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.
Supply Chain Matters provides our readers periodic updates to examples of how supply chain snafus can impact business performance. In that light, we have provided ongoing commentaries related to Lululemon Athletica and its prior sourcing and production snafus of one of its most popular line of yoga pants for women.
In March of 2013 this global B2C online and brick and mortar specialty retailer was forced to both recall and stop selling its most popular line of women’s summer yoga pants after discovering that the “sheerness” of the fabric allowed too much to be seen underneath. The CEO was compelled to publically apologize to customers for the problem and a short time later, announced her desire to step down from her CEO role due to personal reasons. Later in 2013, both a new CEO and Chief Products Officer was brought on-board, unfortunately too late to make any influential impact regarding the 2013 holiday buying period.
The latest business media update for Lululemon reflects a sales recovery with new product designs now becoming attractive for shoppers. Last week, the specialty retailer provided higher-than-expected revenues and profits and raised its outlook for the full year. Online sales increased 30 percent from the year earlier while sales at physical outlets decreased 5 percent. In its reporting, The Wall Street Journal declared: “a sign that efforts to put supply-chain problems and fashion missteps behind are beginning to deliver results.” Prospective investors were certainly impressed, sending the stock upwards in double-digits.
To accomplish this turnaround, supplier relationships were augmented and a new line of fashion products was accelerated to provide more online and store shelf assortment in July, a traditional transitional period from summer to fall. The product line had emphasis other than basic black and gray, which resulted in higher cost and a near 4 basis point erosion in gross margin.
More supply chain challenges remain including upping the assortment of in-demand products that consumers demand as well as further supply chain process improvements. However, the situation seems more of a positive direction.
Our community is often reminded of the both the immediate costs associated with supply chain disruption as well as the longer-term impacts to brand and stock-price. In the specific case of Lululemon, it has been a span of 18 months of such impacts and learning. During that time, competitors have managed to seize an opportunity and provide consumers with other attractive and functional choices.
As acknowledged by company management, more work remains and it wilol certainly include a closer relationship of product design and supply chain.
In the week that Apple staged its massive media event announcing two of its newest iPhone models, BloombergBusinessweek featured an intriguing article titled: Apple’s iPhone 6 First Responders. The report serves as a very timely reminder of the critical importance for harvesting product performance and service reliability information very early in the product launch stages.
The Apple program outlined is termed early field failure analysis (EFFA). The Bloomberg authors had a novel spin as to the purpose, one that may well resonate with our reader audience: “ As customers line up to buy the device (iPhone) around the world, Apple employees will show up at work to learn how they screwed up- and fix it.”
Humor aside, the Apple program was conceived to resolve problems before they become far larger in-scope, when they are far more expensive to resolve across an outsourced supply chain. Bloomberg cites former Apple employee sources as indicating that EFFA testing is most stringent during the device’s first weeks of consumer sales, but can continue longer as problems arise. Therefore, the EFFA program for the iPhone 6 models is most likely underway as we pen this commentary. Once more, the report confirms that defective Apple devices returned at Apple retail outlets are directly airfreighted to Cupertino where the phone is physically examined and where manufacturing history can be traced to individual workers on an assembly line. There are some rather fascinating examples of how previous problems were found and resolved before they became a thorn.
The report is worthy of a read since it provides further evidence of the importance of connecting the service management business process with the product supply chain. It further provides evidence of how Apple’s product management and supply chain teams harness early feedback information related to specific products to avoid more costly issues and to protect the image of the brand. I suppose we could add that it also avoids the wrath of CEO Tim Cook when consumers feedback any displeasure in an Apple product.
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 Supply Chain Matters, we relish when elements of the Wall Street community recognize the critical link of supply chain performance and responsiveness with supporting positive product brand and business outcomes. Thus we were attracted to this week’s posting by Motley Fool concerning what is often rated as the number one supply chain: Is Apple’s Supply Chain a Risk to the Company?
The overall concerns raised in this commentary should not be new news to our community, especially those that often follow Supply Chain Matters. The commentary observes that the supply chain is more difficult than it appears (really!), even though the definition of what is incorporated in supply chain is somewhat simplistic. More importantly is this commentary’s linkage of a corporate culture that is product innovation driven, and how that impacts supply chain responsiveness.
We have brought forward that dimension in many of our Apple supply chain commentaries, the most frequent addressing how last-minute product design changes on the pending iPhone 6 impacted ramp-up production schedules or the current aggressive plan to introduce a new 12.9 inch iPad in Q1 .
A somewhat novel aspect to this commentary is calling attention to the fact that Apple CEO Tim Cook, having come from a background in supply chain, should have been aware of supply chain risks. Our response is: Of course he is aware, and he, in-turn has obvious high expectations in his supply chain partner network to rise to challenge, as they have before.
There is speculation among Wall Street investors as to the scope and breadth Apple’s pending product announcements scheduled next week, along with the market availability of these products in the upcoming holiday focused quarter. In its conclusion, the Motley Fool commentary kind of throws supply chain ‘under the bus’:
“As Apple continues to bring new and exciting technologies to its products, at times there will be delays in both supply and manufacturing processes. In addition, Apple’s going to take its time bringing a cohesive, end-user-focused, product to market. It isn’t always fast, but it’s worth waiting for.”
Supply Chain Matters and many of our community would most likely have a different perspective. A supply chain supporting innovative products as its prime business outcome must be designed to support agility, flexibility and responsiveness to constant product changes and new product introduction cycles. It is not a supply chain driven solely by lowest cost dimensions, but rather scale and responsiveness dimensions.
The good news is that once in a while, Wall Street can appreciate supply chain capability, even as some activist investors constantly strive to destroy years of investment and resources in supply chain capability.
Supply Chain Matters has featured many ongoing commentaries regarding electric powered automotive manufacturer Tesla Motors and its bold “gigafactory” strategic supply strategy. Our last commentary published in mid-August on this topic reflected on the high frenzy of lobbying and proposed incentives among various U.S. states to be designated as the designated site for this massive factory, but the betting for the final site was leaning heavily towards a particular site, that being Nevada.
This afternoon, the formal announcement regarding the chosen site for this massive $5 billion supply facility will be made but business and general media has already running stories concerning disclosed the site, which is an industrial complex near Reno Nevada.
Let’s re-visit the four strategic objectives outlined in our mid-August commentary in light of today’s expected announcement:
Bold supply chain vertical integration
As more information comes to light, there is no doubt in the lens of Supply Chain Matters that Tesla has elected a bold vertical integration strategy. The massive scale of this facility is targeted at reducing the unit costs of lithium-ion batteries by 30 percent. Current reports now cite the statistic that at total capacity, capable of supplying up to 500,000 electric vehicles per year, the plant capacity exceeds than all of the entire automotive industry’s current lithium-ion battery supply needs. However, other information now coming to light indicates that Tesla’s supply strategy extends beyond current automotive industry needs, and could include electric storage needs for public utility, alternative energy or other industry needs.
There are new reports that the Nevada site selection has considerations for being powered by solar, wind and/or geothermal energy methods. as well as being a potential supplier of electrical storage to Las Vegas casinos and entertainment complexes.
Proximity to key commodity supply and transport networks
The site itself is rather close to supplies of the all-important raw material of lithium supply. A report posted on SiliconValley.com observes that Rockwood Lithium, the only operating bulk lithium supplier in the United States could easily supply needed raw material. The sire itself, to be located within the Tahoe Reno Industrial Center is approximately a four hour drive from Tesla’s primary Fremont assembly facility, and does provide for rail services.
A well trained and technically savvy workforce
Currently, Nevada has one of the highest unemployment rates in the United States. No doubt, the State of Nevada probably included workforce training incentives to staff the new facility. This facility is expected to be highly automated, but previous estimates pegged overall employment at 6500 at full capacity.
Subsidies that may well defray the overall cost burden.
In its reporting of the Tesla Nevada site selection, the Wall Street Journal noted: “Nevada likely offered Tesla one of the largest incentive packages in the history of the U.S. automotive industry.” Reports reinforce Tesla’s prior statements indicating expectations that the designated states would defray upwards of $500 million of this facility’s total $5 billion costs. The Governor of Nevada is expected to convene a special session of that state’s legislature to finalize details of the overall incentives package. We’ll know in the coming days the details of such subsidies, but as noted above, early indicators point to a substantial package.
Tesla is a company whose boldness extends across its entire value-chain. Today’s announcement of Reno Nevada as the site as one of the largest single factories ever constructed in the United States is a testament to such boldness and initiative. The race to a 2017 volume production now begins.