Deep Dive on 2017 Prediction Four: Increased Anti-Trade Geopolitical Forces Provide Added Global Sourcing Challenges
The following Supply Chain Matters blog is part of our ongoing series of deep dives into each of our previously unveiled ten 2017 Predictions for Industry and Global Supply Chains.
At the start of the New Year, our parent, the Ferrari Consulting and Research Group along with our Supply Chain Matters blog as a broadcast medium, provide a series of predictions for the coming year. These predictions are shared in the spirit of assisting industry specific and global supply chain cross-functional teams in helping to set management objectives for the year ahead. Our further goal is helping our readers and clients to prepare supply chain management and line-of-business teams in establishing impactful programs, initiatives, and educational agendas.
The context for these predictions includes a broad cross-functional umbrella of supply chain strategy, planning, execution, product lifecycle management, procurement, manufacturing, transportation, logistics and customer service management.
In an earlier Supply Chain Matters blog postings, we provided deep dives related to:
In this deep-dive series posting, we drill down on Prediction Four.
2017 Prediction Four: Increased Anti-Trade Geopolitical Forces Will Provide Added Sourcing Challenges for Industry Supply Chains
In our predictions concerning 2016, we stated that major developments surrounding global trade policies would occupy the attention of many industry supply chain organizations during the year. Our context was the potential adoption of major global trade agreement such as the Trans Pacific Partnership (TPP), China’s competing One Belt, One Road (OBOR) initiative, and the Transatlantic Trade Investment Partnership (T-TIP). Geopolitical events turned quite negative in terms of expanded global trade and thus the attention of industry supply chains never materialized.
For 2017, our prediction remains that major developments surrounding global trade policies will occupy the attention of many industry supply chain organizations during the year, but now from a far different and perhaps opposite perspective.
Across the globe, growing gaps in income inequality and rising political discontent against elements of domestic and international status quo are fueling a growing backlash towards global trade and unfettered open markets. With heightened global tensions now turning toward more anti-trade and possibly more protectionist rhetoric among developed nations, industry supply chains must now be prepared to deal with potential near and longer term implications that such policies will bring about.
A global environment that begins to turn hostile toward open global trade policies could result in increased import tariffs and added protectionist measures among trading nations, particularly China and the United States. According to the IMF’s October 2016 World Economic Outlook: “In short, turning back the clock on trade can only deepen and prolong the world economy’s doldrums.”
As we pen this prediction in early January, the World Bank declared that political and policy uncertainty in China, Europe, and the United States and in other major global economies are at unprecedented levels. There are fears that the Administration of Donald Trump could trigger a trade war with China and Mexico with threats to impose higher import tariffs for components and products entering the United States. The bank cautions that such a trade war may offset any gains from corporate tax cuts for U.S. businesses.
Further as we pen this prediction, proposals being floated by the Republican Party dominated U.S. Congress that are being directed at corporate tax reform feature border adjustment concepts. Essentially, the concept is applying taxes based on where a product is sold rather than where it is made or where the producer’s operations or executives are based. Imports would not be deducted as a cost of doing business, while exports would be exempted from taxes. The Wall Street Journal and other business media have already raised awareness as to the potential impact on industries that sell most their products domestically while sourcing most production externally in lower cost manufacturing regions. Examples are toys, consumer electronics, apparel and footwear and other products. Such concepts, if enacted, will place a far different financial perspective related to lower-cost production sourcing.
We anticipate that industry supply chain network models will undergo continuous analysis and scrutiny in the coming year as respective supply chain teams assess various changing landed cost and tax factors among product management models. That will likely require a lot of analytical modeling to ascertain impacts to product margins and line-of-business financial metrics. They could further impact today’s contract manufacturing services model in the notions of where bill-of-material components originate from and where final products are shipped to.
Global trade issues indeed percolate in the coming year and they will likely be complex and confusing to sort out in terms of which will ultimately come to fruition. We concur with the IMF and the World Bank assessments that the Trump Administration could well be part of the epicenter of anti-trade disruption rhetoric to fulfill the political promise of Make America Great Again, and that may well include heightened trade tensions involving China or other lower-cost manufacturing nations.
Global trade advisory firms and consultants will be quite busy in 2017 in advising clients of potential implications of more protectionist trade policies or the heightened risk factors for certain global markets.
As noted in Prediction One, the ability to analyze and share important information, and to educate the business and C-Suite executives on supply chain impacts and/or risk tradeoffs of changed trade policies that potentially impact existing global and product innovation sourcing will be an important differentiator and competency throughout 2017. Collaboration among product sourcing, product development and supply chain strategy teams is essential. Organizations should further consider the value of organizing centralized, dedicated sourcing strategy and impact teams responsible for ad-hoc analysis while fostering a common foundation of analysis data and information. In essence, the task may be more of multiple scenario based analysis predicated on different input and output factors.
Our takeaway is that an assumed static global sourcing strategy could prove to be rather risky in 2017. Technology supporting more analytically focused analysis and decision-making will likely play a very important role in the coming year.
This concludes our Prediction Four drill-down. In our next posting of this series, we will dive into Prediction Five that predicts continued turbulence across global transportation networks.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Phoenix Rising from the Ashes- Samsung Suddenly Moves from Damaging Product Recall to Profit Milestone in a Single Quarter
In May of 2012, in our commentaries related to high-tech and consumer electronics industry, Supply Chain Matters coined the analogy of the shiny apple and the complex orange. It related to that of Apple and Samsung and their competitive battles in the smartphone market.
The analogy drawn was that the shiny apple, which distinctively sits in the fruit basket and can easily be identified in its familiar image and taste. This apple is very delicious, somewhat tart, but consistently delivers on taste. Sometimes the apple can develop blemishes, but consumers can overlook the blemish and still relish the taste. The apple has an iconic brand image and a warm memory.
The orange does not garner all the attention of the shiny apple, but the reality is that it is slightly bigger, and can serve multiple purposes. The orange serves as a multi-purpose fruit, not only for direct eating but as an ingredient or compliment to other foods. The taste of the orange is often tart or bristle to the palette, its skin is difficult to remove and its pulp is complex layering. That orange analogy referred to Samsung.
For years, Samsung itself has exercised a supply chain vertical integration model that has served that company well in its ability to continuously refresh innovation in products, support faster time-to-market and quickly ramp products to enormous global wide volumes. In February 2012, Fortune magazine featured a profile of Samsung noting that the secret sauce of the company is that it controls the supply chain of many of the building blocks of its phones, tablets, electronic watches, and other electronic devices. The not so secret sauce is that major consumer electronics value-chain components such as leading-edge semiconductor chips, high-resolution LCD displays and memory components often come from Samsung’s electronics business units and supply many other branded providers.
Last week, business media reported that the South Korea based technology giant expects its recent December-ending fourth-quarter operating profit to rise upwards of 49 percent from the year earlier period. In its reporting, The Wall Street Journal’s opening paragraph in a January 5th report exclaimed:
“For a quarter in which Samsung Electronics Co. suffered its most embarrassing product recall in its history, the world’s biggest smartphone maker has also forecast its strongest profit in more than three years.”
In a separate article the next day, the WSJ wrote:
“Even with the early-October recall of its premium Galaxy Note 7 smartphone that cost it at least $5 billion, Samsung projected fourth-quarter earnings would be the highest in more than three years. The reason: competitor’s growing demand for Samsung components.”
This article (Paid subscription required) observes that global smartphone shipments have slowed sharply, registering less than one percent global growth in 2016. Our analogy of the orange comes embedded in this WSJ observation:
“Even as smartphones were selling strong, Samsung continued to pour tens of billions of dollars into semiconductors and display panels to enable phones to run faster, hold more storage and offer crisper images. Recent advances have made its components more powerful than those of competitors—positioning Samsung as an essential parts supplier for many of its rivals.”
The profit forecast has pushed Samsung stock to record highs, and investors have obviously turned from gloom to elation.
We suggest a couple of takeaways can place this new development in perspective.
First, there should be no question that the Samsung brand image took a major hit with the exploding Galaxy Note 7 product recall debacle, followed by the exploding laundry machines. The memory of media accounts of exploding phones and announcements banning Samsung Galaxy Note 7 phones from air travel remains ingrained on the minds of consumers. That will take time to overcome. However, the company will learn from this incident, and that learning will be transferred to new product and component designs.
Samsung’s broader vertical supply chain focused strategy for high-tech electronics component innovation and value-chain penetration has proven thus far to be a far more insightful strategy, particularly as increasingly electronics and information-laden intelligence continues to be embedded in other products such as autos, trucks, and machines. It remains a manifestation that supply chains do matter in the context of supplier-driven product innovation and industry scale. As the WSJ observed, even if the Galaxy Note 7 was a somewhat successful product, limited global market growth of the market itself would have limited is profit contribution.
The reward is benefiting from the broader advances in high-tech electronics among numerous brands.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Just before the Christmas holiday there was an announcement regarding an additional investment in LCD supplier Japan Display. Its largest shareholder, the government-backed Innovation Network Corp. of Japan is investing an additional $636 million in this supplier, consisting of both convertible bonds and a subordinated loan. Yet another financial infusion from government of Japan interests provides yet another example of the high stakes involved for being a supplier and constant innovator of consumer electronics components.
In late August of 2011, three of Japan’s existing liquid crystal display (LCD) component producers, Sony Corporation, Toshiba Corporation, and Hitachi Ltd. merged their, at the time, money-losing LCD manufacturing operations to form a single company that was named what is today’s Japan Display. Each of the former suppliers could not financially afford to continue to compete with the likes of other industry competitors such as Samsung Electronics and Sharp Corp., who were major suppliers to Apple and some other consumer electronics OEM’s. The new venture was financed primarily by $2.6 billion in funding by The Innovation Network of Japan, a government backed agency with strong industry influences, and subsequently an IPO in 2014.
Today, Japan Display serves as one of the four suppliers of LCD technology for the Apple iPhone product lineup. This includes competing with industry leader Samsung Electronics who is already suppling Organic Light Emitting Diode Display (OLED) screen technology. Japan Display indicates that the latest round of funding will boost its efforts to develop OLED panel capability, the literal next wave of technology innovation in displays. This includes the acquisition of OLED developer Joled, which was formed in 2015 by the merger of the OLED operations of Panasonic and Sony. Plans further call for Japan Display to decrease its current concentration as a technology supplier for mobile devices, and to instead focus on next generation display needs within automobiles, laptops, appliances, and virtual reality devices.
This strategic move is wise from two perspectives.
First, Samsung Electronics remains a dominating industry leader and already provides OLED displays for namesake Samsung smartphones, and is likely to continue to supply Apple’s and other high tech OEM OLED needs as well.
Rival Sharp Corp. was acquired earlier this year by Apple’s prime contract manufacturer Foxconn Technology after a lengthy and endless cycle of capital infusions. The acquisition represented a strategic move by Foxconn toward vertical integration of the value-chain of high tech and consumer electronics devices. A February published commentary in The Economist pointed out that in acquiring Sharp, Chairman Terry Gau had the opportunity to exercise his grand “eleven screens” strategy, which opens the possibility that Foxconn assumes the dominant supplier position of advanced high-tech displays of broader industry products from computers, to automobiles to industrial devices or smart watches. Recognizing that threat, Sharp was also evaluating a counter bid from Innovation Network Corp. of Japan for roughly the same ownership stake. The issue of concern behind this counter option was having Japan based Sharp not come under foreign control.
Foxconn’s presence as a long-term strategic manufacturing and technology implementer for Apple places Sharp’s eventual OLED technology as another preferred supplier option, which had to be on the minds of Japan Display executives. With a move away from sole dependence on mobile smartphones, Foxconn and Japan Display will now compete head-to-head in next generation auto and consumer electronics display needs.
As noted in our prior high tech industry focused blog commentaries, LCD screens account for a considerable amount of cost of goods sold (COGS) complement in smartphones and tablets. Increasingly, electronic displays will cater to the needs for enhanced user interaction, most notably automobiles and other transport or user-centric equipment.
The need for production innovation remains relentless, the cost of capital highly expensive and the competition for favored supplier status is fierce. Another theme is one of nationalism, namely a country’s control of product and process innovation securing a long-term industry and component supply chain presence in that country. Often, display industry supply exceeds demand because of overcapacity, eroding abilities to maintain prices that insure adequate profitability as well as continuous new investment needs. It’s a model permeated by dominant high tech OEM players such as Apple and it continues to extract needs for even more financial investment from suppliers.
The difference in this cycle is the potential for electronic displays to be part of the designs of many other product and equipment areas and to lessen the influence of high tech industry supply chain dominants. The financial and market stakes are high but the opportunities continue.
The open question remains which suppliers eventually dominate.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Ever Larger Bets in the Next Generation of Semiconductor Technology and the Key Dominance of Product Value Chains
As many of our high tech and consumer electronics supply chain readers are aware, there has been a wave of consolidation occurring across semiconductor industry sectors. The reasons are many. They include making bets on the next generation of chip technology that will drive specific industry applications such as artificial intelligence, autonomous driving and Internet of Things. Of late, acquisitions have also focused on the mitigating the rather expensive cost of investing in the next generation of chip technology as well as leveraging the influence and investment in semiconductor design and foundry capacity. This ongoing consolidation not only impacts high-tech product value chains, but other key industries as well.
A reminder of this implication of such trends has come from contract semiconductor chip fabrication producer Taiwan Semiconductor Manufacturing Company (TSMC). The “fab” chipmaker has recently announced plans to build a $15.7 billion new design and fabrication facility that would produce the world’s most advanced 5-nanometer and 3nm chips.
A recent published report from Nekkei Asia Review observes that Apple currently utilizes TSMC’s 16nm process technology for core processor chips utilized in the iPhone7. TSMC will begin producing 10nm processor chips in 2017, and with this new investment, could conceivably produce 3nm chips as early as 2022.
The report further observes that only premium tech players with deep pockets such as Apple, Huawei, Qualcomm, Media Tek and Nvidia can afford investments in these next generation chip technologies. According to the Nekkei report, TSMC’s most dominant customers are Apple and Qualcomm, each accounting for 16 percent of the company’s revenue. In late October, Qualcomm announced its intent to acquire NXP Semiconductors, a major supplier of semiconductor chips and microprocessors that control more sophisticated automobile functions in power management, security access, media, and audio functions. Qualcomm is paying a hefty sum, upwards of $39 billion, to enter automotive technology value-chain needs. The announcement represented one of the largest semiconductor related acquisitions to-date. Industry speculation is that Qualcomm will turn to TSMC for 7nm chips which are scheduled for production sometime in 2018.
Further, more and more fabrication capacity is being consolidated around just a few “fab” owners. The report notes that TSMC current accounts for 55 percent share of global fabrication production needs, which by any standard points to growing market dominance. Other fabrication players that make-up the bulk of industry needs are Intel and Samsung, and to some extent Global Foundries which acquired the Former IBM microelectronics and semiconductor business unit.
Intel indicates it will begin producing 10nm chips in late 2017 while Samsung plans to introduce 7nm chips by the end of 2018.
Thus, the most critical link for high tech and consumer electronics supply chains is indeed semiconductor design and manufacturing capability, and forces are accelerating toward consolidation of the major players. More and more, the required investments in the next breakthrough in technology are becoming far more expensive and will require bigger and more deep pocketed players willing to make such bets.
The race is indeed about major control of not only the high-tech product value-chain, but increasingly key levers of automotive and equipment manufacturing value chains as well. Tesla Motors is already demonstrating the dominance of high technology components in the production and operation of electrically powered vehicles.
In today’s multi-industry environment of short-term focused investor value, not a lot of industries can tolerate a $16 billion bet on a new technology and production capability. Sharing the investment risk among fabless designers and fabrication producers is a practice increasingly being consolidated among key players.
These past few days, Supply Chain Matters has been updating our readers regarding ongoing supply chain management developments involving specific companies. That includes Airbus, Boeing, Chipotle Mexican Grill, Pratt and Whitney and others. We have been somewhat remiss in not updating on developments involving one of global business’s most visible supply chain, that being Apple.
There are two somewhat significant developments to share.
Potential U.S. Manufacturing Presence
To begin, multiple published reports now indicate that prime contract manufacturer Foxconn, has confirmed that the CMS is in preliminary discussions to make investments to in-essence expand Apple’s manufacturing operations presence in the United States. One report indicates that this activity is underway despite the objections and wisdom of Foxconn chairman Terry Gau. A Bloomberg published report observes that the disclosure came hours after a joint announcement by U.S. President-elect Donald Trump and SoftBank Group Corp. to invest $50 billion in the U.S. and create 50,000 jobs.
As we have noted in prior commentary, during the heated U.S. Presidential campaign, Donald Trump specifically cited Apple for its tendencies to source thousands of manufacturing jobs in China while reaping the benefits of higher profits. As of now, Foxconn has provided little additional details to business media, no-doubt not wanting to steal Apple’s thunder in such an announcement. Other reports indicate that Apple has been approaching certain other suppliers to consider moving supply chain component manufacturing from China to the U.S.
In the past two weeks, President-elect Trump has publicly confronted Carrier, a Division of United Technologies and this week, Boeing over the projected costs of a new replacement for the Air Force One presidential aircraft.
For multiple years, this blog has challenged Apple to consider expanding some of volume manufacturing volume presence in the U.S. over and above the manufacture of certain Mac computer models. Being a rather savvy and public relations astute company, it may well be that Apple has quickly read a sea-change in the political discourse of the United States and now needs to be prepared to stay on the good side of the incoming administration.
We shall all see what headlines develop in the coming weeks.
iPhone Battery Failure Issues
Turning to the product front, Apple has publicly confirmed that a problem involving some batteries in the manufacturer’s iPhone 6S model is apparently become more widespread than initially revealed. The issue has become known from China’s product safety agency, and Apple reportedly quietly acknowledged the situation on a Chinese web site. China now represents one of the largest installed base markets for the iPhone 6S. The Chinese regulatory agency claims that the battery issue involves older iPhone models as well, including the iPhone6 and iPhone5S but Apple thus far is only acknowledging the small batch of iPhone 6S units.
Apple has stressed that the battery issue poses no safety risk for customers.
The problem manifests itself with the phone prematurely and unexpectedly shutting down to protect its electronic circuitry. Indications are that the cause may be a component within the battery that was contaminated by ambient air. The contamination was initially disclosed to involve phones sold in September and October 2015, but other reports indicate that the situation may be more widespread than just this production interval. Apple has instructed Chinese users to bring their phones to authorized repair centers or to an Apple store for a battery swap. The manufacturer further indicates that it will add a new diagnostic in its forthcoming IoS software update in hopes to mitigate any future problem by a software modification.
This iPhone battery issue is garnering wider visibility after Samsung’s recent crisis involving exploding batteries in the new Galaxy Note 7. Samsung obviously had a clumsy response to its battery issues, which were far more severe, including not informing or involving product safety regulatory agencies early in the process of discovery.
Apple is obviously a more brand marketing savvy customer and has been rather careful in the widespread sharing of the occurrence of product quality issues among its smartphone products. However, one similarity shared with Samsung would seem to be the suspected manufacturing defects involving batteries. Apple also shares a similar battery supplier, that being a component division of Samsung.
Two new developments, each with different connotations related to the brand, and directly involving the supply chain. Even the perceived best in class supply chain is not immune to externally focused developments.