The on again, off again proposed acquisition of Japan based Sharp Corporation by Foxconn Technology Group is as of today, reported as off again. Thus, a multi-year saga continues.
Yesterday, Sharp’s board of directors reportedly approved the acquisition plan which made headlines in social and traditional business media. Today, however, Foxconn indicated it is delaying the signing of the definitive agreement because of last minute disclosures by Sharp of a 100 item list of “contingent liabilities”. A published report in today’s edition of The Wall Street Journal cites informed sources as indicating that Foxconn received this contingent liabilities list consisting of ¥350 billion yen of costs that the company might face in the future related to either outstanding lawsuits, accounting changes, supply contracts or other uncertainties.
In a prepared statement to the WSJ, Foxconn indicated it hopes to clarify the newly disclosed information quickly and bring the proposed acquisition to a successful conclusion. Sharp has reportedly declined to comment to the WSJ and other publications on Foxconn’s latest statement.
The stakes are obviously high in this proposed acquisition. As noted in our most recent posting, LCD screen suppliers such as Sharp have extraordinary challenges. The need for production innovation is relentless, the cost of capital is expensive and yet supply often exceeds demand, eroding abilities to maintain prices that insure adequate profitability as well as new investment needs. LCD screens account for a considerable amount of COGS not only in smartphones and tablets, but increasingly in other products that want to cater to needs for enhanced user interaction.
Customers such as Apple exercise bargaining power by multi-sourcing component supply contracts. In the specific case of Apple, Sharp represents one of three other suppliers of LCD screens. The other reported bidder for Sharp was the state-directed Innovation Network Corp of Japan, which controls one of the four Apple LCD suppliers, Japan Display. In its reporting today, The WSJ quotes an academic professor at Waseda Business School opining that Apple would likely not desire that Sharp and Japan Display join forces because it will diminish bargaining leverage on price and other supply conditions.
There are other more strategic far reaching implications for Foxconn as well. A recent commentary published by The Economist (Paid subscription required) observes: “At face value, there is little sense in the $5.6 billion proposal by Foxconn, the world’s largest contract electronics manufacturer, owned by Hon Hai of Taiwan, to buy Sharp of Japan.” While the commentary also cites the increased bargaining power with Apple to the advantage of Foxconn, it cites a broader strategy implication, a risky attempt to reinvent a business model.
“If Foxconn could design and sell its own devices under Sharp’s globally recognized name, it could at least keep the brand owner’s margin for itself.”
The commentary further points out that in acquiring Sharp, Chairman Terry Gau gets 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.
That ladies and gents is the mother lode insight- the ability of the world’s largest contract manufacturer that continues to have to deal with the slimmest of margins from high tech and consumer electronics equipment OEM’s , having the opportunity to diversify both up and down the value chain. This author wrote of that possibility several years ago and since then, others have joined in predicting the inevitable, namely that the CMS model could evolve into the designing and selling of owned products under a recognized brand, or in becoming the leading-edge, preferred supplier of advanced LCD screens.
Our sense, for what’s it’s worth, is that Foxconn will go-forward with its acquisition despite last-minute financial concerns because the strategic high tech value-chain opportunities are bold and reflect the visions of industry icon Terry Gau.
Time will tell how the saga of Sharp and Foxconn transpires and what it eventually leads to
Industry supply chain strategists should obviously continue to monitor events such as these since the traditional contract manufacturing business model is about to change.
It is inevitable, and OEM’s need to be prepared to deal with the potential consequences.
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Foxconn Finally Declares Desire to Acquire Sharp- A Long Legacy of Cultural Business Norms and High Tech Peril
In our Supply Chain Matters commentaries related to high tech and consumer electronics focused supply chains, we have often featured commentaries related to Sharp Corp. Sharp is a volume supplier of advanced liquid crystal display (LCD) technology and is one of three strategic suppliers of LCD screens in Apple’s product value-chain. Sharp’s dependence on Apple has been reported to be as much as 20 percent of existing revenues.
This week featured the news that Apple contract manufacturer Foxconn, which assembles the bulk of Apple iPhones has offered approximately $5.3 billion to acquire Sharp. Behind this week’s headline is a rather long history related to Sharp, one that requires some history as well as some takeaways.
LCD screen suppliers have extraordinary challenges. The need for production innovation is relentless, the cost of capital is expensive and yet supply often exceeds demand, eroding abilities to maintain prices that insure adequate profitability as well as new investment needs.
In April of last year, we commented on the perils for being an Apple supplier, and specifically Sharp’s challenges in maintaining a leading-edge focus on screen technology innovation but having a track record of financial challenges including near bankruptcy. The conundrum of Sharp and other Japan-based high-tech component suppliers is that bankruptcy is culturally looked upon as a major failure and embarrassment of senior management, often a career-ending event.
There has been a rather long history of manufacturers, including Apple itself, taking some form of investment in Sharp in order to secure its longer-term financial future. We have tracked this since at least 2012.
By April, The Wall Street Journal reported that Sharp would spin-off a portion of its LCD panel business unit with intent to seek a capital injection from Innovation Network Corp. of Japan, a governmental entity overseen by Japan’s Ministry of Economic Trade and Industry. At that time, banks were holding in excess of $5 billion of Sharp debt, and subsequently these same bankers agreed to provide an additional $1 billion lifeline, the second in three years, in exchange for restructuring measures that included a 10 percent workforce reduction along with other cost reduction measures.
In June, Sharp warned that its financial survival could be at-stake, and that it was pushing its own supply chain for deeper cost reductions. Options being considered were sourcing components from China based suppliers rather than Japan based.
This was also the time when rumors continually surfaced that Hon Hai Precision, the parent of major Apple contract manufacturer Foxconn, was also considering an equity investment or outright acquisition of Sharp. Initial talks actually began in 2011 after both firms established a joint technology partnership. However, the one and off again talks involved many cultural implications of whether Hon Hai, a Chinese company would have a majority ownership with access to Sharp’s leading-edge technology. A further implication was that Apple, through its relationship with Hon Hai and Foxconn, was willing to invest in Sharp’s longer term supply, but that component sourcing and selection strategies would cede to Hon Hai.
In August, Reuters , citing its own informed sources, broke the news of Hon Hai’s more formal acquisition talks. According to Reuters as well as a subsequent Financial Times report, the proposed tie-up would spin-off Sharp’s display unit and possibly include additional cash injections from other outside entities such as the state-directed Innovation Network Corp of Japan.
This week’s announcement of Foxconn’s bid raises similar concerns. In its reporting, the WSJ cites a person familiar with the talks as indicating that Sharp is evaluating a counter bid from Innovation Network Corp. of Japan for roughly half of Foxconn’s bid. The issue of concern remains having Sharp come under foreign control. Innovation Network already has controlling stake in the remnants of three other Japan based LCD producers.
The pressure has reportedly now shifted to Sharp’s bankers and creditors to make a decision. Sharp and its lenders are expected to make a final decision by early February.
From our lens, this long legacy of Sharp represents the perils for being a leading-edge LCD technology provider in today’s high tech and consumer electronics sector. As we opined in August, high tech OEM’s such as Apple and others demand the latest breakthroughs in innovative technology and more automated manufacturing processes, in return for orders representing significant volume scale. However, in a technology area where multiple suppliers fiercely compete for the same high-volume OEM business, and a cutthroat environment where severe amplitudes of supply and demand imbalances force prices to dive quickly, the need for adequate profitability to fund constant capital becomes paramount. Added to this environment are business cultural challenges where innovation control is a rather big deal in insuring a country’s manufacturing presence.
The takeaway for strategic sourcing professionals and C-level executives is an understanding that supplier relationships continue to be not solely driven by needs for innovation and reduced cost, but by business cultural forces that sometimes run a course. Supplier management and supply risk require broad-based perspectives and deeper knowledge of business nuances and the sensitivities of risk. It cannot be solely one-dimensional and Apple’s sourcing teams are often balancing such forces and nuances.
The legacy of Sharp’s LCD unit will eventually run its course and in the end, provide business case study learning on strategic supplier management and how business cultural norms often move at a different pace.
Copyright 2016. The Supply Chain Matters® blog and The Ferrari Consulting and Research Group.
This week, The Wall Street Journal validated what those in Apple supply chain ecosystem had already suspected, that the global consumer electronics icon has scaled back supply chain requirements for iPhones.
Citing three informed sources familiar with the Apple supply chain, the report indicates that order forecasts to iPhone suppliers have been pared back in the past several months. According to this report (Paid subscription required): “Component suppliers that rode the iPhone’s boom are now bracing for lower sales.”
Further noted was that iPhone factories had some idle capacity in the final two months of the calendar year when they typically would be all-out. That situation surprised this author since Apple has consistently been good at product demand forecasting.
Major contract manufacturer Foxconn Technology reportedly began dismissing some employees earlier than usual from its Zhengzhou China facility that employs upwards of 200,000 workers. The Provincial government reportedly promised Foxconn $12 million in subsidies to minimize layoffs.
In late June-early July, the WSJ indicated that Apple was planning for a larger initial production run of the next iteration of iPhones, requesting suppliers to support between 85 million and 95 million iPhones for the all-important end-of-year holiday buying season. In 2014, Apple planned its supply chain output for a range of 70-80 million phones, and actually shipped 74.5 million smartphones during the holiday quarter. What was unusual for the forecast numbers related to iPhone6S models were the lack of any significant hardware changes it its release, thus the larger numbers would have indicated expectations for increased global demand or additional customer upgrades this past holiday season. In October, Digitimes reported that integrated circuit suppliers were indicating concern for iPhone chip orders.
Based on this latest WSJ report, we logically assumed that Apple’s supply chain planners and Sales and Operations team members are dynamically managing product demand and supply alignment. As readers participating in S&OP process know quite well, sometimes sales and marketing can have rather exuberant expectations regarding product sales volumes for a key quarter, only to change such expectations when actual order volume patterns are known.
With so many global investor eyes on Apple, and with so many supplier fortunes pegged to business volume concerning Apple, the stakes are obviously high and far reaching. This is especially pertinent to newer iPhone suppliers brought in to diversify supply sources and balance supply risk. As we have concluded in many prior Supply Chain Matters commentaries, there are few supply chains that garner wide visibility as that of Apple. So much so that information leaks are actively nutured.
Apple’s upcoming report of financial results related to this past holiday quarter are therefore a rather important indication of the consequences of iPhone focused supply chain activity in the first-half of 2016.
In these end-of-year Supply Chain Matters commentaries, we wanted to update our readers on certain news and developments that occurred just prior to the Christmas holiday.
On December 17th, Apple realigned its senior executive ranks for the coming year and promoted its existing worldwide operations and supply chain executive to chief operating officer. Senior vise-president Jeff Williams, a longtime trusted lieutenant to CEO, Tim Cook was promoted to the COO position, once occupied by Cook when Steve Jobs was CEO. With this appointment, Williams becomes fourth C-level executive at Apple which includes chief financial officer Luca Maestri, chief design officer Jony Ive and of-course, Cook.
Williams joined Apple in 1998 as head of procurement and has steadily increased leadership responsibilities among Apple’s various supply chain operations, administration and global initiatives, including efforts to improve global supply chain transparency and social responsibility. In 2013 he was designated to oversee the development and ongoing product management efforts of the Apple Watch. Williams came to Apple after procurement and operational leadership roles at IBM.
This announcement came amid other new executive assignments that included Phil Schiller, senior vice president of worldwide marketing, expanding his role to include leadership of the App Store® across all Apple platforms and Johny Sroujii who led semiconductor engineering being appointed senior vice-president for hardware technologies. Tor Myhren, who will be joining Apple in the first calendar quarter of 2016 was appointed vice president of marketing communications, reporting to CEO Cook.
In its press release announcing the COO role CEO Cook cited Williams as being “..hands-down the best operations executive I’ve ever worked with”
Supply Chain Matters extends congratulations to Mr. Williams on his new leadership role.
It is yet another example of how supply chain leadership experience is a doorway to broader C-level roles.
Global commercial real estate firm CBRE Group Inc. has released a research report indicating that over the next decade, 20 markets worldwide—including South Florida; Santiago, Chile; Bajio, Mexico; and Philadelphia—are set to emerge as global logistics hubs.
The concept of emerging global logistics hubs was brought forward to in the book, Logistics Clusters, Delivering Value and Driving Growth, authored by Yossi Sheffi at MIT’s Center for Logistics and Transportation.
According to the CBRE research report, while global hubs will continue to best meet the needs of companies with international supply chains that encompass the sourcing, manufacturing, distribution and sale of goods, there are 20 specific regional hubs that are poised to become major players in the network for global trade. Although they currently serve as central processing locations for regional supply chain networks, the report cites a number of factors are shifting the dynamics of international distribution and catapulting some regional hubs into the supply chain spotlight. We have attached the report’s infographic that names these various hubs.
The CBRE research points to significant logistics investments, such as the ongoing expansion of the Panama Canal, regional industry production cluster, such as those manifested in the automotive sector, the ongoing impacts of Omni-channel and E-Commerce, and evolving trade agreements as major impetus factors for these new emerging logistics centers.
In the latter, the report cites The Trans-Pacific Partnership (TPP) as a potential trade agreement that will have drastic effects on global trade routes and manufacturing demand in Asia. Supply Chain Matters has recently published our initial impressions of the impacts of TPP.
For the implication of e-commerce’s impact on customer fulfillment and supporting logistics, the report indicates:
“In the past, a network of regional centers that fed into the local supply chains with 3-4 day delivery time coverage of the region was sufficient to meet service standards. However, compressed service times—in many cases, to overnight or same-day delivery—has reshaped the supply chain and has often resulted in distribution direct to the consumer from a global or large regional hub. The Eastern Pennsylvania region, anchored by Philadelphia but fueled by the growth of the Lehigh Valley, is an example of a hub that has been transformed by this new technology. This mid-Atlantic location enjoys access to over100 million people within a one-day drive, including key metropolitan areas such as New York, Washington, D.C., and Boston.”
“E-commerce shipments are smaller in size and require more technology and expertise to execute efficiently. As a result, modern logistics facilities are being developed in the traditionally strong logistics hubs of Tokyo, Seoul and Taipei. Brick-and-mortar retailers are entering the online sales market, resulting in strong demand for modern logistics in Tokyo, as logistics networks must be upgraded to accommodate the higher volumes of package movement. Additionally, the online trend is strong in Taiwan and South Korea, where 83% and 73% of shoppers, respectively, go online to avoid going to a physical store.”
There are many other insights and observations regarding rapidly shifting patterns of logistics which are impacting commercial real estate investment. However, what should be of concern to supply chain and Sales and Operations teams are the implications to existing distribution fulfillment networks that were formed under far different business process assumptions than today’s Omni-channel and global production strategy world.
The report itself can be accessed at this CBRE hosted web link. Please note that registration and account sign-up is required to download this complimentary report.