In mid-July, business and social media was abuzz with the announcement that two long-time rivals, Apple and IBM, would team-up in an alliance to create business apps leveraging Apple’s iPhone and iPad devices. Under the alliance, IBM will create what it terms as “simple” business productivity apps leveraging the respective Apple mobile devices.
Today, Bloomberg released some somewhat stunning news which many are speculating is directly related to above announcement. Supplier sources informed Bloomberg that Apple is preparing to manufacture the largest model iPad ever, a 12.9 inch screen device, with production scheduled to commence in the first quarter of 2015. That is 6-9 months from today.
As we have echoed in previous Supply Chain Matters commentaries, the Apple supplier network is feverishly ramping-up production volumes for new models of iPhones and iPads for the all-important upcoming holiday buying surge period. Apple’s three key suppliers of LCD screens are especially challenged due to a rather late design change incurred on the new iPhone 6 model.
According to the Bloomberg report, this rather large iPad screen model is being positioned to compete in the business applications arena as an alternative device for business tasks currently performed by laptops. The Q1 timing is especially noteworthy since that is the time when Apple’s China based suppliers and contract manufacturers temporarily shut-down for celebration of the Lunar New Year as workers return to their homes and families. It is a period where suppliers recover from the hectic end-of-year scramble. The fact that Apple is targeting yet another product release in this period is a probable sign that the IBM-Apple discussions were already in the planning stages prior to the official announcement last month. Both parties are aggressively planning to take advantage of the alliance opportunities.
Apple’s supply chain, S&OP teams and value-chain partners are once again going to be put to the test of simultaneous volume production ramp-ups involving a multitude of products including a new iWatch as well as phones and tablets. There is obviously little room for snafu’s and LCD screen suppliers may well be the critical linchpin to pull-off a series of simultaneous successful product launches.
Supply Chain Matters has featured previous commentaries reinforcing the critical dependence of product design and new product introduction (NPI) with supply chain network decision-making. We now have another real-world reminder of the challenge that many high tech and consumer products focused supply chains continually encounter in the constant dependency and alignment of NPI decisions with the external supply chain network.
Reuters, in an exclusive report, indicates that LCD suppliers for the pending Apple iPhone 6 product NPI launch have been scrambling to scale volume production, after a late product re-design disrupted supplier production plans. The Reuters report cites two supply chain sources as indicating that the backlight design of the LCD panel was supposed to feature a single layer instead of the standard two-layers of film. Apparently the new design was not bright enough to meet Apple’s product management expectations and was sent back to design to fit in the extra layer. That step is reported as “costing precious time and temporarily idling some screen assembly operations.”
While Reuters indicates that out is now back on track, suppliers Japan Display, LG Display and Sharp are working flat-out to make-up the lost time.
As noted in many prior reports, Apple is a task master in incorporating constant changes in product design up to the last minute. This culture stems from the passion of Steve Jobs and his relentless pursuit of product perfection. However, Apple’s value-chain ecosystem and production volume requirements are far larger in scope.
An engineering or product-driven culture can certainly be an important factor in delighting customers. However, when such design changes occur in a highly outsourced supplier network involved in the critical phase leading up to new product production ramp-up, information and assessment related to the implications of such product design changes is equally important. Apple has a unique culture, and the firm’s suppliers are well aware that the ability to scramble at the very last moment is an expected and required capability.
Dynamic tension among product design and supply chain teams is a normal occurrence. This latest takeaway for our community is that even one of the top-rated supply chains has its own challenges in synchronizing product design disruption in critical new product ramp-up phases. It is yet another reminder of the critical importance for taking a broader supply chain business network perspective in information integration, assessment and decision-making.
The bulk of Apple’s component supplier and contract manufacturing partners reside in China and Asia where many high tech electronics products are produced. Unfortunately, this is an area that continues to deal with high levels of industrial pollution, worker safety and industrial accidents.
Apple is now taking meaningful steps to initiate substance regulations across its supplier network.
According to a recent posting appearing on Apple Insider, the company is banning the use of cleaning agents’ benzene and n-hexane within supplier factories. This moves is part of Apple published Regulated Substances Specification which has recently been made available for open viewing. The purpose of this specification reads in-part:
“We require our suppliers to adhere to this Regulated Substances Specification, which describes Apple’s global restrictions on the use of certain chemical substances or materials in our products, accessories, manufacturing processes, and packaging used for shipping products to Apple’s customers.”
Apple’s vice-president of Environmental Initiatives has additionally published a letter regarding the company’s stance on safe working environments. Apple further intends to establish a new advisory board made up of chemical and pollution prevention experts who are tasked with finding additional ways to minimize or eliminate the use of toxins across Apple’s supplier network.
These moves come after activist groups submitted petitions calling for the company to place a ban on dangerous substances.
The fact that one of the top rated global supply chains has taken this proactive stance regarding supply chain safety and environmental responsibility is quite meaningful. Hopefully it will be an impetus for more high tech and consumer electronics brand owners to join in citing higher standards for safe chemical use.
This is a follow-up commentary related to Tesla Motors, specifically this electric powered automotive manufacturer’s efforts in supply in deploying a broader supply chain vertical integration strategy. In our Supply Chain Matters commentary in February, we noted Tesla’s announcement to build its own $5 billion electric battery supply facility which is termed the “gigafactory”, capable of supplying up to 500,000 electric vehicles per year. That level of supply commitment exceeds Tesla’s current planned output and implies providing a U.S. based manufacturing presence for electric batteries that would be available to other automotive and vehicle producers. Tesla currently supplies batteries for the ToyotaRAV4 EV and the Mercedes B-Class electric.
We noted that the strategy savvy, given that when one reflects on the entire value-chain and cost-of-goods sold (COGS) for an electric Tesla Motors Model S powered automobile, the batteries are indeed the highest portion of material cost. Tesla expects that the new factory would reduce its current battery costs by 30 percent in its first year,
In late July, during its second-quarter earnings report, Tesla executives made a side announcement indicating that the company had reached a final agreement with Panasonic Corp. as the supplier partner in the construction and operation of the planned gigafactory. Five western U.S. states continue to be cited as potential sites for either one or two linked supply facilities, although site work has actually begun in an area near Reno Nevada. Other potential U.S. states in the running are Arizona, California, New Mexico and Texas. The western portion of the U.S. is an obvious choice because of its proximity to the supply of lithium carbonate, a key raw material for lithium-ion batteries.
Journalist Michelle Quinn pens in a report posted by the San Jose Mercury News that the potential for landing this new battery factory with upwards of 6500 manufacturing continues to fuel a massive wooing and lobbying effort among each of the potential states. State legislatures are rushing through incentive packages to sweeten prospects in their individual states and Governors and city mayors have resorted to novel efforts in demonstrating enthusiasm and keen interest. One example, Texas Governor Rick Perry drove a Tesla Model S to California and taunted California officials about the overwhelming advantages of locating manufacturing in the Lone Star State. Quinn describes these lobbying efforts as a ‘beauty pageant” and: “if a song and dance could help (California), let’s do it.”
Readers should recall that Boeing launched a nationwide RFP bidding effort among potential U.S. states for selection of component and final assembly facilities for its new announced 777x commercial aircraft program. In our January posting, Collaboration According to Boeing, we noted that Boeing’s ultimate objective was to secure the most lucrative economic incentives related to production sourcing. Boeing was in-essence conducting a reverse auction, seeking the lowest economic bidder. In the end, a package of incentives described as the largest of its kind in U.S. history assured that new generation 777 production would remain in the OEM’s current Seattle area.
One of the learnings from the deep economic recession of 2008-2009 is that state, local and provincial governments will do all that is required to secure needed jobs and an economic future in times of uncertain economic growth. If that requires massive incentives in tax breaks, site location subsidies, workforce training and infrastructure developments, so be it. Current efforts among local and state governments to top one another only adds to the reality that manufacturers can hold out for the sweetest deal available with lucrative benefits. Appearances, stunts and lobbying add more leveraging power for the manufacturer.
In the specific case of Tesla, a company well known for its innovative and bold thinking. When the company announced that it would manufacture autos in California, many auto industry observers scoffed at that decision. California is not known as a low-cost manufacturing region.
The ultimate selection of its U.S. based battery gigafactory will accomplish four objectives:
- Bold supply chain vertical integration
- Proximity to key commodity supply and transport networks
- A well trained and technically savvy workforce
- Subsidies that may well defray the overall cost burden.
At this point, Tesla has more than likely honed its selection list based on the above objectives. The thinking is bold and timing is exquisite. It’s time to move beyond the politics and to the objective at-hand.
Three weeks ago, Supply Chain Matters commented on the effort underway among Apple’s ecosystem of suppliers and manufacturing partners to prepare for the upcoming product launch and distribution of the new model iPhone. Our commentary made note of reports indicating a number of moving milestones and potential challenges related to new product production ramp-up and product yield. Besides the next generation of the iPhone, there were additional published reports indicating that Taiwan’s Quanta Computer would begin mass production of Apple’s new smartwatch in July, with the planned product launch coming as early as October.
Today, Bloomberg, citing sources with knowledge, is reporting that Apple suppliers have also begun initial manufacturing of the planned new models of the iPad. According to the report, volume production of the next generation full-sized 9.7 inch version of the new model iPadAir is underway, with a newer version of the 7.9 inch iPadmini now entering production with general availability expected by the end of the year. The product introduction announcement is reported to be either at the end of Q3 or early Q4, but many Apple watchers are betting on the month of October, since other next generation products are scheduled for market introduction in that month. In any case, the NPI and volume production scenarios for iPad and iPhone are both pressing towards critical windows for required availability.
The latest quarterly financial results for Apple reflected a marked decline in iPad sales volumes, declining by over 13 million units, thus the upcoming new product introduction cycle is crucial. Timing is critical since there must be inventory available when consumers elect to make their end-of-year holiday purchases.
Like all things related to Apple’s product innovation cycles, design engineers introduce last-minute component features that would challenge any high volume focused supply chain. In our previous iPhone6 commentary, we highlighted reports of yield challenges with the larger LCD screen, the rumored inclusion of sapphire based screens and continued challenges for higher-volume production of fingerprint scanners. The next generation iPad Air is strongly rumored to include more innovative anti-reflective coating as well as a fingerprint sensor.
A separate report from the Associated Press further indicates that Apple’s sapphire glass provider, GT Advanced Technologies, indicated this week that its production facility is close to starting production, but does not expect to reach full operational production until early 2015. That is not an encouraging report for Apple’s supply chain planners and will likely lead to further tough decisions in the weeks to come.
Apple supply chain teams indeed important challenges is the coming 12 weeks with many simultaneous moving milestones impacting multiple product management plans. It is a consummate example of changing information in constant motion. Integration of NPI and supply chain information coupled with multi-tier response planning will invariably be put to the test.
Our previous Supply Chain Matters commentary noted that Apple is in the process of marshalling its vast supply chain scale in ramping-up for the pending introduction of new iPhone and other products while stoking consumer demand for the upcoming holiday buying surge. Upwards of 110,000 or considerably more additional workers are being marshalled to support production ramp-up while suppliers themselves reap the benefits of orders exceeding 100 million units.
In December 2012, Apple CEO Tim Cook conducted a series of orchestrated media interviews that included an announcement that Apple planned to invest upwards of $100 million to build Mac computers in the U.S. Our Supply Chain matters commentary at that time reflected on one interview conducted by NBC News anchor Brain Williams. Below is an excerpt of that commentary:
“There were statements by Cook that, in our view, were somewhat on the mark and deserve amplification. Brian Williams asked in the Rock Center interview- What would be the financial impact to the product if, for example, the production of iPhones were shifted to the U.S.? Cook’s response was that rather than a price impact, the real issues reflect a skills challenge. Skills were identified as the existence of talented manufacturing process engineers, as well as experienced manufacturing workers. Cook pointed to deficiencies in the U.S. educational system, as well as the ongoing challenge of recruiting skilled manufacturing workers in the U.S. Great answer! But perhaps, there is much more unstated. High tech and consumer electronics firms long ago shifted the core of consumer electronics supply chains to Asia. Foxconn alone represents a production workforce of over a million people, not to mention many more of that number spread across Apple’s Asian based suppliers. Add many other consumer electronics companies and the arguments of existing capabilities in people, process, component product innovation and supply chain across Asia remain compelling.”
We recall that commentary in light of yet another major ramp-up of Asia based consumer electronics supply chain providers. Yet, the open question remains, where or what is the status of Apple’s planned $100 million investment in the U.S. let alone a more far reaching commitment toward renewing a U.S. based consumer electronics component supply chain ?
A posting in All Things Digital in May of 2013 indicated that according to testimony from CEO Tim Cook before a Congressional Subcommittee the Mac facility would be located in Austin Texas and rely on components made in Florida and Illinois and equipment produced in Kentucky and Michigan. Soon after, Apple contract manufacturing partner Foxconn announced that it was looking to source more manufacturing in the U.S.
In June of this year, PC World made note that Cook tweeted a photo of his visit to the Austin Texas facility where Macs are being produced. The snafu was the iMac in the background was running Microsoft Windows.
The problem however is that a Google search to find updated information related to Apple’s investment in U.S. supply chain capability yields scant information. We certainly urge our readers with knowledge of Apple’s U.S. production and supply chain investment efforts to chime in, if they are allowed.
Compare that with the efforts being generated by Wal-Mart in its Made in the U.S.A. initiative, committing upwards of $250 over the next ten years on U.S. produced goods. During the Winter Olympics, Wal-Mart produced a super slick video, I am A Factory, that garnered over a million You Tube views. That has been followed by summit meetings held with would-be suppliers in multiple product categories to encourage U.S. investment and provide assistance in sourcing or skills development training. Wal-Mart is even willing to make multiple year buying commitments to prospective manufacturers to help them invest in U.S. based supply chain resources. Last week, the Wall Street Journal profiled Element Electronics which is currently assembling televisions in a production facility in South Carolina under the Wal-Mart program. Noted is that the Element production line is an exact duplicate of one that exists in China, installed by Chinese engineers. While Element management admits that there are challenges in the sourcing of a U.S. component supply chain, and in required worker skills, it is making efforts to correct that situation over time under the support of Wal-Mart’s longer term buying commitment.
The point is this. There is no question that Apple has the financial resources and the public relations savvy to make a U.S. production and supply chain sourcing effort far more meaningful, impactful and visible. Yet one has to dig real deep to find information let alone acquire any sense of active commitment. Instead, business headlines note massive scale-up and flexibility of Asia based resources as being far more important to Apple’s business goals. Yet Apple has no problem in demanding a premium price for its products from U.S. consumers. We will avoid diving into the debate regarding Apple’s offshore cash strategy.
Supply Chain Matters therefore challenges the top rated supply chain to join Wal-Mart and others in a far more active and impactful multi-year commitment to U.S. manufacturing which includes higher volume products and education of required worker skills.