Added Visibility to the Challenges of an Apple Supplier- The Increased Importance of New Product Information Integration
Supply Chain Matters has featured a number of commentaries regarding the perils and pitfalls for being an Apple supplier. Our commentary in early October reflected on challenges at Foxconn and the sudden bankruptcy filing of sapphire glass supplier GT Advanced Technologies. Subsequent information has come to light from the unsealing of information filed in relation to GT Advanced Technology’s bankruptcy. Embedded in these reports are important insights on the increased importance of more timely integration of new product introduction information across the extended supply chain business network.
This week, The Wall Street Journal Digits blog (paid subscription or free metered view) featured its own commentary regarding the lessons of being an Apple supplier. The WSJ was successful in gathering specific responses from other Apple suppliers including Pegatron and Wintek. Regardless of the significant customer demands, suppliers do not turn away from Apple’s business because it provides scale, volume and the potential for profits in far higher dimensions.
The WSJ commentary also cites Apple’s peak and valley tendencies for extraordinary new product ramp-up and corresponding large-scale production volume surges that correlate with condensed product release cycles. In one recent example, Supply Chain Matters called specific attention to a rather last-minute product design change that impacted the current iPhone 6 NPI process.
Apple’s key suppliers point to a common strategy to not have a singular reliance on any large, highly demanding customer but rather a diversification among several high-profile customers. Apple is often cited as a rather demanding customer, having key knowledge on a supplier’s cost and production process structures which is an important indicator for having the most up-to-date knowledge and detailed information on a new product’s required test and production process changes or needs.
These reports provide continued learning for high tech and other industry suppliers that feature highly complex, globally extended supply chain networks. Needs for timely two-way integration of new product introduction (NPI) information across the extended supply chain has become far more evident. Product innovation involves time sensitive collaboration for product design and test changes as well as supply chain production ramp-up needs. That is why product design process information is quickly becoming the new requirement for inclusion within end-to-end supply chain business and collaboration networks.
Multi-year supplier contracts often are associated with the need for strategic direct materials. For large enterprises that have the financial resources, they can well provide a source of industry competiveness or edge in supply.
A prime example is provided in aerospace industry as Boeing has just announced a memorandum of agreement with Japan’s Toray Industries for long-term supply of carbon fiber composite material. Once finalized, this contract extension will take effect in 2015. According to one syndicated report, the contract is estimated to have a value of $8.6B.
This ten year supply agreement represents by Boeing’s words, a significant increase in material provided by Toray. It includes expanded material supply for Boeing’s ongoing 787 Dreamliner production program along with provisions to supply wing structures for the new 777x aircraft development and production program. According to the announcement, the wingspan of the planned 777x measures 22.8 feet longer than the span of today’s 777-300ER, which in-itself is a large commercial aircraft. Further noted was that in 2013, Boeing contracted for more than $4 billion in goods and services sourced within Japan’s aerospace sector suppliers.
A large portion of the future demand for commercial aircraft stems from Asia and Middle East air carriers. Sourcing strategic materials in these regions assures continuity of product innovation as well as customer related influence.
In our coverage of challenges and learning among aerospace supply chains, we have featured commentaries related to industry dominants Airbus and Boeing, as well as those attempting new innovation such as Bombardier. Our Supply Chain Matters coverage of the C-series program dates back to 2010 as the company’s Aerospace Group cranked-up efforts to introduce a technologically advanced single-aisle aircraft, termed the C-Series that could compete with industry dominants Airbus and Boeing in the smaller single-aisle aircraft segment. Bombardier embarked on a huge strategic gamble with the supply chain deployment and market launch of the new and innovative C-Series aircraft which was originally slated for market introduction in 2013.
Earlier this year, the program experienced a noteworthy setback resulting in a nine-month delay for the program due to a malfunction concerning the aircraft’s technologically advanced power plant. Since that time, program management and global supply chain teams have been working to resolve issues and move the C-Series forward.
Bombardier has now demonstrated what we believe was a rather effective use of social media based product marketing. The company utilized Twitter to broadcast a video link featuring program vice-president Rob Dewer, narrating a visual status report of the program. The video, which can be accessed by double-clicking here, speaks for itself and provides a good example on how to get the word out on program progress. It further points out the important coordinated contributions being made by all production, design engineering and supply chain teams.
How did you respond to this video? Do you view it as an effective means of brand marketing? Do you believe that senior management within your industry is open to such efforts?
Share your thoughts in the Comments section.
Supply Chain Matters provides a follow-up to Apple supplier GT Advanced Technologies and the events leading up to its bankruptcy filing. In early October, in a sudden and startling announcement, this developing supplier for new, more durable sapphire glass applications for Apple’s product lineup announced that it had commenced a voluntary filing under Chapter 11 of the Bankruptcy Code as a best means to reorganize and protect that company.
This weekend, The Wall Street Journal, which first identified GT Advanced Technologies as the prime supplier of the new sapphire based material, revealed details previously included but sealed in the bankruptcy filing in October (paid subscription required). On Friday, the bankruptcy judge had ordered the release of this information.
According to the WSJ, GT’s CEO characterized Apple’s efforts as a “classic bait and switch” strategy that caused this supplier to be stuck in what was described as an “an onerous and massively one-sided deal.” The article further indicates that the supplier described constant changes in product specifications without adequate compensation and that Apple had no obligation to buy the material but demanded the supplier restrict the company from selling to other consumer electronics company. In an earlier motion to the court, Apple stated that the filing was intended to “vilify Apple and portray Apple as a coercive bully” and that the CEO’s statements were untrue and defamatory. Apple also invested the sum of $439 million which it must now try to recover.
This Apple supplier relationship has obviously reached a point of no-return. The WSJ quotes GT’s bankruptcy lawyer as indicating: “There are discussions between Apple and the company not about continuing the marriage but rather what I could call a divorce without a custody fight.”
As Supply Chain Matters has noted in many prior commentaries, the perils of being an Apple supplier are those of having the capability of high agility in the wake of what others would view as rather difficult obstacles. That tendency dates back to the era of Steve Jobs who instilled a perfectionist culture for design engineering. Also with Apple come huge scale and the potential for financial reward. In the case of GT Advanced Technologies, the risk-reward strategy has an apparent far different outcome.
Obviously, Apple has no desire to have such a supplier relationship vetted in business and social media but this is a far different era of transparency and openness that sometimes transcends discussions behind closed-doors.
This is today’s mission for high tech and consumer electronics suppliers, namely dealing with whatever is required to make the customer’s business model successful, but sometimes at-peril if a counter-balancing strategies are not pursued. One of the Comments affixed to the WSJ article very pointedly states: “If you cut a deal with Apple, you better know what you’re getting into.” That comment sums it all.
If our readers have had the occasion to travel to Boston, you might have experienced the public transit subway system which is referred to as the “T”. Typical to the historic nature of the city, its subway system dates back to the late 1800’s. Today, its subway lines are denoted by colors, namely the Red, Green, Orange and Silver lines.
Last week, another very important milestone took place.
The Massachusetts Department of Transportation awarded a contract to China’s state-owned CNR Corp. for the replacement and delivery of 284 modern subway cars. The important headline for this development was the awarded contract cost, namely $567 million, is a rather compelling sum for this amount of modern equipment.
It its reporting, Bloomberg News echoed that this was the first deal of this kind for a Chinese company in the U.S.: “The deal breaks new ground for Chinese train makers whose overseas push, backed by Premier Li Keqiang, has been mostly limited to developing markets.” According to CNR officials, this deal eventually places CNR equipment in all of the world’s six continents.
The contract calls for CNR to replace 152 Orange Line subway cars, that line’s entire fleet, which has an average of 1.5 million miles of service per car. Additionally, 132 Red Line subway cars which date back 27 years and have racked up to 2.3 million average miles will also be replaced. CNR will construct a new $60 million final assembly manufacturing facility at a former closed Westinghouse factory site located in Springfield, a central city in Massachusetts. The new production facility is expected to employ upwards of 150 factory workers.
Since the contract stipulates that 60 percent of the work to take place in the U.S., Supply Chain Matters speculates that the subway car components will be imported directly from China, most likely by ship via and expanded Panama Canal routing to an east coast port.
The timetable calls for a three to four year design phase, with initial pilot cars delivered in 2018, and production car output spanning the years 2019-2021. The deal has an additional option for the delivery of 58 additional Red Line cars.
The specifications for these new subway calls call for adding an additional 15 additional passengers per car, wider accessibility doors, LED lighting, regenerative braking systems, environmentally friendly HVAC and advanced customer information systems.
The Massachusetts Bay Transit Authority (MBTA), operator of Boston’s transit system has struggled with its finances for many years, falling behind in any efforts to invest in new operating equipment. Thus, the opportunity to replace this amount of equipment at the stated cost had to be a very attractive proposition for taxpayers. However, it has to a rather concerning development and omen for existing train equipment manufacturers.
A reported six companies bid on this replacement contract. Bidders were reported to have been evaluated on criteria ranging from technical and manufacturing experience, quality assurance, reliability as well as price. In its reporting, Bloomberg noted that the CNR price was a little more than half that of Bombardier and other bidders included Hyundai Rotem Co. of South Korea and Kawasaki Rail Car of Japan. An MBTA spokesperson later added that that agency found no human rights violations with CNR.
Rival state-owned CSR Corp. is reportedly keen to supply high-speed trains to the State of California. A published Reuters report indicates U.S.-based SunGroup USA indicated to Reuters earlier last week that it had teamed up with CNR and its unit Tangshan Railway in a pitch to supply California’s $68 billion project with up to 95 trains that can travel as fast as 354 kilometers per hour (221 miles per hour). That news is significant in that CSR could possibly team up with rival CNR, the recipient of the recent Massachusetts subway car contract, for the California contract. About a dozen firms are expected to compete for the California project.
And then there is one more development. An additional Bloomberg report published yesterday indicates that both CNR and CSR will make “a major announcement” in about a week. The report cites speculation that China’s State-Owned Assets Supervision and Administration Commission (SASAC) is seeking the merger of the two companies to boost exports of high-speed railway technologies.
Obviously, China has indeed set aggressive targets for exporting train equipment and supply chains to global markets and developments are moving rather quickly.
Revenues for the aerospace provider’s commercial aircraft division rose 15 percent as a result of stepped-up production deliveries. However, operating margins dropped to 11.2 percent from 11.6 percent a year earlier.
In the earnings report, Boeing’s CFO again indicated that Boeing sells each Dreamliner for less than it costs to manufacture this aircraft, and that the program spending broke through the $25 billon milestone barrier this past quarter. Boeing utilizes accounting measures that allow it to spread program costs and revenues for the 787 program over a longer multi-year horizon.
In its reporting, The Wall Street Journal characterized that development as suggesting that reducing costs on the program is taking longer than expected. This news calibrates with reports in June indicating that Boeing has re-negotiated certain long-term component supply agreements with major suppliers of the 787 and other aircraft.
Also noted by the WSJ in its reporting is that turning cash positive on the 787 program is central to Boeing’s efforts to boost shareholder returns through stock buybacks and higher dividends. In the earnings briefing, Wall Street financial analysts peppered questions regarding concerns that planned production increases across various aircraft programs would delay ramp-up in shareholder’s payments.
That is not a good omen for those participants in Boeing’s supply chain ecosystem who can anticipate further pressures for cost reduction and efficiency gains.