Earlier this week, The Wall Street Journal reported what Supply Chain Matters believes to be a troubling trend, namely that some U.S. hi-tech firms are electing to transfer more intellectual property as well as value-chain activity among China’s state-owned tech firms. (paid subscription required) The trend among China’s internal high-tech sector would appear as though companies are no longer content to replicate innovations from foreign firms but rather lead markets with new innovation.
The principal catalyst was this week’s announcement by Dell indicating that it is significantly expanding its investments in China, including collaborating more closely with Chinese companies in sectors that the country deems crucial to national security. Dell plans to invest $125 billion, no small sum, within China over the next five years as part of what is termed as: “In China, for China” strategy. According to the report, the investment figure includes the cost of procuring additional value-chain components for the manufacturing of PC’s and servers in the country.
Dell further announced partnerships with software and cloud-based technology firms Kingsoft Corp. and state-owned China Electronics Corp., whose subsidiary, China Standard Software, provides a market alternative to the Microsoft Windows operating system. Dell’s partnership with China Standard Software began last year as the high tech manufacturer became what was termed by a China Standard executive as the first Western brand to produce PC’s utilizing that firm’s NeoKylin operating system. Another partnership involves Tsinghua Tongfang Co., where the two companies are collaborating to develop was it is described as: ”high-performance computing products.” According to the WSJ report, Tongfang produces security equipment for the government of China including metal detectors and embedded chips within national ID cards. The report indicates that Apple, Microsoft and Cisco are also meeting with Chinese officials in advance of Chinese President Xi Jinping’s first state visit to the United States later this month.
There are two important concerns related to these developments. One is that intellectual property protection (IPP) has always been a major concern around sourcing activities within China. That risk extends to the early days of foreign firms investing within China. This latest shift in strategy among certain U.S. firms like Dell could expose more technology to such risks. Then again, some in the high tech sector would argue that these types of risks are ongoing and are part of the cost for added access to China’s vast and growing market.
Another risk is related to the ongoing Trans Pacific Partnership agreement, a proposed trade agreement among 12 nations including several Pacific Rim countries and the United States that remains in ongoing negotiation stages. This agreement, if adopted, does not include China.
As noted in our previous commentary, the stated goals of the TPP are to “enhance trade and investment among the TPP partner countries, to promote innovation, economic growth and development, and to support the creation and retention of jobs.” As many in business media have observed, the TPP is all about lowering existing market barriers along with tolerances for supply and value-chain sourcing arrangements for many years to come. Some high tech companies have initiated ongoing political lobbying to insure any TPP agreement does not impose a competitive or cost disadvantage for their products, along with protecting access to a huge market such as China. And that reflects the conflict and our concern. Are we about to witness different IP and technology transfer strategies, one predicated on access to China’s market with IP and value-chain sourced primarily internally, and one on TPP with market access, IP and sourcing spread among member TPP nations? And, the larger what-if question focuses on whether China’s industry or government leaders elect to later block foreign based firms from future opportunities for China’s business.
In essence, market access, political, technology access and job-growth needs are all interwoven in moving parts with implications to global product innovation and value-chain strategies.
There are no easy answers and thus are the risks, perils and strategy implications that continue to unwind within today’s globally based and more globally competitive supply chains.
In many prior Supply Chain Matters commentaries related to high tech and consumer electronics, we have discussed the pros and cons of a supply chain strategy that supports two different business models. Each has a different purpose and supports a different market environment.
One involves a product and supply chain strategy that supports a cost-affordable price for hardware, with the expectation that additional profitability can be garnered through the sale of related content, applications and services. The other model is to harvest profitability from both hardware and service sales. These models particularly apply to smartphone producers, but apply to other products, especially in the light of evolving Internet of Things (IoT) driven devices.
The Wall Street Journal recently published (paid subscription required) a report on smartphone producers in China, where Xiaomi remains a market leader, which continues to sell a high-end, feature-rich phone at what is described as rock-bottom prices of roughly $280. Now other producers, including Lenovo, Huawei and ZTE have launched rivals to Xiaomi. The article cites 209 million unit sales across China in the first-half of this year compared with 75 million in the U.S. Thus, market scale and volume are considerable incentives.
Then there is Apple, which reportedly sold 26 million iPhones during this same period, 5 million less than that of Xiaomi. As we probably know, Apple fosters the latter strategy of harvesting profitability from both hardware and follow-on platform driven sales. It is therefore no surprise that Apple in now often referred to as a profitability machine. With growing profitability and cash, it can invest in more product innovation, longer-term supply agreements and all forms of supply chain agility.
But, the WSJ points out that the smartphone market across China, the largest in the world, has stopped growing. Once more, the U.S. market has by many accounts reached saturation with phone upgrades and/or replacements primarily driving product demand. Existing producers within China are now in a battle for market-share dominance, which remains driven for the most part by price, followed by functionality.
Today, Apple held its annual super hyped product event. The company announced its new iPhone 6 line-up, which includes a new aluminum case, 3D Touch system and an upgraded camera. The event was jubilant and CEO Tim Cook declared the launch of: “the most advanced smartphone in the world.”
But yet, the new battle ground of growth remains China and other emerging economies where consumer discretionary spending has far different characteristics and behaviors.
As to which of these strategies prevail as successful will be the subject of many commentaries and reports to come. However, one important tenet is that product and supply chain strategy will play a crucial role in long-term business outcomes.
Today, all business and social media eyes were focused on Apple and its annual Special Event timed to announce the latest iteration of product innovation, just in-time for the upcoming holiday buying period. Supply Chain Matters provides our initial impressions of new Apple products from a supply chain and product lifecycle management lens.
A New Model iPad
From our lens, the most significant news was the new iPad Pro model, which Apple executives boasted as the: “Biggest news in iPad since the iPad.” And rightfully so, since overall sales of the tablet device have been steadily declining for the past several quarters. Apple needs a boost for this product line, especially in growing the user base to greater numbers of business users.
The new iPad Pro features a 12.9 inch Retina display, the biggest ever built for an IoS driven device. Other announced features included an upgraded A9X, third generation processor, virtual full-sized smart keyboard, three additional input ports, an optional pencil stylus and other performance features. Announced pricing was $799 for the baseline 32GB model, upwards to $1079 for the 128GB Wi-Fi and Cellular enabled version. Add in the optional pencil stylus and smart keyboard and the price exceeds $1100.
Apple executives further declared that this new model iPad is: “Faster than 90 percent of PC’s shipped in the last 12 months.” That statement alone points to the primary strategic thrust of this newer model, increased attraction for business users and mobile-based business applications. Representatives from Microsoft, Adobe and 3D for Medical were invited to demo various office and industry apps than will run on the new iPad. From our lens, glaringly missing from the stage was IBM, which announced a groundbreaking partnership with Apple for mobile-based enterprise business applications nearly one year ago.
Availability for the new iPad Pro was announced as November which is an indicator that the supply chain is still laboring to scale-up supply and production volume to support expected customer demand needs.
Next Iteration of iPhone
The company announced its new iPhone 6 line-up, which includes a new 7000 series aluminum, the same alloy used in the aerospace industry, a new 3D Touch system and an upgraded camera. Tim Cook declared the launch of: “the most advanced smartphone in the world” but the reality of this year’s product upgrade is one predominantly software related. There are a couple of noteworthy hardware changes: a new custom aluminum case described as “aerospace like material” an upgraded 12MP camera and a more durable glass screen. However, the new screen in not described as sapphire glass.
Availability of the iPhone 6 was announced as September 25th, with pre-orders being accepted beginning on September 12. As was the case with last year’s iPhone launch, initial availability will span an initial twelve counties including China. This year, Apple’s supply chain ecosystem got an early start on ramp-up production and with little hardware changes, the volume machine should be in full cycle.
In a new twist, Apple is offering consumer financing programs to help customers pay for their phones in monthly payments since many U.S. carriers are no longer subsidizing the purchase of iPhones.
Finally there was very little supply chain and customer fulfillment related news related to the new Apple Watch, other than the availability of a new Hermes Collection line-up.
Every year at this point, we have featured our Apple product announcement commentary, and have noted that Apple’s supply chain will once again be put to the ultimate test. However, this year seems different, with more muted expectations.
As always, we will all discover the results and the implications in Q1 of 2016 and beyond.
Over the past month, business and general media has been reporting on leaked and other types of information stemming from the ongoing Trans Pacific Partnership (TPP) talks currently underway concerning a proposed trade agreement among 12 nations including several Pacific Rim countries and the United States. The stated goals of the TPP are to “enhance trade and investment among the TPP partner countries, to promote innovation, economic growth and development, and to support the creation and retention of jobs.” The latter portion of job creation is the most political and most impactful to industry global sourcing strategy.
The latest round of negotiations that occurred in Hawaii at the end of August ended without any sense of major agreement and the ongoing process remains politically charged among potential partner countries. What has been capturing the interest of Supply Chain Matters is the consideration and weighting that has been placed on global supply sourcing for certain key industries.
Automotive Supply Chain Impacts
Much of traditional business media reporting has been concentrated on the implications to the automotive industry. Major automotive OEM’s do not want this agreement to upend existing global sourcing strategies for component supply. Both Bloomberg Businessweek and The Wall Street Journal have recently reported that Mexico’s primary automotive industry group, which has been booming from continued new sourcing of production announcements from various global auto producers, has thrown a wrench into the current talks.
Mexico overtook Japan to become the second-largest exporter of vehicles to the U.S., primarily because existing free-trade agreements have attracted new plant investments from various global brands. In essence, the country wants to protect its interests in the definition of “rules of origin” and what would be classified as duty-free imports to the U.S. Under the North America Free Trade Agreement (NAFTA), 62.5 percent of component sourcing must come from within the NAFTA free-trade area to qualify as duty-free. Bloomberg reports that Washington tentatively agreed that Japan based automotive producers should be allowed to ship vehicles duty-free to the U.S., even if upwards of 50 percent of component sourcing comes from non-TPP countries. Component suppliers from both Mexico and Canada are reportedly lobbying for negotiators to stand pat with NAFTA guidelines. Meanwhile, autoworkers in all three NAFTA countries are voicing the need for fairer standards, and not allowing Asia-Pac car companies to game the system in favor of more job creation among lower cost manufacturing regions.
U.S. based automotive OEM’s have been similarly vocal as well, declaring that they rely on global supply chains to be able to competitively manufacture vehicles in the U.S. Nations such as Malaysia and Vietnam anticipate that the TPP will provide an incentive for each of these countries to increase their presence in supply of automotive supply chains, but Thailand is now an important component sourcing hub for Japan based OEM’s.
Dairy Industry Exports
Another area of dispute is that of dairy based imports, which are the basis of supply for other food related producers. New Zealand’s economy is dependent on exports of dairy products, which is prompting that country to lobby for broader access to markets of TPP member countries including Canada. Dairy imports into Canada currently invoke a tariff in excess of 200 percent, and that country’s politicians fear a backlash in the upcoming federal elections in October if they dare agree to cutback current tariffs that protect Canadian dairy farmers. New Zealand reportedly is holding firm that the country will not sign any new trade agreement that does not open new dairy related markets.
Apparel and Textile Sourcing
For the apparel and textile industry, only clothing that is wholly sourced and produced within TPP nations qualify for duty-free sales. A recent report from Time points out that Vietnam, currently the second-largest exporter of apparel to the United States, is only able to produce a fifth of the fabric it needs to supply finished apparel to global markets. Vietnam currently imports nearly $5 billion of fabric from China, a non-TPP country, and that scale of fabric sourcing must shift. However, current U.S. tariffs of Vietnam sourced apparel which are currently 32 percent would be eliminated, perhaps adding some impetus for finding new TPP-centric sources of fabric.
High Tech Sourcing
Similarly, high tech and consumer electronics producers have a current high sourcing content dependency on China and Taiwan, and to some extent, the Philippines and Thailand for component supply. Some high tech companies have initiated their own political lobbying to insure any TPP agreement does not impose a competitive or cost disadvantage for their products. Consider how much of the value-chain components of an iPhone or iPad are sourced from non TPP regions.
Clock is Ticking
The clock is ticking on whether a final agreement on TPP can be reached soon. The U.S. Presidential sweepstakes is well underway, and member nations have their own political events that will hold legislators to task. In the end, it would appear that any TPP agreement will have some direct and probably indirect impacts on global component sourcing strategies for multiple industries.
Supply Chain Matters has featured previous commentaries concerning GT Advanced Technologies, an advanced technology sapphire glass supplier that experienced some of the perils in being a supplier to Apple, particularly in a new product development phase.
In October of 2014, this advanced technology supplier was unexpectedly forced to file for Chapter 11 bankruptcy protection when Apple suspended its supply contract. The news reportedly wiped out in upwards of $1 billion in equity value when the news broke. A further casualty was a 1.3 million square foot advanced sapphire glass production facility near Mesa Arizona that included more sophisticated glass fabrication furnaces and was supposed to ramp-up to supply sapphire glass requirements for various Apple products including the iPhone.
Since that time, information leaked from bankruptcy court filings pointed to a tense supplier relationship that GT Advanced described as “an onerous and massively one-sided deal. “The supply agreement eventually ended when Apple withheld a product development process payment. GT was forced to lay off in excess of 700 employees at the Arizona production facility, which Apple has since announced will be converted into a world-class global command data center. Apple itself invested the sum of $439 million in the GT Advanced relationship.
On Monday of this week, after exiting Chapter 11 protection, the supplier has now announced that it will be reducing its workforce by an additional 40 percent in order to “right size” its cost structure. According to a published report by The Wall Street Journal, GT Advanced had about 1000 employees when it filed for bankruptcy.
As we observed in prior commentaries, product innovation involves time sensitive collaboration for product design and test changes as well as supply chain production ramp-up needs. That is why product design process information is quickly becoming the new requirement for inclusion within end-to-end supply chain business and collaboration networks.
The perils of being an Apple supplier include a high risk-reward ratio. That includes having the capability of high agility in the wake of what others would view as rather difficult obstacles. That tendency dates back to the era of Steve Jobs who instilled a perfectionist culture for design engineering. Also with Apple come huge scale and the potential for financial reward. In the case of GT Advanced Technologies, the risk-reward strategy continues to have an apparent far different outcome.
There has been much reporting within social and business media regarding the potential industry supply chain disruptive effects of the recent massive warehouse explosions that affected the facilities adjacent to the Port of Tianjin.
It is rather important and crucial that industry supply chain and sales and operations team obtain meaningful and insightful information regarding what is happening on the ground as well as the potential short or long-term supply chain impacts, if any.
We at Supply Chain Matters are disappointed to observe that certain technology and service providers are attempting to utilize this tragic incident as a backdrop to product marketing outreach campaigns. Neither should technology providers suddenly become news outlets.
Not good ideas by our lens.
Supply chain technology providers should instead continue to educate on the benefits of the technology they provide and allow industry supply chain teams to receive clear, unfiltered and unbiased insights and information from informed and educated sources.
One of the better Tianjin perspectives Supply Chain Matters has reviewed to-date ia a published white paper: The Aftermath of the Tianjin Explosions: A Global Supply Chain Impact Analysis, authored by supply chain risk management provider Resilinc.
While this 24 page white paper does include some product marketing, along with requiring registration, the bulk of the report provides meaningful and insightful information related to potential immediate, near-term, medium and longer term supply chain impacts.
The paper concludes that the less apparent ripple effects of the warehouse explosions will be felt weeks, months and even years to come.
The paper provides meaningful background information regarding this vital logistics and manufacturing hub, which services industry needs of automotive, commercial aerospace, high-tech, petrochemical and general industrial manufacturing supply chains, among others. It further outlines important mapping of industrial manufacturing and supplier concentrations within close proximity of the explosions, based on a mapping of over 30 sites in a 2-10 mile radius of the blast. Four large industrial zone districts are adjacent to the port, with the port serving as what is described as the largest free trade zone in northern China, and the second largest Vehicle Processing Center for importing and exporting of automobiles.
On the topic of near-term ripple effects, the Resilinc analysis predicts that extensive delays can be expected for most companies and sites moving products through Chinese ports as government agencies deal with the after-effects of a regulatory environment needing extra attention.
There are predictions that Tianjin port operations will only begin to resume normal operations by approximately mid-September, and that any containers now at the port will be inaccessible for the next two months, even if they are intact. Resilinc indicates that for any suppliers located within 2-15 miles of the explosions, companies may presume 12-16 weeks of delays.
Long-term impacts outlined related to the ripple effects of increased regulatory actions impacting certain industry sectors including the location and storage of goods near large population centers.
Regarding potential long-term impacts, the paper cites Chinese media as indicating the economic cost of Tianjin crisis could be as high as $8 billion.
If your organization is dependent on operations, logistics partners, suppliers or service providers in the Tianjin area, we recommend you review this report which can be accessed at the following Resilinc web link. (Some personal registration information required)