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Yet Another Significant Supply Chain Risk Looming

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Here at Supply Chain Matters, we often highlight for our readers’ important areas of industry supply chain risks. That is why recent published reports by Bloomberg Businessweek and by Reuters specifically regarding South Korea caught our attention. Our readers have most likely been reading and hearing of growing tensions between the United States and North Korea over the latter country’s continued development of a missile system.

The Bloomberg Businessweek report, A Korean War Could Cut Pipeline of Vital Technologies to the World (Paid subscription required) indicates that: “If South Korea were to be hit by a missile, all high-tech electronics production will stop.” Noted is that the globe’s premier manufacturing center for advanced organic light-emitting diode (OLED) panels, the LG Display Co. facility in Paju, is in just a 15-minute drive from the Demilitarized Zone that separates North and South Korea, and within easy range of North Korea’s artillery capability. Further reported by Bloomberg is that about 12 percent of Apple’s existing suppliers are from South Korea, with LG Display being one of its largest suppliers. Once more, South Korea’s semiconductor manufacturers, including SK Hynix and Samsung Electronics reportedly supply tw0-thirds of the world’s electronic memory chips. A manufacturing supply disruption here would impact not only high-tech and consumer electronics, but various other equipment sectors as-well.

Reuters concurs that any interruptions could significantly disrupt global manufacturing of smartphones, televisions, computers, and tablets, but further notes that investors continue to pour money into South Korea’s equity markets, despite such risks.

Risks among other industry supply chain sectors are also noted.

Two of South Korea’s most prominent drug makers, Samsung BioLogics and Celltron have facilities located in a special economic zone located about 25 miles from the DMZ.

South Korea also hosts three of the globe’s largest shipbuilding firms, Daewoo Shipbuilding & Marine Engineering, Hyundai Heavy Industries, and Samsung Heavy Industries, and according to the report, two could be likely targets because they produce war ships.

The Bloomberg report raises concerns for South Korea’s logistics and transportation facilities being disrupted, which potentially could impact multinational manufacturers such as Hyundai and Kia Motor.

While businesses in this region have continually be sensitized to business risks because of their specific proximity to North Korea, most firms have forms of supply chain or other risk mitigation plans.  However, as noted from industry experts interviewed by Bloomberg, tensions this time seem far higher, along with the overall scope.

The takeaway from both reports are that a war with North Korea could indeed paralyze the global electronics industry and disrupt vital trade routes in the Pacific. While tensions in the area are not a new phenomenon, and have been accepted for many years, the unanswered question remains if the building escalations are now different, with added concerns.

Supply Chain Matters would additionally add that certain leading-edge high-tech producers have their supply chain risk mitigation teams sensitized to conducting various risk contingency scenario analysis and contingency planning. That would include augmenting some safety stock levels for certain top-line revenue components as well as back-up sourcing scenarios of alternative suppliers of DRAM and other electronics components. In the case of OLED displays, such back-up plans may have limitations due to an inherent shortage of the technology.

Yet other stark reminders of global supply chain risk.

Bob Ferrari

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

Autonomous Driving Technologies for Trucks Takes on Added Interest

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Supply Chain Matters continues to highlight exponential developments in advanced technologies that will eventually impact various industry supply chains with an update on increased investments in autonomous driving technologies for trucks.

In November of 2016, Supply Chain Matters observed why increasingly high-tech and semiconductor technology providers wanted to position themselves in automotive value-chains. There have been quite several significant merger, acquisition and strategic product development announcements involving automotive supply chains and the stakes involve which company will ultimately control and benefit from the movement of more advanced technology being embedded into value-chains of automobiles and transportation. As we noted last year, a lot of M&A and investment monies are being plowed into the automotive and transportation sector to take advantage of the various movements towards on-demand, autonomous and highly intelligent motor vehicles. This movement presents a competitive dynamic among traditional OEM’s who control brands and markets with those of technology companies that know about software and digital transformation.

It is now becoming ever more obvious that value-chains of short and long-haul trucks are another, perhaps more promising area of long-term strategic interest. The reasons are likely obvious to our readership audience. The increased savings in efficiencies, driver productivity, and overall safety make a case for more near-term investment. There is also the other elephant in the room, namely the continual shortage or turnover of qualified long-distance truck drivers. In September of last year, consulting firm McKinsey indicated in a research report- Delivering Change, the transition of commercial transport by 2025, that by this timeframe, at least one in three new heavy duty trucks will contain higher levels of onboard automation technology, including Level 4 autonomous technologies, that will buffer the need for full-time driving.

Another open question is obviously the receptivity of regulators to various forms of autonomous driving technologies applied to trucking and transport. There are some perceptions that European regulators have been more open to considerations of advanced technology, and have become directly involved in ongoing industry demonstrations of various forms of autonomous driving technology. US federal regulators, on the other hand, seem to be taking a more wait and see perspective. In either case, the receptivity by safety regulators will obviously be an important determinant in timing.

Latest Announcements

Semiconductor technology provider Nvidia whom originally developed of the Graphical Processing Unit (GPU) chip in 1999, and that ultimately sparked the growth of the PC gaming market. The company has moved on to redefine modern computer graphics and gaming platforms and has made advancements in parallel computing. More recently, GPU deep learning ignited modern artificial intelligence married with digital visualization— which Nvidia describes the next era of computing, has led to the development of autonomous vehicle technologies.

Thus far, Nvidia has been collaborating with what the company describes as a wide range of automotive partners, including Tesla, Mercedes Benz, Audi, and others. A recent presentation at an investor conference indicates 80+ companies are currently leveraging the company’s self-driving platform and that every Tesla Motors vehicle now comes equipped with DRIVE PX 2 for full self-driving capabilities

In a company blog posting in March, Nvidia announced that it’s working with PACCAR, maker of Kenworth, Peterbilt and DAF truck brands, on developing technology for autonomous vehicles. The same blog posting further announced a partnership with Tier One automotive parts and systems component producer Bosch, for self-driving car technology.

PACCAR has developed a proof-of-concept self-driving truck with SAE Level 4 (full self-driving) capability built on the DRIVE PX 2 technology. It includes elements of adaptive cruise control, the identification of digital objects along with lane-keeping technology to make trucks safer in long-distance hauling.

Convoy Approach

Wall Street is increasingly paying closer attention to autonomous driving technology applied to trucks and truck fleets. Earlier this month, Silicon Valley based software firm Peloton Technology raised $60 million in a second-round of funding for expanding its development and market presence in automating commercial truck fleets.

As its name implies in the field of competitive cycling, Peloton Technology supports the ability of trucks to travel in a convoy with a driver in the lead vehicle controlling various following truck (s). While the value proposition is predicated on higher safety and fuel savings, some in the industry are a bit skeptical on the notions and regulatory approval of an automated convoy of multiple trucks controlled by software. Instead, the software provider is initially focusing on supporting a convoy of two trucks, with the lead driver in full control of both vehicles. Peloton is planning development and deployment of its software for 2018.

Current investors in Peloton include Intel Corporation, Omnitracs LLC, Magna International, United Parcel Service and Volvo AB, all various value-chain players in trucking, transportation, autonomous driving and truck component technology.

Future Technology Leaders

If our readers have been scanning various other business and technology media, you have likely read that the trucking industry has struggled of-late because of the compelling need of fleet owners to want to invest in new, more fuel efficient and technology-laden trucks. The likely solution rests both in hybrid powered technologies and in increased levels of safety, driver productivity and automation.

Thus, over the coming months, a number of both established players and high-tech startups will all be vying to be the future technology innovators and leaders. Startups will bring the usual speed, agility, and advanced technology knowledge – all prerequisites for the majority of new business models. To counter new entrants, OEMs must demonstrate agility to both build their own digital capabilities and enter collaborative efforts with partners around the product value chain.

Established names such as Daimler, PACCAR, Scania, and Volvo will be contrasted with those of Otto (recently acquired by Uber), Nicola Motor Company, others and yes, even Tesla Motors.

Exponential technology developments will eventually impact many industry supply chains, the product value-chains they support, and the tools and technologies utilized to move physical goods. As in all things exponential, the question is timing, and the cycles of that timing are accelerating.

Bob Ferrari

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

Apple Declares a Long-Term Commitment Toward a Closed-Loop Materials Supply Chain

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In its 2017 Environmental Responsibility Report released this week, global consumer electronics provider Apple has declared a goal towards implementing a closed-loop supply chain. This report includes a pledge to end the company’s reliance on mined materials from the earth, and to one day, make its products, including the iPhone, totally from renewable or recycled materials.  Apple Logo Apple Declares a Long Term Commitment Toward a Closed Loop Materials Supply Chain

The section titled Finite Resources includes the following statement:

Traditional supply chains are linear. Materials are mined, manufactured as products, and often end up in landfills after use. Then the process starts over and more materials are extracted from the earth for new products. We believe our goal should be a closed-loop supply chain, where products are built using only renewable resources or recycled material.

Apple is also realistic in acknowledging that a closed supply chain is indeed an ambitious goal for a high-tech and consumer electronics manufacturer. The company’s Vice President of Environmental Affairs, Lisa Jackson, told business network CNBC that while Apple does not currently know how the full objective will be achieved, it will require many years of collaboration across multiple internal teams, component suppliers, and specialty recyclers- but work efforts are already under way. She further indicated that the company is embarking on something it rarely does, establishing a goal before all the elements are completely figured out.

Current efforts include the encouraging customers to return end-of-life products through the Apple Renew recycling program. This program is piloting innovative new recycling techniques that include a line of disassembly robots that helps to reclaim materials from used smartphones and other electronics products. The company has further prioritized which materials to tackle first by creating Material Risk Profiles for 44 elements within products. These profiles identify global environmental, social, and supply risk factors spanning the life of each material.

Describing the need for high quality aluminum material free from defects found in mass level recycling programs Apple has begun a pilot proof-of-concept program using reclaimed aluminum from recycled phones to build new devices. The aluminum enclosures recovered from iPhone are melted and reused to create Mac mini computer enclosures.

What forward thinking companies are continuing to demonstrate is that supply chain sustainability efforts are good for business and they are equally good for the supply chain.  Increasingly customers based their buying decisions on a company’s commitment and demonstrated efforts in sustainability. In our current year predictions for industry supply chains, we have re-iterated that there is literally too-much momentum and positive business benefits to motivate senior executives to derail such efforts. Apple has been one of other early adopters of a supply chain sustainability commitment and this latest declaration of a closed-loop supply chain is indeed, an added manifestation of a sustainable business model, one that assures a continuous supply of product value-chain components at a more controlled cost with assured availability. We also like the emphasis on leveraging new technologies to address such needs.

Supply Chain Matters commends Apple for its declaration and commitment toward manifesting a closed-loop supply chain.

Well done and keep up this good work.

Bob Ferrari

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

Report that Foxconn Offered $27 Billion for Toshiba’s Chip Business

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Supply Chain Matters provides some follow-up news to our earlier posting regarding the world’s largest global contract manufacturing services provider Foxconn (Hon Hai Precision Industry Co.) and its recent revenue decline.

Citing informed sources, The Wall Street Journal reported this afternoon (Paid subscription required) that Foxconn has offered upwards of $27 billion to acquire Toshiba Corp.’s computer chip business, in yet another bold move to acquire a Japanese high-tech company.

The Toshiba business unit produces flash-memory chips, including NAND flash memory, utilized in smartphones and computer servers. The business is considered strategic to Japan’s high-tech industry. Of-late, Toshiba has been battered by significant cost overruns from another operating division, its nuclear reactor construction business. Westinghouse Electric Co., which is majority owned by Toshiba, filed for U.S. bankruptcy last month and Toshiba expects to book considerable financial losses, which has prompted the proposed sale of its computer chip business. Thus, Toshiba’s prime motivation is reportedly to garner a lucrative price for its chip business.

Like its successful effort to acquire Sharp Corp., Foxconn has reportedly placed a very attracted offer on the table, well beyond what other entities are currently offering.

The WSJ reports that the government of Prime Minister Shinzo Abe is in a tough spot since government officials are hoping to see a Japanese company or a Japanese-U.S. joint venture company assume ownership of the computer chip business. A government official is indicated to the WSJ that Japan would be opposed to any mainland Chinese bidder due to fears that the technology would be leveraged for competitive advantage along with the threat of spyware being placed on the chips themselves. Thus, the process may take on political and national security dimensions, before any final deal is done.

The WSJ cautions that the process has not reached any final stage and bids can change as contenders acquire added knowledge of Toshiba’s chip business.

Both Foxconn or Toshiba declined WSJ’s request for comment.

While the computer chip business can greatly add to Foxconn’s strategic intent to further diversify into the high-tech component product value-chain, this is a business highly dependent on continuous and expensive research and development. The sum of $27 billion is quite hefty burden, especially for a contract manufacturing services provider that has operated in very thin margins. The WSJ opines that these factors may favor bidders already part of the chip manufacturing business.

Needless to state, this process bears watching for high-tech and consumer electronics supply chain and procurement teams. Similar to what occurred with Sharp, it could drag on for months, something that is likely not within Toshiba’s timetable for making a deal.

Bob Ferrari

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

A Not So Attractive Milestone for Foxconn- A First Annual Revenue Decline

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Last week, Asian financial business media featured the headline that global contract manufacturer Foxconn Technology, also referred to as Hon Hai Technology Group,  experienced a significant milestone, its first-ever revenue decline since going public in 1991.

Foxconn is of course well-known as Apple’s prime assembler of iPhonesFoxconn 300x201 A Not So Attractive Milestone for Foxconn  A First Annual Revenue Decline

While total full-year revenues declined 2.8 percent, net profits were up 1.2 percent from 2015, according to a filing with the Taiwan Stock Exchange. That is a testament to rigid cost controls and the application of increased automation in its existing manufacturing operations. A report from the Nikkei News Agency indicates that the contract manufacturer’s December revenues grew 9.76 percent year-on-year although no detailed information related to Q4 was disclosed by Foxconn last week.

High-tech and consumer electronics Industry observers attribute Foxconn’s revenue decline directly to falling iPhone sales along with Apple’s decision to shift iPhone assembly to other contract manufacturers. We recently posted that Apple will begin production of iPhones in India utilizing Wistron as the CMS provider. Pegatron also serves as a CMS for iPhone 7 models.

Nikkei cites Vincent Chen, head of regional research at Yuanta Investment Consulting as indicating that for 2016, iPhone shipments declined to 207 million, from 236 million in the prior year. Chen now predicts that Foxconn’s revenues will increase 5 to 10 percent due the healthier demand generated by this year’s tenth-anniversary iPhone 8 model.

Readers will also recall from our various other Foxconn focused blogs that the company has been actively pursuing a strategic shift away from its primary dependence on Apple and to diversify into other upstream high-tech component areas as well as in branded consumer electronics products of its own. In 2016, the manufacturer completed its acquisition of Sharp Corp., and is now reportedly actively exploring an acquisition of Toshiba Corp’s semiconductor business. Earlier this year there was a report that Foxconn was looking to construct a $7 billion LCD production facility in the United States. Like all things related to Foxconn, it is often an on-again or off-again process.

Not all Apple suppliers have the where with all to pivot away from a high dependence on Apple, and of-late, the consumer electronics giant continues to pursue supply chain segmentation strategies that source lower-cost contract manufacturers and suppliers. However, a larger concern obviously centers on Trump Administration calls U.S. corporate tax reform that features a form of import taxes.  As we all know, Apple’s supply chain is for the most part, highly Asia-centric. If the U.S. Congress were to adopt a form of a value-added tax related to imports, that would be a different impact as-well.

While Foxconn will bounce back from this revenue shortfall model, it will be as a more diversified participant in the high-tech and consumer electronics supply chain value-chain. Contract manufacturing product margins alone are far too challenging not to do otherwise.

Bob Ferrari

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


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