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Alcoa and Airbus Announce a Billion Dollar Supply Deal


In previous Supply Chain Matters postings, we have called attention to metals and components supplier Alcoa. In September of 2014 we highlighted the announcement of Alcoa’s long-term strategic agreement with Boeing’s commercial aircraft unit. Our March 2015 commentary further highlighted this supplier’s strategic positioning within commercial aircraft and aerospace supply chains, and our September commentary noted how product innovation efforts have begun to pay off.

This week features the news that Alcoa has signed a $1 billion deal to supply aircraft components such as bolts, rivets and other specialty fasteners with Airbus. Alcoa classifies this deal as its largest deal for aerospace fastening systems with Airbus.

According to published reports, the parts are to be fabricated from titanium, steel and nickel-based alloys utilized in newer Airbus aircraft models such as the A350, the A320 neo, and the A330. The components were designed to withstand extreme operating conditions and be more resistant to wear.

Once again, Alcoa has characterized these new fastener components as having “breakthrough technology for some of the most advanced aircraft in the world.” Of further significance, these specialty parts that Alcoa has developed are normally provided by niche specialty metal suppliers catering to the aerospace sector.

According to a report from The Wall Street Journal, most of the work related to this new Airbus supply contract would be completed in California and a more than a dozen Alcoa world-wide sites.


Manufacturing Sourcing in China- What Have We Learned?


I recently came across a report from business network CNBC that had the eye-gripping title; Why US Manufacturers are Nixing the US for China. The premise of this report was that the combination of applied robotics and the devalued yuan are now lowering manufacturing costs for the global manufacturing hub. This was not the only report we have seen that suddenly trumps the new attractiveness for sourcing in China.  However, industry sourcing teams need to be cautious and thorough in their positioning and weighting of manufacturing sourcing decisions.

The argument seems compelling. Chinese factories are cutting prices because their costs are going down as a result of devaluation of China’s currency, not to mention that the current downswing impacting China’s economy has motivated many manufacturers to become more aggressive in preserving existing business or seeking additional customers.

The other compelling force noted was the offset of raising direct labor costs by the shift to more automated manufacturing enabled by robotics. However, a recent posting by China Tech provides a different picture or reality, with the headline: The manufacturing boom in Guangdong is over’: Industrial robot makers the latest to get swallowed up by China’s economic slowdown.  A senior salesperson of a leading Chinese robotics firm predicts that only 5 percent of current robotics producers will survive in the next two years because manufacturers do not have the available capital to invest in automation.  Apparently many Chinese robotic manufacturers set overly aggressive sales targets and did not factor an economic downturn. Declaring that the export-led boom in coastal region Guangdong is over, exports continue to decline every month.

The specific geography of Guangdong is a key since this was the former lower cost direct labor manufacturing region for apparel, footwear, toys and electronics that can benefit from the application of robotics and automation.  Instead, manufacturing has shifted to more interior regions of China, seeking lower direct labor costs.

A separate recent article states that the world’s largest contract manufacturer Foxconn, has throttled back its robotics targets to target 30 percent automation in its factories by 2020. Previous reports had cited a 70 percent target. This report indicates that Foxconn’s Chinese factories, including those in Shenzhen, have 50,000 fully functional robots currently operating. Replicating human tasks in high volumes is not as easy as it seems.

While both outlined factors, the devaluation of Chinese currency and the promise of increased automation to offset increasing direct labor costs would appear to be a compelling argument to once again consider China for manufacturing sourcing, we advise caution for manufacturers and retailers.

The primary lesson learned from the initial wave of strategic sourcing decisions that favored China so many years ago was the one-dimensional view that weighted so many industry sourcing decisions. That sole weighting was the attractive cost of direct labor.

Industries have since learned that intellectual property protection, added logistics and transportation costs and the risks inherent within China and across global distribution networks are all added factors.  The same holds true for current decisions, but the assumptions have somewhat changed.

More and more manufacturing has moved to the interior regions of China, requiring added logistics and transportation factors. The global transportation industry has its own set of problems.  Ocean container carriers are in a race of survival of the fittest, those with the biggest ships, lowest costs and highest revenue potential. Air freight capacity has been dramatically reduced, and existing air service comes with a premium. Last year’s massive disruption involving U.S. West Coast ports provided a lesson in overburdened port infrastructure and increased transportation risks. Supply chain teams must now balance their transportation risks among both U.S. East and West Coast port entries.  For Europe based firms, a massive overcapacity of ocean container vessels on the China to Europe segment has yet to shake out as to which multi-carrier network will garner the most leverage in shipping rates.

China’s leaders are desperately trying to move the economy to one of consumption-based vs. the prior export led, and that will drive capital availability. A consumption-based economy places the priority on China’s own manufacturers and service providers to fuel job growth and compete for business within China.  The government has identified strategic industries that will fuel China’s economic growth over the next five years and they will have access to advanced research and needed capital. If you happen to compete in these industries, your business risks are magnified, especially if you source within China.  Consider the recent challenges of Western brands competing within China, as their supply chains came under attack for poor quality or sub-standard practices.

Technology is a new imperative, particularly in gaining end-to-end and multi-tiered supply chain visibility across global supply networks.

The takeaway of our commentary is to not be swayed by a singular trend or singular factors.  Sourcing decisions continue to require a holistic analysis that not only includes the cost of manufacturing, but the various other factors related to landed costs, inventory investment, security of information and added supply chain risks.

A given in today’s increasingly competitive global economy is that change is a constant, and assumptions prevalent today will be different in the not too distant future.

Industry supply chain teams have hopefully learned that strategic sourcing decisions need to stand the test of landed costs, market access, supply chain resiliency and risk mitigation. While China will remain an important and meaningful source of manufacturing and value-chain capability, industry supply chain teams will require a balanced global approach in sourcing, one that spans cost, technology capabilities, IP protection and risk mitigation.

Bob Ferrari

High Tech CEO’s Meet with the President of China to Gain Favor


Supply Chain Matters provides a follow-up to our prior commentary: high tech supply chains- increased risks associated with global access.  In that commentary, we posed the question of balancing the need of high tech firms for increased market access to China’s market with the added risks of intellectual property protection.  Leading up to the visit by Chinese President Xi Jinping to the United States last week, prominent high tech firms elected to seek favor and seek new deals with Chinese partners.

The U.S.-China summit managed to yield some significant deals. On Friday, both countries agreed not to direct or support cyber-attacks that steal corporate information for economic benefit. The countries further agreed to cooperate more closely on the investigation of cybercrimes along with the creation of a high-level working group to combat such attacks. However, beyond the agreement are the actions and will of enforcement. President Obama declared: “We (United States) will be watching carefully as to make an assessment as to whether progress has been made in this area.” President Xi declared that the proper approach was to strengthen cooperation to avoid confrontation and politicization of the issue.

Prior to his summit meeting with President Obama, President Xi Jinping hosted an Internet Industry Forum meeting of prominent corporate high tech executives at the Seattle campus of Microsoft. In its reporting, The Seattle Times features a photo of the prominent high tech CEO’s invited to attend. The optics are stark. The CEO of Alibaba, Amazon, Apple, Cisco, Facebook, IBM, Lenovo, among others are shown as participants. U.S. and China based alike. The Times notes: “Based on the attendance for what was essentially a photo-op in Redmond, that tech industry is betting that their future relies on China.”

In conjunction with the Seattle and Washington meetings, Cisco Systems announced a partnership with China based Inspur Group Co.  In June, Cisco indicated that it was prepared to invest more than $10 billion in China over the next several years. The irony of the current announcement was that Cisco was the key supplier to help build China’s internal Internet and was later accused of spying on Chinese citizens. Now its CEO declares: “There are certain geopolitical dynamics that we have to navigate.”

As we along with business media has noted, Chinese authorities have informed state-owned companies and agencies to buy more locally owned and produced high tech equipment and that has accelerated the strategic importance of domestic technology. Foreign based high tech companies now have to pick their partners in order to continue to expand revenues in China.

Surely not as a coincidence, India’s Prime Minister Narendra Modi visited Silicon Valley last week and made time to speak with prominent high tech and consumer electronics executives about investments in the country.

Market and technology access along with job-growth needs are all interwoven in moving parts with implications to global product innovation and value-chain strategies. There are no easy answers and thus are the risks, perils and strategy implications that continue to unwind within today’s globally based and far more competitive supply chains.



Report that Intel LTE Chips May Make a Presence on iPhones in 2016


This week, Venture Beat, citing knowledgeable sources, indicated that Intel’s new 7360 LTE wireless modem chip will likely be some part of the new Apple iPhones in 2016. The commentary goes on to indicate that Intel’s inclusion as an iPhone supplier: “is as much about “second-sourcing’ as it is about the quality of the 7360 chip.”  The report cautions that it remains unclear exactly which iPhone SKUs will contain the Intel sourced chip.

As Supply Chain Matters has previously echoed, Apple has active strategies addressing strategic and tactical supply risk and segmentation needs. This includes areas related to key components such as processor chips, displays, along with contract manufacturing needs. For the supply of modem chips for the iPhone, Qualcomm has far been the dominant supplier.

Intel arrived late to the mobile phone market and has since initiated earnest product development and other efforts directed at gaining traction. Venture Beat notes that Intel’s modem chip is highly regarded for being well-built, power efficient as well as fast. Further noted is that Intel acquired the former Infineon’s communications chip business in 2010 and since turned it into a seat of research and development for Intel’s next generation of LTE chips. Interesting enough and according to Venture Beat, Infineon once produced the 3G modem chips for iPhones at the Munich facility, but Apple quickly stopped sourcing the chips from Infineon after Intel bought the company.

Neither Intel nor Apple chose to comment to Venture Beat on their story.

We have often called attention to the risk, reward and peril aspects for being an Apple supplier. Even a high tech provider the size and stature of an Intel is not immune to procurement influence and supplier criteria factors that Apple can garner.

The Challenges Surrounding Volkswagen


There is an expression that is often cited in business and military situations: “We are so, so screwed

That expression likely describes current conversations among the halls and facilities of Volkswagen.

The U.S. Justice Department has begun a wide ranging investigation into alleged use of software installed in nearly a half-million diesel powered cars that make these vehicles appear to have cleaner air emissions than they actually do in operation. The auto producer has now acknowledged that the vehicle software installed in some U.S. diesel powered passenger cars make it appear that the vehicles conform to U.S. emissions standards.

According to various media reports, the German automaker could be subject to fines and penalties amount to $18 billion. That of course, does not include the costs involved in mitigating and correcting the problem of non-conforming vehicles currently being driven by U.S. consumers.’

The Wall Street Journal reports that Volkswagen stock has declined nearly 35 percent since Friday, when word began to spread that the U.S. Environmental Protection Agency (EPA) would accuse the company of cheating.  The publication is further reporting this evening that CEO Martin Winterkorn is literally fighting for his job. Today, Volkswagen indicated that it would take a $7.2 billion charge to earnings and cut its full-year outlook, with an indication that as much as 11 million vehicles could be affected by this development.

While business media continues to dive into the implications and consequences to Volkswagen, this blog commentary briefly dwells on the implications from our product design and supply chain management lens.

First and foremost, Volkswagen has the risk of losing the trust and loyalty of its U.S. and global customers if this crisis is not proactively managed.  Thus far, it seems that Volkswagen senior management has been candid and forthcoming in issuing a public apology for violating consumer trust. That cannot be said about other automakers recently involved in government investigations alleging wrongdoing.

Beyond words, the automaker has to now expediciously develop a set of action plans to address several supply chain challenges. One relates to a growing inventory of unsold diesel cars that now have their U.S. sales suspended. The auto maker has made great strides in overcoming prior U.S. consumer pre-conceived impressions that diesel powered cars were noisy and dirty. About a year ago, this author test drove a new diesel powered Passat and I was impressed. Now, all of that market education effort could be compromised if proactive management of this crisis does not occur.

Another challenge relates to all of the sold vehicles currently in-service, that are probably now deemed as violating air emissions standards. Both a mechanical and software fix, if one can be economically developed, must be engineered and expeditiously deployed.

In past cases involving vehicles that do not meet air emissions standards, U.S. regulators have either ordered them off the roads or imposed stiff daily fines. The clock is now ticking.

It is no secret that Volkswagen has struggled with its vehicle line-up for the U.S. market. As noted, the U.S. designed Passat is an impressive vehicle but has failed to capture wider interest among buyers.  Competitive models are laden with more on-board electronics and entertainment features. The automaker has further lacked any competitive mid-sized SUV model which is essential for competing in the U.S. market. In 2014, the automaker committed to produce a competitive 7 passenger SUV model by 2016 along with a $600 million investment in a new vehicle design research center. The design included fuel-efficient diesel powered models.

The coming weeks and months promise to provide Volkswagen with a leadership and response crisis with significant product development, product and service focused supply chain implications. These are significant challenges requiring proactive actions.

Similar to past consumer trust incidents involving Toyota and sudden unintended acceleration, we all get to observe and learn how a global automotive leader responds to brand, product design and consequent supply chain response crisis.

Bob Ferrari

Alcoa’s Proactive Acquisition and Product Innovation Efforts Are Paying Off

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In September of 2014, Supply Chain Matters began calling reader attention to aluminum producer Alcoa and its efforts to collaborate and introduce newer, high-strength and corrosion resistant aluminum alloys for the commercial aerospace industry. At the time, Alcoa struck a multiyear aluminum supply agreement with Boeing’s Commercial Airplane unit to make this producer the sole supplier for wing skins on its metallic structure commercial aircraft along with aluminum plate products used in wing ribs or other structural aircraft components.  The supply deal was valued to be more than $1 billion at the time, and the two parties a desire continue to collaborate on developing newer, high-strength and corrosion resistant alloys including aluminum-lithium applications.

In March of this year, we updated our readers with news that Alcoa’s indent to acquire RTI International Metals, described as one of the world’s largest producers of fabricated titanium products in a stock-for-stock transaction valued at approximately $1.5 billion. RTI’s business focus was centered on long-term supply of titanium fabricated parts that make-up landing gears engines and airframes for both Airbus and Boeing aircraft.  The Wall Street Journal reported at the time that that as much as 80 percent of RTI’s 2014 revenues originated from the aerospace and defense sector. This RTI acquisition followed the 2014 acquisition of Germany based titanium and aluminum castings producer Tital, and U.K. jet-engine parts maker Firth-Rixson.

Our March commentary noted that the metals producer was further positioning itself to be a more strategic supplier to the global automotive industry, helping to pave the way for use of lighter metals in automobile product design and functionality.

Last week, the news reverberating across automotive supply chain audiences was that Ford Motor Company had reached an augmented supply agreement with Alcoa for use of aluminum based components. Readers might recall that the Ford F-150 was recently re-designed, making it the first mass market pick-up truck with an aluminum body.  As a result of the design of lighter materials, this vehicle’s over weight was lightened by 700 pounds, adding upwards of 29 percent in overall fuel economy. Alcoa worked with Ford on the aluminum component re-design.

According to published reports, this revised supply agreement will allow for the use of more sophisticated alloys for additional use in the F-150 along with production of other exterior metal components such as fenders and door panels for other future Ford models. In its reporting, The Wall Street Journal (paid subscription required) quotes Ford’s product chief as indicating that collaborating on technology at this scale represents a fairly significant commitment by both companies.

While a reportedly large amount of Alcoa’s business still emanates from raw aluminum, the supplier is clearly on a strategic product innovation thrust to target business and product innovation needs in key industries. The WSJ reported that Alcoa is aiming to grow its automotive-aluminum sheet business alone to upwards of $1.3 billion by 2018, from a level of $229 million in 2013.

By developing new casting technologies for fabricating both aluminum and titanium based component parts, the door is being opened for joint product design collaboration and more strategic longer-term supply agreements to insure adequate supply. In its reporting of the Ford supply agreement, the WSJ spoke with Alcoa CEO Klaus Kleinfeld who indicated a focus on growing dozens of niche downstream businesses from aerospace to truck wheels, and in developing supply agreements with eight other auto makers.

Supply Chain Matters brings Alcoa to light as an example of joint supplier and OEM production efforts paying rewards in multiple strategic industries and boosting bottom-line results for both supplier and customer.

Bob Ferrari

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