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Report Indicating Apple is Near Deal to Manufacture Products in India

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The Wall Street Journal reports (Paid subscription required) that according to a senior government official, Apple is nearing a deal to manufacture its products locally in India.  Apple Logo

India is expected to overtake the United States as the globe’s second-largest market after China, and thus such a move is a big deal for Apple and India’s government.

The report indicates that a group of Apple executives have been meeting with government officials this week to hammer out terms. Specific requests are noted as including concessions related to tax and tariff exemptions, including a 15-year tax holiday on imports of components and equipment.

That alone would imply that localized manufacturing will stem from supply chain components sourced from China, the U.S., and other regions.

One quoted official, who reportedly works with India Prime Minister Narendra Modi indicated to the WSJ that Apple could see India as an export hub.

The WSJ notes an Apple spokeswoman as indicating that: “We appreciate the constructive and open dialogue we’ve had with the government about further expanding local operations.” That seems to be some acknowledgement of talks.

If local manufacturing of Apple products were to be formally announced, we strongly suspect a blowback reaction emanating from the Twitter account of U.S. President Donald Trump. It’s no secret that Trump has Apple in his crosshairs because of the presence of a large number of Apple’s manufacturing employees throughout China. Not to mention that Apple is the most highly watched supply chain among Wall Street investors.

We would surmise that Apple, similar to other Trump industry targets, should be prepared with some sort of follow-on announcement relative to U.S. investment.

Of course, we can speculate all we want since today’s U.S. political environment is one not experienced for quite a long time, if ever.

Bob Ferrari

Breaking News: Foxconn Evaluating $7 Billion Investment in U.S. LCD Manufacturing Facility

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The Wall Street Journal is today reporting (Paid subscription required) that high-tech and consumer electronics provider Foxconn Technology is considering an investing $7 billion to build an advanced flat-panel LCD screen factory in the United States. This investment would involving the contract manufacturer’s recent acquisition of Sharp.

However, ongoing discussions reportedly remain fluid and highly dependent on government and other incentives. According to the WSJ report, a Foxconn spokeswoman declined to confirm specific statements but did indicate that the company was considering potential manufacturing presence in the U.S.

When SoftBank Group CEO Masayoshi Son recently personally met with U.S. President Donald Trump during the transition period, the two disclosed upwards of a $50 billion investment of technology companies with the United States. A hand-written piece of paper held by Mr. Son and shown to the press had the words Foxconn and SoftBank included.

Today’s WSJ report indicates remarks from Foxconn Chairman Terry Gou:

In his comments Sunday, Mr. Gou indicated that a deal was far from assured, and that he thought his discussions with Mr. Son were private and informal. But then when he and Trump met with the media, he exposed me

Speaking a company event in Taiwan on Sunday, Gou indicated that such a facility could generate from 30,000 to 50,000 jobs in the United States and discussions were underway with state and local officials in Pennsylvania and other U.S. states. Further stated was that any deal would hinge on getting rather attractive land and utility rates.

The report indicates that Foxconn has been considering a flat-panel display manufacturing facility in the U.S. for years in order to avoid the costly transport of large displays from Asia to U.S. based destinations. These efforts did not make headwind because of reported unfavorable economics and terms. Last month, Foxconn announced a new $8.8 billion investment for a new flat-panel manufacturing facility in Guangzhou China.

We at Supply Chain Matters view this Foxconn focused report in the context of our 2017 Prediction related to increased anti-trade geopolitical forces providing added supply chain global sourcing challenges and/or opportunities.  The new dynamic related to the United States is for multi-national manufacturers to gain the good graces or attention of the new Trump Administration by announcing incremental investments in U.S. based manufacturing. What makes this Foxconn development ever more interesting is not only its potential strategy related to Sharp LCD technology, but also its relationship as the prime contract manufacturing partner to Apple which has the bulk of its component and finished goods high tech consumer electronics manufacturing capabilities sourced throughout China.

While Chairman Gou’s hand was possibly forced by the SoftBank announcement, one can speculate as to other potential manufacturing shifts motivated by Apple. Thus morning, President Trump met with a select group of business CEO’s and reinforced his tendencies to favor a major border tax on products imported into the United States by manufacturers selling products in the U.S. Such statements may motivate other manufacturer’s, including Apple to revisit existing sourcing strategies.

Thus is this evolving new era of global sourcing dynamics.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

Deep Dive on 2017 Prediction Four: Increased Anti-Trade Geopolitical Forces Provide Added Global Sourcing Challenges


The following Supply Chain Matters blog is part of our ongoing series of deep dives into each of our previously unveiled ten 2017 Predictions for Industry and Global Supply Chains.

At the start of the New Year, our parent, the Ferrari Consulting and Research Group along with our Supply Chain Matters blog as a broadcast medium, provide a series of predictions for the coming year. These predictions are shared in the spirit of assisting industry specific and global supply chain cross-functional teams in helping to set management objectives for the year ahead. Our further goal is helping our readers and clients to prepare supply chain management and line-of-business teams in establishing impactful programs, initiatives, and educational agendas.

The context for these predictions includes a broad cross-functional umbrella of supply chain strategy, planning, execution, product lifecycle management, procurement, manufacturing, transportation, logistics and customer service management.

In an earlier Supply Chain Matters blog postings, we provided deep dives related to:

Prediction One- Subdued World Economic Outlook and Heighted Uncertainty to Test Industry Supply Chain Agility.

Prediction Two- A Challenging Year in Procurement

Prediction Three- A Supply Chain Talent Perfect Storm

In this deep-dive series posting, we drill down on Prediction Four.


2017 Prediction Four: Increased Anti-Trade Geopolitical Forces Will Provide Added Sourcing Challenges for Industry Supply Chains

In our predictions concerning 2016, we stated that major developments surrounding global trade policies would occupy the attention of many industry supply chain organizations during the year. Our context was the potential adoption of major global trade agreement such as the Trans Pacific Partnership (TPP), China’s competing One Belt, One Road (OBOR) initiative, and the Transatlantic Trade Investment Partnership (T-TIP).  Geopolitical events turned quite negative in terms of expanded global trade and thus the attention of industry supply chains never materialized.

For 2017, our prediction remains that major developments surrounding global trade policies will occupy the attention of many industry supply chain organizations during the year, but now from a far different and perhaps opposite perspective.

Across the globe, growing gaps in income inequality and rising political discontent against elements of domestic and international status quo are fueling a growing backlash towards global trade and unfettered open markets. With heightened global tensions now turning toward more anti-trade and possibly more protectionist rhetoric among developed nations, industry supply chains must now be prepared to deal with potential near and longer term implications that such policies will bring about.

A global environment that begins to turn hostile toward open global trade policies could result in increased import tariffs and added protectionist measures among trading nations, particularly China and the United States. According to the IMF’s October 2016 World Economic Outlook: “In short, turning back the clock on trade can only deepen and prolong the world economy’s doldrums.”

As we pen this prediction in early January, the World Bank declared that political and policy uncertainty in China, Europe, and the United States and in other major global economies are at unprecedented levels. There are fears that the Administration of Donald Trump could trigger a trade war with China and Mexico with threats to impose higher import tariffs for components and products entering the United States. The bank cautions that such a trade war may offset any gains from corporate tax cuts for U.S. businesses.

Further as we pen this prediction, proposals being floated by the Republican Party dominated U.S. Congress that are being directed at corporate tax reform feature border adjustment concepts. Essentially, the concept is applying taxes based on where a product is sold rather than where it is made or where the producer’s operations or executives are based. Imports would not be deducted as a cost of doing business, while exports would be exempted from taxes. The Wall Street Journal and other business media have already raised awareness as to the potential impact on industries that sell most their products domestically while sourcing most production externally in lower cost manufacturing regions. Examples are toys, consumer electronics, apparel and footwear and other products. Such concepts, if enacted, will place a far different financial perspective related to lower-cost production sourcing.

We anticipate that industry supply chain network models will undergo continuous analysis and scrutiny in the coming year as respective supply chain teams assess various changing landed cost and tax factors among product management models. That will likely require a lot of analytical modeling to ascertain impacts to product margins and line-of-business financial metrics.  They could further impact today’s contract manufacturing services model in the notions of where bill-of-material components originate from and where final products are shipped to.

Global trade issues indeed percolate in the coming year and they will likely be complex and confusing to sort out in terms of which will ultimately come to fruition. We concur with the IMF and the World Bank assessments that the Trump Administration could well be part of the epicenter of anti-trade disruption rhetoric to fulfill the political promise of Make America Great Again, and that may well include heightened trade tensions involving China or other lower-cost manufacturing nations.

Global trade advisory firms and consultants will be quite busy in 2017 in advising clients of potential implications of more protectionist trade policies or the heightened risk factors for certain global markets.

As noted in Prediction One, the ability to analyze and share important information, and to educate the business and C-Suite executives on supply chain impacts and/or risk tradeoffs of changed trade policies that potentially impact existing global and product innovation sourcing will be an important differentiator and competency throughout 2017. Collaboration among product sourcing, product development and supply chain strategy teams is essential. Organizations should further consider the value of organizing centralized, dedicated sourcing strategy and impact teams responsible for ad-hoc analysis while fostering a common foundation of analysis data and information. In essence, the task may be more of multiple scenario based analysis predicated on different input and output factors.

Our takeaway is that an assumed static global sourcing strategy could prove to be rather risky in 2017.  Technology supporting more analytically focused analysis and decision-making will likely play a very important role in the coming year.

This concludes our Prediction Four drill-down. In our next posting of this series, we will dive into Prediction Five that predicts continued turbulence across global transportation networks.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

Phoenix Rising from the Ashes- Samsung Suddenly Moves from Damaging Product Recall to Profit Milestone in a Single Quarter

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In May of 2012, in our commentaries related to high-tech and consumer electronics industry, Supply Chain Matters coined the analogy of the shiny apple and the complex orange. It related to that of Apple and Samsung and their competitive battles in the smartphone market.

The analogy drawn was 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 can overlook the blemish and still relish the taste. The apple has an iconic brand image and a warm memory.

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, not only for direct eating but as an ingredient or compliment to other foods. The taste of the orange is often tart or bristle to the palette, its skin is difficult to remove and its pulp is complex layering. That orange analogy referred to Samsung.

For years, 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, support faster time-to-market and quickly ramp products to enormous global wide volumes. In February 2012, Fortune magazine featured a profile of 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, tablets, electronic watches, and other electronic devices. The not so secret sauce is that major consumer electronics value-chain components such as leading-edge semiconductor chips, high-resolution LCD displays and memory components often come from Samsung’s electronics business units and supply many other branded providers.

Last week, business media reported that the South Korea based technology giant expects its recent December-ending fourth-quarter operating profit to rise upwards of 49 percent from the year earlier period. In its reporting, The Wall Street Journal’s opening paragraph in a January 5th report exclaimed:

For a quarter in which Samsung Electronics Co. suffered its most embarrassing product recall in its history, the world’s biggest smartphone maker has also forecast its strongest profit in more than three years.”

In a separate article the next day, the WSJ wrote:

Even with the early-October recall of its premium Galaxy Note 7 smartphone that cost it at least $5 billion, Samsung projected fourth-quarter earnings would be the highest in more than three years. The reason: competitor’s growing demand for Samsung components.”

This article (Paid subscription required) observes that global smartphone shipments have slowed sharply, registering less than one percent global growth in 2016.  Our analogy of the orange comes embedded in this WSJ observation:

Even as smartphones were selling strong, Samsung continued to pour tens of billions of dollars into semiconductors and display panels to enable phones to run faster, hold more storage and offer crisper images. Recent advances have made its components more powerful than those of competitors—positioning Samsung as an essential parts supplier for many of its rivals.

The profit forecast has pushed Samsung stock to record highs, and investors have obviously turned from gloom to elation.

We suggest a couple of takeaways can place this new development in perspective.

First, there should be no question that the Samsung brand image took a major hit with the exploding Galaxy Note 7 product recall debacle, followed by the exploding laundry machines. The memory of media accounts of exploding phones and announcements banning Samsung Galaxy Note 7 phones from air travel remains ingrained on the minds of consumers. That will take time to overcome. However, the company will learn from this incident, and that learning will be transferred to new product and component designs.

Samsung’s broader vertical supply chain focused strategy for high-tech electronics component innovation and value-chain penetration has proven thus far to be a far more insightful strategy, particularly as increasingly electronics and information-laden intelligence continues to be embedded in other products such as autos, trucks, and machines. It remains a manifestation that supply chains do matter in the context of supplier-driven product innovation and industry scale. As the WSJ observed, even if the Galaxy Note 7 was a somewhat successful product, limited global market growth of the market itself would have limited is profit contribution.

The reward is benefiting from the broader advances in high-tech electronics among numerous brands.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

Japan Display Secures Another Financial Bailout Infusion

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Just before the Christmas holiday there was an announcement regarding an additional investment in LCD supplier Japan Display. Its largest shareholder, the government-backed Innovation Network Corp. of Japan is investing an additional $636 million in this supplier, consisting of both convertible bonds and a subordinated loan. Yet another financial infusion from government of Japan interests provides yet another example of the high stakes involved for being a supplier and constant innovator of consumer electronics components.

In late August of 2011, three of Japan’s existing 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 what is today’s 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. The 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, and subsequently an IPO in 2014.

Today, Japan Display serves as one of the four suppliers of LCD technology for the Apple iPhone product lineup. This includes competing with industry leader Samsung Electronics who is already suppling Organic Light Emitting Diode Display (OLED) screen technology. Japan Display indicates that the latest round of funding will boost its efforts to develop OLED panel capability, the literal next wave of technology innovation in displays. This includes the acquisition of OLED developer Joled, which was formed in 2015 by the merger of the OLED operations of Panasonic and Sony. Plans further call for Japan Display to decrease its current concentration as a technology supplier for mobile devices, and to instead focus on next generation display needs within automobiles, laptops, appliances, and virtual reality devices.

This strategic move is wise from two perspectives.

First, Samsung Electronics remains a dominating industry leader and already provides OLED displays for namesake Samsung smartphones, and is likely to continue to supply Apple’s and other high tech OEM OLED needs as well.

Rival Sharp Corp. was acquired earlier this year by Apple’s prime contract manufacturer Foxconn Technology after a lengthy and endless cycle of capital infusions.  The acquisition represented a strategic move by Foxconn toward vertical integration of the value-chain of high tech and consumer electronics devices. A February published commentary in The Economist pointed out that in acquiring Sharp, Chairman Terry Gau had the opportunity to exercise his grand “eleven screens” strategy, which opens the possibility that Foxconn assumes the dominant supplier position of advanced high-tech displays of broader industry products from computers, to automobiles to industrial devices or smart watches. Recognizing that threat, Sharp was also evaluating a counter bid from Innovation Network Corp. of Japan for roughly the same ownership stake.  The issue of concern behind this counter option was having Japan based Sharp not come under foreign control.

Foxconn’s presence as a long-term strategic manufacturing and technology implementer for Apple places Sharp’s eventual OLED technology as another preferred supplier option, which had to be on the minds of Japan Display executives. With a move away from sole dependence on mobile smartphones, Foxconn and Japan Display will now compete head-to-head in next generation auto and consumer electronics display needs.

As noted in our prior high tech industry focused blog commentaries, LCD screens account for a considerable amount of cost of goods sold (COGS) complement in smartphones and tablets. Increasingly, electronic displays will cater to the needs for enhanced user interaction, most notably automobiles and other transport or user-centric equipment.

The need for production innovation remains relentless, the cost of capital highly expensive and the competition for favored supplier status is fierce. Another theme is one of nationalism, namely a country’s control of  product and process innovation securing a long-term industry and component supply chain presence in that country. Often, display industry supply exceeds demand because of overcapacity, eroding abilities to maintain prices that insure adequate profitability as well as continuous new investment needs. It’s a model permeated by dominant high tech OEM players such as Apple and it continues to extract needs for even more financial investment from suppliers.

The difference in this cycle is the potential for electronic displays to be part of the designs of many other product and equipment areas and to lessen the influence of high tech industry supply chain dominants. The financial and market stakes are high but the opportunities continue.

The open question remains which suppliers eventually dominate.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

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