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The Toyota-Mazda U.S. Manufacturing Plant Announcement Must Factor a Changing Industry and Geo-Political Environment


Toyota Motor and Mazda Motor recently announced joint plans to build a new $1.6 billion auto assembly plant somewhere in the United States. The announcement prompted an immediate tweet from President Trump praising the decision.

Beyond the current industry and or politically motivated speculation as to where this plant will be ultimately sourced and built are today’s new realities of major industry supply chain sourcing decisions, including fundamental power-train value-chain differences.

The plant itself is reported to be of a size capable of producing upwards of 300,000, vehicles per year and employing roughly 4000, an average sizing by today’s industry practices. Production is to be divided between both automakers and the plant has been targeted to be operating in 2021, four years hence.  That timeframe has important significance, both from manufacturing strategy, technology sourcing as well as a geo-political dimension.

Let us explain.

In manufacturing strategy, the plan reportedly calls for the joint production of Toyota’s Corolla sedan and Mazda’s crossover SUV vehicles such as the CX5. In last week’s announcement, reports indicated that the two companies have been exploring various areas of joint manufacturing collaboration. More importantly, both companies recognize the strategic market shift toward vehicles less dependent on internal combustion powered vehicles, and more toward hybrid or electrically-powered vehicles. That has special significance in considering the 2021 timeframe. Mazda is especially in need of development of such vehicles, hence Toyota’s prior experience in its Prius hybrid and all-electric model family provides lots of proven product design and manufacturing experience. Subaru, reportedly also has a strategic partnership with Toyota for electrified vehicles.  Toyota Corolla Emblem 300x169 The Toyota Mazda U.S. Manufacturing Plant Announcement Must Factor a Changing Industry and Geo Political Environment

The fastest selling segment in the U.S. car market remains small to mid-sized crossover vehicles and the Toyota RAV4 stands out as a best-seller. To accommodate future demand, Toyota has linked its new Corolla U.S. sourcing decision with plans to boost RAV4 manufacturing capacity in the Canadian plant that currently produces the Corolla. The automaker will reportedly go-ahead with prior plans to construct the new manufacturing facility in Guanajuato Mexico, however that plant will now be designated to produce the popular selling Toyota Tacoma pick-up truck models, in-essence doubling existing production levels to accommodate rising demand across North America.

Now let’s turn to the geo-political dimension.

Toyota has been producing Corolla branded cars both in Canada and in the United States at a Mississippi production facility. In 2015, the Japanese automaker announced plans to construct a new $1 billion plant facility in Mexico, which was to be the new home of Corolla production. That caught the attention of the U.S. Presidential primary and election process, and specifically candidate Donald Trump who challenged the decision. In January, President Trump again criticized Toyota publicly for importing manufactured cars from Mexico to the United States while threatening to impose added tariffs on such cars. Mazda’s current sole presence in a manufacturing facility in Mexico, with lack of any current U.S. based manufacturing capability, exposes that company to trade and currency risks, given the current geo-political climate.

Let’s now turn to the actual process of U.S. plant site selection.

Reports indicate the eleven U.S. states are currently lobbying to land the new facility in their respective state. The short-listing is speculated to involve the U.S. South, Midwest, and Southwest regions. Many of the reported short-listed states have traditionally voted and elected Republican party candidates, hence another political dimension. Some business media publications point to the U.S. Southeastern region as a leading choice, from the notions of both a robust-network of existing just-in-time production focused automotive suppliers, existing modern transportation, and logistics capabilities, as well as tendencies to offer very attractive incentives to foreign-based manufacturers. The key determinant is noted to be labor force and best government incentives.

Supply Chain Matters hastens to add another determinant, one far more strategic. That of course, is the implied shift in power-train requirements in the 4-5-year timeframe, namely the inclusion of more lithium-ion battery packs in automotive product value-chain, along with lower direct-labor requirements via factory automation.

Current U.S. sourcing of lithium-ion batteries resides in the U.S. Western and Midwest regions, not to mention the flexibility or necessity of having such batteries or components shipped from Asian-based manufacturing. As our automotive industry-focused readers know all too well, batteries are heavy and rather expensive to transport over long distances. Thus, any direct labor or government incentives now need to be factored and balanced with the assumption of a more alternative energy focused product value-chain for Corollas or Mazda SUV’s. The good news is that automotive manufacturers have now matured auto assembly processes to be able to accommodate both predominate internal combustion and alternative energy powered vehicles on the very same assembly line.

From our lens, all the above implies that whichever state ultimately is chosen for siting, a key determinant will be strategic sourcing of battery production coupled with transportation and logistics capability and costs in the plant’s region.

The takeaway is that the tradition notions in automotive manufacturing that direct labor and local government incentives alone determine plant site selection are changing rather quickly with the increasing attraction, pricing and popularity of hybrid and electric-powered vehicles. A further new dimension is a reading of the geo-political environment in an era of increasing global trade tensions, one that features constant uncertainty as to tariff, trade, and intellectual property protection challenges. This week marks the start of talks focused on revisiting the NAFTA (The North America Free Trade Agreement), with the implication of an automotive industry highly dependent of the assumption of free-trade and movement of automotive value-chain components.


Bob Ferrari

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

Added Information Leaks from Apple’s Supply Chain Clarify New iPhone Production Plans


This week, there is an indication that rumors about a potential product introduction delay for the speculated Apple “iPhone8” model may be unfounded. Then again, we have seen this movie before.  Apple Logo Added Information Leaks from Apples Supply Chain Clarify New iPhone Production Plans

The statement emanates from KGI Securities analyst Ming-Chi Kuo, and amplified by a posting appearing on Apple Insider. Kuo’s supply chain monitoring has been frequently cited by Apple followers, and he is noted as being insightful in predicting Apple’s product and supply chain plans.

According to the analyst’s latest report, three iPhone models are to be announced simultaneously in September. However, the so-termed 50th Anniversary Model “iPhone8”, rumored to be priced in excess of $1000, will reportedly be in short supply at time of announcement.

According to Kuo’s estimates, the supply chain is expected to support the production of between 2 to 4 million units in the September-ending quarter, ramping-up to an estimated 45-50 million units by the end of this year. That is obviously a significant production ramp-up in a matter of three months, implying that multiple production lines will be operating around the clock pumping out these smartphones.

That notion is supported by a separate Korean media report, and cited by 9 to 5 Mac, that indicates that OLED LCD producer Samsung Electronics Samsung has been building the world’s largest OLED production plant as it chases further Apple orders. That report indicates that Samsung will by the end of this month, operationalize seven simultaneous production lines to increase capacity output to a reported 700 percent in order to support the model’s ramp-up requirements.

Earlier reports indicate that Apple is reportedly paying LG Electronics, another current LCD supplier, $2.7B for OLED production lines exclusively dedicated to iPhone screens.

Apple is one of few global manufacturers that can support the funding of such an extreme supply chain and manufacturing response.

According to the latest Apple Insider report, the other two models planned for announcement and unveiling in September, the termed “iPhone 7s” and “iPhone 7s Plus” are noted as already in volume production with three color options. The KGI Securities analyst is forecasting that planning for the 4.7 inch “iPhone7s” supports production of between 35-38 million units, and 18-20 million units for the 5.5 inch “iPhone 7s Plus” phones.

Given all of these current production forecasts, Apple product management along with Sales and Operations Planning teams are placing a special emphasis on more anticipating far higher channel and consumer demand for the higher priced “50th Anniversary” model. Recall that during last year’s holiday fulfillment quarter, Apple reported that the supply chain was supply-constrained in meeting consumer holiday orders for the iPhone 7 Plus model, which later recovered in the first-half of this year.

Again, we have seen this movie before. Apple’s marketing and PR teams are masters at creating market hype prior to new releases of iPhones. But 2017 provides a significant added challenge, promoting and managing the correct demand mix among three simultaneously released models, in addition to demand for any existing or phase-out models. Competition among other global-wide smartphone manufacturers such as China local smartphone manufacturers Oppo, Vivo, and Xiomi, along with global manufacturer Samsung which has already released its newest Galaxy 8 model that includes new OLED screen technology.

In the next several months, we all get to observe Apple’s supply chain response and agility in-action.

Bob Ferrari

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

More Information Disclosed Relative to Tesla’s Model 3 Ramp-Up

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This Supply Chain Matters blog is a supplemental update which adds additional information to our prior blog commentary- Tesla Conducts Model 3 Customer Handover Event.

It concerns this week’s formal briefing of Q2 2017 financial performance by Tesla’s senior management team, where more information was shared regarding the planned ramp-up of the company’s new and innovative Model 3 sedan.  Tesla model 3 side profile Sized 300x118 More Information Disclosed Relative to Teslas Model 3 Ramp Up

In our prior posting, we stated that we know less about how Tesla will manage the huge planned production and supply chain ramp-up of the Model 3. That question resonated among Wall Street equity analysts to the extent that CEO Elon Musk fielded a lot of questions related to ongoing Model 3 supply chain and manufacturing strategy.

In the briefing, Musk reiterated that when he indicated the term “manufacturing hell,” he really meant it. He further provided an explanation of the manufacturing S curve, a trend quite familiar to our manufacturing and supply chain readers, a curve that essentially depicts the series of plateau constraints that can occur with any product ramp-up. Situations such as supplier shortfalls or production machinery that does not support ramp-up volumes, for example. His message to Wall Street analysts and investors was to not fixate on individual snafu’s but on the target milestone for full production volume levels in 2018.

Nice try- Elon!  Tesla is way-too visible a company to not have multiple eyeballs focused on any snafu.

Further communicated was that Tesla has turned to its major suppliers to assist in achieving both required cash flow and product margin goals. This strategy has a way too familiar ring. However, Musk was quick to praise what he described as the “A-level” collaborative effort and expertise extended by suppliers to prepare for the ongoing production ramp-up.

Tesla has negotiated what the automaker considers better payment terms with suppliers, extending payments out to an average of 60 days. Since the Model 3 consists of less component parts, and can supposedly be manufactured faster than other prior Tesla models, such a goal is the strategy initially adapted by Dell Computer, namely to get paid by the customer before paying all suppliers for the components. Musk’s statement to analysts was on-average, the industry average combined time of production, distribution, and actual sale to end-customer averages 70-90 days. (In today’s sales environment- much higher) Since Tesla owns and controls its own distribution and customer delivery processes, the goal for the Model 3 is an order-to-cash strategy of under 60 days.

From our lens, it’s a great strategy, but as we all know, there are many moving parts to such a strategy, especially in automotive manufacturing that presents a steep production ramp-up phase. This is an area worth monitoring.

Supply Chain Scale-up

CEO Musk acknowledged that Tesla would eventually need to invest in added battery production capacity, particularly for other geographic regions. Acknowledged was the added expense for shipping batteries and completed cars across oceans to fulfill international demand. We believe that this represents a public acknowledgement that Tesla must eventually consider added manufacturing and supply chain presence beyond just the U.S. Musk communicated to equity analysts to expect some further announcements before the end of this year.

Sales Strategy

In our prior blog, we estimated the Model 3 outstanding order reservations to be in the range of 400,000 – 500,000 vehicles, which was candidly an educated guess on our part. In this week’s briefing, Musk clarified the real numbers after queering the automaker’s sales teams. Noted was 518,000 gross reservations and 450,000 existing net reservations for the Model 3 after factoring ongoing customer cancellations. Consider that number for a moment, nearly a half-million customers lined-up with money deposited to secure a Model 3. That is clearly an incredible and enviable position for any automotive or other manufacturer to be in from a customer demand perspective. In fact, Musk noted that his teams can easily drive the current Model 3 customer demand higher with little effort, but cautioned that there would be little point if actual delivery times extend for many additional months. The analogy was waiting an hour-and-a-half for a hamburger to be served. So much for quoting a 2018 delivery date on the Tesla website for new Model 3 orders.

We cannot close without highlighting what we believe was a very positive depiction of cross organizational alignment and collaborative strategy among the extended supply chain management team and senior Tesla management. It concerns the termed Model X, which is the internal depiction of the planned compact SUV iteration of the Model 3.

Musk indicated that his prior communicated goal was to unveil a totally-new architecture for this planned model. The CEO than received council from the executive team (and no doubt product engineering and supply chain focused executives) that incorporating substantial carryover platform features of the Model 3 would facilitate a lower technical and production risk with a faster time-to-market, allowing Tesla to tap a larger existing small SUV market much faster than with a complete new platform.

Musk publicly thanked his team “who reeled me back from the cliffs of insanity


We highlight all the above for readers to reinforce the notions that supply chain and manufacturing strategy does indeed matter in achieving desired business outcomes. In the specific case of Tesla’s Q2 briefing of financial performance, it was the essence of a briefing on detailed manufacturing and supply chain strategies. We observe much more of this occurring in financial performance briefings with every passing quarter.

Supply Chains indeed matter.


Bob Ferrari

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


Tesla Conducts Model 3 Customer Handover Event


Last Friday, Tesla conducted its long-awaited Model 3 customer handover event that unveiled the final production versions of the new entry-level, mass-produced electric car, along with announcing the delivery of the first 30 cars to designated employee customers. Initial deliveries to select employees is an established tradition at Tesla, since these initial completed vehicles will be continually evaluated by employees for performance and reliability metrics.  Tesla model 3 side profile Sized Tesla Conducts Model 3 Customer Handover Event

We now know a lot more about this new vehicle, but at the same time, less about how Tesla will manage the huge production ramp-up.

The Model 3 will feature two different versions including one that extends the electric car’s range to a noteworthy 310-mile range. However, customer will have to pay an extra $9000 for the extended range option. Even more compelling is that if a customer where to add all the available add-on options, including the extended range batteries, enhanced autopilot, premium upgrade package and other options, the total price of the fully loaded Model 3 is just below $60,000.  That perhaps narrows the notions for the mass-produced car for the masses, but it does reinforce the need for Tesla’s quest for profitability.

The more expensive extended battery version has now begun production with the real-wheel drive version. Standard battery Model 3’s is slated to begin production by November.  It is not until the first-half of 2018 that the all-wheel drive versions enter production while international models with right-hand drive commence production and delivery in the second-half of 2018.

Founder and CEO Elon Musk spoke plainly regarding the supply chain and manufacturing challenges currently facing Tesla. He stated: “Frankly, we’re going to be in production hell”. Further stated was that this tough period of Tesla’s production ramp-up will last at least six months, but maybe longer.

From our Supply Chain Matters lens, Musk maybe understating the challenge.

Musk spoke to a delivery schedule of around 100 Model 3’ s in August and just above 1,500 in September. By December, Musk believes that Tesla’s manufacturing and supply chain teams will begin achieving more meaningful production volume rate of upwards of 20,000 Model 3 deliveries monthly. That is roughly the equivalent to the total production volume of all of Tesla model vehicles during Q2 alone.

Once again, such production goals are rather aggressive for any single final assembly manufacturing facility and there can be little tolerance for supply chain or manufacturing snafus.

To add added background to the challenge, Tesla’s web site currently indicates that customers reserving a new Model 3 today can expect a mid-2018 delivery date. While Tesla will not publicly declare the total number of existing customer reservations for the Model 3, some in media and investor channels are speculating that there are upwards of 400,000 – 500,000 existing reservations with customer deposits.

In reporting Tesla’s recently completed Q2 financial performance, Musk pointed a severe production shortfall of 100 kWh lithium-ion batteries packs. According to the earnings release, production of all-important electric battery packs averaged 40 percent below planned supply up until early June. Musk further indicated a need to open as many as three new battery factories as well as active consideration for opening a second automobile production facility, perhaps in China. These are all indicators of scale-up challenges, and imply the use of added capital to fund such investments.

As noted in our Supply Chain Matters commentary related to Tesla’s Q1 operational performance, which each passing quarter, there will be added scrutiny surrounding Tesla’s operational performance as well as the underlying supply chain processes and management systems. While Tesla stock valuations continue to reflect a perception of being a more valuable company than perhaps Ford Motor Company or General Motors, we continue to submit the broader determinant is consistent supply chain performance and scalability.

Up to this point, the sheer dedication, stamina, and creativity of individual Tesla employees has helped to deliver expected performance numbers. At some point, energy levels will succumb to the sheer scale of what remains to be accomplished.

Readers can view video of the entire customer handover event at this YouTube web link.


Bob Ferrari

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


U.S. Border Adjustment Tax Seems Off the Table But Remain Vigilant


As we entered 2017, Prediction Four of our 2017 Predictions for Industry and Global Supply Chains was that major developments surrounding global trade policies and corporate tax reform would occupy the attention of many industry supply chain teams during the year. Our premise was that a climate of uncertain or volatile geo-political developments coupled with an aggressive political and trade agenda of the incoming Trump Administration in the United States would potentially have near or longer-term effects.

One specific element of that prediction were Trump Administration and U.S. Congressional proposals being discussed that would impose forms of border adjustment taxes as part of a major corporate tax reform proposal. Essentially the proposals amounted to taxing corporate revenues and profits based on location of product consumption, essentially resulting in the taxing of imports with a form of a border adjustment tax, while businesses would have their export revenues exempted from corporate tax consideration. Needless to state, businesses whose supply chains had high dependency on importing higher-value finished goods and components would incur significant supply chain cost impacts. We were specifically addressing significant impacts to retail, consumer electronics, apparel and shoe, toys, and other industry supply chains.

This week, Congressional Republicans and the Trump Administration essentially abandoned the border adjustment tax approach amid a heavy amount of lobbying by various impacted industries. According to published reports, political leaders agreed to take the border tax off the table in name of party unity in formulating a workable U.S. corporate tax reform package.

On Thursday, news of this compromise approach sent retail stocks into growth numbers.

Potentially impacted industry supply chains can take a deep breath regarding this latest news.

But, we continue to advise caution for industry supply chain and procurement sourcing teams, including the need to remain diligent in continual analysis and scrutiny of global sourcing strategies in relation to changing sourcing and/or landed cost scenarios.

The current political environment in the U.S. reflects that of constant policy turmoil and continued uncertainty. While approaches to global trade and tax policy show more positive signs toward more rational approaches, anything can happen in this environment of confrontational politics in many dimensions. While the global business front remains optimistic, the geo-political environment is far different and subject to added shocks in the coming weeks and months. In seems that rational thinking has been replaced by the President’s mood of the day and public declarations and that is a clear indication that assumptions related to business as usual remain unwise.

We therefore continue to advise teams to remain vigilant in a detailed understanding all the elements that make up the supply chain network and remain prepared to be able to assess any geo-political or global trade impacts. This remains a time of continual scenario-based planning and what-if analysis, and insure that resources remain allocated for active planning.

Bob Ferrari

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

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