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.
In a Supply Chain Matters posted commentary in August, we called attention to continued railcar shortage concerns among U.S. Midwest grain farmers. Last winter, specialty rail car shortage problems stemmed from pileups among both the BNSF Railway and the Canadian Pacific Railway (CP) networks heavily burdened by surging crude oil transport demand and compounded by severe winter weather. The problem was a classic capacity-constrained network, as winter conditions incurred a heavy toll on equipment and schedules. At the time, the railcar shortage was expected in extend further into this year.
A published Bloomberg report in August reported that upwards of 10 to 15 percent of last year’s grain crop still remained stored in silos because of the continued lack of availability of specialized bulk rail cars to transport the crop. Some contracts for delivery of grain from as far back as March remain unfulfilled in August.
An expected high U.S. spring wheat crop began harvesting last month and must now be either stored or sent on bulk railcars to end-markets and export ports. Growers were concerned whether railroads would ever be able to catch-up with compounding backlogs.
There is now have another data point to consider. Last week, CP outlined a series of aggressive financial targets that included a doubling of earnings by 2018. One-third of the expected new revenues is expected to come from added crude-oil transport from both the Alberta and North Dakota Bakken region, While today, Bakken crude represents 60 percent of CP’s unit volume, plans call for shifting that percentage toward the Alberta region. According to industry reports, Alberta crude is less volatile in transport, and CP is obviously betting that Alberta crude will be in more demand for rail transport needs.
To accomplish these financial and operational objectives, CP has plans to increase crude shipments upwards of 60 percent in 2015 while expanding specialized crude terminals in the Alberta region.
From our lens, the above is not good news for U.S. and Canadian farmers.
Shifting an already overburdened CP rail network further north could well take more capacity away from U.S. Midwest use. If currently harvested grain and other crops become just as log-jammed as last year, the situation may get far uglier, especially considering that both U.S. and Canadian rail networks are now running under constricted speed requirements in transporting crude.
We would appreciate hearing the views of farmers and operators on the ground, dealing with the current bulk rail transportation challenges. Do you feel this planned network shift by CP will compound current logjams?
Either share your observations in the Comments area below this posting, or send us an email: info <at> supply-chain-matters <dot> com
Last week, commercial aerospace manufacturer Boeing announced an increase for its monthly production rate of 737 aircraft starting in 2018. The designated production rate will increase to 52 airplanes per month in order to sustain a production goal of 620 finished 737’s per year, the highest ever volume for this particular aircraft. This boost amounts to a near 24 percent increase from the current pace of producing 42 of the 737 aircraft per month. Boeing is providing an ample two year notice to its supply chain and ecosystem partners in ramping the 737 supply chain to sustain this level.
With a reported 4000 unfilled orders for both the named Next-Generation 737, and even more fuel-efficient 737 MAX models, Boeing has to crank-up the pace in order to satisfy customer operational and business timing needs. Once more, the global economic environment can change very quickly. We suppose our readers among other industries would relish a two-year window for planning.
Meanwhile, Boeing also announced its report of aircraft deliveries in Q3. Deliveries included 120 of the Next Generation 737 aircraft and 31 of the 787 Dreamliners, which reflect meeting current quarterly production goals. Year-to-date, Boeing has delivered 79 Dreamliners utilizing two final assembly sites with quite a ways to go in reducing the current backlog of that aircraft family.
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.
In April, German based ocean container carrier Hapag-Lloyd and Chilean based CSAV formally announced a merger deal after preliminary talks leaked in December 2013. This combination would create the fourth largest container shipping company in the world with upwards of 200 vessels and transport capacity of 7.5 million TEU’s in the fleet. The outlined deal involved Hapag’s control of 34 percent of the merged entity after two added capital infusions totaling approximately $1 billion.
After its consideration, the European Commission has now issued its approval of the planned merger.
Approval hurdles in other jurisdictions remain before the final green light, but the EU nod is a significant milestone.
This week, a significant milestone occurred for the global supply chain ecosystem of the new generation Airbus A320 aircraft. The first Airbus A320neo completed its maiden flight at 2:22pm local time yesterday after its two-and-a-half test run flown by Airbus’s experimental test pilots over southern France. The maiden flight comes weeks ahead of prior program expectations. Video and a complete program overview can be viewed via the Airbus web site.
The Neo (new engine option) of the workhorse A320 includes newly designed more fuel-efficient aircraft engines with incremental innovations in aerodynamics and updated cabin features. That aside, the most significant customer feature for the Neo and its promised, more enhanced fuel burning efficiency expected to be upwards of 20 percent more efficient. The A320neo family will consist of A319 and A321 variants as well, the latter offering seating up to 240 passengers. Airbus touts the A320 as the globe’s best-selling single aisle aircraft and thus the program stakes are especially high. To date, the A320neo has garnered 3200 orders involving 60 customers and thus more innovative, stepped-up production cadence will be an important requirement for the end-to-end supply chain.
The aircraft for the maiden voyage was powered by two of the newest Pratt and Whitney PW1100G-JM engines which features that supplier’s new geared-turbofan technology. According to Pratt, the engine successfully completed its first development flight in May of last year and has completed 11,000 hours of testing across the supplier’s PurePower engine family. The stakes for Pratt are additionally high with its newest innovative geared turbofan technology. The Neo is also offered with CFM International’s LEAP-1A power plant as an airline customer option. The LEAP-1B engine was selected as the prime power plant for Boeing’s planned 737 MAX aircraft, which is the prime competitive offering in contrast to the A320neo. According to CFM, there are already orders amounting to 6770 LEAP family engines.
This maiden flight milestone kicks-off 3000 hours of rigorous flight test process involving upwards of eight aircraft with various options and engine options. As Supply Chain Matters has noted in many prior aerospace industry highlighted commentaries, many things can be discovered in the flight testing process, some with reverberations up and down the supply chain. The A320neo with Pratt engines is currently planned to enter service in the fourth quarter of 2015, with the first airline customer being Qatar Airways.