We along with other recognized supply chain thought leaders have been raising awareness to the current talent shortages regarding areas of supply chain management, particularly individuals with experience related to linking the introduction of new products and product management with overall supply chain ramp-up and ramp-down deployment needs.
One of globe’s top-ranked supply chains, Apple, has been under considerable pressure of-late because of the perception that its product innovation cycles have slowed and industry competitors are quickly narrowing the gap in surpassing such capabilities.
A newly published report from the Wall Street Journal (paid subscription or free metered view) places a poignant perspective to Apple’s growing need. The report indicates that Apple is in the midst of hiring hundreds of new engineers and supply chain managers across China and Taiwan in its attempts to speed product development and introduce a wider range of innovative products. The report notes that current victims of this hiring blitz include the likes of HTC Corp. and other Taiwanese technology firms. According to the report: “The total number of engineers and (supply chain) operations staff in China now exceeds 600…”
The report further outlines that while core research and development will remain in Cupertino, engineering and supply chain management talent investments within China pale in comparison to those in the United States, implying an ever more expanded presence in China. Further disclosed is that Apple has added contract manufacturers Wistron Corp. and Compal Communications to help produce upcoming versions of iPhones and iPads.
Supply Chain Matters has often commented how Apple’s purchasing clout and volume scale can lock-out smaller high tech and consumer electronics OEM’s from lowest cost pricing and favored supply agreements. With this latest report regarding the current talent seeking hiring spree centered on China, the industry can probably add talent raiding and talent shortages to the impacts of Apple along with its competitors.
Talented and experienced cross-functional supply chain management professionals with experience in new product ramp-up and time-to-market, along with alleviating supply chain choke points are going to be in the catbird seat across global locations, since the talent war seems to be escalating across high-tech supply chains.
Supply Chain Matters has provided a number of previous commentaries regarding when is it appropriate to execute a more vertical integration strategy within a specific industry supply chain. Our commentaries on this strategy focused on General Electric in aerospace engines, Delta Airlines in airline service operations, Hon-Hai Precision in high-tech contract manufacturing services and Hyundai Motors in automotive manufacturing.
This week, general, business and social media as abuzz with the announcement that electric automobile maker Telsa Motors has announced audacious plans to build its own $5 billion electric battery “gigafactory” capable of supplying up to 500,000 electric vehicles per year. This strategy is fairly savvy, given that when one reflects on the entire value-chain and cost-of-goods sold (COGS) for an electric powered automobile, the batteries are indeed the highest portion of cost. The location of this factory is stated as somewhere within the U.S. Southwest, with locations in Arizona, New Mexico, Nevada and Texas all being explored. The area 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. Another neat aspect to the proposed 10 million square foot production facility are plans to have the factory green and sustainable, including solar and wind farms for supporting internal power needs. Telsa’s blog features a presentation that describes the conceptual plans for the proposed “gigafactory”.
According to published reports, the total cost of the plant is estimated in a range of $4-$5 billion, with $1.6 billion raised through a convertible bond issue and a $2 billion investment from Telsa. Panasonic is the current primary supplier for Telsa’s lithium-ion batteries and in its reporting, the Wall Street Journal indicated the possibility that Panasonic and other unnamed Japanese suppliers could contemplating a $1 billion investment in this proposed facility. Reports caution, however, that Panasonic’s plans are still fluid.
Telsa currently supplies batteries for the Toyota RAV4 EV and the Mercedes B-Class electric. In its reporting, the San Jose Mercury Times notes that Telsa’s prime assembly facility in Fremont California is directly located on a Union Pacific railway spur line and that the “gigafactory” will more than likely be serviced by rail as well, to control transportation costs in shipping batteries to the final assembly point.
Telsa expects that the new factory would reduce its current battery costs by 30 percent in its first year, which as we all know, is a significant contribution to COGS, and further opens up opportunities to produce electric cars for the mass market. The WSJ further reported that Telsa is attempting to break through the $200 per kilowatt hour cost point which affords the opportunity for these types of batteries to be economical as backup power supplies for electric utilities along with other forms of static energy storage. Telsa CEO and principal owner Elon Musk also is chairmen of SolarCity Corp., a solar energy provider, and that is fueling additional speculation among certain Wall Street analysts that Telsa could morph to become a power storage company.
From an industry value-chain perspective, reports that that the proposed facility will produce more lithium-ion batteries than the entire global supply for 2013 has incredible meaning with the implication for establishing a highly significant alternative energy value chain capability within the United States. It is obviously an attempt to provide a more competitive lithium battery sourcing strategy from current areas such as China, South Korea and other countries. By our view, is a rather exciting and bold announcement, one that has the potential to add more to U.S. manufacturing and value-chain momentum for alternative energy, high-tech, consumer electronics and other industries.
Investors seem also impressed since Telsa stock has shot-up since the announcement.
Forms of vertical integration or closed supply chain strategies do indeed have their applicability and seem to be garnering additional favor.
In late August of 2011, three of Japan’s liquid crystal display (LCD) component producers, Sony Corporation, Toshiba Corporation and Hitachi Ltd. merged their, at the time, money-losing LCD manufacturing operations to form a single company that was named Japan Display. Each of the former suppliers could not financially afford to continue to compete with the likes of other industry competitors such as Samsung Electronics and Sharp Corp., who were major suppliers to Apple and some other consumer electronics OEM’s. This new venture was financed primarily by $2.6 billion in funding by The Innovation Network of Japan, a government backed agency with strong industry influences. Each of the merging companies was reported to hold 10 percent ownership in the new venture while the government agency held 70 percent ownership. The goal at the time was to position Japan Display and its technology in strategic markets related to small and mid-sized LCD displays, and to have the new company operating as an independent entity by early 2016.
This week, Japan Display announced its intent to raise upwards of $4 billion in an initial public stock offering (IPO) which the Wall Street Journal characterized (paid subscription) as the largest IPO from Asia this year. The WSJ further noted that if successful, it would represent a rare turnaround for Japan’s manufacturing industry. The report indicates that Japan Display currently supplies LCD displays for Apple’s iPhone 5S and iPhone 5C and its customer list now includes other top Asian and U.S. smartphone makers. The supplier has been skillful in improving the overall energy efficiencies of its LCD products while integrating touch sensors directly into the display, eliminating the need for a separate touch screen layer. Japan Display also appears on Apple’s 2013 listing of its top suppliers, and according to the WSJ report, garners up to a third of its current revenues from supply agreements with Apple.
While Japan Display made a small profit for its fiscal year ending in March 2013, it has not indicated to business media what its profit figures are for the current fiscal year. That information should presumably come with the IPO disclosures.
Reports indicate that $1.7 billion of the IPO proceeds will be utilized to enhance production capacity and develop new technologies. The remaining proceeds will be directed at current investing shareholders who will be unloading their stakes
With this announcement, it would appear that the timetable for Japan Display to become an independent operating company may be accelerating. Then again, with current favorable basis of Japan’s currency, the IPO may have more to do with opportunistic timing.
In either case, this IPO marks a significant positive milestone in resurrecting previous un-competitive LCD suppliers in Japan into a singular entity that is now holding its own. It represents another positive indicator that industry and government came come together to resurrect a supply eco-system, similar to what has occurred in Europe and the U.S.. It provides a reference model for other suppliers and supply ecosystems as well.
This is a follow-up posting to our previous Supply Chain Matters commentary concerning Apple’s 2014 Supplier Responsibility Report.
In addition to charting progress in social responsibility actions, Apple is one of very few manufacturers that will publically identify its suppliers. This effort first began in 2012 with the advent of Tim Cook as the company’s CEO and his goal to make the company’s supply chain, previously clouded in high secrecy, must more open and transparent. Even though this listing represents the top 200 suppliers for Apple, it does provide important pointers to how the company strategically and tactically manages its supply needs.
Readers can view the 2013 supplier listing at the following web link.
Scanning the full list, we share some of our observations relative to previous disclosures:
Once again, consider for a moment the scale required by a supplier to be able to support Apple’s production volume needs on a global basis, and at the same time, manage geographic supply risk. The complete listing remains small by high tech industry standards, reflecting Apple’s procurement strategy for concentrating influence on a select few strategic suppliers, yet tasking these same suppliers to manage scale, operational and supply chain disruption risk.
A sampling for matching select supplier names with individual supplier geographically based facilities reveals:
3M Company- 9 facilities
Intel Corporation- 14 facilities that span China, Costa Rica, Ireland, Israel, Malaysia, Mexico, Netherlands, United States and Vietnam
Maxim Integrated Products- 9 facilities
Micron Technology Inc. – 10 facilities that include Israel, China, Taiwan, Singapore and the United States
Molex Inc., (a Koch Industries company) – 10 facilities, only two of which are located in the United States
Murata Manufacturing Co. Ltd. – 12 facilities that span China, Indonesia, Japan. Malaysia, Singapore, Taiwan, Thailand and Vietnam
Panasonic Corporation- 31 facilities, 20 of which are located in Japan and 6 within China
Samsung Electronics Co. Ltd. (subsidiary of rival Samsung) – 9 facilities
TDK Epcos Corp. – 20 facilities
Texas Instruments Inc. – 21 facilities, 9 of which are located in the United States
Vishay Intertechnology Inc.- 25 facilities which include Belgium, China, Czech Republic, Israel, Germany, Hungary, Mexico, Malaysia, Philippines, Portugal, Taiwan and the United States
In 2011, the widespread floods that occurred across Thailand severely impacted what was estimated to be upwards of 30 percent of existing hard disk drive supply at the time. Two of Apple’s prime HDD suppliers remain listed as Seagate Technology and Western Digital. A review of plant facilities indicates that Seagate has but one plant listed in Thailand, with two listed within China. Western Digital is noted with a total of 5 facilities, two located in Thailand, 2 within China and one within Malaysia.
In previous Supply Chain Matters commentaries, we have observed how Apple has strategically sourced in LCD Display needs among a number of strategic suppliers. The 2013 supplier listing reinforces that existence of that strategy with the names of LG Display Co. Ltd. (7 facilities), Samsung Electronics (noted above), Sharp Corp. (9 facilities) and Japan Display (3 facilities).
Finally, a commentary on Apple suppliers is not complete without addressing contract manufacturers. Last year, Apple announced that it would expand its contract manufacturing presence beyond its prime provider Hon Hai Precision Industry Co. Ltd. (Foxconn).The 2013 listing includes 29 Foxconn facilities, 26 of which are located in China. Flextronics International Ltd. is listed with 4 facilities, two of which are located in China, the other two noted as Austin Texas and Sao Paulo Brazil. Apple’s newest contract manufacturer, Pegatron Corp. is listed as 8 production facilities, all located within Shanghai and Jiangsu China. By our count, these three CMS suppliers equates to 36 production facilities across China. That, ladies and gentlemen amounts to a lot of manufacturing-driven employment and provides further evidence of how Apple manages margins.
As a community we very seldom get the opportunity to review any company’s listing of suppliers, let alone the supply chain rated highest. Learn from this opportunity and share in praising Apple for its openness.
As in previous year’s commentaries related to the Apple supplier listing, readers are welcomed to share any additional observations and thoughts in the Comments section below this posting.
Consumer electronics leader Apple has released its 2014 Supplier Responsibility Report with declarations of better working conditions and tougher standards for those suppliers fortunate to be a part of Apple’s value-chain and supply eco-system. This year’s report is the eighth since annual reporting was initiated by Apple, and by our lens, continues to provide industry leadership and transparency in areas that require continuous industry attention.
Noted highlights of the 2014 report include:
- Increased efforts directed at social responsibility practices by publically releasing for the first time, more than 100 pages of declared Social Responsibility Standards.
- The education and training of 1.5 million people on their worker rights, and the weekly tracking of hours worked for over one million workers. Apple indicates that its suppliers have achieved 95 percent compliance with adherence to a standard maximum of no more than a 60-hour work week and with workers voluntarily agreeing to work such hours.
- A 51 percent increase in supplier audits at all levels of the supply chain amounting to 451 audits in 2013, averaging more than one per day.
- Continuing to seek out abuses of migrant workers by conducted 33 specific audits requiring certain suppliers to reimburse foreign workers $3.9 million in excessive fees paid to labor brokers.
- Enrolling 240 supplier participants in an Environmental Health and Safety (EHS) Academy covering 270,000 workers across China and other geographic regions.
- A declaration that as of January 2014, all active, identified tantalum material smelters in the Apple supply chain were verified as utilizing conflict-free materials.
In numerous previous Supply Chain Matters commentaries, we have both praised and taken Apple to task for certain social responsibility practices across its supply chain. The latest was the introduction of newest contract manufacturer Pegatron and the unexplained deaths of alleged underage workers.
We all know that Apple has experienced its share of incidents and unsavory practices among its supplier base. Being chosen or remaining to be a supplier to Apple comes with significant rewards in terms of volume scale and revenue potential. Apple extracts performance and scale capabilities that can tax suppliers and provide motivations to turn a blind eye to certain responsible labor practices.
However, we continue to praise the company for its continued efforts in openly sharing its declared Supplier Responsibity Standards along with taking a visible industry lead in providing education, support programs and enforced supplier accountability. Not all consumer electronics manufacturers follow such standards and that is not good. We were especially impressed with Apple’s approach to Environmental Health and Safety efforts across China, namely identifying a critical shortage of people trained to understand global standards, and establishing a formal 18 month training program to help increase qualified experts in EHS within the region, a program upon which the entire industry benefits.
High tech and consumer electronics manufacturers know all too well about the challenges and pitfalls of low-cost, high volume manufacturing environments that exist across China and other lower-cost regions. While industry associations and collaborations exist on paper, they do not seem to have the open leadership and teeth that Apple continues to demonstrate. If they do, we certainly want to be educated.
More progress is will obviously be required and other high tech and consumer electronics providers need to step-up and demonstrate their open and transparent efforts directed at social responsibility practices.
In what we would characterize as a significant development, a posting on the Wall Street Journal Digits Technology blog quotes informed sources as indicating that global-wide contract manufacturer Foxconn, also known as Hon Hai Precision Industry, has been quietly working with Andy Rubin of Google on developing advanced robotics that can be deployed within Foxconn factories. The posting further indicates that Foxconn has dispatch engineers to the campus of the Massachusetts Institute of Technology (MIT) to learn the latest in manufacturing automation technology.
Google has acquired eight robotics companies in the last year and has established a robotics development group. The WSJ posting makes note of the recent acquisition of Boston Dynamics, a company that has designed mobile research robots for the U.S. Defense Department. Speculation is that Google’s interests are in building a new robotics operating system for manufacturers, similar to its Android mobile operating system.
What makes this revelation more interesting is that Foxconn is the major contract manufacturing services provider to Apple and other high tech and consumer electronics providers. In essence, Google may be assisting these OEM’s in assuring a considerable manufacturing presence in China and other lower-cost manufacturing regions.
A number of major players are vying for control of the next iteration of automation and/or operating systems associated with the “Internet of Things”. In addition to Google, Amazon, General Electric, Siemens, Qualcomm and others are investing large amounts to be on the forefront of the next iteration technologies that leverage combinations of robotics, additive manufacturing and predictive analytics techniques.
Supply Chain Matters has previously brought attention to Foxconn’s aggressive goals to automate its factories with a million robots to counter increasing direct labor costs in China. This revelation comes after other announcements that Foxconn had established a joint engineering development effort with Carnegie Mellon University in the U.S.
This revelation comes in the throes of a recent revelation that Google’s Chairmen Eric Schmidt was the recent recipient of a $100 million compensation package, and the release of a former Yahoo senior executive with an exit package in excess of $100 million. There have been public protests in the San Francisco area concerning the growing wealth disparity among Silicon Valley companies, which gets continually reinforced by these revelations.
One can trust that Google will share intellect and collaborate with other manufacturers located across global regions including the Eurozone, North America and other regions. It would indeed be unfortunate that a future headline declares that other manufacturing regions are placed within a strategic competitive disadvantage because of the actions of a Silicon Valley giant with a singular goal.