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Industry Disruptor: Tesla and the Automotive Driving Experience

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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.   Telsa Motors Model S

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.

Bob Ferrari

Note: This author is not a current owner of a Tesla automobile nor  a stockholder, rather an observer and enthusiast of automobiles.

 


Report That Foxconn is Close to Finalizing Plans for Massive Production Facility in Northern China

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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.


Reports That Availability for Apple’s New Larger iPad Pushed Back

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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.

Bob Ferrari


Latest Reports of 2014 Smartphone Sales: Focus Beyond the Eye Catching Headlines

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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.

Bob Ferrari


More Information Comes to Light Regarding Speculation that Apple is Developing an Electric Car

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Supply Chain Matters provides a brief update to our previous commentary regarding Apple’s reported potential development of an electric powered car. More information has come to public light, information pointing to development of advanced battery component capabilities for larger applications.

Today’s edition of The Wall Street Journal echoes a published report from Reuters that A123 Systems, a lithium-ion battery developer and producer is in the process of filing suite with Apple for what that company alleges as “an aggressive campaign to poach employees.” The compliant names five employees that have defected to Apple or appear to be in the process of recruiting other existing A123 employees to join Apple.

According to the Reuters report: “Apple has been poaching engineers with deep expertise in car systems, including from Tesla, Inc., and talking with industry experts and automakers with the ultimate aim of learning how to make its own electric car, an auto industry source said last week.” In its reported lawsuit, A123 believes Apple aims to build a competing battery business partially relying on the expertise from its former employees.  The employees in question, who initially joined Apple in June of last year, were reported to be working of A123’s most critical projects, and by joining Apple, they violated their employment agreements.

Neither Apple nor A123 have responded to both media outlets in requests for confirmation.

A123 was initially funded in-part by a research grant in 2009 from the U.S. government as part of a broad economic stimulus program as a result of the severe recession at the time.  A123 Systems, who was awarded a $249 million matching, grant to construct world class lithium-ion battery manufacturing facilities in the U.S., and Johnson Controls was awarded a similar amount to deploy advanced battery supply capabilities. A123 had been previously designated by Chrysler as its prime battery supplier, while Johnson Controls, in a joint venture with France’s SaftGroupe, was previously chosen to be a primary battery supplier to Ford Motor Company. Later however, A123 ran into a number of business challenges and had to file for bankruptcy in 2012.

These notion reinforces the speculation that we raised in our previous commentary, namely that if Apple has serious intent to produce electric cars, it needs to invest in product design and manufacturing sourcing of batteries.

Bob Ferrari


Reports of Apple Designing and Producing a Concept Electric Car

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Business media including the Financial Times and the Wall Street Journal reported last week that Apple was working on a secret research lab (not so secret anymore) possibly directed at developing a concept electric car.  According to these reports, under the code name “Project Titan” Apple has several hundred employees working at this research lab designing a concept vehicle that resembles a minivan.

Apple, of course, has declined comment to any of these publications.

According to the published WSJ report, the size of the project team and the senior executive hires are indications of seriousness, with Apple CEO Tim Cook approving the development project almost a year ago.  Once more, the report indicates that Apple executives have flown to Austria to meet with contract manufacturers.  The publication names the Magna Steyr unit of Canadian auto parts supplier Magna International as one potential party involved.

The report accurately notes that manufacturing an automobile is enormously expensive with a single plant costing upwards of well over $1 billion. Thus, it should be of little surprise that Apple might be investigating existing contract manufacturing options.

Auto supply chain teams know all too well that sourcing production in any particular country and transporting autos among global regions can be an expensive proposition without volume and market scale. It’s clearly not the same as shipping iPhones and iPads or for that fact, ramping-up new product and supply chain labor resources to coincide with a product development lifecycle. Once more, intellectual property (IP) protection becomes a larger consideration because of the nature of the multiple components and new technologies that may be involved. For electric powered vehicles, the design and production cost of the batteries is the single most important material and product margin component.

Another parallel that these reports bring forward is that if Apple becomes serious in pursuing this foray into electric cars, it will likely be a competitor to Tesla Motors, who has been pursuing a vertical integration strategy including the design and production of its own electric storage batteries for automotive and solar energy storage use. Tesla elected to invest in a former Toyota auto factory located in Fremont California.

Certainly, there will be continued speculation as to what Apple ultimately decides to do.  However, in the light of our previous Supply Chain Matters challenge to Apple to invest more in U.S. or North America based production, Project Titan could provide the opportunity to consider such an investment commitment, either contract manufacturing or owned manufacturing investment.  North America automotive production plants and their associated supply chains have proven world class competitiveness and indeed are exporting vehicles to global markets.

However, in light of our previous commentary noting excess auto production capacity across China, Apple may elect its familiar new product introduction and contract manufacturing model.

Bob Ferrari


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