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Report Indicating Sharp-Foxconn U.S. Plant Announcement Could Come This Weekend

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In late January, we alerted our Supply Chain Matters blog readers of a published report from The Wall Street Journal indicating that global contract manufacturer Foxconn, new parent of Sharp Corp. was evaluating a $7 billion in new LCD manufacturing facility in the United States. Our takeaway from this report was that if this investment did indeed occur, it would represent a significant milestone for the high-tech and consumer electronics supply chains. We believed that the plant investment would further have a linkage to Apple’s production needs.

Today, and this weekend, Japanese Prime Minister Shinzo Abe will meet with U.S. President Donald Trump both at the White House and in Florida this weekend.  This week, a subsequent published report by Reuters is citing informed sources as indicating that the proposed LCD manufacturing plant could begin construction as early as the first-half of this year.

According to this report, Prime Minister Abe will unveil this and other potential manufacturing investments during his meeting with Trump.  Further noted is an informed source indicating that the plant investment may include “other manufacturing equipment makers.” The report also indicates: “Abe will unveil investments to create as many as 700,000 U.S. jobs, people familiar with the matter told Reuters earlier.”

Such a jobs figure is rather significant in scope, especially if the announcements come in the context of contract manufacturing for other high tech and consumer electronics providers. To paraphrase Trump language: it would be a very big deal. Foxconn declined to comment to Reuters regarding any investment.

Prior to the planned meeting with President Trump this weekend, Abe also met with the head of Toyota, which has also been a target of prior Trump criticism regarding a decision to build a Corolla manufacturing facility in Mexico for export of vehicles to the United States.

Such an announcement will obviously make significant news in the coming days.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

Apple’s December-Ending Performance Provides Indications of Supply Challenges

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Supply Chain Matters provides added insights to recent financial and operational performance reports from major companies. We reflect on Apple’s latest report of December-ending (Fiscal 2017 Q1) financial and operating results which acknowledged supply constraints as limiting even more sales growth.  Apple Logo Apples December Ending Performance Provides Indications of Supply Challenges

Wall Street headlines were generally positive as the iconic consumer electronics provider reversed three straight quarters of declining iPhone sales. Total revenues grew 3 percent to a record $78.4 billion while net income was reported as $17.9 billion, $400 million lower than the year-earlier period. International sales accounted for 63 percent of total revenues. Total inventories grew by $580 million in the latest quarter.

Overall iPhone shipment volumes reportedly increased by 5 percent. The irony is that sales could have been higher but uncharacteristic supply chain challenges were encountered.

During the company’s management briefing, CEO Tim Cook, whose background DNA includes prior leadership of global supply chain operations acknowledged some planning and operational missteps that could have impacted additional sales. Insufficient supply impacted several product lines, including the newly announced Air Pods wireless earbuds, the iPhone 7 Plus model, and the Apple Watch. The former garnered a lot of visibility early in the quarter, delaying the actual product launch. We venture a guess that many of our readers had first-hand visibility to some of these supply issues.  Cook indicated demand for the larger iPhone 7 Plus was:

the most we’ve ever seen by far and we under-called it. We clearly missed some sales because of that

In other words, Apple’s sales and operations planning process likely planned for higher product demand for the baseline iPhone 7. As early as October, customers placing an iPhone 7 Plus order on Apple’s website were being informed of a wait time of up to eight weeks for the device to arrive, especially for its new “Jet Black” finish. This was also the period of the spillover from Samsung’s Galaxy Note7 product recall due to battery fires, and consumers were trying to substitute their product choice for the iPhone 7 Plus model.

Further, supply chain information leaks leading up to product launch had indicated that Apple had initially planned for three model variants, the largest being a “Pro” model that would include more features and a 5.5-inch screen, offered at a higher price point to compete with Samsung’s now ill-famed and suspended Galaxy Note 7 smartphone. That was later scrapped for the two-model product strategy. and during volume build further pointed to usual volume ramp-up challenges related to new components.

Readers may also recall that a major earthquake struck Taiwan a year ago, in an area that includes major suppliers such as semiconductor fab supplier TSMC and other lower-tiered consumer electronics component providers. Throughout 2016, apple placed additional pressures on component suppliers to reduce prices to boost margins on the company’s iPhone revenues.

Upon reviewing Apple’s performance in the all-important holiday fulfillment quarter, readers can take solace in the takeaway is that even the world’s most admired, most visible, and influential supply chain is not immune to S&OP product forecasting and planning mix challenges, supply disruption and capacity constraints. Even when the CEO has first-hand supply chain leadership experience.

Apple performed well in spite of many challenges but it could have performed better.

Sales and operations planning is a continuous process of product demand and supply balance supported by the most contextual and timely decision-making. That applies to all industry supply chains including the most admired and most visible.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Samsung Galaxy Note 7 Investigation Points to Battery Flaws- or Something Broader

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As we continue deep dives on the remainder of our 2017 Predictions for Industry and Global Supply Chains, we have fallen behind a bit on some other noteworthy supply chain news and developments. This being Friday, this Editor wanted to catch-up.

One event that we wanted to highlight in this blog was last week’s meeting with U.S. regulators and the disclosure from Samsung of its investigative efforts to seek the root causes of the battery explosions and fires that impacted that firm’s newly announced Galaxy Note 7 smartphone. These incidents caused the recall of all 2.5 million produced Galaxy Note 7’s and the unprecedented decision to suspend all subsequent sales of this model. The irony was that this model phone had received rave product reviews prior to its market release. Samsung Gal Note 7 Sized 300x200 Samsung Galaxy Note 7 Investigation Points to Battery Flaws  or Something Broader

According to various published reports, Samsung conducted its investigation with the aide of two independent quality control and one supply chain analysis firm.

The report outlines what many of our readers can relate to as a series of cascading supply chain focused snafu’s. The findings were announced after testing 200,000 devices and 30,000 batteries in a special charging and recharging test facility fitted for the task.

The initial phones released in August were fitted with lithium-ion batteries supplied by Samsung SDI, one of the electronic component subsidiaries of Samsung Electronics. The investigation revealed that the SDI batteries were irregularly sized and there wasn’t enough room between the heat-sealed protective pouch around the battery and its internals. This disparity apparently led to battery shorting, overheating and the subsequent fires.

A secondary supplier of batteries was Amperex Technology which produces its batteries in China. This supplier was originally tasked to supply batteries for the China version of the Note 7. As Samsung began to sense a disturbing pattern of fire incidents related to its initial phones, it recalled the devices while urging Amperex to ramp-up production of more batteries to re-fit customer replacement phones with the alternative Amperex battery.

To the likely frustration of many product focused managers, these second issue phones also experienced battery overheating and fires. The second series of battery fires prompted the decision in October to pull the plug on this model.

The investigation of the Amperex batteries points to manufacturing inconsistencies. According to a posting by Wired, some cells were missing insulation tape, and some batteries had sharp protrusions inside the cell that led to damage to the separator between the anode and cathode. The batteries also had thin separators in general, which increased the risks of separator damage and short circuiting. Wired further provides a detailed review of all the other technical issues brought forward in the investigation and similarly cites a subsequent published report by The Wall Street Journal, reporting that Samsung had misdiagnosed the problem when issuing the first recall.

Samsung reiterated during the press conference that it found no irregularities with phone features that may have “helped” the battery overheating issues. However, the consumer electronics mobile chief, D.J. Koh, half acknowledged some product design process deficiencies:

To produce an innovative Galaxy Note 7, we set the goals on battery specifications. We now feel a painful responsibility for failing to test and confirm that there were problems in the design and manufacturing of batteries before we put the product out to the market.”

To address regulator concerns as to how Samsung will avoid future incidents, the manufacturer has established a new eight-step process that includes supplemental testing, inspections and manufacturing quality checks, among other measures. As for its own phones, the company is designing a new compartment to give batteries more space inside the phone to avoid damage from physical drops. Koh finished the event by saying that Samsung will share its lessons with the entire industry to improve overall lithium-ion battery safety

But, as we all probably know, major damage has been done to the Samsung brand, and this recall alone will cost the company upwards of $5 billion.

One of the more insightful reports concerning this Samsung recall came from the New York Times. (Metered view) The Times authors posed the question:

How could such a technologically advanced titan — a symbol of South Korea’s considerable industrial might — allow the problems to happen to begin with?

Noted was that Samsung, like South Korea as a whole fosters a top-down, hidebound culture that stifles innovation and buries festering problems.  Cited is a former Samsung employee who states: In the Samsung culture, managers constantly feel pressured to prove themselves with short-term achievements. Executives fret that they may not be able to meet the goals and lose their jobs, even when they know the goals are excessive.”

The Times spoke with Samsung officials, who spoke on the condition of anonymity while the Note 7 investigation was being completed. Their reported observation was:

With the Note 7, Samsung pushed its business model, as well as its technology, to the limit… Driven by the desire to prove it was more than a fast follower of Apple, Samsung rushed the Note 7 to market ahead of Apple’s iPhone 7. To fend off Chinese competitors like Huawei and Xiaomi, it packed the phone with new features, like waterproof technology and iris-scanning for added security.”

A further insight:

Samsung’s insistence on speed and internal pressures to outdo rivals in part signal a breakdown in the ability to truly innovate and push out new ideas, critics say. In place of big new ideas, Samsung focused on maxing out the capability of components like the battery. That philosophy, which worked to keep Samsung on the heels of the likes of Apple, simply is not as effective as Samsung tries to push ahead, they argue.

As noted in our most previous Supply Chain Matters commentary related to the Note 7 incident, Samsung achieved a significant $5 billion in profitability in its latest quarter. That had more to do with the performance of the Samsung Electronics component businesses as opposed to the Mobile business.

We wonder aloud if the observed flaws in corporate culture and its consequent implication to management’s ability to manage and weigh risk factors will be a lost memory because of its recent financial performance.

Somewhat similar to Volkswagen and its emissions cheating incident, the real question comes down to long-term damage to the brand, and to the ability to recruit talent and leadership willing to make the right decisions for both the business as well as customers and supplier partners.

In the minds of consumers and customers, product and supply chain component integrity and safety trumps all other concerns.

Bob Ferrari

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


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 Report Indicating Apple is Near Deal to Manufacture Products in India

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.

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