The current waves of industry acquisition frenzy continue as cheap money remains available, and as usual, industry supply chains are impacted.
Today’s business headlines include a massive deal involving two global automobile systems, components and parts suppliers. ZF Friedrichshafen AG announced its intent to acquire TRW Automotive Holdings in a reported all-cash deal that is estimated to be in excess of $11 billion. According to reports, this deal would form an industry supplier with combined annual revenues near $41 billion, rivaling the size of other major global industry suppliers Robert Bosch and Denso. Under the deal, TRW would become an integrated but separate operating unit of ZF. The combined research and development investment portfolio exceeds $2 billion. This transaction requires several closing conditions and the approval of TRW stockholders, and is expected to close in the first-half of 2015.
According to the press release and statements from ZF’s CEO, the prime motivation for this combination is combining of product innovation resources applied to markets in electro-mobility and autonomous driving. TRW Automotive is a supplier of automotive integrated safety electronics, sensors, steering, suspension and integrated braking systems. TRW’s production and supply chain resources are global in scope and include support for major automotive production regions of United States, Europe, Asia and Latin America. ZF is a closely-held global supplier in transmission driveline, axle and chassis technology with 122 facilities in 26 countries and is a major supplier to German based mainline and premium model OEMS’s including Volkswagen. Combined, both suppliers will more than double revenues in support of major regions of China and the United States, and be able to support a fairly broad area of automotive and truck component system supply needs. With its combination with TRW, ZF has the opportunity to significantly increase its revenues and presence in the U.S. market.
The talks between these two automotive industry suppliers have been percolating for some time, and according to a published report from The Wall Street Journal, other suppliers such as Delphi Automotive, BorgWarner and AutoLiv have each expressed interest in “bulking up through acquisitions” in order to have sufficient scale to further stay ahead of product innovation needs to support various global automotive OEM’s. OEM’s have a desire to move forward in electric drivetrains and autonomous driving systems but prefer that system component innovation come from Tier One and other suppliers.
This wave of acquisitions involves other industry as well. Business headlines today include reports of a percolating massive mega-deal between Anheuser-Busch InBev and SAB Miller that could involve upwards of $122 billion. That would involve the combination of two of the world’s largest brewers and according to the WSJ, put control of nearly one-third of global beer supply under one company, and a wide range of brands.
The beat goes on and industry supply chains will have to continue to deal with the opportunities and/or consequences.
In our streaming Supply Chain Matters commentaries related to Boeing’s supply chain efforts in commercial aircraft production, we have highlighted that the global aerospace provider has been re-negotiating its key commodity and specialty supplier agreements in an effort to reduce long-term costs.
Last week, Alcoa announced a multiyear aluminum supply with Boeing’s Commercial Airplane unit valued to be more than $1 billion. According to the announcement, the agreement makes Alcoa the sole supplier for wing skins on its metallic structure commercial aircraft, while aluminum plate products used in wing ribs or other structural aircraft components. The two parties indicate that they will continue to collaborate on developing newer, high-strength and corrosion resistant alloys including aluminum-lithium applications. This supply agreement represents nearly a 25 percent potential boost to Alcoa’s existing aerospace industry business unit. Details of the new supply agreement were not disclosed and thus how much Boeing was able to save remains an open question.
Earlier this year, Alcoa previously announced its intention to acquire United Kingdom based Fifth Rixson, a reported leader in aerospace jet engine components. The deal was reported to be approximately $2.9 billion.
In its reporting, The Wall Street Journal noted that Alcoa has been strategically targeting aerospace amid declining aluminum supplies amid a current glut in global aluminum supply, and a reduction of 1.2 metric tons of smelting capacity since 2007. Combined industry production cuts have enabled to boost raw aluminum prices to above $2000 per ton for the first time in 18 months.
In a few short hours, Apple will once again announce a new set of innovative products to the global community amid a flurry of social and business media posts, streaming commentary and headlines. Announcements are expected on the new iPhone 6 models that will include more elegant physical design, innovative materials such as sapphire-based screens, as well as new functionality. Pundits further expect the long-awaited announcement of the wearable iWatch along with a new iPad model that features a super large screen version.
As we have noted in prior Supply Chain Matters commentary, the one certain thing at the end of today is that Apple’s supply chain ecosystem remains under the gun to deliver on the collection of high expectations. There are continued reports of big bets on expected shipments to be supported for the upcoming holiday period, production yield challenges associated with last-minute design change involving the larger screen displays of the iPhone 6, as well as reports of a simultaneous and the unpredicted Q1 introduction of the rumored 12.9 inch iPad in conjunction with the announced Apple-IBM alliance focused on business applications enablement.
TechCrunch recently posted a commentary citing sources indicating that Apple is already tying up air freight capacity out of China for the forthcoming months as it floods channels with last-minute shipments, which is reportedly causing some delays for other manufacturers. Whether that’s true or not, it reflects a certain state. The scramble is in high gear and all hands are expected to be on-deck on a global-wide basis in the coming weeks awaiting input from Apple’s Sales and Operations Planning (S&OP) process.
Every year at this point, we have noted that Apple’s supply chain is about to be put to the ultimate test. Every year, the stakes seem to get higher and more complex. Like all of our readers, we await the forthcoming chapter in this saga. Can the number one rated supply chain ecosystem repeat in meeting the high expectations and business outcomes of its demanding business partners? Will other high tech and consumer electronics supply chains feel additional impacts?
We will all know the results and the implications in Q1.
At the beginning of this year, a 2014 Supply Chain Matters prediction and consul was that industry supply chain teams should anticipate continued consolidation activity for the ocean container industry. That indeed has been unfolding. The failed attempt among the top three global ocean container carriers to form the P3 Network was quickly followed by the announcement of the 2M Alliance and the Hapag-Lloyd – MSC merger. Now comes the next iteration.
Today features the announcement from French container shipping group CMA CGM that the service carrier has entered into service-sharing alliance with China Shipping Container Lines (CSCL) and United Arab Shipping (UASC). According to the announcement, the alliance will be termed Ocean Three, and will extend among Asia-Europe, Asia-Mediterranean, Transpacific and Asia- United States East Coast transit routes. The agreements will reportedly cover vessel sharing, slot exchange and slot charter agreements among the three carriers. Routes will be utilizing transshipment hubs common to the three partners. Rather noteworthy is that this alliance covers container shipments originating from the Middle East, Indian sub-continent and West Africa.
This new alliance requires the approval from the U.S. Federal Maritime Commission before it can go into effect.
Readers will recall that CMA CGM was one of the lines originally included in the former P3 Network alliance proposal, and was not included in the 2M Network alliance announcement among industry leader Maersk Lines and Mediterranean Shipping Company (MSC). If approved the Ocean Three alliance will also compete with the announced merger of Hapag-Lloyd and Chile based CSAV, an effort to create the fourth largest global container shipping line by consolidation. That merger is still subject to approval from European Union maritime officials.
Industry supply chain teams and transportation and logistics service providers should anticipate further announcements related to consolidation as the industry domino effect continues. While the various ocean container carriers continue to point out the benefits of increased efficiencies, schedule frequency and overall capacity utilization from these consolidation moves, the smoking gun remains as to the impacts to future tariff rates.
This week, the U.S. Postal Service (USPS) suddenly changed the dynamics related to shipping costs in B2C/B2B online commerce and the beneficiaries may well be online customers and mass retailers. The agency aggressively cut shipping prices involving small packages in what the Wall Street Journal described as: “..aiming to steal business from both FedEx Corp. and United Parcel Service Inc.,”
In effect, the Postal Service is acknowledging that its parcel rates were not competitive with its market competitors and it wants to do something about that. The steepest rate cuts are targeted to large volume shippers with packages of less than 5 pounds, with cuts involving other package weights and volumes. In its reporting, the Wall Street Journal (paid subscription or free metered view) cites an industry observer as indicating that a number of E-commerce shippers are either considering or have elected to now utilize the USPS as a result of this rate price change. In its article, WSJ further features a table that contrasts carrier shipping costs for 5-10-20 pound packages which clearly depicts more competitive USPS rates, especially when shippers factor the added fuel and other surcharges incurred by both FedEx and UPS. The USPS does not apply surcharges and has been the last-mile delivery mechanism for many rural addresses in the United States.
In previous Supply Chain Matters commentaries, we raised awareness that planned dimensional-based rate increases initially announced by FedEx and subsequently UPS would have definite impacts to E-commerce shipments in 2015. These rate hikes especially involved low weight but high bulk item shipments such as a case of toilet paper or paper towels.
Both FedEx and UPS were not at all pleased by the latest USPS pricing move and have each logged formal protests and claiming foul. No doubt, certain members of the U.S. Congress may be receiving protest calls. Then again, the cry concerning the USPS was to stop hemorrhaging money and this may well be a bold step in that direction. Officials at the USPS indicate that they will make money with these more competitive rates.
The USPS has made other important moves including partnering with online retailers Amazonfor Sunday deliveries, This week provided an additional announcement that Amazon, specifically its Amazon Fresh unit, and the USPS will partner in a trail to shuttle insulated containers of food products and groceries to residences in San Francisco, and perhaps other urban markets as well.
In the view of Supply Chain Matters, this latest move sets-up a whole different dynamic for B2C/B2B online customer fulfillment in the forthcoming holiday buying peak period. Online retailers who want to maintain attractive free shipping options now have a potential new alternative to control costs of such programs. Both FedEx and UPS will have to deal with a different competitive landscape in terms of rates.
Readers will recall that during the 2013 holiday surge period, the prime headline was the blame game directed at package delivery carriers carrier’s UPS, and to some extent FedEx, inability to handle the last-minute online fulfillment volumes that swamped logistics networks in the two days prior to the Christmas holiday. Both carriers have since invested in added logistics capabilities and have alerted online retailers that there may be a premium cost involved in supporting last-minute or time-sensitive shipments. Amazon for one has also been working on developing its own parcel delivery network.
The USPS has in all likelihood, added itself to this dynamic in the upcoming period. Reducing rates is one strategy, but delivering on-time at the height of crunch periods when all networks are tapped is the other test of competitiveness. We will all have to wait and observe.
In the meantime, we extend a Supply Chain Matters thumbs-up to the USPS for finally making bold moves.
You and I as online consumers, and many online retailers and businesses stand to benefit with these latest USPS moves.
Yesterday, Supply Chain Matters posted a commentary relative to ISM’s August PMI report noting continued positive momentum for U.S. manufacturing. Beyond just parroting of business and traditional media regarding the news, we raised caution on important warning signs relative to sustaining such momentum.Today’s published edition of the Wall Street Journal adds more evidence of caution, observing that many U.S. manufacturers have neglected to invest in replacing aging capital equipment.
The WSJ cites a recent Morgan Stanley report indicating that the average age of industrial equipment in the U.S. has risen above 10 years. Growth of all types of capital spending by U.S. firms increased 3 percent in 2013, and is forecasted to be 3.8 percent this year. These levels are far below the Morgan Stanley historic average of 8 percent.
Instead, firms are investing in acquisitions, stock buy-back programs and capital investments in other faster growing economies in Asia and Latin America. The WSJ cites a Dealogic statistic which indicates that in the first-half of this year, firms have shelled out $80.7 billion for acquisitions, compared to $69.5 billion in this same period of 2013. That equates to the potential of a lot of capital equipment investment.
Of more concern, geopolitical events are changing rather quickly. China’s huge market potential has increasingly become more challenging for foreign based manufacturers. In a separate news report, The WSJ cited a recent survey conducted by The American Chamber of Commerce in China, whose members include manufacturers, which indicated that 60 percent feel less welcomed in China, compared with a 41 percent sentiment a year ago. Responding to a new added question as to whether respondents feel that foreign firms are being singled out for attack, 49 percent indicated yes. Europe’s manufacturing sector still remains in doldrums while Latin American countries, with continue to be challenged with global currency and inflation challenges. Mexico seems to be the new exception.
Thus, previous manufacturing capital investment bets within emerging economies may be sidelined at this point because of fast changing global events. That places even more dependence on U.S. manufacturing resources, hence the growing need to continue to invest for added productivity and newer U.S. based equipment.