Yesterday, the long anticipated and incredibly pre-leaked Apple product launch event occurred, and Wall Street and the rest of the industry did not seem all that impressed. As we pen this posting on the morning after, Apple stock has already dived more than 7 percent, over $40 lower than pre-announcement. Most of the reaction to the event stems from the pricing strategy of the new model of iPhones along what was not announced.
As was widely rumored, the company announced two new models of smartphones. The new generation iPhone 5S includes a faster and more powerful A7 64 bit microprocessor, a fingerprint scanner, an advanced camera, and a phone case constructed of highly durable liquidmetal which is available in three high-end color options including gold. The screen size is a 4 inch Retina display, the same as the prior model. Pricing for the new iPhone 5S was announced at a carrier subsidized price of $199 for the entry 16GB model.
Much more attention was placed on the announcement of the so-termed, lower-cost iPhone C version. That phone essentially packages most of the technology of the previous iPhone 5 and adds five available color combinations. As we have noted in previous Supply Chain Matters commentaries, this newer scaled down version was supposed to be Apple’s response to consumer preferences in high growth emerging markets such as China and India. The long awaited declared pricing is where most equity analysts and Supply Chain Matters were disappointed. The 5C was priced at a carrier subsidized $99 with a two year contract for the 16GB version, which equates to a reported $549 without carrier subsidy for the U.S., and $733 for China, which is roughly 4500 yuan.
In its reporting, the Wall Street Journal noted that competitor Samsung is offering smartphones in China and India for less than $100 without a carrier subsidy. Other Chinese based OEM’s such as Lenovo, ZTE and others have similarly lower cost alternatives with attractive functionality. Unlike the U.S., smartphone consumers in China usually pay the unsubsidized price with carrier subsidies coming later in the term to lower monthly phone bills. Thus it would appear that Apple has initially targeted the 5C not as a lower cost model but rather for the far upper end of consumers in emerging markets who would be attracted to the Apple brand. It is believed that this initial pricing strategy provides an ample opening for existing competitors to undercut Apple in pricing and features. Equity analysts have further concluded that the 5C model has to be less expensive to produce, by witness to a lower cost segmentation of Apple’s supply chain which we have also concluded.
Thus, Apple’s strategy appears to be protection of higher margins at the risk of further erosion in global market share.
A sample of reaction from Silicon Valley circles was penned by Troy Wolverton columnist for the San Jose Mercury Times, which concluded; Apple’s Timid Tim once again disappoints, and that: “The iPhone 5C is just a new version of that old strategy.” Another conclusion was that it was clear the company (Apple) is not exactly stretching itself in product and market innovation.
Of further significance was what was not announced yesterday. There was no announcement of the rumored deal with carrier China Mobile, although that is likely to come. There was no announcement of the introduction of the rumored iWatch or upgraded models for both the iPad and iPad Mini, which are rumored to be coming before the end of the year.
Apple’s supply chain teams now face rather tough challenges in the weeks and months to come. Rather than a phased product available launch that occurred in prior market introductions, the current plan call for simultaneous inventory availability of the 5S and 5C in all major countries and geographies. Information leaks emanating from various areas of Apple’s supply chain these past weeks indicated that there were production ramp-up issues involving the 5S fingerprint scanner, its new casing as well as the larger display. Prior newly introduced iPhones tended to sell out rather quickly, and the supply chain had to rally to make adequate inventory available for the all-important Q4 holiday buying period. Supply chain teams supporting the new innovative 5S are additionally tasked with preparations for launching potential other new products later this year.
Teams supporting the 5C model had already been anticipating a high volume ramp-up to support expected volume growth from emerging markets. Whether the higher list price will affect forecasted or anticipated shipment volumes remains to be seen. Some equity analysts are already speculating that Apple may cut the price of the 5C earlier than past cycles, if consumer response and margins are not as anticipated. There have been charges of alleged worker labor violations associated with at least two contract manufacturers associated with 5C volume manufacturing which no doubt will have to be investigated. With the introduction of multiple color models, inventory mix planning will become far more important, especially if one or two colors become far more attractive for consumers.
More importantly, the pressure on Apple’s management to restore its reputation as most innovative in the market will place added pressures on the entire value-chain for discipline in meeting highly aggressive time-to-market and time-to-volume objectives while supporting its corporate culture of last-minute design changes. Other information leaks point to Apple’s current plans to double staffing in its marketing groups which will add more tension in cross-functional discussions and objectives.
Readers of this author’s prior commentaries related to the Apple supply chain might have noted the disclosure that the author was a holder of Apple stock. This morning, that situation changed, since our meager amount of stock sold-off automatically because of a short, protected position. Some companies tend to pay more attention to protection of margins and the status quo, and that turned out to be the negative response of the market.
The new transparency of Apple and its supply chain is becoming more visible and more concerning.
As the world awaits Apple’s long awaited announcement this week’s on new models of iPhones, another report of potential labor rights violations associated with this phone’s production ramp-up has surfaced.
On Thursday, labor rights watchdog group China Labor Watch cast another light on the potential existence of labor rights violations at the contract manufacturing production facility operated by Jabil Circuit in Wuxi China. The labor rights organization conducted an undercover investigation that resulted in alleged infringements involving millions of dollars in unpaid overtime wages, over 100 hours of monthly mandatory overtime, more than 11 hours of standing work with little rest outside of 30 minute meal breaks, along with hiring discrimination and lack of worker pre-training.
A posting on Huffington Post Business reports echoes the China Labor Watch report and points to workers having little time to eat during meal breaks, having to travel to a distant factory cafeteria after being required to pass through mandatory security checkpoints. Workers are also alleged to be sleeping in 8 person dorms where workers assigned to day or night shifts are sharing the same dorm room.
For its part, Apple informed Huffington that it had conducted three audits of Jabil Wuxi over the past three years with some findings, and that Jabil has “an excellent track record of meeting Apple’s high standards.” At publishing, Huffington was unable to secure a comment from Jabil management.
Reviewing the Jabil web site, one can find a rather definite declaration of business conduct, signed by the firm’s CEO, that addresses supply chain transparency, health and safety and other business requirements supported by audit processes. Thus both Apple and Jabil do indeed publish high standards related to social responsibility and worker labor practices. In addition, Apple contracts with the Fair Labor Association to conduct ongoing formal audits of its supply chain across China and other regions and much work is underway in identifying problem areas and corrective plans. To its credit, Foxconn, Apple’s largest contract manufacturer has made some strides in correcting previous labor audit findings.
The timing of this latest China Labor Watch report is a bit suspect since it comes just before Apple’s pending media blitz for new model iPhone announcements. The fact that an undercover investigation has led to these alleged findings should be indicator of practices which factory audit teams are either not discovering, or worker reluctance to identify grievances through formal channels.
As Supply Chain Matters has noted in a previous commentaries related to the Apple supply chain, its transition to a segmented lower-cost supply chain model, in addition to one supporting its higher cost innovative products is still underway, and newer suppliers may be in the midst of adjusting to higher demands for volume and efficiency. None the less, the issues raised by China Labor Watch should warrant additional response from both Jabil and Apple management.
Disclosure: The author is a current holder of Apple stock.
News of Last Week’s Factory Fire at DRAM Facility Provides Deja Vu on the Effects of Unexpected Supply Disruption
Last week, a factory fire occurred at the SK Hynix Dynamic Random Access Memory (DRAM) semiconductor production facility in Wuxi, China. According to reports, this facility accounts for 15 percent of global DRAM supply and Hynix is a key supplier to some of the largest consumer electronics brands.
This September 4th incident had an almost immediate effect on the pricing of benchmark 2-gigabit DRAM chips and the value of the company’s stock as markets immediately reacted to the initial news.
According to a Reuters published report, high demand incurred from both smartphone and electronic tablet manufacturers had already incurred a market wide increase in DRAM pricing. On Thursday and Friday of last week, news of the fire caused DRAM prices to immediately spike an additional 19 percent, the highest spike in three years. Hynix stock also incurred a 3 percent immediate drop on this news.
Over the weekend, reports from Bloomberg and Reuters indicate that SK Hynix has resumed some partial operations on the impacted production line. However, Hynix is still inspecting its production line and clean room affected by this fire and according to both reports, it is still not clear when full production can be resumed at the impacted facility and how long disrupted supply will continue. Reuters quotes a source familiar with the situation that Hynix may resume operations within two to three weeks.
Bloomberg observes that OEM’s with long-term contractual supply relationships with Hynix such as Apple and Samsung will more than likely have little disruption in supply. However, OEM’s such as China based mobile phone and tablet manufacturers, who elected to be aggressive in price by placing orders in short-term spot situations and who lack long-term supply agreements may not fare as well if DRAM supply becomes significantly constrained.
A chapter or two in the book, The Resilient Enterprise, Overcoming Vulnerability for Competitive Advantage by Yossi Sheffi, describes the situation concerning a fire that occurred at a Phillips Semiconductor plant that initially seemed not to be significant. Later after a complete assessment of damage along with the subsequent dynamics of pressure placed by influential OEM customers, the disruption turned out to be much more significant in dollar and service terms.
We do not in any way imply that this current Hynix incident is of the same scope, but rather it serves as another current day reminder that supply risk occurs when you least expect it. Without comprehensive planning, and solid supplier relationships, it can be far more disruptive for all parties involved.
Supply Chain Matters has frequently reminded our readership on the increased existence of supply chain risk in a multitude of commentaries. Our latest was a mere few weeks ago when we called reader attention to a Resilinc published study indicating that concentrated risk remains in sub-tiers of global supply chains and that for automotive and high tech supply chains, that risk is concentrated in four countries and four major component suppliers.
Last night, we picked-up an alert to postings by the San Francisco Chronicle and the Huffington Post Green site which caused us a pause. Perhaps our readers, especially those with supply chains, product development or design operations located on the U.S. west coast should also take note.
Both postings report that a recent U.S. Geological Survey reveals that if a large earthquake, on the magnitude of 9.1 or higher, were to strike off the coast of Alaska, it could trigger a devastating wave of tsunamis that could cause widespread destruction to California coastal regions. That destruction potential is described by USGS scientists as at least $10 billion, and have the potential to destroy the port facilities of Oakland, Los Angeles and Long Beach, as well as flood low lying areas of San Francisco and the Bay Area. Scientists also predict that widespread flooding could impact 13 low-lying counties of California including flooded buildings, facilities and warehouses with likely damage in the hundreds of million. These reports did not address other west coast regions potentially at-risk such as Oregon or Washington.
While our readers may initially come to the conclusion that such a magnitude tremor is not likely, best recall that the Tohoku earthquake and resultant tsunami that devastated Northern Japan in 2011, and caused multiple and considerable industry supply chain disruption, was of this same magnitude. In their reported briefing of officials, USGS scientists characterized this type of event occurring in Alaska and the U.S. west coast as “hypothetical but plausible”.
If this latest study does not capture attention, consider that in preparation our Supply Chain Matters Top Ten Predictions for 2013, we included in our honorable mentions commentary, a report from the Guardian indicating that geologists believed that a 7.9 magnitude earthquake could hit the “Ring of Fire”, composed over 75% of the world’s active and dormant volcanoes and earthquakes, sometime in 2013. The “Ring of Fire” is an arc stretching from New Zealand, along the eastern edge of Asia, north across the Aleutian Islands of Alaska, and south along the coast of North and South America. Thus far, we have noted multiple reports of significant sized tremors occurring in the Ring, particularly off the coast of Japan.
Again, we do not portend to be alarmists nor do we believe that supply chain teams have to incorporate plans for any conceivable “black swan” event. However, we will continue to advise that supply chain teams need to be able to identify and quantify where potential risk exists in the extended value-chain, have certain plans to mitigate the most obvious risks, and have playbooks in-place to respond to major disruptions when they occur. New and evolving predictive analytics capabilities provide supply chain planners will the ability to conduct what-if and scenario planning around multiple potential events.
In the meantime, take heed to the latest U.S. focused study noted above. After having a few beers or some wine this weekend, check on your contingency planning related to U.S. west coast value-chain operations.
In April, Supply Chain Matters made an observation that two of the world’s most competitive supply chains, Apple and Samsung, would continue to respond to different business needs and outcomes. Yesterday, yet another important precedent was set in this highly visible battle of supply chain response and market agility capabilities.
Samsung again upped Apple in its market introduction and media buzz concerning its brand new Galaxy Gear smartwatch. This new wrist device is scheduled to go on-sale later this month and retail for $299. This follows prior Galaxy smartphone announcements from Samsung that have been strategically timed to steal the market thunder from Apple.
In its reporting of the launch event, the Wall Street Journal opened its article with the following: “Samsung Electronics Co. planted its flag in the battle over wearable devices Wednesday, unveiling a digital watch than can run apps and interact with its own family of smartphones.” Of even more interest, the WSJ reminds its readers that Qualcomm also announced yesterday plans to ship its own new color-display Toq smartwatch later this year, available in a “limited edition” for $300, while in June, Sony unveiled an Android powered smartwatch expected to also ship later this month.
While these initial smartwatch models can arguably be described as first generation, they have been designed to extend the features of existing smartphones and will compete for consumer wallets this upcoming holiday buying season. They enter the market ahead of Apple where numerous information leaks indicate that an “iWatch” has been in the development pipeline. In our Supply Chain Matters posting in mid-July, we called attention to business media published reports indicating that high level external hiring by Apple raised questions over hard engineering problems and that Apple’s in-house teams have apparently not been able to solve and the ability of its in-house engineering team to develop wearable technology on a market timely basis. A published Financial Times article speculated that a new wrist computer device may not be introduced until the latter part of 2014. This obviously leads to speculating that Apple has desires to introduce market notable product innovation in a smartwatch, and has been willing to accept a delay in market introduction to achieve a more innovative product perception. Continual information leaks from various Apple supplier sources also attest to designers constantly changing product specifications almost to the final moment, which was a tenant of the prior Steve Jobs product design culture of the company.
A lot can change in the coming months and perhaps Apple will announce its rumored smartwatch later this year. A shout-out is certainly in-order for Samsung as well as Qualcomm supply chain teams for their efforts in supporting a well-timed announcement.
Our readers who stem from product lifecycle management roles can well attest to the arguments for either being first in the market or being a later entry with more compelling product features. Invariably, supply chain teams, and in particular, that of Apple will again be called upon to translate product design to high volumes of production in near record times.
Consumer electronics and high tech supply chains remain the crucible for the needs for tight linkages among product development and supply chain teams to meet highly competitive and compressed time-to-market and time-to-volume objectives. The prior walls among these teams is quickly evaporating.
Disclosure: The author of this commentary is a current holder of Apple stock.
Last week, industry analyst firm Gartner announced its Top 25 Supply Chains Ranking for the Asia Pacific Region, which deserves some commentary on our part.
Supply Chain Matters has in the past been a bit critical of Gartner for not including Asia Pacific based supply chain organizations in its global rankings of Top 25 Supply Chains. Gartner responded by re-positioning its rankings among major global regions, which although has obvious connotations for further client business development in succinct global regions, none the less affords demonstrated supply chains competencies greater recognition when ranked on a regional basis. We praise Gartner for it efforts to provide broader recognition of supply chains in the Asia Pacific region.
According to the Gartner report (free registration required in order to download), supply chain resilience is high on the agenda for most Asia Pacific based supply chains along with rising costs, a shortage of talent and increased regulatory pressures. Volatility in demand, particularly from western based companies, continues to present challenges for these Asia Pacific based teams. According to Gartner, the three year weighted average of revenue growth slowed to 25 percent.
Five new organizations move into the top ranking, while others moved-up in ranking. It should be of no surprise that Samsung was ranked the number one supply chain for Asia Pacific in 2013 because of its efforts in innovation and supply chain talent development. Lenovo was ranked as number two, moving up two spots from 2012, gaining high marks for revenue growth and deployment of a hybrid supply chain model. Supply Chain Matters has featured two previous commentaries of Lenovo’s unique supply chain process capabilities, along with its recent announcement of U.S. manufacturing presence.
The top five further includes Haier (Number #3), Hyundai Motor (Number #4) and Tata Motors (Number #5). Toyota Motor came in at Number #6, jumping 11 positions from its former 2012 ranking based on volume recovery from a series of major supply chain disruptions. Honda Motor was ranked Number #8.
We found it quite interesting to observe four automotive industry supply chains ranked in the Asia Pacific top ten, when no automotive supply chain is ranked in the Gartner global top ten.
We also expected to see more global contract manufacturers appearing in this ranking. Singapore based Flextronics moved into the top ten for the first time, attributed to strong financial results along with advanced planning and risk mitigation capabilities. Remarkably missing from the latest top ten ranking is Foxconn or its parent Hon Hai Precision, which is a prime manufacturing contractor to the 2013 global number #1 ranked supply chain of Apple. That deserves some explanation and we were disappointed that we could not retrieve any explanation from Gartner as to why. Also missing was Jabil and Taiwan Semiconductor Manufacturing Company (TSMC), which by our view, deserve top ten recognition.
Cannon and LG Electronics round out the 2013 Gartner Top Ten, reflecting that High Tech, Consumer Electronics and Automotive are the sole industries represented in the Asia Pacific Top Ten supply chains. Perhaps a future ranking will include recognition of a consumer goods and/or diversified discrete manufacturer or retailer in this region.
Gartner concludes: “The ability to segment supply chains that are aligned to different customer expectations, backed by improved cost-to-serve, will differentiate the leaders from the followers. Supply chain leaders in Asia Pacific must enhance collaboration capabilities to integrate internal functions and key external trading partners across the value network.”
Supply Chain Matters would hasten to add that given the prior history in the region for potential major supply chain disruption brought about by natural catastrophe or extreme weather events, that investments in supply chain risk mitigation, more predictive capabilities and enhanced end-to-end visibility should also be a part of this message for future performance.
What is your view regarding Gartner’s current ranking of Top Asia Pacific Supply Chains? Agree or are there omissions?