subscribe: Posts | Comments | Email

Reports that IBM is Looking to Divest of Semiconductor Chip Manufacturing

Comments Off

Yesterday, the Financial Times cited familiar sources (paid subscription or free metered view) indicating that IBM may be exploring a possible sale of its semiconductor division in a move that could see Big Blue sever its ties with the core part of its computer hardware business. That story was echoed today by a separate article published in the Wall Street Journal.

The Journal report cites its sources indicating that IBM may be seeking a buyer for its semiconductor fab operations but will likely retain its proprietary chip design capability. 

IBM’s semiconductor business represents a true vertical integration of the company’s IT hardware value-chain. However, the division has been losing money and the capital investment required to stay ahead of today’s chip design technology curve is incredibly expensive.

If IBM does decide to go ahead with such a sale, the obvious question is who would be likely buyers.  In its reporting, FT notes that the pool of potential buyers is extremely small, namely three manufacturers that already have close production and licensing ties with IBM. The publication cites: Samsung, TSMC and Global Foundries as such candidates.  From our lens, either of these potential buyers could benefit from having a U.S. based fab presence, especially since energy costs have become far more cost competitive across the U.S.

One other potential wildcard name we would dare to whisper is Apple which relies on two of the potential suitors for its current chip fabrication supply needs. Such a move, although risky and rather expensive, would insure strategic vertical integration for Apple’s proprietary processor and other semiconductor component needs that will make-up its future products.  The company already relies on separate chip design firms. It could further open broader opportunities to expand a manufacturing presence within the U.S. and allow cash hoarded at off shore countries to be re-invested domestically. Apple’s contract manufacturer Foxconn has been investing in a production facility in Pennsylvania and has been seeking out feelers from six other U.S. states to potentially invest in multiple component manufacturing plants. That is the basis of a U.S. or North America based high tech value-chain.

Of course, Apple may have other, more pressing strategic priorities. This week, the company shelled out $14 billion to re-purchase its own shares which have plunged in value of late.

With activist investors seeking a cut at Apple’s cash pile, who knows what will happen!

Lenovo Makes Major Moves to Leverage Global Supply Chain Scale

1 comment

Both the tech world and business media are abuzz this week with the back-to-back news regarding China based Lenovo’s announced acquisitions of both the IBM low-end server hardware business and this yesterday’s revelation regarding the acquisition of Google’s Motorola unit.

From our lens, both moves point to added global brand presence and further leveraging of the current scale of Lenovo’s global supply chain capabilities.

However, both deals are contingent on government scrutiny, and that may present a challenge.

Lenovo’s thrust into low-end servers where product margins have been an ongoing challenge, can complement the firms core manufacturing presence across China.  This is rather significant since the server market has rapidly shifted toward commodity plug-and-play hardware options. It also provides further depth to the firm’s server based product lines, not to mention the previously installed base of existing IBM customers. By our lens, it is a parallel to the actual creation of the Lenovo global brand with the acquisition of IBM’s personal computer hardware business.

The Motorola acquisition provides a more interesting backdrop. Google acquired the Motorola unit in 2012 for $12.5 billion amid lots of market speculation as to why the search and mobile operating system giant would want to get into the smartphone hardware business. Since the acquisition, Google has incurred a reported $2 billion in additional operating losses along with creating additional friction among existing Android OS hardware brands including Samsung. With the announcement of this deal, one Silicon Valley outlet was quick to opine that Google’s prior decision to acquire Motorola was a major mistake and with the deal, Google is taking more than a $5 billion loss on its prior investment.

Reports indicate that Google insisted on holding on to a portfolio of key product patents which was more than likely the original motivation to acquire Motorola. Thus Lenovo is buying the brand, product IP licensing and platform to add to existing line-up of smartphone products. If the acquisition is approved, it would thrust Lenovo into the number three position within the global market, along with a credible presence in the U.S. and North America smartphone market.

Motorola was already attempting to transform itself into a lower-cost, higher volume smartphone hardware provider with the launch of its recent Moto X and Moto G product line-up. Lenovo has its own smartphone line-up, pursuing an aggressive strategy to compete within China’s massive but cost-conscious smartphone market It has been competing directly with Samsung, Apple, Huawei and according to one research firm, has assumed the number four position in China.

In its reporting of the deal, the Wall Street Journal astutely concluded that Lenovo’s greater worldwide supply chain scale positions the company well to be able to leverage low-cost Android devices across the global market. It would appear that Lenovo will retain all Motorola employees in the smartphone segment and thus there an incremental plus in product development and distribution.

In a September 2012 commentary, Supply Chain Matterscommented that from what we extracted from a talk given by Lenovo’s Vice President of Procurement, that its hybrid supply chain strategies were well positioned to be able to enable the company’s strategic business and product outcomes.  If these two new acquisitions are approved by U.S. regulators, the Lenovo supply chain may well reap more benefits from its ongoing capability efforts.

Bob Ferrari

© 2014, The Ferrari Consulting and Research Group LLC and the Supply Chain matters Blog.  All rights reserved.

Report that Foxconn in Talks to Build U.S. Factories

Comments Off

A Bloomberg published report indicates that Foxconn Technology Group, prime contract manufacturer for Apple and other consumer electronics providers is in current talks with at least six U.S. state authorities, including Arizona and Colorado to build advanced manufacturing facilities for electronics components.

Various OEM’s such as Apple are seeking to have more of the supply chain located closer to the U.S. and North America market and Foxconn is accommodating these request.  The report clarifies that any U.S. investment would not be centered on labor-intensive manufacturing such as assembling smartphones and tablets, but rather more advanced automated manufacturing. Foxconn will also invest in a $10 million venture with Carnegie Mellon University to research advanced robotics and manufacturing.

These reported investments are in addition to a previous announcement regarding an expansion of Foxconn Interconnect Technology facility in Pennsylvania will is estimated to create an additional 500 jobs.

Obviously, this is more encouraging news regarding the potential re-building of a more advanced high tech electronics supply chain ecosystem based in the U.S. and opens the door for future product mass customization for the North American market. The speculated locations add credence to building a localized high tech manufacturing infrastructure.

The announced adds yet another reinforcement to the current momentum and resurgence of U.S. and North America based manufacturing as noted in Prediction Three of our Supply Chain Matters 2014 Predictions for Global Supply Chains.

The full copy of the report is now available for complimentary downloading within our Research Center.


Apple’s Fiscal Q1 Earnings Points to More Supply Chain Implications

Comments Off

Yesterday Apple disclosed earnings for its fiscal Q1 period ending in December, along with a lukewarm forecast for the current quarter, and Wall Street did not like what it heard.  In the aftermath of these results, investors have driven Apple shares down over 8 percent as we pen this commentary.  In the quarter involving all-important holiday related buying, customers bought less than expected iPhones, Apple’s most profitable product.  More importantly, there is much clearer evidence that the consumer electronics giant is focusing on a strategy of product margin adherence vs. volume, which will place far greater pressures on its supply chain ecosystem.

In terms of the numbers, Apple revenues grew 5.7 percent to $57.6 billion while profits were unchanged at $13.1 billion. Closely scrutinized gross margin was 37.9 percent in the December quarter compared with 38.6 percent in the year ago period. While the company indicated that it sold 51 million iPhones in the quarter, a 7 percent increase from last year’s same period, the consensus expectation by many equity analysts was for 55 million iPhones. According to quantitative analyst firm IDC, industry-wide smartphone sales grew 24.2 percent in the quarter thus Apple did not capture significant share in this wave. Sales of the premium iPhone 5s far outpaced those of the plastic encased iPhone 5c. That was reflected in the company’s reported average iPhone selling price (ASP) of $637 in FQ1 from $577 in FQ4 and $582 in FQ3. In the earnings briefing, Apple’s CFO noted that iPhone 5s sales were impacted by supply constraints during the quarter.

On the brighter side, sales of 26 million iPads in the quarter considerably up from the 22.9 million sold in the year earlier quarter.  It was probably a reflection on consumer acceptance of the newer models of iPads introduced in November, especially the iPad Mini with Retina display. I suppose we can all speculate that sales might have been greater given an earlier announcement in the year.

From our supply chain and B2B lens, observations and conclusions are becoming clearer:

  • Throughout the quarter there were continued rumors that Apple was dynamically adjusting production forecasts, reducing iPhone 5c output in favor of higher 5s needs. While Apple’s supply teams performed dynamically, adjusting to market demand sensing needs, supply constraints surrounding the 5s, most likely the troublesome fingerprint scanner had an impact.
  • International based sales now make-up 65 percent of Apple’s total revenues. The current thrust into China and Japan through new supply contracts with large influential carriers like China Mobile will add additional challenges in channel distribution and product margins. As an example, while iPhone sales through Japan’s DoCoMo increased 44 percent year over year, a weak yen resulted in Apple’s sales rising only 11 percent.
  • Top industry players in smartphones, Samsung, Apple and LG are all currently challenged on margins and profitability ensuring continued hyper competition in the coming months. IDC recently reported that “markets like China and India are quickly moving toward a point where sub-$150 smartphones are the majority of shipments
  • Supply Chain Matters interpreted last year’s production sourcing and ramp-up of the iPhone 5c as an indicator of a lower-cost supply chain output strategy. Apple’s election to price the 5c higher than market consensus, coupled with sales performance of the completed holiday quarter now indicate that the higher volume, low cost strategy is no longer favored.  That was clearly reinforced by CEO Tim Cook’s statement to analysts: “Our objective has always been to make the best, not the most.”
  • Silicon Valley and other industry watchers are now concluding that Apple might have lost its way in product innovation. This past quarter’s performance coupled with statements from company executives all point to far greater pressures on Apple’s supply chain ecosystem to crank-up new product innovation and time-to-market in 2014. Rumors are rampart on new larger screen versions of iPhones, iPads and other products. With all of this prototype development occurring, the supply chain must continue to dynamically respond to daily and weekly changes in this hyper competitive market.
  • Finally, activist investor Carl Icahn continues to accumulate Apple stock, the latest buys being on Apple’s current stock price decline.  Icahn will continue to pressure Apple management to return more cash dividends to existing stockholders including the tapping of the company’s current $159 billion in cash reserves

Needless to state, Apple’s supply chain teams will be in the center of many initiatives and market response actions in the coming year, challenging its stature as the number one rate global supply chain.

What’s your view- can Apple’s supply chain again rise to current challenges?

Share your observations and comments.

Bob Ferrari

© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog.  All rights reserved.

The Compensation for the Leader of the Number One Rated Supply Chain

Comments Off

Are you curious as to the financial rewards for managing the number one rated global supply chain?

On its most recent Securities and Exchange Commission (SEC) filings, Apple disclosed the financial compensation of its top executives including its CEO, CFO and Vice President of Operations and Supply Chain.

Jeff Williams, the head of Apple’s supply chain earned $2.63 million in compensation, somewhat less than last year.  CFO Peter Oppenheimer earned $2.63 million as well.

CEO Tim Cook’s compensation was noted as $4.2 million, an increase of 1.9 percent, which included a performance bonus of $2.8 million.

Here is a note to our numerous student readers.  If you have been thinking at all about dedicating your career to supply chain management, it would be a wise decision when you consider the leader of the most visible supply chain is compensated at the same level as other senior executives.  Consider also that Tim Cook cut his management teeth in operations and supply chain.

Supply chain management is a great career option.  Then again, we are obviously biased.

Keep Supply Chain Matters as your source of continued insights in 2014 and we will convince you of why you are needed in our community, and why we need to expand career opportunities for those of you already contributing.

Report Card on Supply Chain Matters 2013 Predictions- Part One

Comments Off

On the eve of the beginning of the chronological New Year, it is our time to reflect, look back and scorecard our Supply Chain Matters 2013 Predictions for Global Supply Chains which we published nearly a year ago.     Supply Chain Matters Blog

Readers are welcomed to review our predictions series for 2014 which we outlined previously in a series of detailed commentaries. But now is the time to look back and reflect on what we predicted and what actually occurred in 2013.

As has been our custom, our scoring process will be based on a four point scale.  Four will be the highest score, an indicator that we totally nailed the prediction.  One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different.

So here we go with each of the predictions we had concerning 2013:

2013 Prediction One: Yet Another Year of Global Challenges to Support Required Revenue and Profit Growth.

Rating: 3.5

Many of our readers and clients residing in multiple industry supply chains can well attest to the constant challenges that were incurred throughout 2013.

Regarding the overall global economy, the IMF had originally projected 2013 global growth to be 3.6 percent overall, but that number was constantly adjusted downward throughout this year. The current 2013 estimate is for growth to be 2.9 percent, a considerable difference from the start of the year and a reflection of the many economic uncertainties across global markets.

Optimistic revenue and profit growth that was focused squarely on emerging market economies such as China turned out to be more challenging, since the growth in many of these sectors was more subdued. According to China’s own forecasters, that economy is expected to complete this year with overall growth of 7.6 percent, a far cry from the double-digit growth rates of past years. When we developed our predictions a year ago, both the International Monetary Fund (IMF) and the OECD predicted China’s growth rate in 2013 to be in the range of 8.2 to 8.5 percent. Growth among the Eurozone region remained rather challenging throughout the year, but finally bottomed towards the second-half.  Growth in the U.S. struggled in the first half, and rebounded considerably in this current quarter.

Fortunately, there were no widespread supplier failures during the year, and we are pleased that we missed on that part of our prediction.

This has indeed been a year of uncertainties and industry supply chains had to respond to product demand or contraction requirements at the most discrete levels.


2013 Prediction Two: Stabilized and Potentially Reduced Inbound Commodity Prices with Certain Exceptions.

Score: 3.5

Commodity costs did indeed moderate throughout 2013 as reflected in the Standard and Poor’s GSCI Commodity Index being down 5 percent as of mid-November. Prices in certain sectors were down considerably but there were some upside pressures in energy related costs.  However, commodity costs among emerging market regions such as India and China remained challenging during the year because of currency and local economic conditions.

Costs in the food related sector were not as high as we predicted a year ago, although severe weather did indeed impact various global regions. Global supply and demand forces seemed to compensate for shortfalls.

Procurement teams drove deeper into indirect material costs to foster additional overall cost reductions.  That included areas such as utilities, transportation, travel, temporary labor and other services. The market for spend analysis tools continued robust, which was reflection of continued cost savings initiatives in this sector.

The year 2013 was a good year for procurement teams, better than past years.


2013 Prediction Three: The Renaissance of U.S. Based Manufacturing to Continue Throughout 2013

Rating: 3.8

This prediction was a relative no-brainer. Throughout 2013, we tracked PMI growth among the major manufacturing regions.  By Q3 it was rather clear that the production activity in the United States was clearly gaining more momentum over other regions.  The strategic advantages of cheaper energy and a stable currency, coupled with continued concerns for double-digit cost increases of direct labor and global transportation continued to motivate more manufacturers to elect either expansion or initiation of a U.S. based manufacturing initiative.

Among the business headlines in 2013 were names such as Caterpillar, Motorola, General Electric and Wal-Mart, all making considerable announcements. Regarding Wal-Mart, that global retailer committed $50 billion over the next ten years to assist certain suppliers in expanding their U.S. manufacturing presence. Even the world’s top contract manufacturer Flextronics, which has three-quarters of its manufacturing capacity located in low-cost manufacturing regions, is now investing millions to upgrade its four million square feet of manufacturing capacity across the United States. A landmark study from the Massachusetts Institute of Technology’s (MIT) Task Force on Production and Innovation was released in the latter half of this year which provided additional recommendations for public-private partnerships and industry innovation zones. We predicted continued momentum for U.S. based manufacturing to continue in 2014.


2013 Prediction Four: Supply Chain Talent Retention, Management and Development to Remain a Significant Challenge.

Rating: 4.0

Talent retention and management has been a significant challenge since 2012.  We predicted this would continue in 2013, and that has indeed been reinforced in many executive surveys and reports throughout this year.  So much so that we elected to carryover this prediction into 2014 as well and readers can review our 2014 Prediction Four commentary for the detailed perspectives on the current problem and what strategy needs are required to overcome the challenges of maintaining a skilled supply chain management workforce that provides ample opportunities for career growth.


2013 Prediction Five: Two Industry Supply Chains, B2C and Aerospace to Undergo More Significant Challenges.

B2C Supply Chains

Rating: 3.8

As we pen our 2013 Predictions scorecard, the aspects of the massive transformation for how consumers shop for goods has reached the top quadrant of business media headlines. The good and not so good news for 2013 was that it was a banner year for online fulfillment. As we close 2013 and the holiday buying surge, online retailers and shipping companies as pointing fingers at one another as to what went wrong in the final days as capacity came to a grinding halt. Brick and mortar retailers learned a lot from 2012 and deployed more effective strategies to overcoming consumer showrooming or price shopping. They invested in online fulfillment and broader multi-channel and multi-tier inventory management capabilities. The not so good news is that retail sales forecasts turned out to be too optimistic as economically stressed consumers were very diligent with their shopping habits, seeking out best possible price coupled with best strategic timing of purchases. In the Eurozone countries, consumers are especially distressed and that was reflected in shopping patterns throughout this year.

The 2013 holiday buying season appears to be headed toward disappointment for certain retailers, despite unprecedented promotional and price competitive activities. A shorter 26 day period between the Thanksgiving and Christmas holiday period did not help, and frequent winter storms impacted shopping trends.  Since the Christmas holiday, by far the most prominent headline has been the security breach across Target Stores retail locations compromising an estimated 40 million credit card accounts. The other prominent headline was UPS’s failure to guarantee delivery of holiday related packages, which by our view, was a scapegoat for retailers over aggressiveness in pushing the envelope in instant delivery. There are reports that Amazon signed up over one million free shipping Prime accounts the week before Christmas. The online retailer than guaranteed delivery as late as Sunday, two days prior to the holiday.  UPS has now indicated that 132 million packages entered its network the week before Christmas, and we now know the results.

Our prediction called for at least one, possibly two failure announcements concerning high visibility retailers.  We can now disclose the names that we had in-mind, namely JC Penny and Sears.  Both of these retailers continue to struggle with the overall effects of the online, Omni-commerce economy and as the Wall Street Journal recently opined, the availability and abundance of cheap financing provided another few months of added life. We predicted that Amazon would have another banner year in 2013 and all indications are that this will be the case. We therefore believe that while were fairly close on consequence, timing and events produced a bit of a delay as to our prediction. Candidly, we were of the belief that retailers had addressed systems security needs but the Target incident will have significant retailer implications in the coming months.

Aerospace Supply Chains

Rating: 3.8

Once again, Aerospace industry supply chains dis indeed encounter extraordinary challenges throughout this year. These challenges were twofold.  The continued after- effects of severe global recession and high debt spending among national governments caused cutbacks in military and defense spending.  This was especially evident in Europe and the United States.  For the U.S., the so-termed automatic sequester cutbacks were directed squarely on military and defense spending and effects quickly spilled over to defense divisions of aerospace companies. Both Airbus and Boeing have since announced layoffs and cutbacks centered on each of their defense sectors.

At the same time, the boom for airline demand for new technologically advanced and more fuel-efficient commercial aircraft continued unabated. The literal duopoly of Airbus and Boeing continued to dominate industry news in 2013 as both global OEM’s continued to balance unprecedented increases in new orders for aircraft while challenged to dramatically increase the production volumes for finished aircraft. The current backlog of sold new aircraft remains incredibly healthy and both Airbus and Boeing may yet again announce new records in order volumes for 2013. At the recent Dubai Air Show held in November, new aircraft orders amounting to excess of $150 billion were booked with delivery slots beginning in 2020.  Meanwhile, program delays continue to make business headlines along with Boeing’s tense relationship and conflicts with its organized labor unions.

Other smaller industry OEM’s such as Bombardier, Embraer and COMAC compete for niche aircraft segment needs, and each of these players faced critical milestones in 2013.

Aircraft engine suppliers General Electric, Safran and Rolls Royce were beneficiaries of unprecedented new aircraft orders. GE Aviation has a backlog of orders for 15,000 new generation aircraft engines between now and 2020 and must fulfill a delivery rate of more than 4,000 engines per year for the next two years amid increasing customer orders for its new GE90, GEnx and CFM56 engine models.

Thus, 2013 was an incredible contrast for aerospace supply chains in overcoming the challenges of relentless product demand and capacity barriers in the commercial sector with cutbacks and re-structuring in military and defense sectors.  And this is just the beginning of other challenges to come in 2014.


This concludes Part One of our 2013 Predictions scorecard. In Part Two we will review our other five predictions for this year and how they fared. Readers are certainly encouraged to add their observations regarding either our predictions for this year and our self-rating.


© 2013 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.

« Previous Entries Next Entries »