A new dynamic is occurring within the global E-tablet market, one that is being orchestrated by some key suppliers. This dynamic provides a reminder to the crucial importance of supplier intelligence strategies.
The Wall Street Journal recently observed that global microprocessor chip maker Intel, in response to being shut out as a key supplier for the Apple iPad and iPhone as well as Samsung models, is wooing smaller electronic tablet providers within China. The strategic objective is sub $250 tablet markets that are attractive to consumers within emerging market economies.
Intel has been calling on the likes of Shenzhen Hampoo Science & Technology Co., Shenzhen Ramos Digital Technology and select other China based mid-sized consumer electronics providers. These companies were previously learning towards existing ARM-based chip producers as well as Google’s Android operating system. According to the WSJ: “Among other tactics, Intel has taken a cue from Chinese chip makers and last year began offering “reference designs”- essentially ready-made tablet designs that allow manufacturers to create a product in as little as one month.” Intel has further sped-up its chip product development cycles in China.
This week provides another related development. Microsoft announced that it would expand its subsidies to vendors for Windows-based tablets and sub 9 inch models priced below $250, in essence receiving free Windows licenses. Microsoft is betting that tablets featuring full Windows functionality, in combination with lower-cost processors, have a good chance of capturing added market-share from Android devices. A posting by Digitimes reports that with this new strategy, China white-box, private brand manufacturers have quickly raised their proportion of Windows based tablets.
Two major, influential suppliers are thus in the process of altering existing market dynamics and the stakes are high. The sub-$250 electronic tablet market could lead to larger production volumes and subsequently, leverage existing electronic content distribution strategies.
As Supply Chain Matters has noted in previous commentaries, within today’s highly dynamic high tech and consumer electronics supply chains, key component suppliers can serve as either a strategic partner or a potential market disruptor by shifting product and market development strategies. The takeaway is that supply chain and procurement sourcing leaders need to fully understand the markets they serve and the key strategic suppliers within that market. Supplier intelligence has never been as crucial as it is today. A key sourcing decision made for certain business outcome purposes can have ramifications when deep pocket suppliers elect to counter that strategy.
Global contract manufacturer Foxconn (Hon Hai Precision Corp) conducted its annual meeting of shareholders last week and continued to reinforce a business transformation strategy. The company’s chairmen indicated to shareholders that revenues and profits will grow 10 percent this year.
According to the Wall Street Journal, Foxconn’s $130 billion in revenues for 2013 were but a one percent increase over 2012 levels, while operating margins have flattened to 2.76 percent. The contract manufacturer’s direct labor costs have more than doubled since 2009, compelling the company to accelerate initiatives directed at robotics and factory automation.
Founder and CEO Terry Gou indicated to the company’s shareholders: “Business transformation is crucial for Foxconn’s sustainable growth in the next ten years.” That is the similar message delivered at last year’s stockholder event. Mr. Gou indicated that the contract manufacturer will continue to test new business models that integrate hardware, software and services initially in Taiwan, and then in global markets. According to a published report by China Post, the current investment plan reflects the company’s determination to go beyond its status as the world’s biggest contract electronics manufacturer and move into new generation businesses. Gou indicated a strategic focus on development in four key areas — smart grid networks, smart broadband networks, smart Information networks and cloud computing-based artificial intelligence networks.
Initiatives underway include the offering of mobile accessories under the Coverbank brand name, a Bluetooth headset branded under the name of Candyard along with smartphone related distribution and inventory management services including local distribution of Blackberry smartphones.
A recent posting by PC World indicates that earlier this month, Japanese tech company Softbank unveiled Pepper, a personal robot that Foxconn helped develop. Pepper is designed to interact with humans, and can talk and even read people’s emotions: “I believe it will become a huge platform for human companionship” Gou indicated, noting that additional software services could be bundled with the robot. According to PC World, Foxconn is already a partner with U.S.-based Tesla Motors, having built the touchscreen found inside the company’s vehicles. But last week, Foxconn’s CEO revealed that his company is developing its own electric cars, with a target price of less than $15,000.
However, the company continues to indicate that it has no plans to enter the smartphone market as a branded competitor since over half of current revenues come from being a key contract manufacturer for Apple. In a recent Supply Chain Matters commentary, we noted rumors that Foxconn is being tapped as the lead manufacturer for Apple’s next release of the iPhone.
As Foxconn , the most dominant global contract manufacturer continues at its efforts towards business diversification, the implications for other contract manufacturers are also evident. Contract manufacturing is a low margin business without product diversification or increased investments in factory automation. The China advantage for direct labor savings is fast evaporating.
The world of contract manufacturing is rapidly changing and so will the manufacturing outsourcing dynamic. Supply Chain Matters has noted in prior commentaries, a new model of manufacturing will evolve over the next five years, one with different regional manufacturing capabilities and perhaps different global players. The inter-relationships will be dynamic and so will the notion of brands, products and services. OEM’s will have increased pressures for opening up more customer value-chain opportunities to key suppliers, or else, suffer the consequences.
High tech and consumer OEM’s can no longer lean on past assumptions related to outsourced manufacturing business models.
Wall Street insiders and the financial press are hard at work extracting tidbits of information from elements of Apple’s supply chain. The buzz and interest centers squarely on what can be anticipated for Apple’s Fall new product introduction (NPI) pipeline. Obviously there is a lot at-stake.
We at Supply Chain Matters have featured prior commentaries related to information leaks from the Apple supply chain ecosystem. But we put that aside in this commentary. Rather, let’s focus on Apple’s new product ramp-up, overall planning and supplier management strategies that are evolving in this current phase.
The current two areas of focus are on the rumored introduction of Apple’s next iteration of the iPhone along with the so termed, iWatch, a smartwatch that is rumored to have rather mind blowing functionality and characteristics.
Earlier this week, the Wall Street Journal published an article, Can Apple Crack the Smartphone Code? (paid subscription required) The article indicates that Apple will join other consumer electronics firms, namely Samsung, Sony, Intel and a host of start-ups who have already released versions of a smartwatch into the market. We recently called Supply Chain Matters reader attention to reports that Google was ramping-up volume production for a smartwatch product as well. According to the WSJ article authors, thus far the market has been lukewarm in sales volumes. Thus, Apple does not have its usual first-mover advantage, and is compelled to provide more attractive product innovation to differentiate from existing competitors. The publication cites one market research firm as indicating that shipments of so-termed wearable devices amounted to roughly 3 million units in the first quarter of 2014, not a lot in the context of previous Apple product releases.
Regarding supply chain related insights, the WSJ cites a source indicating that Apple’s past ability to integrate both hardware and software design concurrently give it a leg-up in the market. Another source from a component supplier is quoted as indicating that Apple is planning for 2014 shipments ranging from 10-15 million production units this year.
A separate published report by Reuters , citing a source familiar with the matter, indicates Taiwan’s Quanta Computer will begin mass smartwatch production in July, with the planned product launch coming as early as October. Thus, we can surmise that in 3 months, Apple is planning to ship three to four times the market volumes that occurred in Q1. That’s Apple’s big bet on more attractive production innovation. The cited source further indicates that Apple expects to ship 50 million units within the first year of the product’s release, although these types of initial estimates can be subject to change or later adjustment. Further noted is that LG Display Co is the exclusive supplier of the screen for the gadget’s initial batch of production. LG Display has become Apple’s preferred go-to supplier for next generation display technology, that which requires difficult challenges in overcoming initial production yields. Two other sources of Reuters indicated that the subject smartwatch is rumored to also contain a sensor that monitors the user’s pulse. Singapore-based imaging and sensor maker Heptagon is cited as being on the supplier list for that feature, a rather new player in the Apple ecosystem.
Now let’s turn attention to the rumored new iPhone6.
A published advisory on Seeking Alpha cites Taiwan’s Economic Daily News report indicating that global contract manufacturer Foxconn is being tapped to be the prime contract manufacturer and is in the midst of hiring 100,000 workers to help ramp up iPhone 6 production. Fellow ODMPegatron is also said to be ramping iPhone-related hiring. Further noted is the rumor that Apple is targeting a price hike for carriers regarding the new phone model, which perhaps implies a bigger margin. Yesterday, a published report from Bloomberg indicates that production for the new model iPhone will begin in July and include two different models. One model will have a 4.7-inch display, compared to the 4-inch screen of the current iPhone 5s and may be available to ship to retailers around September. A 5.5-inch version is also being prepared for manufacturing and may be available at the same time according to the Bloomberg sources. The new iPhones will also be rounder and thinner than previous models, and include curved glass. Production of the 5.5-inch model is more complicated than the smaller version, resulting in lower production efficiency that must be overcome before manufacturing volume can be increased.
That news concerning Foxconn is incredibly interesting because the CMS was previously transitioning away from Apple’s volume business. Foxconn actually declared in February 2013 that it would freeze all hiring in China. Supply Chain Matters featured a past commentary related to Foxconn’s annual meeting of shareholders that communicated that having Apple as one of your prime customers is probably both a blessing and a curse, because the Apple way requires maximum flexibility with a magnification of the principle that the customer is always right, even when that customer abuses planning norms. In that stockholder event just about one year ago, Foxconn management indicated the intent to lighten its high exposure to Apple related production contracts in favor of both moving downstream in the consumer electronics supply chain and developing its own line of devices and software. At the time we opined that we would not be at all surprised that one day, there will be a number of consumer electronics devices branded by Foxconn, probably in the China market. If the rumors that Foxconn will be the prime manufacturer for the upcoming iPhone 6 turn out to be accurate, that would place a new or different perspective, namely that Apple is leaning on its most trusted and experienced contract manufacturer to insure that innovative design can meet high volume production requirements in a more-timely manner.
Apple is obviously deep into two major new production introduction ramp-ups with entirely new product designs, over the next several months. Notice that the windows are shorter, production start in July with possible global product launches in September or October. Usually, these NPI ramp-up phases start earlier in the year, perhaps May or June.
A brand new product area, namely a wearable device, far different iPhone design functionality (bendable glass, touch fingerprint sensor, wireless charging to name but a few rumors) blended among dynamic connections among product design, management and contract manufacturing partners. No doubt, this is an intense effort, with high stakes. Apple’s information connections from product management to the manufacturing shop floor, its inventory positioning and overall S&OP coordination are all dynamically at-play. We would not be all that surprised to hear that product designers are still making changes. That is the Apple way.
Yet, if any supply chain is up to the task, it certainly will be that of Apple.
We all await the results that come over the coming months.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
Business media is reporting that Barnes and Noble has reached a deal that sources the production and distribution of the book chain’s Nook branded color readers with Samsung Electronics. According to these reports, the revised sourcing deal relieves the burden of Barnes in Noble to continue to invest in product design and manufacturing and focus more on its book distribution businesses.
According to a report published by the Wall Street Journal, the deal calls for Barnes and Noble to commit to buying one million Samsung co-branded tablets over the next 15 months which will be sold either online or in physical stores starting in August. These tablets will be a version of the Samsung Galaxy Tab 4 released in May. Barnes and Noble is also moving its Nook related staff out of expensive office space in Palo Alto California into newly leased office space in both Santa Clara and Mountain View California.
From our Supply Chain Matters lens, this development places Barnes and Noble is a less desirable position to be able to compete with the likes of Amazon and Apple in the reader and tablet area, since Samsung will reserve its most cutting-edge technologies for its own branded product. However, if Barnes’s strategy is to solely leverage readers and tablets as a distribution media for book content, than technology that lags leading-edge may be just fine since it accomplishes the prime objective of electronic distribution.
Factory Destruction Across Vietnam: Supply Chain Sourcing Flexibility and Resiliency Has Never Been as Important
In the quest to seek alternative global low-cost manufacturing sourcing across multi-industry supply chains, countries such as Thailand and Vietnam were high on the list. Both offered relatively attractive direct labor wage rates while offering a highly educated and motivated workforce. Up to this point, that has resulted in a steady flow of foreign investment in these countries including internal supply chain ecosystem capabilities.
All of this is now subject to current re-evaluation because of new political and social unrest that is occurring in these countries. The most visible has been Vietnam where this week, anti-China related violence has caused widespread rioting across the country, targeting factories and industrial parks that rioters believe are owned by Chinese interests. This rioting began earlier this week and according to various global media reports has resulted in arson and vandalism involving multitudes of factories and businesses owned by Japanese, Malaysian, South Korean and Taiwanese ownership since rioters have not been precise in targeting.
The protests were apparently prompted by Vietnamese citizen outrage over an oil rig that China placed in a disputed part of the South China Sea. We have read reports of some speculation that the core anger may be more broadly directed at accumulated anger against foreign-based exploitation within the country. The government of China is holding the Vietnamese government responsible for not taking more definitive actions to curb the rioting and damage. A report published by the Wall Street Journal today indicates that upwards of 3000 Taiwanese and 600 Chinese citizens were fleeing the country amid fear of further violence.
While foreign based business people flee Vietnam for fear of personal safety, a large number of factories have halted production because of either damage or lack of workers. Thus, the potential for significant industry supply chain disruption in the automotive, footwear, high tech, consumer goods and other areas is growing each day. It would appear that many brand owners and foreign interests are looking to the government of Vietnam to curb the current building wave of violence and factory destruction and avoid the current situation from quickly moving from the current bad to a far worse situation.
Meanwhile, continued political unrest across Thailand continues to provide an uneasy environment as violent protests continue sporadically across that country. Yesterday, there were reports that at least three anti-government protestors were killed and 22 were injured as government authorities fired guns and lobbed grenades at antigovernment protestors.
Supply Chain Matters has previously noted how significant incidents social unrest has led to a new wave of worker protests within China’s low-cost manufacturing sectors such as footwear. Political tensions involving China and Japan over disputed ownership of islands continue and have both supply and product demand impacts to certain Japan based firms.
From our lens, the notions of global sourcing are beginning to take on a new risk management perspective, that being social, national and political unrest along with the longer-term implications of that unrest. The notions that industry supply chains can continually follow a singular strategy that is solely directed at sourcing in low-cost countries is being challenged, and increasingly requires a re-evaluation. Global sourcing now includes far more considerations beyond the cost of direct labor, and as we have continually noted, are now taking on social, political and employer of choice perception aspects. The ramifications apply not only to product brand owners, but to industry supply ecosystems.
We believe that these incidents are not isolated and business and supply chain teams need to focus on much broader trends and their implications in access to foreign markets and supply chain ecosystems. The need for supply chain sourcing flexibility and resiliency has never been as important as it is now becoming. Insure that your firm and its supply chain strategies are prepared to manage among these new challenges and needs.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
While on an airplane early this morning flying to Tampa Florida, this author had the opportunity to catch-up on business magazine readings. Two articles published in two different editions of Bloomberg BusinessWeek provided us more evidence that labor social responsibility trends concerning global-based production sourcing will occupy more agenda time for supply management and other executives. Labor activism continues to be a trend among so-termed, lower cost manufacturing regions, and the implications are significant for cost and product branding considerations over the coming months.
Supply Chain Matters has featured a number of commentaries concerning the ongoing social responsibility developments concerning Bangladesh, specifically those impacting apparel and retail supply chains. The production of garments and apparel accounts for 6 percent of that country’s GDP, and almost 80 percent is exported to other global markets. In the April 28- May 4, 2014 edition of Bloomberg BusinessWeek, the article: For Bangladeshi Women, Work is Worth the Risks, profiles a trend of a predominantly female dominated workforce in that country’s garment factories. This article profiles a mother who was injured but able to survive the fire that occurred at the Tazreen Fashions factory killing 112 of her co-workers, yet she continues in her occupation to better the livelihood for her children. It cites that in 2011, according to a Yale University study, about 12 percent of Bangladeshi women, ages 15 to 30 worked in the garment industry and that hunching over a sewing machine in a 10 hour shift is perceived as a once-in-a-generation opportunity to better the lives of their family members. According to this article, despite the deaths of at least 2000 factory workers since 2005 because of fires and accidents, women in this nation view apparel factory work as a means to claw their way out of poverty, yet they continue to fear for their personal safety and a decent work environment. The cited Yale University study indicates that 27 percent more of young girls have been able to attend school and obtain a basic education than before the garment industry began its increased sourcing in the country.
However, global retailers and factory owners remain at a crossroads as to actively supporting industry initiatives, consortium funding mechanisms and product sourcing incentives to improve basic safety and working conditions among the country’s apparel factories.
A contrast concerns China, where a once predominantly female workforce among this country’s electronics, apparel, and other industries has transformed to a more male dominated workforce. The May 5-May 11 edition of BloombergBusinessWeek features an article, China’s Young Men Act Out in Factories. It quotes a spokesperson at Foxconn, the largest global contract manufacturer, that: “…the factory workforce is now about two-thirds male and more “rowdy” than when it was half female five years ago. The younger generation doesn’t want to continue doing work that is very mundane.” The article points to the trend of a more activist workforce willing to undergo work stoppages to gain more economic benefits. Other workforce issues, such as on-the-job sexual harassment that include offensive comments and grouping of female workers are cited. The article quotes a source as indicating that the recent labor strike involving athletic shoe producer Yue Yuen Industrial was led by 100 all-male workers. Contract manufacturers Foxconn and Flextronics are reported to be responding to these demographic workforce shifts by sponsoring “date nights” and other worker counseling programs.
What struck this author were the contrasts and similarities for both reports. A female dominated workforce in Bangladesh for the most part, endures workplace perils to sacrifice for the better good of families. A now predominately male workforce in China has become much more activist and vocal for motivations of career, marriage, and future benefits. The commonality is increased activism, appealing to social conscience and the collective voice of many to stop abuses and the taking of workers welfare and advancement opportunities for granted.
The primary motivations for the era of global outsourcing, namely significantly lower costs, is being challenged among multiple industry supply chains. A surgical approach to these trends is to address them in isolation. A general assumption that social responsibility and conscience can be outsourced or belongs solely to individual suppliers is wearing thin. There needs to be monetary qualifiers and incentives that address a brand owner’s commitment to social responsibility in the same light and milestones that are affixed to many of today’s environmental responsibility commitments.
Adding more pressures for increased automation or production robots for specific supplier factories, finding the next low-cost sourcing alternative, negotiating for even lower unit costs or adding more action phrases to corporate social responsibility policies that umbrella the supply chain are not the sole remedies. An industry social conscience needs to step forward, one that positions supply chains squarely into key performance indicators and performance objectives directly related to achievement of global social responsibility.