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Tesla Reports Q4 and 2016 Financial Performance with Most Eyes Affixed on the Model 3 Supply Chain

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Electric-automobile and solar power producer Tesla reported fourth quarter and full year 2016 results this week but it seemed that most eyes are focused on the ramp-up of the new Model 3 volume ramp-up production and supporting supply chain strategies. Tesla_Flag

On the financial front, the company reported mixed results. Q4 automotive revenues were reported down by 7 percent on a quarter on quarter basis while total year revenues increased 69 percent from the year-earlier period. Q4 gross margin in automotive nearly doubled from the year-earlier quarter while full year gross profit for automotive increased 74 percent.

Equity analysts remained concerned about Tesla’s current and anticipated cash-burn rate, particularly since the new Model 3’s ramp-up will require added capital spending. The Wall Street Journal today observed that total liabilities now stand at nearly $18 billion, compared with $7 billion a year ago. Total cash on-hand amounts to $3.4 billion with speculation that the company must raise additional capital. A further development is the pending departure in April of the firm’s current CFO Jason Wheeler who will be replaced by Deepak Ahuya, Tesla’s initial CFO for more than 7 years.

In this week’s letter to stockholders, Elon Musk, Chairman and CEO indicated that in the past quarter, combined net orders for the Model S and Model X increased 49 percent compared to the same period in 2015.  Vehicle production increased by 77 percent over the year-earlier period. I

In January, Tesla reported that it produced a total of 83,922 vehicles which was at the low-end of its mid-year forecast for producing between 80,000-90,000 vehicles in 2016. During the final quarter, the auto maker produced 24,882 vehicles, many of which were delayed until December because of a what have been described as short-term production challenges starting in late October and extending to early December. Like the rest of the auto industry, Tesla remains challenged by a gap of finished goods produced vs. vehicles actually delivered and signed for by customers. In the final quarter, the gap between vehicles produced and vehicles delivered was 2682 vehicles, which will be counted in the new fiscal year as revenue.

Yet, the company still has a long way to go to meet its milestone of producing upwards of 500,000 vehicles on an annual basis by 2018.

We previously alerted our readers to a published report that Tesla began pilot production of the new Model 3 vehicle earlier this month, to coincide with this week’s report to shareholders. In this week’s letter to shareholders, Musk declares that Model 3 product development, supply chain and manufacturing are on-track to support volume deliveries in the second-half of this year, while installation of manufacturing equipment is underway at both the Fremont California and the Nevada based Gigafactory. The company expects to invest somewhere between $2 billion and $2.5 billion in capital expenditures ahead of the start of Model 3 production and by our lens, there is little tolerance for missteps in engineering and process design.

Upwards of 400,000 paid deposit reservations are believed to have been made so that prospective Tesla customers can be assured of a Model 3 delivery slot. Tesla executives however refuse to cite any number related to Model 3 deposits.

Musk previously informed shareholders of plans to begin Model 3 volume production by July of this year but cautioned that the company could miss that date if suppliers do not meet deadlines. In this latest letter to shareholders, there is a statement indicating that all Model 3-related sourcing is on plan to support the start of production in July.

During the Q&A phase of management’s briefing to equity analysts regarding the latest financial results, there were multiple questions related to further background for the Model 3 ramp-up. Musk re-iterated that the goal for the Model 3 is to have production rates of 5000 per week by the end of this calendar year and that current supplier parts orders begin to ramp to increased volume cadence from July through September. He reiterated that the auto maker has refocused most of Tesla’s engineering, including design engineering into designing the factory. “I think in the future, the factory will be a more important product than the car itself.” Also stated: “I’ve said this before, but our goal is to be the best manufacturer on Earth. This is our real goal. I don’t know if we will succeed, but I think we’re making good progress in that direction.”

Responding to a question on the difference in the Model 3’s design, executives indicated that the amount of complexities in the overall design and vehicle complexities to assemble the newer, lower priced but higher volume model have been dramatically reduced, while the amount of operations that involve more judgment from production operators have been dramatically reduced, or almost eliminated. The Model 3 was described as designed for manufacturability.

A further acknowledgement was learning from the previous Model X production ramp-up where complex design changes hampered ramp-up, bottleneck and cost efficiency milestones, which we have pointed out in prior blog postings related to Tesla.

Another difference noted by Musk is that in earlier models, it was rather difficult to recruit established automotive tier-one suppliers for long-term supply contracts because Tesla was viewed as a start-up with financial risks. For the Model 3, component and subsystem supply contracts have been established with some tier-one suppliers and there is now renewed confidence in supplier capabilities to meet design, quality, and volume commitments.

Supply Chain Matters has previously praised Tesla’s vision, innovative thinking and its can-do perspectives concerning supply chain and distribution. Many eyes are now focused on Tesla’s next critical milestone, that being the ability to operate as a high volume, disciplined manufacturer of industry-leading and technology-laden innovate automobiles.  As many of our readers are well aware, Tesla is now embarking on a full-blown supply chain segmentation strategy, one that differentiates capabilities of full-featured, higher-priced vehicles from that of the high-volume, lower-priced Model 3.

The year 2017 will be the crucial test.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Rolls Royce- Another Potential Weak Link for Commercial Aerospace Supply Chains

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Supply Chain Matters has highlighted some percolating supplier weak links among commercial aerospace supply chains from either financial, operational or product quality perspectives.  Certain key suppliers such as Pratt and Whitney have provided signs of such industry concern. Now, broader industry visibility to engine producer Rolls Royce is likely added.

Rolls-Royce Trent 1000 aircraft engine

Source: Rolls-Royce Image Gallery

This week, Rolls Royce reported financial and operational performance for the December-ending quarter and the headline was a $5 billion annual loss driven by a corruption scandal and negative currency factors, along with signs of premature engine component failures.

Recall that this manufacturer is a prime supplier of aircraft engines for the newest models of wide body, longer distance aircraft such as the Airbus A350 XWB and A330 aircraft and Boeing’s 787 Dreamliner.

The reported annualized loss in the latest year reflects a large, noncash accounting charge from the revaluation of U.S. currency hedges after the British pound slumped. It further includes a £671 million one-time charge for bribery settlements with U.S., British and Brazilian authorities after the company admitted to illegal business practices spanning decades.  Operating pre-tax profitability fell for a third year to £813 million from £1.43 billion a year earlier. Total revenues declined 2 percent to £13.4 billion. Chief Executive Warren East indicated to shareholders and analysts that 2017 will provide another challenging year. Shareholders responded with a reported 5 percent decline in the company’s stock value.

The UK based company has now undertaken a corporate-wide restructuring that unfortunately includes the shedding of positions. A reported 600 manager positions are being eliminated along with upwards of 2,600 job losses in the aerospace division. About 1,800 jobs are further reported as being eliminated in the ship-engine group. The company is forecasting annual savings starting at the end of this year of around £200 million as a result of such efforts.

Further, according to business media reporting, the company is preparing for the introduction of new accounting standards that will impact the reporting of near-term profitability. Rolls-Royce typically sells aircraft engines at a loss and makes up revenues during the operating phase through various pay by the hour servicing contracts with airline operators. The company buffers the early losses by booking some of the assured services revenue early. Under new accounting rules, such losses reportedly will need to be reflected immediately, while services revenue should be accounted for as-delivered.

According to reporting by The Wall Street Journal, costs associated with the Trent 1000 engines used to power Boeing Dreamliner’s have also risen as a result of turbine components degrading prematurely. Other problems include weakness in its business in equipping engines for the regional and business jet sectors where Rolls-Royce is losing ground to rivals.

Thus, as the commercial aerospace industry now enters its next industry inflection point, with overall airline order demand for larger, wide-body  aircraft is now showing signs of contraction, a potential supplier weak link is likely added.  An added irony is that Rolls can likely benefit from added automation of manufacturing and supply chain business processes along with the more leveraged use of advanced technology in areas such as improved sensing of key component operating performance parameters in its engines. Such investments can be difficult when shareholder eyes are focused on near-term profitability.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Report Indicating Tesla Model 3 Pilot Build About to Begin

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After Founder and CEO Elon Musk declared last May an intent to revolutionize Tesla Motors production activities to coincide with the availability of the new dramatically lower cost Model 3, a report now indicates that the electric auto maker is planning to start pilot production this month at its Fremont California production facility.

The Reuters report syndicated by global business network CNBC, cites sources as indicating that Tesla has informed suppliers that test build of the new Model 3 sedans will initiate on February 20.  While the sources did not know of how many sedans were planned for this initial pilot build, it would likely be a small number to test the new assembly and test needs.

The February date happens to precede by two days, Tesla’s scheduled shareholders meeting. Speculation is that the initiation of test build would provide added optics for reservation customers as well as shareholders.

Upwards of 375,000 paid deposit reservations have been already made by prospective Tesla customers. Musk previously informed shareholders of plans to begin Model 3 volume production by July of this year but cautioned that the company could miss that date if suppliers do not meet deadlines.

According to the report, sources indicate that the Model 3 timeline is indeed considered to be extremely aggressive, especially since engineers are still making last-minute design changes to the vehicle. This has been a common pattern for Tesla, one in the mold of Apple under the leadership of Steve Jobs, where last-minute design changes drove suppliers and contract manufacturers crazy in periods of critical production volume ramp-up.  Tesla suffered some effects of this process with the prior Model X, whose revolutionary gull-wing doors and seating designs had to be re-visited because of volume production yield challenges.

At last year’s annual meeting of shareholders, Founder and CEO Elon Musk indicated that Tesla will “completely re-think the factory process.” Musk repeatedly raised the notions of “physics-first principles” and made the point that his team now realizes that where the greatest potential lies is in designing and building the factory.  He challenged Tesla engineering teams to the principles of “you build the machines that build the machine.” In other words, the context is in thinking that the factory is the product, and that you design a factory with similar principles as in designing an advanced computer with many interlinking operating needs. Further acknowledged was that the Model X design was over complicated, perhaps too much to accommodate production volume needs. Going forward with the development of the new Model 3, Musk indicated that a tighter integration loop among product design and manufacturing would be fostered.

This latest report raises the question of whether Musk can fulfill his promise for producing 500,000 cars annual by 2018. That currently represents 4-5 times 2016 production levels, which missed their annual goal as well.

From our lens, the other open question is whether Tesla’s unique new vehicle distribution and customer delivery model can also ramp-up to such levels. Increasingly, at the close of each quarter, Tesla reports thousands of vehicles still in-transit to awaiting customers.

Readers may well have their own views but it would seem to this blog that Tesla’s better efforts should be directed at taking the time to get all production and distribution processes highly synchronized in high volume dimensions across the entire supply chain. Rather than communicate whether suppliers can meet deadlines, communicate the readiness of the entire supply chain machine to meet production and distribution milestones.

The optics can come later.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


2017 Industry Specific Predictions- Commercial Aerospace Manufacturing Supply Chains

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Thus far, we have posted deep-dives on the first nine of our 2017 Predictions for Industry and Global Supply Chains.  The one prediction remaining is our final Prediction Ten, which for each year, dives into what we foresee as unique industry-specific supply chain challenges or environments for the coming year.

This year’s industry-specific challenges were especially challenging in that we contemplated adding a lot of industries, more so than prior years. In the end, we will hone in on those industries that merit additional monitoring and updates in the coming months. As Editor, I have also decided for the purposes of brevity and reader interest, to present each industry in a separate Supply Chain Matters blog posting. We will be also posting these industry-specific predictions in a faster cadence.

Our prior Prediction Ten posting, we dived into Automotive Supply Chain Residing Across North America

Next-up:

Commercial Aerospace Manufacturing Supply Chains  Boeing_787_SC

Once again, for many former and now new challenges, we have once again included commercial aircraft supply chains in our industry-specific predictions for 2017.

Commercial aerospace focused supply chains will have an especially challenging year in 2017 from several dimensions. While Airbus and Boeing both declared that they each exceeded operational performance targets in 2016, the numbers indicate that an industry inflection point is at-hand, one that has implications for the collective industry supply chain ecosystems. The overall demand for larger, wide aisle aircraft is now showing signs of contraction. Added challenges remain in the number of planned new product introductions in the coming quarters, and the industry has now discovered some weak links in supply, namely new more technologically sophisticated aircraft engines and certain other troublesome components.

Our stream of research and observations related to commercial aircraft supply chains have painted a picture of an industry that has created extraordinary levels of product demand streams by designing and manufacturing new generations of more technology laden, far more fuel efficient new aircraft. This has led to the enviable position of having order backlogs of upwards of $1.5 trillion that extend outwards of ten years. At the same time, an industry with a track record of prior challenges in its ability to more rapidly scale-up overall aircraft production levels are clashing with the industry dynamics of both Airbus and Boeing in their desire to deliver higher margins, profitability, and more timely shareholder returns.

Smack in the middle of these dynamics are relationships among suppliers, a need to continue to invest in expanded production capacity and innovation capability and now meet shareholder return needs. Suppliers have been buffeted by various OEM demands for larger cost and productivity savings. In the specific case of Boeing, suppliers to the wide body 787 program are now being asked to step-down pricing related to prior volume ramp-up needs as Boeing seeks to better balance new order flows with annual production.

A Declared Industry Inflection Point

Aviation Week, a well-respected and highly followed industry publication made a declaration in an early January 2017 commentary: The End of the Airbus-Boeing Supercycle. (Free complimentary sign-up account required)

This declaration declares:

After a remarkable 12-year boom, world aircraft industry output growth sputtered to a halt in 2016. The market fell 1.2% (in constant dollars) relative to 2015, the first aggregate decline since 2003. While military demand remains robust, most civil segments are feeling the impact of negative macroeconomic and geopolitical developments.”

This commentary further observes:

The jetliner market is just finishing a 12-year supercycle. Airbus and Boeing guidance, until recently, indicated that they expect a 17-year supercycle. That now looks unlikely to happen. For some time now, there has been a disconnect between airliner market prosperity and the rest of the world economy, which is seeing higher instability and slower growth. The jetliner industry, unfortunately, is falling in line with that macro environment.”

While Aviation Week anticipates some modest growth in commercial aircraft deliveries this year, it will be half-that experienced over the past 12 years. Most order growth going forward is anticipated in the single-aisle segment with the twin-aisle market being declared as flat at best. Meanwhile, jet fuel prices are again rising adding more financial pressures on airlines to operate more efficiently.

Implications

For the industry’s respective multi-tier supply chain, the implications of this inflection point are sobering for planning windows through the year 2020. After 2020, the industry may well be in a decline from the current 12-year cycle. The decline of new order flows for higher margin wide aisle aircraft place the major emphasis on narrower margin single-aisle aircraft that must produce higher volumes to meet financial business objectives.

The notions of euphoria in multi-year order backlogs will likely be replaced with more conservative, but far more detailed planning pitting OEM’s and suppliers at-odds with mutual win-win financial performance objectives.  The challenge for Airbus and Boeing will be in implementing increased production automation, higher levels of end-to-end, multi-tier supply chain visibility with far more informed supply chain wide insights and business intelligence.

Other Supply Chain Challenges

New Product Introduction

As was the case in the prior three years, the industry again has important NPI milestones this year.

For U.S., based Boeing, the first 737 MAX 8 is scheduled to delivered to Southwest Airlines in the first-half of this year, followed by 737 MAX 9 model later in the year. This aircraft has been five years in development and will feature a far more automated production process that must now be ramped to expected volumes. An expanded 787-10 Dreamliner, designed to carry more passengers and utilizing more carbon fiber content is scheduled for first flight this spring. For the first time, Boeing North Charlestown facility will have sole manufacturing responsibility for this model.

European based Airbus likewise has important NPI milestones this year. The second iteration of Airbus’s revamped single-aisle family, the A321 neo (new engine option), will enter service in 2017. It will represent the largest member of the updated A320 neo family and has significant dependencies on newly designed, more fuel-efficient engines being supplied by CFM International along with Pratt & Whitney. The 366-seat long-range A350-1000 representing the biggest twin-engine jet Airbus has ever designed, with eventually compete with the Boeing 777-300ER. First customer ship to flagship customer Qatar Airways is scheduled for late 2017 and this airline has had a pointed relationship with Airbus regarding meeting expectations.

Weak or Critical Links

Commercial aircraft supply chains are often described as constantly dealing with exceptions or surprises. Whether it is an unexpected notice of late-delivery from a key supplier, components that unexpectedly slip from meeting highly engineered conformance standards, or having full visibility to events or risks occurring across the extended supply chain.  With the current wave of new, more technologically laden aircraft models, engineering specifications are more demanding and new process technologies such as 3D printing and other additive or automated manufacturing techniques are now present. Yet, amid such an environment, the industry is now hard at work meeting and sustaining higher volume production and supply chain cadence needs.

One of the most critical supply links in 2017 will be that of aircraft engine manufactures, which collectively must now transition revolutionary new designed engines into meeting high- volume manufacturing and customer delivery requirements of aircraft OEMS.

In the single-aisle aircraft category, two prime manufacturers, CFM International (joint venture of Safran Aircraft Engines of France and General Electric Aircraft Engines) and Pratt & Whitney, are prime power plant options based on airline selection. CFM had planned to deliver a total of 100 of its new LEAP engines in 2016, but could deliver but 77. For 2017, 500 LEAP engine deliveries are being planned. For Pratt, a series of highly visible supply chain related challenges related to the new geared turbo-fan (GTF) PurePower engines contributed to a delay in deliveries for the Airbus A320 neo and Bombardier C-Series programs. In 2016, Pratt delivered 138 GTF engines, 62 of which were in the final Q4 quarter. Pratt plans to produce between 350-400 engines in 2017, but some identified component reliability issues have some of these engines designated as spares to support airline uptime requirements. Any subsequent slippage or delivery disruptions from either of these two engine suppliers will likely impact planned OEM deliveries to customers.

In the wide-aisle, long distance aircraft segment, Rolls Royce and its family of Trent engines have served as the workhorses of these larger, more fuel-efficient aircraft. For the past three years, Rolls has been challenged with profitability performance as well as allegations of bribery practices related to sales of various products. Revenues from commercial aircraft engines currently make-up upwards of one-half of revenues, yet Rolls has not been able to control costs related to design and manufacturing.  A new restructuring plan calls for this aerospace engine provider to double production levels by 2020, which is being described as the fastest ramp-up in its history. The company is headquartered in the United Kingdom, and thus any effects of Brexit in terms of currency, trade, or tariff issues are a further open question.

While on the topic of Brexit, the United Kingdom hosts several aerospace providers who serve the technology and equipment component needs of various global commercial aircraft manufacturers. Depending on the outcome of the European Union and British exit terms related to currency, tariffs, taxes, trade and population movement, aircraft model producers may well have to assess any impacts to costs, pricing and added risks.

 

This concludes our 2017 prediction related specially to commercial aerospace supply chains.

In our next posting, related to Prediction Ten, we will dive into consumer packaged goods and beverage focused supply chains.

Readers are reminded to review all our prior 2017 predictions postings.  And a final reminder, all ten of our 2017 predictions will be available in a full research report which we expect to be available for downloading in our Research Center by February 10th.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


2017 Industry Specific Predictions- Automotive Supply Chains Residing in North America

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Thus far, we have posted deep-dives on the first nine of our 2017 Predictions for Industry and Global Supply Chains. We trust that our Supply Chain Matters readers are garnering insights from these prediction sand they have been helpful for setting objectives and work agendas in the coming year.

We have one prediction remaining which for this year is our final Prediction Ten, which for each year, dives into what we foresee as unique industry-specific supply chain challenges or environments for the coming year. This year’s industry-specific challenges were especially challenging in that we contemplated adding a lot of industries, more so than prior years. In the end, we will hone in on those industries that merit additional monitoring and updates in the coming months.

As Editor, I has also decided for the purposes of brevity and reader interest, to present each industry in a separate Supply Chain Matters blog posting. We will be posting these industry-specific predictions in a faster cadence.

We begin, to perhaps no one’s surprise, with the North America based Automotive sector.

 

Automotive Supply Chains Residing Across North America ford-f150_450

We cite unique challenges for automotive supply chains residing across North America for two specific reasons. One relates to the ongoing industry dynamics related to accommodating product demand mix with inventory and capacity levels. The other with the potential impact of the new Trump Administration policies related to both North America and global trade that has certain automakers in the cross-hairs of direct Presidential criticism, and of U.S. Congressional efforts directed at U.S. corporate tax reform policies.

Sales Trending

Record low gasoline prices in the first-half of the year boosted U.S. light vehicle auto sales to hit a record high of 17.6 million vehicles in 2016. That number was only slightly larger than the 17.5 million vehicles sold in 2015. Strong sales momentum in December reflecting 1.7 million vehicles sold during the last month had pushed the seasonally adjusted annual selling pace momentum to 18.4 million vehicles.

Of the total vehicles sold in the U.S. during 2016, 60 percent were classified as higher-margin light trucks. Promotional discounts heavily influenced sales of sedans and compacts, with the growth in demand for pricier pick-up trucks and SUV’s generally boosting auto maker profit margins.  That helped to fund innovation efforts directed at autonomous vehicle technologies and efforts to meet stricter emission standards in future years. At the end of the year, the industry-wide average of new vehicle unsold inventories was the equivalent of three months, while the average of U.S. big-three automakers averaged upwards of 100 days of unsold inventories.

Looking to 2017, some auto dealers were uncertain if the sales momentum would last, given the current length post-recession sales cycle and the growing credit burden of U.S. and North American consumers in outstanding auto loans. Finished goods inventory levels for certain auto and truck models trended higher in the final quarter and some U.S. based OEM’s elected to curtail factory output levels and lower inventories in late December and January. Factory headcount cutbacks were further being exercised.

The challenge for automotive product management, supply chain management, sales and operations planning teams in 2017 will therefore be effectively managing model and volume mix sales and production output and overall inventory levels while maintaining or exceeding line-of-business goals related to product margins and profitability. To cite just one-example, the traditionally largest selling sedan in the U.S. market has been the Toyota Camry. As we publish this prediction in early February, Toyota reported a 25 percent decline in Camry demand while the smaller RAV 4 SUV outsold the Camry in January.

A singular planning framework can sometimes be a daunting challenge for automotive producers with independent product business groups. The problem can come-down to unaligned business processes and a lack of consistent data and information standards. In October, we featured a Supply Chain Matters commentary reporting on how Ford Motor was addressing such challenges in an effort towards a singular, global S&OP planning framework.

From the longer-term perspective, consumer affinity towards ride-sharing services, higher tech electronics and autonomous vehicle capabilities and IoT enabled vehicle services weighs heavy on future model product planning. The open question is how long will most North American consumers favor trucks and all forms of SUV’s vs more fuel-efficient smaller cars and traditional sedans. It usually comes down to the average cost of gasoline and on the continuation of promotional buying incentives. It’s a constant back and forth among product management and supply chain teams shepherded by longer-term goal setting from sales and operations planning teams.

Tesla the Disruptor

There remains the presence of industry disruptor Tesla Motors, which has successfully captured consumer brand loyalty through leveraged advanced technology in alternative energy powered vehicle models. Tesla has broken the mold in the notions of a vertically integrated supply chain, and is now, with the acquisition of Solar City, rebranding the company to be one of alternative energy. Thus, far has the bulk of its supply chain strategy anchored in the U.S. but that may have to change to accommodate two evident challenges. In order to support required broader annual global sales growth and especially for the over 300,000 booked orders for the Model 3, production volumes need to expand significantly the strategy to source and construct the huge lithium-ion gigafactory in the U.S. may well turn out to be a brilliant decision in the light of increased U.S. protectionism forces. If the U.S. Congress adopts corporate tax reform that exempts exports and taxes imports, Tesla may well find itself in a strategic advantage with other alternative energy powered vehicles who sell in the United States and globally.

Global Sourcing Dynamics

Automotive executives, both global and domestic, with U.S. and North America production and supply chain presence had their primary attention focused on incoming U.S. President Trump and his vow to stop job losses at U.S. automotive factories in favor of job gains within other countries. In January, The Wall Street Journal observed: “Few industries have spent as much time in Mr. trump’s crosshairs as the U.S. auto sector.” Trump stunningly defeated his rival by winning key U.S. Midwest states whose populations have a high dependency on automotive industry and services focused employment.

Mr. Trump’s statements on trade, border or import taxes have rattled auto executives. The President has signaled intent to re-negotiate trade policies within the existing North America Free Trade Agreement (NAFTA) and to impose added tariffs or a border tax on automotive imports from Canada, China, Mexico, and other countries.  Mr. Trump specifically targeted Ford, General Motors, and Toyota for prior decisions to source new auto production manufacturing in Mexico. Auto executives have been packaging strategy announcements to invest more in U.S. based manufacturing.

The strategic stakes are high in that the entire industry has become globally integrated in production and supply chain component and finished goods flow. Mexico was especially being positioned as a North American product hub for lower margin vehicles and as a lower cost manufacturing hub for thousands of automotive component parts.

The larger concerns rest with the imposition of a border or import tax in conjunction with overall corporate tax reform. Such added costs may well tip the balance in landed costs significantly impacting existing margins and overall profitability. Imposing anywhere from a 20 percent to as much as a 40 percent tax on imports to the U.S. could force consumers to pay thousands more for new vehicles and similarly double-digit increases for auto component and aftermarket parts. Each could have a profound impact on future product demand and as we all know, it is quite difficult to predict the outcome of a political process.

As we pen our industry-specific predictions, such proposals remain a matter of speculation and a focus on intense lobbying efforts directed at the U.S. Congress. Where such efforts lead to will ebb and flow during the year, but a certainty is that automotive supply chains will have their teams quite involved in all levels of supply chain sourcing analysis and in supplier contingency planning. Supply chains that have a high product value-added profile dependency for importing component and finished goods parts into the U.S. will especially be challenged.

Further, there is the reality that automotive supply chains must continue to be globally focused to remain competitive and thus countries such as Mexico will continue to play a pivotal role in supply chain strategy. Bottom-line, the environment will be dynamic, and automotive supply chain teams will have little option but to serve as strategic advisors and counselors to line-of-business and product management teams.

This concludes our 2017 prediction related specially to automotive. In our next posting, related to Prediction Ten, we will dive into Commercial Aerospace manufacturers and respective supply chains.

Readers are reminded to review all our prior 2017 predictions postings.  And a final reminder, all ten of our 2017 predictions will be available in a full research report which we expect to be available for downloading by February 10th.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


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