Supply Chain Matters provides a follow-up to our prior commentary: high tech supply chains- increased risks associated with global access. In that commentary, we posed the question of balancing the need of high tech firms for increased market access to China’s market with the added risks of intellectual property protection. Leading up to the visit by Chinese President Xi Jinping to the United States last week, prominent high tech firms elected to seek favor and seek new deals with Chinese partners.
The U.S.-China summit managed to yield some significant deals. On Friday, both countries agreed not to direct or support cyber-attacks that steal corporate information for economic benefit. The countries further agreed to cooperate more closely on the investigation of cybercrimes along with the creation of a high-level working group to combat such attacks. However, beyond the agreement are the actions and will of enforcement. President Obama declared: “We (United States) will be watching carefully as to make an assessment as to whether progress has been made in this area.” President Xi declared that the proper approach was to strengthen cooperation to avoid confrontation and politicization of the issue.
Prior to his summit meeting with President Obama, President Xi Jinping hosted an Internet Industry Forum meeting of prominent corporate high tech executives at the Seattle campus of Microsoft. In its reporting, The Seattle Times features a photo of the prominent high tech CEO’s invited to attend. The optics are stark. The CEO of Alibaba, Amazon, Apple, Cisco, Facebook, IBM, Lenovo, among others are shown as participants. U.S. and China based alike. The Times notes: “Based on the attendance for what was essentially a photo-op in Redmond, that tech industry is betting that their future relies on China.”
In conjunction with the Seattle and Washington meetings, Cisco Systems announced a partnership with China based Inspur Group Co. In June, Cisco indicated that it was prepared to invest more than $10 billion in China over the next several years. The irony of the current announcement was that Cisco was the key supplier to help build China’s internal Internet and was later accused of spying on Chinese citizens. Now its CEO declares: “There are certain geopolitical dynamics that we have to navigate.”
As we along with business media has noted, Chinese authorities have informed state-owned companies and agencies to buy more locally owned and produced high tech equipment and that has accelerated the strategic importance of domestic technology. Foreign based high tech companies now have to pick their partners in order to continue to expand revenues in China.
Surely not as a coincidence, India’s Prime Minister Narendra Modi visited Silicon Valley last week and made time to speak with prominent high tech and consumer electronics executives about investments in the country.
Market and technology access along with job-growth needs are all interwoven in moving parts with implications to global product innovation and value-chain strategies. There are no easy answers and thus are the risks, perils and strategy implications that continue to unwind within today’s globally based and far more competitive supply chains.
This week, Venture Beat, citing knowledgeable sources, indicated that Intel’s new 7360 LTE wireless modem chip will likely be some part of the new Apple iPhones in 2016. The commentary goes on to indicate that Intel’s inclusion as an iPhone supplier: “is as much about “second-sourcing’ as it is about the quality of the 7360 chip.” The report cautions that it remains unclear exactly which iPhone SKUs will contain the Intel sourced chip.
As Supply Chain Matters has previously echoed, Apple has active strategies addressing strategic and tactical supply risk and segmentation needs. This includes areas related to key components such as processor chips, displays, along with contract manufacturing needs. For the supply of modem chips for the iPhone, Qualcomm has far been the dominant supplier.
Intel arrived late to the mobile phone market and has since initiated earnest product development and other efforts directed at gaining traction. Venture Beat notes that Intel’s modem chip is highly regarded for being well-built, power efficient as well as fast. Further noted is that Intel acquired the former Infineon’s communications chip business in 2010 and since turned it into a seat of research and development for Intel’s next generation of LTE chips. Interesting enough and according to Venture Beat, Infineon once produced the 3G modem chips for iPhones at the Munich facility, but Apple quickly stopped sourcing the chips from Infineon after Intel bought the company.
Neither Intel nor Apple chose to comment to Venture Beat on their story.
We have often called attention to the risk, reward and peril aspects for being an Apple supplier. Even a high tech provider the size and stature of an Intel is not immune to procurement influence and supplier criteria factors that Apple can garner.
Earlier this week, The Wall Street Journal reported what Supply Chain Matters believes to be a troubling trend, namely that some U.S. hi-tech firms are electing to transfer more intellectual property as well as value-chain activity among China’s state-owned tech firms. (paid subscription required) The trend among China’s internal high-tech sector would appear as though companies are no longer content to replicate innovations from foreign firms but rather lead markets with new innovation.
The principal catalyst was this week’s announcement by Dell indicating that it is significantly expanding its investments in China, including collaborating more closely with Chinese companies in sectors that the country deems crucial to national security. Dell plans to invest $125 billion, no small sum, within China over the next five years as part of what is termed as: “In China, for China” strategy. According to the report, the investment figure includes the cost of procuring additional value-chain components for the manufacturing of PC’s and servers in the country.
Dell further announced partnerships with software and cloud-based technology firms Kingsoft Corp. and state-owned China Electronics Corp., whose subsidiary, China Standard Software, provides a market alternative to the Microsoft Windows operating system. Dell’s partnership with China Standard Software began last year as the high tech manufacturer became what was termed by a China Standard executive as the first Western brand to produce PC’s utilizing that firm’s NeoKylin operating system. Another partnership involves Tsinghua Tongfang Co., where the two companies are collaborating to develop was it is described as: ”high-performance computing products.” According to the WSJ report, Tongfang produces security equipment for the government of China including metal detectors and embedded chips within national ID cards. The report indicates that Apple, Microsoft and Cisco are also meeting with Chinese officials in advance of Chinese President Xi Jinping’s first state visit to the United States later this month.
There are two important concerns related to these developments. One is that intellectual property protection (IPP) has always been a major concern around sourcing activities within China. That risk extends to the early days of foreign firms investing within China. This latest shift in strategy among certain U.S. firms like Dell could expose more technology to such risks. Then again, some in the high tech sector would argue that these types of risks are ongoing and are part of the cost for added access to China’s vast and growing market.
Another risk is related to the ongoing Trans Pacific Partnership agreement, a proposed trade agreement among 12 nations including several Pacific Rim countries and the United States that remains in ongoing negotiation stages. This agreement, if adopted, does not include China.
As noted in our previous commentary, the stated goals of the TPP are to “enhance trade and investment among the TPP partner countries, to promote innovation, economic growth and development, and to support the creation and retention of jobs.” As many in business media have observed, the TPP is all about lowering existing market barriers along with tolerances for supply and value-chain sourcing arrangements for many years to come. Some high tech companies have initiated ongoing political lobbying to insure any TPP agreement does not impose a competitive or cost disadvantage for their products, along with protecting access to a huge market such as China. And that reflects the conflict and our concern. Are we about to witness different IP and technology transfer strategies, one predicated on access to China’s market with IP and value-chain sourced primarily internally, and one on TPP with market access, IP and sourcing spread among member TPP nations? And, the larger what-if question focuses on whether China’s industry or government leaders elect to later block foreign based firms from future opportunities for China’s business.
In essence, market access, political, technology access and job-growth needs are all interwoven in moving parts with implications to global product innovation and value-chain strategies.
There are no easy answers and thus are the risks, perils and strategy implications that continue to unwind within today’s globally based and more globally competitive supply chains.
In many prior Supply Chain Matters commentaries related to high tech and consumer electronics, we have discussed the pros and cons of a supply chain strategy that supports two different business models. Each has a different purpose and supports a different market environment.
One involves a product and supply chain strategy that supports a cost-affordable price for hardware, with the expectation that additional profitability can be garnered through the sale of related content, applications and services. The other model is to harvest profitability from both hardware and service sales. These models particularly apply to smartphone producers, but apply to other products, especially in the light of evolving Internet of Things (IoT) driven devices.
The Wall Street Journal recently published (paid subscription required) a report on smartphone producers in China, where Xiaomi remains a market leader, which continues to sell a high-end, feature-rich phone at what is described as rock-bottom prices of roughly $280. Now other producers, including Lenovo, Huawei and ZTE have launched rivals to Xiaomi. The article cites 209 million unit sales across China in the first-half of this year compared with 75 million in the U.S. Thus, market scale and volume are considerable incentives.
Then there is Apple, which reportedly sold 26 million iPhones during this same period, 5 million less than that of Xiaomi. As we probably know, Apple fosters the latter strategy of harvesting profitability from both hardware and follow-on platform driven sales. It is therefore no surprise that Apple in now often referred to as a profitability machine. With growing profitability and cash, it can invest in more product innovation, longer-term supply agreements and all forms of supply chain agility.
But, the WSJ points out that the smartphone market across China, the largest in the world, has stopped growing. Once more, the U.S. market has by many accounts reached saturation with phone upgrades and/or replacements primarily driving product demand. Existing producers within China are now in a battle for market-share dominance, which remains driven for the most part by price, followed by functionality.
Today, Apple held its annual super hyped product event. The company announced its new iPhone 6 line-up, which includes a new aluminum case, 3D Touch system and an upgraded camera. The event was jubilant and CEO Tim Cook declared the launch of: “the most advanced smartphone in the world.”
But yet, the new battle ground of growth remains China and other emerging economies where consumer discretionary spending has far different characteristics and behaviors.
As to which of these strategies prevail as successful will be the subject of many commentaries and reports to come. However, one important tenet is that product and supply chain strategy will play a crucial role in long-term business outcomes.
Today, all business and social media eyes were focused on Apple and its annual Special Event timed to announce the latest iteration of product innovation, just in-time for the upcoming holiday buying period. Supply Chain Matters provides our initial impressions of new Apple products from a supply chain and product lifecycle management lens.
A New Model iPad
From our lens, the most significant news was the new iPad Pro model, which Apple executives boasted as the: “Biggest news in iPad since the iPad.” And rightfully so, since overall sales of the tablet device have been steadily declining for the past several quarters. Apple needs a boost for this product line, especially in growing the user base to greater numbers of business users.
The new iPad Pro features a 12.9 inch Retina display, the biggest ever built for an IoS driven device. Other announced features included an upgraded A9X, third generation processor, virtual full-sized smart keyboard, three additional input ports, an optional pencil stylus and other performance features. Announced pricing was $799 for the baseline 32GB model, upwards to $1079 for the 128GB Wi-Fi and Cellular enabled version. Add in the optional pencil stylus and smart keyboard and the price exceeds $1100.
Apple executives further declared that this new model iPad is: “Faster than 90 percent of PC’s shipped in the last 12 months.” That statement alone points to the primary strategic thrust of this newer model, increased attraction for business users and mobile-based business applications. Representatives from Microsoft, Adobe and 3D for Medical were invited to demo various office and industry apps than will run on the new iPad. From our lens, glaringly missing from the stage was IBM, which announced a groundbreaking partnership with Apple for mobile-based enterprise business applications nearly one year ago.
Availability for the new iPad Pro was announced as November which is an indicator that the supply chain is still laboring to scale-up supply and production volume to support expected customer demand needs.
Next Iteration of iPhone
The company announced its new iPhone 6 line-up, which includes a new 7000 series aluminum, the same alloy used in the aerospace industry, a new 3D Touch system and an upgraded camera. Tim Cook declared the launch of: “the most advanced smartphone in the world” but the reality of this year’s product upgrade is one predominantly software related. There are a couple of noteworthy hardware changes: a new custom aluminum case described as “aerospace like material” an upgraded 12MP camera and a more durable glass screen. However, the new screen in not described as sapphire glass.
Availability of the iPhone 6 was announced as September 25th, with pre-orders being accepted beginning on September 12. As was the case with last year’s iPhone launch, initial availability will span an initial twelve counties including China. This year, Apple’s supply chain ecosystem got an early start on ramp-up production and with little hardware changes, the volume machine should be in full cycle.
In a new twist, Apple is offering consumer financing programs to help customers pay for their phones in monthly payments since many U.S. carriers are no longer subsidizing the purchase of iPhones.
Finally there was very little supply chain and customer fulfillment related news related to the new Apple Watch, other than the availability of a new Hermes Collection line-up.
Every year at this point, we have featured our Apple product announcement commentary, and have noted that Apple’s supply chain will once again be put to the ultimate test. However, this year seems different, with more muted expectations.
As always, we will all discover the results and the implications in Q1 of 2016 and beyond.
Over the past month, business and general media has been reporting on leaked and other types of information stemming from the ongoing Trans Pacific Partnership (TPP) talks currently underway concerning a proposed trade agreement among 12 nations including several Pacific Rim countries and the United States. The stated goals of the TPP are to “enhance trade and investment among the TPP partner countries, to promote innovation, economic growth and development, and to support the creation and retention of jobs.” The latter portion of job creation is the most political and most impactful to industry global sourcing strategy.
The latest round of negotiations that occurred in Hawaii at the end of August ended without any sense of major agreement and the ongoing process remains politically charged among potential partner countries. What has been capturing the interest of Supply Chain Matters is the consideration and weighting that has been placed on global supply sourcing for certain key industries.
Automotive Supply Chain Impacts
Much of traditional business media reporting has been concentrated on the implications to the automotive industry. Major automotive OEM’s do not want this agreement to upend existing global sourcing strategies for component supply. Both Bloomberg Businessweek and The Wall Street Journal have recently reported that Mexico’s primary automotive industry group, which has been booming from continued new sourcing of production announcements from various global auto producers, has thrown a wrench into the current talks.
Mexico overtook Japan to become the second-largest exporter of vehicles to the U.S., primarily because existing free-trade agreements have attracted new plant investments from various global brands. In essence, the country wants to protect its interests in the definition of “rules of origin” and what would be classified as duty-free imports to the U.S. Under the North America Free Trade Agreement (NAFTA), 62.5 percent of component sourcing must come from within the NAFTA free-trade area to qualify as duty-free. Bloomberg reports that Washington tentatively agreed that Japan based automotive producers should be allowed to ship vehicles duty-free to the U.S., even if upwards of 50 percent of component sourcing comes from non-TPP countries. Component suppliers from both Mexico and Canada are reportedly lobbying for negotiators to stand pat with NAFTA guidelines. Meanwhile, autoworkers in all three NAFTA countries are voicing the need for fairer standards, and not allowing Asia-Pac car companies to game the system in favor of more job creation among lower cost manufacturing regions.
U.S. based automotive OEM’s have been similarly vocal as well, declaring that they rely on global supply chains to be able to competitively manufacture vehicles in the U.S. Nations such as Malaysia and Vietnam anticipate that the TPP will provide an incentive for each of these countries to increase their presence in supply of automotive supply chains, but Thailand is now an important component sourcing hub for Japan based OEM’s.
Dairy Industry Exports
Another area of dispute is that of dairy based imports, which are the basis of supply for other food related producers. New Zealand’s economy is dependent on exports of dairy products, which is prompting that country to lobby for broader access to markets of TPP member countries including Canada. Dairy imports into Canada currently invoke a tariff in excess of 200 percent, and that country’s politicians fear a backlash in the upcoming federal elections in October if they dare agree to cutback current tariffs that protect Canadian dairy farmers. New Zealand reportedly is holding firm that the country will not sign any new trade agreement that does not open new dairy related markets.
Apparel and Textile Sourcing
For the apparel and textile industry, only clothing that is wholly sourced and produced within TPP nations qualify for duty-free sales. A recent report from Time points out that Vietnam, currently the second-largest exporter of apparel to the United States, is only able to produce a fifth of the fabric it needs to supply finished apparel to global markets. Vietnam currently imports nearly $5 billion of fabric from China, a non-TPP country, and that scale of fabric sourcing must shift. However, current U.S. tariffs of Vietnam sourced apparel which are currently 32 percent would be eliminated, perhaps adding some impetus for finding new TPP-centric sources of fabric.
High Tech Sourcing
Similarly, high tech and consumer electronics producers have a current high sourcing content dependency on China and Taiwan, and to some extent, the Philippines and Thailand for component supply. Some high tech companies have initiated their own political lobbying to insure any TPP agreement does not impose a competitive or cost disadvantage for their products. Consider how much of the value-chain components of an iPhone or iPad are sourced from non TPP regions.
Clock is Ticking
The clock is ticking on whether a final agreement on TPP can be reached soon. The U.S. Presidential sweepstakes is well underway, and member nations have their own political events that will hold legislators to task. In the end, it would appear that any TPP agreement will have some direct and probably indirect impacts on global component sourcing strategies for multiple industries.