General Electric recently announced its fourth quarter and full 2015 financial results and made it a point to call attention to its new GE Digital business unit. It did so because GE’s bold goal is to be a top 10 software company by 2020. In its press and media outreach, GE declared that GE Digital accomplished $5 billion in 2015 revenues with anticipation of far more growth in the coming years.
This relatively new GE Digital business segment was formally launched in November after a series of internal re-alignments. The unit brings together all of GE’s digitally focused and Industrial Internet capabilities under a single business focus. This includes GE’s Software Center, the company’s global IT and commercial software teams along with cyber security teams.
The underlying mission of this business is to make intelligent machines and connected industrial equipment as an emerging reality. GE is of the belief that the Industrial Internet could add $10 to $15 trillion to the global economy over the next 20 years. This includes aircraft engines that can self-diagnose operating performance, alert to pending operating maintenance needs and automatically order required repair components. Railroad locomotives that can communicate onboard diagnostics, train operating conditions and train rail car composition. Data can be analyzed across fleets of similar equipment providing design engineers timely performance information while fleet owners have the ability to optimize operating assets.
GE executives are quick to differentiate Smart Machines and Industrial Internet from Internet of Things (IoT). The latter GE views as more consumer market focused. The Head of GE Digital, Bill Ruh, states in a recent blog post: “There’s a difference between running a smart thermostat in your house and controlling a power plant. We work in mission critical environments.”
Some in today’s broader tech world of IoT may take issue with GE’s succinct differentiation of consumer vs. industrial facing connected devices. Suffice to point out that the opportunities are indeed enormous for both dimensions. However, by our lens, it is rather important to differentiate the different scale, scope and function of needs for both, especially in the data security and scalability dimensions of industrial applications.
GE has indeed been a pathfinder in the notion of connected machines and is now beginning to harvest the financial and market benefits for being an early innovator. From its longstanding industrial roots, the company can surely grasp the notions of what is required for mission critical operating environments.
Other industrial manufacturing and enterprise software providers will surely escalate their commitment to intelligent machines and by 2020, there may well be a different software provider landscape with competitive dynamics. What we term IoT today become more differentiated and more succinct in application. As with all prior tech revolution, there will be winners, laggards and market casualties.
The good news, however, is that bringing the physical and digital aspects of supply chain information and decision-making together are no longer a distant vision, but within the realm of a five-year goal.
Up to now, Supply Chain Matters had not had the opportunity to weigh-in on this week’s rather stunning announcement regarding the intent of China’s appliance giant Haier to acquire General Electric’s Appliance business for a reported $5.4 billion.
Readers may recall that GE previously attempted to sell its appliance unit to Europe based Electrolux for $3.3 billion but that effort did not meet the approval of government regulators. Now, a similar process begins regarding this Haier deal and the prospects are just as challenging since this is a China state-owned company acquiring a very iconic global and U.S. brand. The deal calls for Haier to gain rights to the General Electric brand in appliances for the next 40 years. As we have noted in prior commentary, China’s manufacturers have long coveted global brand presence, at the GE brand is a jewel. Haier was obviously willing to pay far more for access to such a brand as well as deeper U.S. manufacturing and supply chain presence.
As today’s edition of The Wall; Street Journal points out, Haier has twice before attempted to buy its way into the U.S. market including a 2008 attempt to acquire the GE Appliance unit. In 2005, the Chinese firm unsuccessfully courted Maytag, ultimately losing to Whirlpool. The WSJ further points out the peril of this being a year of U.S. Presidential election politics which is a very timely observation. No doubt, we can expect at least a response from Donald Trump if not other would-be U.S. presidential candidates. One could not ask for more attractive political fodder.
If successful, Haier would gain additional U.S. manufacturing presence among GE’s nine manufacturing facilities that include 12,000 workers. That includes the current Haier manufacturing facility located in South Carolina.
One has to also consider the impact on GE Appliance’s current manufacturing workforce and supplier base, each of whom have been buffeted by constant news related to being sold to other global manufacturers. The current announcement adds more months of uncertainty.
Haier’s current U.S. presence has been limited to niche products and mostly privately branded wine refrigerators and window air conditioners. Thus, if this deal passes scrutiny, there are obvious short and longer-term industry supply chain implications. Haier currently indicates that it will maintain GE’s U.S. manufacturing presence in appliances. That is obviously reassuring and gains points for regulatory muster.
Obviously, this is yet another industry development to watch in the coming months.
The biggest news last week and perhaps for all of 2015 was the announcement that long-time rivals Dow Chemical and DuPont‘s intend to merge into a specialty chemicals giant of more than $120 billion. There are stated plans to split both enterprises into three separate companies providing different specialty chemical based product offerings.
This proposed deal has obvious massive implications.
Saturday’s edition of The Wall Street Journal carried the headline that this deal cements activists’ rise. A profound quote of that article stated:
“While they (activists) have become increasingly powerful in recent years, forcing companies to do everything from buying stock to selling assets, their ability to help bring about such a monumental deal represents a new high.”
Today, the WSJ further described long-simmering hostilities between Dow CEO Andrew Liveris and activist investor Daniel Loeb which reached a boiling point this weekend after the announcement on Friday. Loeb apparently declared that this deal was too rushed, and called for Liveris’s resignation.
In October, former Dupont CEO Ellen Kullman suddenly resigned after fending off one of the most prominent wave of activist investor assault on a corporate board. Kullman was succeeded on an interim basis by board member Edward Breen while the company searched for a permanent replacement. Breen, whose resume includes being Chairmen and CEO of Tyco International worked with Dow CEO Andrew Liveris to orchestrate this deal.
Our Supply Chain Matters initial perception is that the announced deal provides a significant new and scary watershed as to the degree of influence that activists portend to have on corporate CEO’s. That is qualified, however, as to whether government regulators would allow this deal to go through given the significant implications. Analysts at Piper Jaffrey were quoted as indicating: “The global natures of the antitrust hurdles are likely to be significant.”
The National Farmers Union (NFU) has already expressed its frustration for yet another enormous merger. NFU President Roger Johnson declared: “Having just five major players remaining in the marketplace would almost certainly increase the pressure for remaining companies to merge, resulting in even less competition, reduced innovation and likely higher costs for farmers. This announcement, combined with the on-again-off-again Monsanto/Syngenta merger, is creating a marketplace where farmers will have very few alternatives for purchasing inputs.” The National Corn Growers Association declared it will do all it can to protect farmer interests and preserve an open and competitive marketplace.
Do not be surprised to read of other such declarations.
Since both of these global companies supply materials at the lowest echelons of many different industry supply chains, this proposed merger has significant internal and external implications from many industry value-chain supply dimensions. These will unfold over the coming days and weeks and will likely take on market, technology and human resource dimensions, since the cost and the scale of this merger is momentous and far-reaching. How long the regulatory approval process actually occurs is likely anyone’s guess.
One thing is certain however, the specialty chemicals industry has reached a watershed moment, one that will likely redefine industry players and their associated supply chains for many years to come.
Since 2010, Supply Chan Matters has provided specific commentaries related to the global supply chain challenges of Canada based Bombardier. This week features another milestone, an announcement that Bombardier has hired a new Chief Procurement Officer with the challenge of centralizing all supply chain strategy among its commercial aerospace and surface transportation units while significantly reducing costs.
Our first commentary in 2010 reflected on the new C-Series commercial aircraft program, and how this diversified transportation equipment provider had joined the supply chain outsourcing perils of the commercial aerospace industry. A lot has transpired over these five years and the C-Series program continues to struggle. The cash drain of elongated delays of this program has affected the company financially and earlier this year, led to a number of senior executive changes including a new CEO. In May, the company announced a partial IPO involving its rail transportation business.
The appointment of Nico Buchholz as CPO is unique, in that in his former role as Vice President, Corporate Fleet and Executive Vice President of Fleet Management for Lufthansa AG, he led efforts for acquisition of new aircraft. This included the influencing of the design of the new C-Series, since Lufthansa remains the designated launch airline for the program. Mr. Buchholz is also reported as having an extensive aerospace industry background. In his new role, the CPO will report directly to recently recruited Bombardier President and CEO, Alain Bellemare.
In the announcement, CEO Bellemare indicates that strategic sourcing is key to achieving best-in-class performance and that the new CPO will develop a company-wide approach, structure and clear action plans to make that happen. In its reporting, The Wall Street Journal added that the appointment of Mr. Buchholz places the veteran aerospace executive in a key role for initiating broad cost cutting initiatives.
Centralization of supply chain strategy and sourcing is often a pre-cursor to needed cost reductions, and in the case of Bombardier, it will include four business segments with complex relationships with various global-based suppliers.
Thus begins another chapter of change involving Bombardier’s supply chain, this time with a centralized strategy and approach.
Supply Chain Matters extends congratulations and best wishes to Mr. Buchholz and his extended supply chain team on this new chapter.
In October of 2014 we alerted Supply Chain Matters readers to a noteworthy milestone development, namely Chinese designed and branded railway cars appearing in a U.S. subway system. Much of U.S. media did not cover this development at the time.
The headline back then was that the State of Massachusetts Department of Transportation selected China’s state-owned CNR Corp. for the replacement and delivery of 284 modern subway cars for the Massachusetts Bay Transportation Authority (MBTA), also locally known as the “T’. This was the first Chinese manufacturer to win a U.S. based major transit system equipment replacement contract. The further significance of this development was twofold. First, the awarded contract cost, namely $566 million, was a rather affordable sum for this amount of modern rail equipment. A further significance was that the contract called for the railcars to be assembled at a new final assembly manufacturing facility at a former closed Westinghouse factory site located in Springfield, a central city in Massachusetts. Assembly operations would therefore be U.S. based, with the expectation that other U.S. equipment supply contracts could follow.
At the time of bidding, there were actually two China state-owned railway firms, CNR and CSR, as bidders along with other prominent global based producers. While CNR eventually won the contract, CSR was eliminated because of deficiencies.
In our 2014 commentary, we cited a Bloomberg published report indicating that the contract awarded price was a little more than half that of Bombardier and other bidders including Hyundai Rotem Co. of South Korea and Kawasaki Rail Car of Japan. Earlier this year, at the request of China’s government, both state-owned rail companies were combined, primarily because both were bidding against each other for the same business opportunities.
Yesterday, a ground-breaking ceremony was held at the site of this new $95 million assembly plant. Massachusetts Governor Charlie Baker was present along with officials of The China Railway Rolling Stock Corporation, the newly formed entity. This new production facility is expected to be completed by the end of 2017 and employ upwards of 150 local factory workers. Rail car production operations are expected to begin in the spring of 2018 with first deliveries of rail cars beginning in early 2019.
A published report from yesterday’s New York Times reiterates that this deal represents China’s biggest push into the U.S. rail market and is part of the Chinese government’s policy to encourage its tech companies to export expertise to foreign markets. It further notes that the contract may be an impetus for other U.S. states and cities to consider modernization of their transit and railway systems.
The Times cites an independent rail economist as indicating that the Massachusetts contract might have been a price-loss leader as a means to establish a presence in the U.S. The publication cites CRRC’s vice-president of international business as indicating that his company was eager to apply the lessons learned in building transit and high speed rail systems in China. This same executive was the former chairmen of Tangshan Railway Vehicle, and oversaw the design and manufacture of one of the fastest high-speed trains in the world. The manufacturer has previously produced subway cars for many systems including three separate lines within Beijing’s subway network. (pictured).
The contract calls for the design, manufacturing and replacement of 152 Orange Line and 132 Red Line subway cars, along with an additional option for the delivery of 58 additional Red Line cars. Existing decades older Orange Line cars have racked up in excess of 1.5 million miles of service per vehicle while some Red Line cars have logged even longer service.
Last winter, the city of Boston and its surrounding metropolis experienced its most severe winter that included in excess of 100 inches of snowfall and subsequently crippled its subway system. Its aged equipment just could not overcome the accumulation of snow and ice and many cars were forced out of service. That situation has placed enormous ridership pressure on the MBTA to replace the aging fleet as soon as possible. Thus it is rather crucial that China Railway Rolling Stock meet its production and delivery milestones.
From a supply chain perspective, the initial plans call for many of the major train components to be produced in China and shipped to the U.S. for final assembly at the Springfield Massachusetts facility. However, there have been some indications that some U.S. service and production suppliers may be considered. Another open question is the recruitment of an adequately skilled U.S. workforce that can adapt to Chinese work methods.
This remains an important development to observe over the coming months as China’s railway experts continue in their efforts to make a more sustained presence within the U.S. We at Supply Chain Matters will continue to provide updates and perhaps a plant visit at some point.