Supply Chain Matters has previously commented on the notions of how supplier capabilities in continuous product innovation can be both an asset, and perhaps a threat. We have noted the notions of threats in the high tech and consumer electronics sector where contract manufacturers continually innovate and move deeper into the value-chain of products. China alone has declared aggressive goals for moving upstream in high tech supply chains including more global brands. It is therefore a matter of time and/or opportunity as to whether vertically-integrated supply chain capabilities of certain contract manufacturers will motivate them to assume a brand presence.
A recent New York Times commentary featured on CNBC.com relates to Mitsubishi Aircraft Corporation, who for decades has assumed the role of supplier for various aerospace supply chains, and is now about to unveil a sleek new 90 passenger MRJ regional jet. It represents Japan’s bid to assume an OEM brand after almost 70 years.
The article’s author observes that the Mitsubishi comeback has something to do with being an increasingly outsourced supplier to Boeing, designing and supplying vital parts of aircraft components. A third of Boeing’s 787 Dreamliner is sourced among Japan based suppliers, which includes Mitsubishi Heavy Industries which is responsible for producing the 787’s carbon-fiber wing structures. According to the article, in addition to supplying 35 percent of the value-chain components within the 787, Japan based suppliers are responsible for 21 percent of the 777 and 15 percent of the 767 family of jets.
Interesting enough, the new regional jet features little of the advanced carbon-fiber composite materials of the Boeing or Airbus new models. Neither will it feature lithium-ion batteries for backup power needs. Mitsubishi has relied on ongoing financing from the Japanese government to become a higher profile supplier in aerospace, and is now pinning its hopes on a revival of a Japanese aircraft brand.
Mitsubishi boasts that its soon to be unveiled jet will deliver 20 percent in fuel savings compared to similar sized competitive offerings such as the Embraer 190. It will also compete with Bombardier, COMAC and other global OEM’s in the regional jet segment. The aircraft will leverage new engine fuel saving technologies from Pratt and Whitney along with a thinner wing structure. The company has booked 165 firm orders to date and has goals to land upwards of 5000 orders over the next twenty years, which the article opines as somewhat unrealistic.
Even more interesting is the observation that this supplier must continue to protect its presence and stature in Boeing’s increasingly more ramped-up aircraft output supply chains while becoming a brand to itself. This will be a rather interesting business case to follow in the unfolding months since it could provide additional signposts on how suppliers transform themselves to both brand owners and key suppliers.
This week, Hon Hai Precision Industry, the parent to global contract manufacturing leader Foxconn, disappointed equity markets by posting a 19 percent decline in calendar Q1 revenues. Financial media was quick to correlate Hon Hai’s revenue decline with previously reported disappointing demand for Apple’s iPhone5 phone, compared with the earlier model.
The fallout from this announcement has already begun with reports that Hon Hai has dependence on 60-70 percent of its revenues on a single major customer. An analyst at KGI Securities is widely quoted as indicating: “A quarterly decline was expected, but not a yearly decline … This shows that Hon Hai’s revenue depends too much on Apple, and iPhone orders corrected more than expected.” Keep in mind that the first three months of the calendar year includes planned shutdowns for the Chinese Lunar holiday period in early February. None the less, equity markets have already factored that reality, and have taken a keen eye to the global leader in manufacturing services.
Hon Hai had actually reported a decent Q4 in terms of revenues and profits, but this latest announcement deflates history. Hon Hai stock has declined considerably since the December period.
As Apple’s supply chain re-positions itself for potential new products and new sources of supply in 2013 and beyond, Hon Hai is caught in the middle. While Apple continues to feel pressure from the investment community for a perceived slowing down of product innovation cycles and failure to buffer competitor Samsung, Hon Hai must continue to deal with the challenges of fluctuating product build schedules and increased social responsibility pressures from the direct labor force. We have previously commented on plans for more investment in robotics to mediate direct labor complaints of monotonous work and to buffer increased wage rates across Foxconn’s China based facilities.
A consensus of equity analysts expects Hon Hai to grow revenues by over 5 percent and profits by over 16 percent in 2013. Judging from the Q1 result, more challenges remain for this global based contract manufacturing and technology development firm, including finding new customers that can buffer the demands of Apple.
Today, The Wall Street Journal reported what social media and the Internet has been buzzing for weeks, namely that Apple plans to introduce both a refreshed iPhone model, as well as a less expensive new iPhone model sometime this year. WSJ cites supply chain sources as indicating that the production of a refreshed iPhone, similar in size and shape as the current model, is in-process of ramping-up for a summer launch. The publication further indicates sources indicating that a less expensive model with a cheaper, plastic casing and a 4 inch screen could launch in the second half of this year, targeted to the emerging market segment.
There seems to be no other company that garners the eyeballs and global wide coverage as Apple, and if we are to believe all that is stated thus far, in addition to the two iPhone product introductions noted above, there is further speculation of an “iTV” like product, complete with a ring accessory, and perhaps an “iWatch” (wristwatch) device also launching this year.
However, it is important to take a step back from all the buzz and note that the market dynamics surrounding Apple are changing rather quickly. Samsung has mounted both a serious product and global marketing challenge in its Galaxy S smartphones. The newest S4 model is launching this quarter, and it features rather innovative new hardware and software functionality capabilities. Andriod powered devices continue to outpace in unit growth. Supply Chain Matters has penned previous commentaries noting the fallout of Samsung processor, LCD screen and other components that previous fueled the Apple supply chain and its product innovations.
Apple stock is under enormous pressure, dropping half its market value from its previous $750 per share eclipse in 2012. Investors are concerned that Apple’s super high product margins may erode, along with its presence as the innovator of the market. Thus, this WSJ article is in our view, too well timed to keep Apple’s product innovation news top-of-mind and to buffer its falling stock price. You see, the same publication speculated in early January about a low-priced iPhone introduction to the market. Our Supply Chain Matters commentary noted the significant supply chain implications related to such a product.
Thus, from the product management, procurement and supply chain lens, there are two strategic implications to keep an eye on in the coming months.
A lower-cost, higher volume iPhone product strategy has to be far more sensitive to considerations of margin and profit distribution among Apple’s contract manufacturing, channel and retail partners who will be instrumental in penetrating higher volume consumer markets such as China and India. It must deal with the new realities of rising labor costs or be much more dependent on factory automation. As many senior supply chain executives and their teams are all too aware, there are distinct differences in the requirements between a high-volume, high-margin global supply chain strategy vs. a higher-volume, much lower-margin one that must cater to the unique channel distribution requirements of emerging markets.
The second strategic implication follows-on to the above and relates to changing expectations and dependencies on a firm’s supply chain. Apple’s supply chain capabilities have in many tests, provided the agility and resiliency to enable explosive business growth. Suppliers were conditioned to expect multiple product changes at multiple times, and were expected to be able to ramp-up rather quickly to be able to reap the benefits of participating in explosive unit volume growth. However, by our view, the third fiscal 2012 quarter for Apple was the turning point for adding ever more challenges for its supply chain ecosystem. The result is provided by the numerous reports of labor unrest and subtle signs of supply shortfalls rumored to have constrained unit and revenue growth.
Thus, the stage is set for a new era of global supply chain dynamics, one that pits the supply chains of both of these two stellar companies against each other in terms of synchronized execution.
The Apple supply chain must now rally to more variety of products, different supply chain fulfillment models and more frequent product introduction cycles. A transition to different key strategic suppliers has been underway for weeks, one that does not include Samsung as a strategic supplier. We may well hear of other new strategic suppliers.
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, quickly ramp products to enormous global wide volumes and deal with multiple channel partners. The February 4th edition of Fortune features an article on 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, supporting the ability to ramp-up production rather quickly. In the U.S. market alone, the company supports 25 unique smartphone models, which takes on more significance when one factors the global-wide market requirements.
In May 2012, Supply Chain Matters coined the analogy of the shiny apple and complex orange. Our analogy related to both of these companies, 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 still relish the taste. 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, but perhaps more behind the scenes.
A new phase has now begun where both of these superior supply chains, with different cultures and capabilities have entered a new competitive dimension with far reaching implications.
This will be exciting for all of us to observe over the coming months and years.
©2013 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.
Disclosure: The author has a small ownership in Apple stock.
In a Supply Chain Matters commentary published In late August 2012, we noted that, in the light of the contentious patent infringement court battles that occurred between Apple and Samsung, there may well be strategic supply implications. In that commentary, we speculated as to whether Apple would gradually replace Samsung as a major supplier for its key ARM microprocessor chips that power iPhones and iPads. We noted that few suppliers could scale to the volume and cost delivery targets of Apple, and thus, any transition of strategic sourcing would gradually occur. The next major turning point would most likely be when certain Samsung multi-year strategic supply agreements reach renewal point.
In early January in a follow-up commentary, we cited a posting appearing in The Strategic Sourceror Blog which indicated that Apple was in the process of making a major change in its strategic component sourcing strategy. The Sourceror commentary made note of published reports in the Taiwan Commercial Times that Apple was considering global semiconductor fab provider Taiwan Semiconductor Manufacturing (TSMC) as a new supplier for the A6X microprocessor utilized in some Apple iPad products.
Since that time, there are reports that Apple is also speaking with Intel regarding its long-term chip needs. DigiTimes has speculated that TSMC would finish tapping out Apple’s A7 processor this month and start trial production in May-June, with volume shipments in Q1 2014 time period.
This week, both the sites iClarified and DigiTimes are citing a Korea based media report indicating that Apple has yet to send Samsung Display a Request for Quotation (RFQ) for renewing the existing contract for LCD panels. That report speculates that because Samsung has yet to receive its RFQ, it will no longer be proving panels for iPad and iPad mini products. That implies that LG Display, Japan Display, AU Optronics, and financially troubled Sharp will continue as display suppliers for these products. DigiTimes further speculates that Samsung will most likely exit its LCD supply commitments after Apple introduces a new 9.7 inch iPad.
Thus, there has indeed been a fallout from the patent disputes among these two companies, and a new era of supply relationships will evolve for Apple in the coming months. Somehow, though, this is not the final chapter in this ongoing drama of intense competitors. Samsung may well have other moves yet to come.
Disclosure: The author is a current stockholder in Apple.
Late last night, while monitoring Twitter, we picked-up on breaking news “tweets” reporting that a major 6.1 magnitude earthquake had occurred in the vicinity of central Taiwan. While earthquakes often occur in this region, a strong tremor that occurs at a shallow depth can be a cause for considerable concern. Knowing that this area in the epicenter for high tech and consumer electronics supply chains, we immediately re-tweeted this news with hopes that our readers would be on-alert to both the event and the potential for disruption.
Fortunately, for those residing in the impacted area, damage was reported as minimal. Tragically, one fatality occurred along with some injuries. As we pen this commentary, there is a report that a number of large production facilities had to be quickly evacuated. They include two separate facilities operated by the world’s largest semiconductor fab producer, Taiwan Semiconductor Manufacturing Company (TSMC), but according to the company, no interruption in production schedules is expected. Three other companies with operations in Taiwan–chipmaker United Microelectronics, flat-panel maker Innolux, and liquid crystal display manufacturer AU Optronics each indicated in public statements to Bloomberg that they expected no impact from the quake.
These names, along with others, should be very familiar to our readers since they are each key strategic partners to large and smaller global high tech OEM’s. Any disruption involving any of these suppliers would probably have a significant supply chain impact without a supply chain risk mitigation plan.
Earlier this month, we were alerted to a startling report from Japanese media. A Japanese government panel predicts that if a magnitude 9.1 earthquake, similar to the size of the quake that struck the northern coastal region in 2011, were to hit off the southern coast of Japan, it could cause upwards of $2.3 trillion in economic damages, ten times the economic impact of the 2011 Great East Japan Earthquake. That would equate to 40 percent of Japan’s current GDP. This estimate regarding a worst-case scenario is sensitive because of a long-expected quake potentially occurring along the Nanki Trough, a roughly 4 kilometer deep depression on the seabed that extends from Suruga Bay to areas off eastern Kyushu.
Think for a moment about what occurred in 2011, and the impacts incurred on aerospace, automotive, high tech, industrial and other supply chains. The impact to supply and brands was enormous and far-reaching.
These are all timely reminders of the realities of supply chain related risk, and the critical importance for having active supply chain risk mitigation and business continuity processes.
What’s the status in your organization?
Added Note: This author will be speaking on this timely topic at an upcoming monthly meeting of the Central Pennsylvania APICS organization in Harrisburg Pennsylvania on Wednesday, April 17. The meeting will be held at the Holiday Inn Harrisburg East beginning at 5:30pm. For further information and registration, please email registration <at> apics-cp <dot> org.
This has been a week that business media has featured two high profiled supplier related snafu’s, or at least, that has been the business media slant. Each is yet another important reinforcement for a more constructive and collaborative relationship with a key supplier.
This is the second of two separate Supply Chain Matters commentaries related to these high profile snafus. Commentary One related to chic sportswear retailer Lululemon Athetica. We now turn attention to smartphone manufacturer HTC.
Earlier this week, this Taiwan based smartphone designer and manufacturer indicated that it was pushing back the rollout of its newest and most important flagship smartphone, the HTC One. The company’s sales of smartphones declined 41 percent in its latest quarter and this new model is strategically important toward regaining prior market share. This announcement was further significant because rival Samsung, with much fanfare, had just unveiled its new Galaxy S model smartphone to the market. As readers are aware, this market segment is highly competitive where a new product becomes ever more critical to sustain innovation and consumer buying interest. That is why an Apple or Samsung product launch literally moves equity markets. Availability in the market is doubly important. HTC initially unveiled the HTC One to the market in February, indicating consumers could get one in late March.
According to business and social media reports, HTC executives attributed the delay in planned March sales to shortages of components including casings and camera parts. An HTC executive is quoted in a Wall Street Journal report as acknowledging that the company “has changed its order forecasts drastically and frequently following last year’s unexpected slump in shipments.” This executive addedthat “HTC has had difficulty in securing camera components as it is no longer a tier-one customer.” The WSJ further notes that CEO Peter Chou informed senior executives that he would step down if this new smartphone model does not succeed in the market. As our readers are well aware, that statement alone would intimate that a lot of management roles are at-stake with an unsuccessful product launch not to mention lots of tendencies for “saving-face”.
Is it any surprise that the hottest consumer electronics segment supply chains is experiencing component supply problems? Not really. The sheer volume numbers and overall pace of Apple and Samsung have produced many commentaries related to various select component shortages these past months. Apple admitted it was supply constrained in its latest quarter.
Smartphone supply chains have plenty of supply commitments and demanding customers. Thus, inconsistent and constantly changing forecasts of product demand are not going to place a customer on the most favored listing, especially if other customers exercise synchronized planning and execution of supply needs. Large contract buys also place bigger players in higher service and supply categories. Any small of medium sized manufacturer is acutely aware of this condition.
The HTC One has had other issues. The WSJ reports issues with employee turnover as rivals poach engineers from the company. For the first time, HTC suspended its year-end bonus for employees supposedly to fund added marketing programs. The queuing of various telecom operators and major retailers to support a March product launch, only to inform these same partners during the execution window that the product is delayed by a month, has not helped on that end as well.
HTC has experienced a 50 percent decline in market share for its products and desperately needs to have a winning product. Instead of pointing the finger at component suppliers, the company would be better served by admitting that there have been some product launch issues and that it is diligently working with both suppliers and channel partners to insure adequate supply of new product.
To dis your key suppliers, especially when you hold some of the blame, is a no-win situation. Positive supplier relationships are built on openness, candor and team collaboration behind the scenes. Even if your company does not hold the highest priority with a supplier, consistency in planning and candidness as to fulfillment needs are certainly more constructive.
Winning in the marketplace is a team sport that involves positive supplier and partner relationships.