Added Visibility to the Challenges of an Apple Supplier- The Increased Importance of New Product Information Integration
Supply Chain Matters has featured a number of commentaries regarding the perils and pitfalls for being an Apple supplier. Our commentary in early October reflected on challenges at Foxconn and the sudden bankruptcy filing of sapphire glass supplier GT Advanced Technologies. Subsequent information has come to light from the unsealing of information filed in relation to GT Advanced Technology’s bankruptcy. Embedded in these reports are important insights on the increased importance of more timely integration of new product introduction information across the extended supply chain business network.
This week, The Wall Street Journal Digits blog (paid subscription or free metered view) featured its own commentary regarding the lessons of being an Apple supplier. The WSJ was successful in gathering specific responses from other Apple suppliers including Pegatron and Wintek. Regardless of the significant customer demands, suppliers do not turn away from Apple’s business because it provides scale, volume and the potential for profits in far higher dimensions.
The WSJ commentary also cites Apple’s peak and valley tendencies for extraordinary new product ramp-up and corresponding large-scale production volume surges that correlate with condensed product release cycles. In one recent example, Supply Chain Matters called specific attention to a rather last-minute product design change that impacted the current iPhone 6 NPI process.
Apple’s key suppliers point to a common strategy to not have a singular reliance on any large, highly demanding customer but rather a diversification among several high-profile customers. Apple is often cited as a rather demanding customer, having key knowledge on a supplier’s cost and production process structures which is an important indicator for having the most up-to-date knowledge and detailed information on a new product’s required test and production process changes or needs.
These reports provide continued learning for high tech and other industry suppliers that feature highly complex, globally extended supply chain networks. Needs for timely two-way integration of new product introduction (NPI) information across the extended supply chain has become far more evident. Product innovation involves time sensitive collaboration for product design and test changes as well as supply chain production ramp-up needs. That is why product design process information is quickly becoming the new requirement for inclusion within end-to-end supply chain business and collaboration networks.
Supply Chain Matters provides a follow-up to Apple supplier GT Advanced Technologies and the events leading up to its bankruptcy filing. In early October, in a sudden and startling announcement, this developing supplier for new, more durable sapphire glass applications for Apple’s product lineup announced that it had commenced a voluntary filing under Chapter 11 of the Bankruptcy Code as a best means to reorganize and protect that company.
This weekend, The Wall Street Journal, which first identified GT Advanced Technologies as the prime supplier of the new sapphire based material, revealed details previously included but sealed in the bankruptcy filing in October (paid subscription required). On Friday, the bankruptcy judge had ordered the release of this information.
According to the WSJ, GT’s CEO characterized Apple’s efforts as a “classic bait and switch” strategy that caused this supplier to be stuck in what was described as an “an onerous and massively one-sided deal.” The article further indicates that the supplier described constant changes in product specifications without adequate compensation and that Apple had no obligation to buy the material but demanded the supplier restrict the company from selling to other consumer electronics company. In an earlier motion to the court, Apple stated that the filing was intended to “vilify Apple and portray Apple as a coercive bully” and that the CEO’s statements were untrue and defamatory. Apple also invested the sum of $439 million which it must now try to recover.
This Apple supplier relationship has obviously reached a point of no-return. The WSJ quotes GT’s bankruptcy lawyer as indicating: “There are discussions between Apple and the company not about continuing the marriage but rather what I could call a divorce without a custody fight.”
As Supply Chain Matters has noted in many prior commentaries, the perils of being an Apple supplier are those of having the capability of high agility in the wake of what others would view as rather difficult obstacles. That tendency dates back to the era of Steve Jobs who instilled a perfectionist culture for design engineering. Also with Apple come huge scale and the potential for financial reward. In the case of GT Advanced Technologies, the risk-reward strategy has an apparent far different outcome.
Obviously, Apple has no desire to have such a supplier relationship vetted in business and social media but this is a far different era of transparency and openness that sometimes transcends discussions behind closed-doors.
This is today’s mission for high tech and consumer electronics suppliers, namely dealing with whatever is required to make the customer’s business model successful, but sometimes at-peril if a counter-balancing strategies are not pursued. One of the Comments affixed to the WSJ article very pointedly states: “If you cut a deal with Apple, you better know what you’re getting into.” That comment sums it all.
This week, The Wall Street Journal reported (paid subscription) that global contract manufacturer Foxconn is in preliminary talks to build a high-end $5.7 billion LCD display screen factory in Northern China. According to this report, the CMS is in discussion with the government of Zhengzhou regarding potential investment arrangements. According to WSJ unnamed sources, Foxconn and Hon Hai Precision Chairmen Terry Gou visited Zhengzhou in August and met with government officials to discuss an investment proposal. The Zhengzhou region is also the home of an Apple iPhone assembly facility.
This news is significant in that it would represent Foxconn’s largest investment in component manufacturing and would be an additional sign of further diversification within key downstream strategic components of high tech and consumer electronics supply chains. LCD production requires rather expensive capital investments and the business has had its ups and downs in profitability.
In its reporting, the WSJ stated that it remains unclear as to whether Apple or other investors are being approached to invest in the proposed display plant. Apple already sources LCD display from three major suppliers. Apple declined any comment to the WSJ report.
Further reported was that Foxconn has been floating ideas for building a component and handset gain manufacturing facility in Indonesia, but is apparently driving a hard bargain for local authorities.
The Movement Toward Cheaper, Open Computing Compatible Servers Spells Opportunity for ODM and CMS Providers
Here is a Supply Chain Matters follow-up commentary that relates to the previous news on the pending split-up of Hewlett Packard along with our commentaries of several years ago, beginning in 2011/2012 commentaries and supplemented in a 2013 commentary) foretelling of original design manufacturing (ODM) and contract manufacturing systems (CMS) providers competing directly with their larger OEM customers.
A recently published Bloomberg article, Cheap Servers Are Bad News for HP and Dell, indicates that the contract manufacturers such as Quanta Computer that these OEM’s often depended upon are now producing generic, Open Compute Project compatible computer servers for hungry data center customers. These generic servers are reported to be one-third to two-thirds cheaper than the branded versions. According to the article, this has been a boon for server-hungry customers such as Amazon, Google and Facebook, but bad for established, branded hardware OEM’s. Further noted is that mega financial services firms such as Fidelity, have jumped-on the generic server bandwagon to reduce IT infrastructure costs.
What’s keeping branded OEM’s in the competitive game is their ability to provide extensive global customer service as well as global distribution scale. However, the current accelerating trend for matching generic server hardware customized to a specific software application compute resource need will only add to the momentum toward generic commodity servers.
This week brings two visible and poignant reminders of the perils for being an Apple supplier. There are of course, the positives related to the sheer production volumes that doing business with Apple provides, along with being on the leading-edge of product or component innovation. Along with the positives come the perils for dealing with a highly demanding and influential customer.
Today’s printed edition of the Wall Street Journal cites suppliers and other sources as indicating (paid subscription) that because of the current surging demand for Apple’s newly announced iPhone 6 models, the Apple supply chain ecosystem has altered previous plans for ramping-up production volumes associated with new models of iPads, and instead are allocating current production resources to iPhones, specifically the iPhone 6 Plus. Apple’s Sales and Operations process has obviously issued marching orders that indicate all hands on deck supporting iPhone shipment needs. That implies a invariable delay for new iPad market availability plans as critical component supplies such as displays allocated their current efforts strictly to supporting current iPhone output demands.
Foxconn, Apple’s prime contract manufacturer has again placed in the role of doing whatever it takes to keep-up with demand, fulfill customer orders and not let lack of finished goods supply be an inhibitor to Apple’s financial results in this all important holiday shipping quarter. The WSJ reports that Foxconn’s Chairman Terry Gou is personally at the Zhengzhou assembly facility “… to monitor production closely.”
In prior Supply Chain Matters commentaries we have pointed out that Foxconn’s real desire is to continue to diversify its business models with less overall dependence on the ebbs and peaks of Apple. That includes building independent branded products. The contract manufacturer has thus been willing to assume a secondary provider role for other of Apple’s products such as the iPad Mini. But, when the stakes are really high, the Apple operational pattern is to turn to its long-standing CMS provider to pull the proverbial rabbits out of the hat in providing almost virtual capacity to move finished goods to consumers and channel partners.
Thus, one peril for being an Apple supplier is having the capability of high agility in the wake of what others would view as rather difficult obstacles.
The other supplier peril reminder comes from this week’s sudden and unexpected news regarding evolving sapphire glass supplier GT Advanced Technologies and its filing for Chapter 11 bankruptcy protection, sending its stock plummeting. This was a classic current day example of what various supply chain academics have noted as bad supply chain news directly correlated to negative stock performance. In GT’s case, it was literally wiping out upwards of $1 billion in equity value according to one report.
Since the GT news broke earlier this week, the reports we have been monitoring indicate that after further testing of the new sapphire glass material that GT was producing a its new start-up plant near Mesa Arizona, Apple engineers determined that the material was not appropriate for the new iPhone models, and reportedly, withheld the final seed investment payment involving upwards of $130 million. Today, the WSJ reports that GT Technologies will exit the business of manufacturing sapphire. A U.S. bankruptcy judge allowed GT to keep the details of its relationships with Apple secret, no doubt from the influence of Apple as a major creditor. Apple has apparently declined any further statements to business media regarding its relationship with GT.
We sense that this Supply Chain Matters commentary regarding perils will resonate with our readers residing within either Apple’s or other supply chain dominant customer supply chain business models. We know that there not much any of you can state publically. However, we as a broader community, in just one week, have open visibility and can dwell, albeit briefly, to such perils.
We usually strive to point out important takeaways for readers in our individual postings. In this particular case we rather play the observer role and state that perhaps this is today’s mission for supply chain, namely dealing with whatever is required to make the business model successful, including a can-do relationship with the most influential and important of customers. It is what is expected for today’s industry supply chains.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
In a sudden and startling announcement, GT Advanced Technologies Inc., a developing supplier for new, more durable sapphire glass applications for Apple’s product lineup, announced today that it had commenced a voluntary filing under Chapter 11 of the Bankruptcy Code as a best means to reorganize and protect that company and provide a path to future success. In the announcement, GT indicated that as of September 29, 2014, the company had approximately $85 million in cash, but there is no mention in the release of current outstanding liabilities.
In early August in its announcement for fiscal year second quarter results, the company indicated six month, year-to-date revenues of $80.5 million including $49.7 million attributed to sapphire equipment and materials. Non-GAPP operating expenses were reported as $76.3 million year-to-date and the supplier incurred a $139 million net loss from operations. GT reported ending its second quarter with $333 million of cash, cash equivalents and restricted cash, compared to a $509 million at the end of the company’s first quarter.
A statement from this supplier’s CEO states:
“GT has a strong and fundamentally sound underlying business. Today’s filing does not mean we are going out of business; rather, it provides us with the opportunity to continue to execute our business plan on a stronger footing, maintain operations of our diversified business, and improve our balance sheet.”
The company indicated that it expects to provide additional details with respect to the Chapter 11 filing as soon as they are available.
Readers may recall that in our previous commentaries related to Apple’s ongoing efforts in product innovation, that Apple provided a long-term strategic seed investment in GT, valued in excess of $500 million, to develop a stronger more durable alternative to the use of gorilla glass for displays in Apple’s forthcoming line-up of products. GT invested in a 1.4 million square foot production facility near Mesa Arizona to produce sapphire at high volumes at comparative cost. There was further speculation that GT was being positioned as the prime supplier of sapphire for the iPhone line-up and the now announced Apple wearable watch scheduled to ship early next year. The recent iPhone 6 new product announcements from Apple did not include sapphire glass as a feature, leading to speculation that GT could not initially ramp to Apple’s high volume production requirements for its newest model.
Suppliers with groundbreaking technology can often fall victim to a far larger and very influential customer with demanding requirements. What happened with GT Technologies will obviously unfold in the coming weeks including its current relationships with Apple.