) reached a landmark $1.3 trillion deal that addresses the categorization of 201 information technology products that will be freed from import tariffs. Among the products covered in this agreement are new-generation semi-conductors, GPS navigation systems, medical products which include magnetic resonance imaging machines, machine tools for manufacturing printed circuits, telecommunications satellites and touch screens. Once approved, the agreement will update an Information Technology Agreement that has not been updated for the past 18 years.

According to the WTO, the tentative accord reached by 54 of its members was confirmed as the basis for implementation work to begin. Ministers from the participating members will now work to conclude their implementation plans in time for the WTO’s 10th Ministerial Conference which will be held in Nairobi this December. Five of the total number of countries needed for final signoff has thus-far not signed up.  Those countries include Colombia, Mauritius, Taiwan, Turkey and Thailand. The Director of WTO has indicated to news sources that approval from the remaining countries is due to process delays, and expects the required additional countries to sign-up soon.

This latest categorization is being billed as the first global tariff-cutting in 18 years with the implication that globally-based consumers should eventually benefit in purchases of computers, game consoles, touch-screen devices and other consumer electronics products.  All 161 WTO members are expected to benefit from this agreement, as they will all enjoy duty-free market access in the markets of those members who are eliminating tariffs on these high tech products. According to the WTO, the terms of the agreement will be formally circulated to the full membership at a meeting of the WTO General Council on 28 July.

A published Reuters report indicates that high-tech manufacturers General Electric, Intel, Microsoft, Nintendo and Texas Instruments are among those firms expected to benefit from the free-up tariffs. A U.S. trade representative indicated to Reuters that more than $100 billion in U.S. exports alone would be covered by the updated agreement.

The implication to hi-tech and consumer electronics industry supply chains is significant.

A considerable amount of new products and product categories have been added since these tariffs were originally created 18 years ago, and with over 200 products designated to be free of import tariffs and duty-free trade, the industry as a whole stands to benefit by increased global market access and more streamlined, direct flows to end markets. The notions of offshore and near-shore production as well as new opportunities for push-pull customer fulfillment strategies can well benefit from this development of tariff-free components and products. On the other hand, the competitive landscape of regional brands competing with global brands will magnify.

By our Supply Chain Matters lens, the agreement will have implications to current manufacturing sourcing of high-tech and consumer electronics products since the assumptions concerning added tariff costs will obviously change.  Supply chain strategy teams should therefore plan on a refresh supply chain network design models in light of these tariff-free assumptions to uncover any new opportunities for more efficient or enhanced customer fulfillment focused manufacturing and sourcing of end-products.

Bob Ferrari


Apple’s June-Ending Quarterly Performance: Disappointment or Supply Chain Praise?


Yesterday, after the stock market closed, Apple announced its fiscal third quarter financial performance and Wall Street’s headline was immediately one of disappointment. This was despite reporting that profits had surged 38 percent from the year earlier period along with total revenues that grew 33 percent. Gross margin was reported as a whopping 39.7 percent which is extraordinary for the majority of today’s consumer electronics providers. Yet within minutes of the earnings report, Apple’s Apple Logoshares plunged 7 percent in after-hours trading and today, dropped as low as 21 points before a small rebound.

What the investment community is primarily concerned with is a perception that Apple is trending toward a one-product company, that being the iPhone, which with the latest results, accounts for 63 percent of Apple’s overall sales. That is a ten percentage point increase from a year ago, prompting concerns that other products such as the iPad are declining in sales, while new products such as the Apple Watch have yet to provide an offset. Unit sales of the iPad are believed to have declined 18 percent in the latest quarter, making a sixth consecutive quarter of year-over-year declines.  Once more, the previously touted partnership among Apple and IBM, designed to provide more business applications leveraging the Apple tablet, do not appear to be stemming the declining trend.

In the fiscal third quarter, while Apple reported shipping 47.5 million iPhones, an increase of 35 percent from the year earlier quarter, that number was 23 percent lower than shipped units reported for fiscal Q2. According to a report by The Wall Street Journal, analysts noted previous quarter-on-quarter iPhone volumes fell by 19 percent and 17 percent respectively, and remain concerned for a steeper rate of decline. Apple attributed unit shortfall to the lowering overall inventory by 600,000 units during the quarter. Fiscal Q3 has traditionally been Apple’s slowest volume quarter.

In an interview with the WSJ, CEO Tim Cook indicated that he refuses to accept the thinking that Apple cannot sustain its existing growth rates. He further indicated that Apple has pried open the door to untapped markets such as China, and that the company is sensing a larger conversion rate from Android powered devices to iPhone.

Apple did not provide any breakdown of Apple Watch performance but CEO Cook indicated to analysts that the “sell-through” of the Watch was better than the iPad and iPhone at their product introduction phases. We will have to wait and observe what that means over the next two critical quarters.

From our supply chain lens, the upcoming quarters will provide Apple’s planning teams with added challenges.  Earlier this month, we highlighted that Apple is now actively planning the ramp-up of the planned next release of iPhone. Reports indicate that the company is  requesting suppliers to support between 85 million and 95 million iPhones for the all-important end-of-year holiday buying season that ends at the end of December, This is despite anticipated modest hardware changes.

Planners are obviously reducing existing model inventories but must be diligent to not impact Apple fiscal Q4 results. With expectations for increased sales of the Watch, as well as a newly introduced iPod Nano, additional effort will be focused on ramp-up production milestones.  An added challenge has got to be focused on what to plan for inventory and fulfillment needs for the iPad, given that there may well be a product change coming.

And then there is that mega “elephant in the room”, what to do with $200 plus billion in cash.

The adage for Apple’s and indeed many other global supply chain teams is often, not what you did yesterday, but what are you going to do tomorrow, next month, and next quarter.

Does that resonate?

Bob Ferrari

An Excellent Supply Chain Executive Perspective


A lot of electronic alerts come across the desk of Supply Chain Matters regarding web content focused on key topics and challenges involving today’s supply chains. We only elect to share content that we feel will serve the interest levels of our global based readers.

Thus we recently came across a blog posting on EBN: Talking about Supply Chain with John Kern, Cisco.

EBN Editor-in-Chief Hailey McKeefry recently interviewed the Senior Vice President, Supply Chain Operations at Cisco.  This author has heard John Kern speak at prior industry conferences and has spoken with John on past occasions. I find John to be a visionary leader.

In the EBN interview, John articulates the mission of supply chain management- namely on enabling the success of the company strategy. He further speaks to the uniques challenges underway within high tech supply chains, in-particular, customer shifts from capital investments to services investments.

John further articulates Cisco strategies regarding the challenge of demand and available supply of supply chain talent.  Pay particular attention to what is defined as the “landing zone”, which is defined as what the supply chain needs to look like in three years in terms of locations, skills, generational mix, roles and leadership.

By our lens, this is an insightful interview and worthy of reading and reflection. Take some time on the beach or in the yard to review it.

Bob Ferrari, Executive Editor

Report Indicating the Profit Power of Apple


A firm’s supply chain exists to support and enable specific business outcomes.  Such outcomes might include increased profits, broader product selection or higher levels of customer satisfaction and service. Supply chain strategy setting can often stumble when specific outcomes are not clearly defined or outcomes become conflicted. Consider the notion that a strategy driven to overall supply chain cost efficiency can sometime hinder needs for more agile response to market opportunities.

Supply Chain Matters has often praised Apple’s supply chain capabilities, not only from aspects of product and supplier innovation, but in overall agility as well as enhancing product margins. By our lens, few supply chains exhibit such a track record.

That point was driven home by today’s published report from The Wall Street Journal, Apple Gets 92 Percent of Smartphone Profit. (Paid subscription required) The report cites estimates from Canaccord Genuity concluding that in the first quarter: “Apple recoded 92 percent of the total operating income from the world’s top smartphone makers.” That was an increase of 65 percent from a year earlier. According to this report, the combination of Apple and Samsung accounted for more than 100 percent of industry profits since other makers broke even or lost money.

According to the report, what stands out even more regarding this achievement is the fact that Apple sells fewer than 20 percent of total volume, yet manages to garner the highest average prices and occupy the high end of the smartphone market.

Once more, as we have pointed out in our numerous Supply Chain Matters commentaries, Apple has the ability to practice highly agile sales and operations planning, segmented supply risk and multi-channel customer fulfillment while supporting the industry’s highest product margins.

From our lens, a lot of the success of the Apple supply chain stems from the ecosystem of responsive suppliers who can scale with Apple’s relentless requirements. And in fact, some suppliers have succumbed because they could not continue to meet Apple’s requirements while attempting to support individual financial outcomes for profitability.

Some will speculate that Apple’s advantage may eventually succumb to the track record of other high tech or consumer electronics OEM’s that eventually over-saturate their market and are attacked from more innovative producers. For now, however, Apple and its supply chain remain the ‘best of show”.

Bob Ferrari

Apple Actively Planning the Ramp-up of the Next Iteration of iPhone


The Wall Street Journal, citing informed supplier-based sources, reports that Apple is planning for a larger initial production run of the next iteration of iPhones. According to the report, Apple is requesting suppliers to support between 85 million and 95 million iPhones for the all-important end-of-year holiday buying season that ends at the end of December, despite expected modest hardware changes.

Last year, Apple planned its supply chain output for a range of 70-80 million phones, and actually shipped 74.5 million smartphones during the holiday quarter.  That was a 45 percent increase from the year ago holiday surge quarter. The iPhone6 incurred its own set of production ramp-up challenges including a last-minute design change involving its larger screen displays. There was the usual production yield challenges associated with the fingerprint scanner and with the LCD displays. During its most recent fiscal quarter, Apple shipped 61.2 iPhones, fueled primarily by emerging market demand primarily from China, Hong Kong and Taiwan.

The WSJ indicates that hardware changes are expected to be less noticeable and that Apple is in-essence betting that consumers will flock to upgrade their existing iPhones. Display sizes and screen resolution are expected to be unchanged.

Further reported is that contract manufacturer Hon Hai Precision (Foxconn) is in the process of hiring additional workers for its Zhengzhou China facility, in anticipation of beginning volume production starting in August.

The report confirms that a third contract manufacturer, Taiwan based Wistron Corp. will supplement production needs this year. In an April Supply Chain Matters commentary, we echoed a published report from Taiwan based Digitimes indicating that Apple was expected to adjust its lower-tier supplier Q3 order volumes for both the iPhone 6 and the newly released Apple Watch to minimize the risk of too much volume dependency on any one single supplier, as well as to meet or maintain targeted gross-margin goals. Noted was that Apple had invited both Compal Electronics and Wistron, noted contract manufacturers in laptops and other consumer electronics, to join its supply chain as augmented suppliers. The report further indicated that Apple’s two major PCB partners, Zhen Ding Tech and Flexium would have their order rates adjusted while suppliers Largan Precision and Advanced Semiconductor Engineering, which reportedly have advantages in advanced technology, will benefit from increased orders.

As noted in many of our past commentaries, the ability of the Apple supply chain to support steep new product introduction ramp-ups is predicated on active supplier risk management coupled with supply chain segmentation strategies focused on product margin and profitability goals.

The next test comes in the next five months.

Stay tuned.

Bob Ferrari


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