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.
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.
Supply Chain Matters has featured prior commentaries concerning GT Advanced Technologies a now defunct Apple supplier that incurred a sudden bankruptcy filing in the fall of last year. A series of new product focused events regarding the ramp-up volume production of an advanced form of sapphire glass led to the supplier’s decision to seek bankruptcy protection.
Included in this unfortunate series of events was a 1.3 million square foot production facility near Mesa Arizona that was slated by GT Technologies to be utilized for volume production. With the bankruptcy proceedings, Apple has now inherited this facility.
Supply Chain Matters has taken Apple somewhat to task, in not being more proactive and meaningful in its prior 2012 commitments to move more of its ongoing manufacturing efforts back to the United States. We have openly challenged Apple to make good on such a commitment as reflected in our commentary of July 2014. Apple CEO Tim Cook at the time indicated to NBC News that the non-availability of important required skills was the most significant factor in Apple’s consideration for shifting any higher volume production back to the U.S.
We were therefore again somewhat disappointed to read of the news that Apple now plans to invest $2 billion in the building of a command data center at the GT Technologies facility in Arizona. According to business media reports, Apple expects to start construction in 2016, after GT Technologies clears out of the facility. Upwards of 700 total manufacturing jobs are lost. The tradeoff will be 150 data center staff employed at what is sure to be a state-of-art lights out advanced data center. According to a prior report by The Wall Street Journal, the state of Arizona had previously provided $10 million in incentives to make way for the manufacturing facility. Not so for the current re-use.
Now some readers may obviously challenge our viewpoint with the argument that Apple’s business model and ongoing obscene profitability is more about growing online services and electronic content distribution emanating from its millions of installed iPhones, iPads and Macs. Yes, that argument has meaning. But, Apple’s management team, under pressure from U.S. based consumers with increased awareness of holding global corporations accountable for their social responsibility and manufacturing sourcing practices, made that increased U.S. commitment to appease such concerns, albeit a couple of hundred million dollars in scope.
Thus, our disappointment is that a $2 billion investment could well have been applied to a state-of-the art manufacturing assembly facility or to supporting a component supplier’s efforts to source additional production in the U.S. Or, Apple could have elected to invest a significant sum in training and preparing U.S. based manufacturing talent.
When a company like Apple is deservedly ranked number one on nearly every researcher’s top supply chain listing, the ranking comes with a high bar of expectations. We all expect Apple to set world class benchmarks in many supply chain capabilities including supplier and social responsibility as well as balanced sourcing of supplier and manufacturing capabilities.
Thus, we will not back off from our prodding of Apple.
As we declared in July: “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.”
From our lens, the decision to re-purpose the Mesa Arizona facility was another opportunity lost to make good on a prior public commitment.
Then again, China and Asia based production affords Apple far more inherent flexibilities including increased margin pressures on suppliers while demanding the ultimate in scale-up and scale-down flexibilities.
When, if ever, will this consumer electronics giant increase its investment in U.S. production capability?
Readers weigh in- What’s your view?
During this period of earnings announcements for the December-ending quarter, a new and significant headwind, the effects of the U.S. dollar, has appeared for industry supply chains with operations anchored in the United States. That was significantly delivered to Wall Street by yesterday’s earnings announcement from Procter and Gamble, which currently has nearly two-thirds of its revenues coming from outside of the U.S. Procter and Gamble was not alone, even the likes of Apple encountered the same headwinds.
P&G reported a 31 percent drop in profit as the stronger U.S. dollar diluted the effects of a modest 2 percent organic sales growth. Net income dropped nearly a billion dollars from the year earlier quarter. According to business media reporting, foreign exchange pressures reduced net sales by 5 percentage points. Once more, P&G indicated that these currency effects will continue to be a drag within 2015, potentially cutting net earnings by 12 percent or in excess of another billion dollars.
The implications are obvious including a continued selloff of underperforming brands and businesses. One published financial commentary report by The Wall Street Journal implied the continuance of “ruthless cost cutting” and a continued slim-down of brands. P&G has further undertaken ongoing efforts to source more production among emerging global regions, and those efforts are likely to accelerate in momentum.
The strong headwinds of currency were not just restricted to consumer product goods. Today’s WSJ reports that it is now evident that:
“The currency effects are hitting a wide swath of corporate America- from consumer products giant Procter and Gamble Co. to technology stalwart Microsoft Corp. to pharmaceutical company Pfizer Inc.. Those companies and others have expanded aggressively overseas in search of growth and now are finding that those sales are shrinking in value or not keeping-up with dollar-based costs.”
Further cited was a quote from the CEO of Caterpillar indicating: “The rising dollar will not be good for U.S. manufacturing or the U.S. economy.” The obvious fears for investors and economists alike is that the U.S. dollar’s explosive gains will backfire for U.S. based companies by reducing the price attractiveness of goods offered in foreign countries as well as reducing the value of foreign-based revenues.
The implications to U.S. centered industry supply chains are the needs for yet further shifting of strategies and resources. The existing momentum for U.S. manufacturing may well moderate with these latest developments. Initiatives directed at supporting increased top-line revenue growth now have the added challenges for more flexible, global-wide sourcing of production and distribution needs. Operations, procurement and product management teams that believed that they could get a breather from draconian and distracting cost-cutting directives will once again face the realities of having to cut deeply into domestic focused capabilities and resources.
We often cite the accelerated clock speed of business as a crucial indicator for agility and resiliency for industry supply chain strategy. Here is yet another example where perceptions of a booming U.S. economy quickly change to the overall business and supply chain implications of the subsequent currency effects.
Throughout the summer and especially in September of 2014, we featured a number of Supply Chain Matters commentaries reflecting on yet another series of Apple supply chain product introduction ramp-ups, and specifically whether the Apple supply chain ecosystem and its internal supply chain teams could yet again pull rabbits out the hat proverbial hat and deliver on business expectations for the all-important holiday fulfillment quarter.
Specifically in our mid-September commentary we noted:
“Over the coming weeks, as the marketing and sales machine cranks-up consumer motivations to buy, the supply chain will deal with the realities of limited supply, production hiccups and product allocation conflicts among various channels that invariably come up in such situations.”
We further declared:
“While some supply chains are challenged with collaborating with sales and marketing on stimulating and shaping product demand, Apple has the current challenge of meeting very high expectations involving an outsourced supply network with many moving parts. They have pulled miracles in the past, and the stakes get even higher.”
Yesterday after the stock market close, Apple announced financial results for its fiscal first quarter ending in December, and the results were staggering, along with the business headlines. The Wall Street Journal headline story today was titled: Apple Delivers Quarter for the Ages.
Apple reported net income of $18 billion for the quarter, was described as more than 435 of the companies within the S&P 500 Index each made in total profits. But the supply chain headline was fulfilling all-time record customer demand for 74.5 million new iPhones. This was up 46 percent from the same holiday fulfillment quarter a year ago, reflecting a lot of pent-up upgrade demand for the new iPhone6 models. In its reporting, the WSJ equated such volume output to more than 34,000 phones per hour, around the clock.
Gross margin was reported as 39.9 percent, nearly two percentage points higher than last year’s similar period. Once more, average sale volume for the iPhone increased to $687, nearly $50 higher than a year ago.
Apple also managed to double its iPhone sales volumes within China during the quarter despite delayed availability slipping to mid-October from the scheduled simultaneous September product launch.
Readers who followed our Apple commentaries should recall that the iPhone6 incurred its own set of production ramp-up challenges including a last-minute design change involving its larger screen displays. There was the usual production yield challenges associated with the fingerprint scanner and with the LCD displays themselves. We called attention to a TechCrunch report that cited sources in September indicating that Apple had already contracted air freight capacity anticipating to flood channels with last-minute shipments.
All was not spectacular news regarding Apple’s latest performance. Sales of the iPad were reported to be down 18 percent from the year ago period. The long-anticipated iWatch availability has now slipped to April of this year. However, these do not take away from the extraordinary performance of the Apple supplier ecosystem, and in particular, its contract manufacturers who had to successfully support the four month production and fulfillment ramp amidst the production challenges.
The Apple supply chain did indeed again pull rabbits out the hat. It performed to enable an expected business outcome, despite operational challenges.
We extend our Supply Chain Matters Tip-of-the Hat recognition for such performance. Let’s hope that the supply chain ecosystem will share in similar financial rewards.
In early August, Supply Chain Matters called attention to a tragic explosion and subsequent fire that occurred at a factory belonging to a Tier Two auto parts supplier located in China. The factory belonged to Kunshan Zhongrong Metal Production Co. and was located in a development zone in the Jiangsu provincial city Kunshan City located about 50 kilometers west of Shanghai. The plant performed plating and polishing of metal hubs that include wheel hubs, a pre-production preparation for aluminum car wheels used by automakers. The explosion was initially believed to have been caused by accumulation of metal dust particles within the facility. At the time of this incident, media reports were unclear as to the full extent of deaths or injuries but the government news agency indicated that 75 workers perished as a result of this accident. The accident was China’s worst industrial disaster in nine years and highlighted continuing problems with workplace safety.
Earlier this week, Chinese investigative authorities reported that the blast killed at least 146 workers, nearly double the initial reported death toll. Reports in August indicated that there were upwards of 260 workers in the plant at the time of the explosion, and this revised number amounts to a significant casualty toll. According to various global and business media reports, Chinese authorities indicated this week that they would prosecute three senior executives of Kunshan Zhongrong Metal Production as well as 15 Kunshan governmental officials. China’s government further announced the firing of two top officials within the city of Kunshan.
According a published report by the New York Times, Beijing has been holding local government officials and company executives accountable by handing out harsh penalties for work accidents with high casualties. In Kunshan, the investigation team found that local officials were negligent in enforcing safety regulations and that plant management failed to provide safety training for workers, ignored rules on building spacing, density in manufacturing lines, dust cleanup, and use of anti-explosion equipment.
As noted in our August posting, previous incidents of explosions caused from combustible metal parts involved two different suppliers to Apple. In May of 2011, a significant explosion rocked a Foxconn Technology Group production facility located in Chengdu, China where two workers were reported killed. In December of that same year, an explosion at a manufacturing facility of Ri Teng Computer Accessory Co., a subsidiary of Pegatron Corp, located in Shanghai’s Songjiang Industrial Park, injured upwards of 60 workers.
This latest report is a further indication that China’s governmental leaders are indeed clamping down on factory safety standards by holding individual executives and investigative agencies accountable for enforcing worker safety standards.