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Some Quantification of the Potential Impact of the Tianjin Port Warehouse Explosions


There has been much reporting within social and business media regarding the potential industry supply chain disruptive effects of the recent massive warehouse explosions that affected the facilities adjacent to the Port of Tianjin.

It is rather important and crucial that industry supply chain and sales and operations team obtain meaningful and insightful information regarding what is happening on the ground as well as the potential short or long-term supply chain impacts, if any.

We at Supply Chain Matters are disappointed to observe that certain technology and service providers are attempting to utilize this tragic incident as a backdrop to product marketing outreach campaigns. Neither should technology providers suddenly become news outlets.

Not good ideas by our lens.

Supply chain technology providers should instead continue to educate on the benefits of the technology they provide and allow industry supply chain teams to receive clear, unfiltered and unbiased insights and information from informed and educated sources.

One of the better Tianjin perspectives Supply Chain Matters has reviewed to-date ia a published white paper: The Aftermath of the Tianjin Explosions: A Global Supply Chain Impact Analysis, authored by supply chain risk management provider Resilinc.

While this 24 page white paper does include some product marketing, along with requiring registration, the bulk of the report provides meaningful and insightful information related to potential immediate, near-term, medium and longer term supply chain impacts.

The paper concludes that the less apparent ripple effects of the warehouse explosions will be felt weeks, months and even years to come.

The paper provides meaningful background information regarding this vital logistics and manufacturing hub, which services industry needs of automotive, commercial aerospace, high-tech, petrochemical and general industrial manufacturing supply chains, among others. It further outlines important mapping of industrial manufacturing and supplier concentrations within close proximity of the explosions, based on a mapping of over 30 sites in a 2-10 mile radius of the blast.  Four large industrial zone districts are adjacent to the port, with the port serving as what is described as the largest free trade zone in northern China, and the second largest Vehicle Processing Center for importing and exporting of automobiles.

On the topic of near-term ripple effects, the Resilinc analysis predicts that extensive delays can be expected for most companies and sites moving products through Chinese ports as government agencies deal with the after-effects of a regulatory environment needing extra attention.

There are predictions that Tianjin port operations will only begin to resume normal operations by approximately mid-September, and that any containers now at the port will be inaccessible for the next two months, even if they are intact. Resilinc indicates that for any suppliers located within 2-15 miles of the explosions, companies may presume 12-16 weeks of delays.

Long-term impacts outlined related to the ripple effects of increased regulatory actions impacting certain industry sectors including the location and storage of goods near large population centers.

Regarding potential long-term impacts, the paper cites Chinese media as indicating the economic cost of Tianjin crisis could be as high as $8 billion.

If your organization is dependent on operations, logistics partners, suppliers or service providers in the Tianjin area, we recommend you review this report which can be accessed at the following Resilinc web link. (Some personal registration information required)

Bob Ferrari

More Evidence of a Changed High Tech Contract Manufacturing Business Model


As far back as 2011, this analyst began to share observations on a growing reality of a changed model of contract manufacturing services (CMS) among high tech and consumer electronics supply chains. The reasons were obvious five years ago, and far more obvious today. The ability to continually experience a mere one to two percent in operating margins, regardless of volume scale, was unsustainable in a strategic window. Once more, with direct labor costs increasing in major manufacturing hubs across China and other areas, and with technology cycles changing more quickly, the need for constant capital infusion in investments in the newest technologies and automation further requires an increased return for such investments. Remember that the CMS model evolved from a need by OEM’s to avoid the need to invest in manufacturing assets and process automation.

CMS firms such as Hon Hai Precision (Foxconn Technology) have been steadily executing a diversification strategy. In the case of Foxconn, the world’s largest contract manufacturer, it includes entry into consumer component and electronics, as well as service sectors serving China’s and greater Asia’s growing middle class. In our last published Supply Chain Matters commentary, we highlighted a report that Hon Hai may well be on the verge of a tie-in with Sharp’s LCD flat screen unit, opening the door for broader high tech value chain integration.

We now call reader attention to this week’s edition of Bloomberg BusinessWeek, that includes the article: The Foxconn of Bathroom Scales. This article describes how Flextronics, now renamed Flex, after spending in excess of 40 years as a low-margin CMS, is re-making itself as a leading manufacturer in a new ecosystem Internet Of Things (IoT) enabled products.

The article astutely observes: “Building stuff for startups and non-tech companies is a lot more profitable than trying to satisfy giants such as Apple and Cisco, which have squeezed contract manufacturers’ margins to 2 percent.”

Flex’s mission is to become to go-to manufacturer for connected products. That would include products ranging from sneaker mounted wireless charges, clothing embedded with sensors that monitor all sorts of body functions, to driverless farm equipment or smart shelves for retail outlets. Its Innovation unit has opened 23 R&D labs where startups and up and coming companies can work with designers and utilize 3D printers and manufacturing equipment to develop new product prototypes. Flex’s design teams have created a library of 130 reusable component designs to help start-up companies to develop IoT related products more quickly and move these products to volume manufacturing and/or service needs.

Bloomberg observes that Flex’s business is growing with clients such as Ford, Fitbit, Johnson & Johnson, and Whirlpool, but perhaps not fast enough to avoid getting crushed by other large manufacturers. The report ends with a quote from a consultant: “If you aren’t getting 50 percent of your revenues outside of traditional electronics, please contact us, and we’ll help you liquidate your assets.”

While a rather blunt and self-serving statement, it does reflect that the traditional CMS model within the high-tech industry will change.

CMS providers have no choice but to move their services models either further up the electronics value-chain, within our consumer service areas, or virtual engineering and manufacturing support and services in areas beyond today’s traditional consumer electronics areas.

For the CMS sector, change is a definite factor. The question will be which firm makes the most successful transition. Meanwhile, high-tech OEM buyers and strategic sourcing teams should best be thinking of the consequences, and the implications.

Bob Ferrari


Report that Sharp is Once Again in Talks with Hon Hai Precision Related to LCD Unit


Our high tech and consumer electronics supply chain readers may recall that Japan’s Sharp Corp., and specifically its LCD screen business unit has had months of financial struggle. One of the important significant factors related to Sharp is that it serves as one of the four Liquid Crystal Display (LCD) and flat panel screen suppliers to Apple, including screen supplier for the iPhone. Sharp has had a track record of innovation in LCD technology but a rather rocky financial history as well

This week, Reuters is reporting that its informed sources indicate that tie-up talks involving contract manufacturer Hon Hai Precision (aka Foxconn Technology) are now in-progress.  The Financial Times also published a similar report.  Hon Hai declined any request for comment by Reuters and FT.

Initial talks between Hon Hai and Sharp actually began in 2011, after both firms had established a joint technology partnership. In 2012, there were many business and social media reports indicating that Hon Hai was prepared to take an equity stake in Sharp’s LCD development and factory operations, but with implications that Hon Hai would become Sharp’s largest shareholder and have the ability to assume some strategic management control of Sharp.  A further implication was that Apple, through its relationship with Hon Hai and Foxconn, was willing to invest in Sharp’s longer term supply, but that component strategies would cede to Hon Hai.  The Hon Hai investment did not occur in 2012, because of Sharp’s deteriorating stock price and the threat of too much outside control.

During that same period, Japan’s Sony Corporation, Toshiba Corporation, and Hitachi Ltd. together merged their money-losing small LCD display operations to form a single company, Japan Display, backed by $2.6 billion of funding from Innovation Network Corp. of Japan, a government backed agency. Japan Display is currently another of the LCD component suppliers to Apple, and the combined operations and infusion of significant new capital likely cemented that relationship.

According to this week’s Reuters report, the latest proposed tie-up would spin-off Sharp’s display unit and possibly includes additional cash injections from other outside entities such as the state-directed Innovation Network Corp.

The two firms continue to jointly operate the advanced large LCD production facility located in Western Japan.

Interesting enough, in 2012, Apple rival Samsung opted to provide a $110 million lifeline investment for Sharp. The deal was reported to provide Samsung with a 3 percent stake, along with gaining access to leading-edge IGZO display and other technology. Business media reports at the time speculated that Samsung’s investment was an attempt to stem Apple’s strategic influence on Sharp.

In late June, Supply Chain Matters called attention to a published report from The Wall Street Journal indicating that Sharp senior management had struck a last-minute deal with the firm’s bankers to provide an additional $1 billion plus lifeline, the second in three years, in exchange for restructuring measures that included exiting the North American television market and a 10 percent workforce reduction. Also noted were the market prices for LCD panels remain in significant decline as other suppliers turn more to China based smartphone manufacturers for revenue needs. The WSJ cited data stemming from market research firm IHS indicating that 5 inch HD smartphone panel components prices have dropped nearly 60 percent from Q1 2013 through mid-year.

This legacy of Sharp represents the perils for being a leading-edge LCD technology provider in today’s high tech and consumer electronics sector.  Product OEM’s such as Apple and others demand the latest breakthroughs in technology and more automated manufacturing processes, in return for orders representing volume scale.  However, in a technology area where multiple suppliers fiercely compete for the same high-volume OEM business, and a cutthroat environment where severe amplitudes of supply and demand imbalances force prices to dive quickly, the need for constant capital becomes paramount.  That may be the legacy of Sharp’s LCD unit.

If this reported tie-up were to occur, it would provide another significant milestone in Hon Hai’s prior strategic plan to move away from a sole focus on the slim margins of contract manufacturing, and more towards a supply chain vertically integrated high-tech and consumer products manufacturer that can control multiple key component supply tiers.

Bob Ferrari

Asia Based Financial and Disaster Developments Warrant Close Monitoring


In our previous Supply Chain Matters posting, we called attention to the announced acquisition of Precision Castparts by Berkshire Hathaway and its speculated impact on commercial aerospace industry supply chains. Already this week, there are two other developments with industry supply chain implications.

Earlier this week, the People’s Bank of China elected to suddenly de-value China’s yuan by a record 1.9 percent, precipitating the yuan’s biggest one-day loss in nearly two decades. The action came after the news that China’s exports shrank a significant 8.3 percent in July amid continuing concerns that China’s economy is slipping more than previously reported.

This sudden news has rocked global markets and has raised the Spector of more devaluation of foreign currencies particularly those related to Asian based countries.

For industry supply chain teams, strategic sourcing, procurement and S&OP teams will need to pay particular attention to quickly changing economics related to sourcing of production and/or products. China is obviously positioning to boost its export sectors and that will have implications in the coming weeks and months.

One other development that warrants monitoring is that related to natural and other disasters.

Typhoon Soudelor struck the island of Taiwan and coastal China this past weekend. Taiwan, a key production center for semiconductor, high tech and consumer electronics supply chains, experienced severe flooding and landslides across the island. More than a meter of precipitation fell in some areas, and there were reports of significant power disruptions. The severe storm move on to China impacting certain coastal cities. High tech supply chain teams have obviously initiated supply chain risk assessment efforts to ascertain if the typhoon had any significant impact to supply and production planning. We suspect that there may be some impacts,

In another development unfolding as we pen this commentary, international media is reporting that catastrophic explosions have occurred in the Chinese port city of Tianjin. Reports indicate that upwards of 50 people have died with scores injured. According to a CNN report, the initial explosion may have come from an industrial warehouse that may have stored dangerous and flammable chemicals which spread to other adjacent buildings and warehouse facilities. The force of the explosion extended to nearly 2 kilometers and registered on earthquake monitoring instruments which imply a massive force. More news will be unfolding concerning this incident.

It seems as though supply chain risk has become a weekly occurrence, regardless of the season.

Bob Ferrari

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


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