Yesterday, the long anticipated and incredibly pre-leaked Apple product launch event occurred, and Wall Street and the rest of the industry did not seem all that impressed. As we pen this posting on the morning after, Apple stock has already dived more than 7 percent, over $40 lower than pre-announcement. Most of the reaction to the event stems from the pricing strategy of the new model of iPhones along what was not announced.
As was widely rumored, the company announced two new models of smartphones. The new generation iPhone 5S includes a faster and more powerful A7 64 bit microprocessor, a fingerprint scanner, an advanced camera, and a phone case constructed of highly durable liquidmetal which is available in three high-end color options including gold. The screen size is a 4 inch Retina display, the same as the prior model. Pricing for the new iPhone 5S was announced at a carrier subsidized price of $199 for the entry 16GB model.
Much more attention was placed on the announcement of the so-termed, lower-cost iPhone C version. That phone essentially packages most of the technology of the previous iPhone 5 and adds five available color combinations. As we have noted in previous Supply Chain Matters commentaries, this newer scaled down version was supposed to be Apple’s response to consumer preferences in high growth emerging markets such as China and India. The long awaited declared pricing is where most equity analysts and Supply Chain Matters were disappointed. The 5C was priced at a carrier subsidized $99 with a two year contract for the 16GB version, which equates to a reported $549 without carrier subsidy for the U.S., and $733 for China, which is roughly 4500 yuan.
In its reporting, the Wall Street Journal noted that competitor Samsung is offering smartphones in China and India for less than $100 without a carrier subsidy. Other Chinese based OEM’s such as Lenovo, ZTE and others have similarly lower cost alternatives with attractive functionality. Unlike the U.S., smartphone consumers in China usually pay the unsubsidized price with carrier subsidies coming later in the term to lower monthly phone bills. Thus it would appear that Apple has initially targeted the 5C not as a lower cost model but rather for the far upper end of consumers in emerging markets who would be attracted to the Apple brand. It is believed that this initial pricing strategy provides an ample opening for existing competitors to undercut Apple in pricing and features. Equity analysts have further concluded that the 5C model has to be less expensive to produce, by witness to a lower cost segmentation of Apple’s supply chain which we have also concluded.
Thus, Apple’s strategy appears to be protection of higher margins at the risk of further erosion in global market share.
A sample of reaction from Silicon Valley circles was penned by Troy Wolverton columnist for the San Jose Mercury Times, which concluded; Apple’s Timid Tim once again disappoints, and that: “The iPhone 5C is just a new version of that old strategy.” Another conclusion was that it was clear the company (Apple) is not exactly stretching itself in product and market innovation.
Of further significance was what was not announced yesterday. There was no announcement of the rumored deal with carrier China Mobile, although that is likely to come. There was no announcement of the introduction of the rumored iWatch or upgraded models for both the iPad and iPad Mini, which are rumored to be coming before the end of the year.
Apple’s supply chain teams now face rather tough challenges in the weeks and months to come. Rather than a phased product available launch that occurred in prior market introductions, the current plan call for simultaneous inventory availability of the 5S and 5C in all major countries and geographies. Information leaks emanating from various areas of Apple’s supply chain these past weeks indicated that there were production ramp-up issues involving the 5S fingerprint scanner, its new casing as well as the larger display. Prior newly introduced iPhones tended to sell out rather quickly, and the supply chain had to rally to make adequate inventory available for the all-important Q4 holiday buying period. Supply chain teams supporting the new innovative 5S are additionally tasked with preparations for launching potential other new products later this year.
Teams supporting the 5C model had already been anticipating a high volume ramp-up to support expected volume growth from emerging markets. Whether the higher list price will affect forecasted or anticipated shipment volumes remains to be seen. Some equity analysts are already speculating that Apple may cut the price of the 5C earlier than past cycles, if consumer response and margins are not as anticipated. There have been charges of alleged worker labor violations associated with at least two contract manufacturers associated with 5C volume manufacturing which no doubt will have to be investigated. With the introduction of multiple color models, inventory mix planning will become far more important, especially if one or two colors become far more attractive for consumers.
More importantly, the pressure on Apple’s management to restore its reputation as most innovative in the market will place added pressures on the entire value-chain for discipline in meeting highly aggressive time-to-market and time-to-volume objectives while supporting its corporate culture of last-minute design changes. Other information leaks point to Apple’s current plans to double staffing in its marketing groups which will add more tension in cross-functional discussions and objectives.
Readers of this author’s prior commentaries related to the Apple supply chain might have noted the disclosure that the author was a holder of Apple stock. This morning, that situation changed, since our meager amount of stock sold-off automatically because of a short, protected position. Some companies tend to pay more attention to protection of margins and the status quo, and that turned out to be the negative response of the market.
The new transparency of Apple and its supply chain is becoming more visible and more concerning.
In April, Supply Chain Matters made an observation that two of the world’s most competitive supply chains, Apple and Samsung, would continue to respond to different business needs and outcomes. Yesterday, yet another important precedent was set in this highly visible battle of supply chain response and market agility capabilities.
Samsung again upped Apple in its market introduction and media buzz concerning its brand new Galaxy Gear smartwatch. This new wrist device is scheduled to go on-sale later this month and retail for $299. This follows prior Galaxy smartphone announcements from Samsung that have been strategically timed to steal the market thunder from Apple.
In its reporting of the launch event, the Wall Street Journal opened its article with the following: “Samsung Electronics Co. planted its flag in the battle over wearable devices Wednesday, unveiling a digital watch than can run apps and interact with its own family of smartphones.” Of even more interest, the WSJ reminds its readers that Qualcomm also announced yesterday plans to ship its own new color-display Toq smartwatch later this year, available in a “limited edition” for $300, while in June, Sony unveiled an Android powered smartwatch expected to also ship later this month.
While these initial smartwatch models can arguably be described as first generation, they have been designed to extend the features of existing smartphones and will compete for consumer wallets this upcoming holiday buying season. They enter the market ahead of Apple where numerous information leaks indicate that an “iWatch” has been in the development pipeline. In our Supply Chain Matters posting in mid-July, we called attention to business media published reports indicating that high level external hiring by Apple raised questions over hard engineering problems and that Apple’s in-house teams have apparently not been able to solve and the ability of its in-house engineering team to develop wearable technology on a market timely basis. A published Financial Times article speculated that a new wrist computer device may not be introduced until the latter part of 2014. This obviously leads to speculating that Apple has desires to introduce market notable product innovation in a smartwatch, and has been willing to accept a delay in market introduction to achieve a more innovative product perception. Continual information leaks from various Apple supplier sources also attest to designers constantly changing product specifications almost to the final moment, which was a tenant of the prior Steve Jobs product design culture of the company.
A lot can change in the coming months and perhaps Apple will announce its rumored smartwatch later this year. A shout-out is certainly in-order for Samsung as well as Qualcomm supply chain teams for their efforts in supporting a well-timed announcement.
Our readers who stem from product lifecycle management roles can well attest to the arguments for either being first in the market or being a later entry with more compelling product features. Invariably, supply chain teams, and in particular, that of Apple will again be called upon to translate product design to high volumes of production in near record times.
Consumer electronics and high tech supply chains remain the crucible for the needs for tight linkages among product development and supply chain teams to meet highly competitive and compressed time-to-market and time-to-volume objectives. The prior walls among these teams is quickly evaporating.
Disclosure: The author of this commentary is a current holder of Apple stock.
Prior to this week’s IBM Smarter Commerce Summit, Supply Chain Matters posed the question as to whether IBM has upped its game in B2B and supply chain technology solutions. After two days of sessions, we found evidence that many of the end-to-end pieces of supply chain and Omni-commerce vision are beginning to fall into place but the roadmap to customer availability needs further acceleration. For that matter, clearer roadmaps would greatly assist.
To refresh our reader’s awareness, IBM has invested upwards of $3 billion in strategic external acquisitions to build out the various components of the Buy-Sell-Service and Market capabilities that make-up the IBM Smarter Commerce portfolio. The effort began three years ago, while the first public market presence for customers was two years ago in the first of the series of summits. Major acquisitions for the supply chain and Omni-Commerce aspect were Emptoris for the Buy segment, Sterling Commerce for the Sell and network messaging segment, ILOG for enhancing Buy, Sell and Service needs, DemandTec for pricing optimization and a whole host of specialized vendors for predictive analytics to name a few. This year’s summit introduced a major new element, the unleashing of IBM’s corporate research and development efforts in coming up with potentially breakthrough approaches for the online Sell and Service aspects.
Two years ago in the first summit, the overall messaging was clearly slanted towards a CIO and IT audience. This year’s summit left no doubt in our mind that the IBM marketing machine can right itself to today’s changed market needs. The messaging and audience was targeted for line-of-business and solutions selling addressing business problems. IBM executives and product marketing now speak in the language of end-to-end supply chain. More subdued however was overt messaging related to public and private clouds buying options.
In our attendance at both general and executive briefings, coupled with some general sessions, IBM is on the way towards embracing the integration of the front-end selling to the back-end value-chain response. The most premiere enterprise technology provider has also become more pragmatic regarding the reality that not all customers will be total IBM shops, and that there are the clear realities of prior investments in legacy ERP or best-of-breed software that needs to be enhanced. Keynotes during day one were broad and visionary while day two included more of the required end-to-end accounting of how each of the Smarter Commerce components can interact.
Our one on one sessions uncovered the internal IBM discovery of the key linchpin that enables tomorrow’s more responsive and adaptable supply chain, that being the information network the spans the entire supply chain. In the specific case of Smarter Commerce, that discovery was that the many roads surround the capabilities of the Sterling Commerce messaging and information integration network. What we assessed as Sterling Commerce capabilities three years ago have clearly changed, bearing the mark of additional IBM development resources. The voices of existing high profile and influential Sterling customers have added to these efforts. We extend a shout out to that community for your openness and perseverance.
In the all-important area of supporting both direct and indirect sourcing and indirect procurement process and predictive analytics capabilities, our perception is that Emptoris is leading the charge up the value-chain to all important integration to Fulfill, Sell and Service. Our current perception is that Emptoris is further into this journey than perhaps SAP and Ariba. Emptoris is also reaching out to the broader elements of ILOG business rules, predictive analytics and other areas. We secured a commitment from IBM executives to keep us updated on this roadmap journey and we look forward to a subsequent update in the fall.
The other area we would like to mention is IBM’s introduction of cognitive based computing, namely Watson and other components, into the Smarter Commerce portfolio. We witnessed some extraordinary demonstrations of a Watson learning system supporting customer service processes. An application which IBM has named Augmented Shopping Advisor, developed by its research labs in Haifa Israel monitors consumer movements within a retail store via the presence of a mobile device, and actually assists consumers (with their permission) in making a smarter product selection. IBM executives disclosed that the application was actually running in the vendor showcase area and monitored the various movements of attendees as to which patterns and which kiosks were visited. The possibilities to integrate this capability for supply chain sensing of product demand and replenishment are exciting. In perhaps the same context, if you believe that sales and marketing teams drive you crazy in product forecasting and integrating to a single product demand plan, wait to they get their hands on augmented shopping and online experience capabilities.
We have many more detailed notes to absorb and thus we close out this initial impressions commentary with our key takeaway. You, the supply chain and Omni-commerce professional will have many more enhanced technology tools in your arsenal in the not too distant future. The all important question, however, are which partners will you decide to invest in.
There are a slew of product announcements and studies that were spawned by this year’s summit and most can be viewed on the IBM Smarter Commerce Blog site.
Stay tuned for further Supply Chain Matters impressions from this year’s Smarter Commerce Summit.
In the meantime, if you have specific questions, send us an email or call. Contact information can be found on our main web site.
Our European based and other readers are probably very aware of the news last week that Swiss frozen foods producer Findus was forced to recall its beef lasagna products in the United Kingdom after it was determined the product contained horse meat. This is not exactly a savory development, to state the least, and British and European media have been quick to call more oversight in food product quality.
In the wake of this development, global consumer goods provider Nestle indicated that it has intensified the screening of and traceability of its food products. Nestle CEO Paul Bulcke indicated to business media that the horsemeat scandal will affect the entire industry even though Nestle product is not directly involved. In a Financial Times interview, Bulcke noted: “We check our suppliers very carefully, and of course, when something like this happens we intensify our procedures. But everything under our labels is not affected.”
Of course, every CEO of a consumer goods company wants to insure traceability across the supply chain but then again, how many have funded the proper tools and resources to insure such traceability? Once more, when the threat of acquisition and cost cutting looms large, will traceability needs see the light of day?
As investigations related to the European horse meat scandal run their course, companies may again discover that traceability and conformance extends to the lowest tiers of the supply chain. It is not about a primary supplier attesting to product conformity, but the supplier to that primary supplier. The rub often comes when negotiating supply contracts, when the customer refuses to acknowledge the need for added costs to insure product traceability and quality conformance.
In many of our past Supply Chain Matters commentaries related to specific food or drug product recalls, a common pattern is the eventual breakdown in quality conformance monitoring, latency in detecting unusual patterns, and waiting too late before a governmental regulator forces a product recall. In the specific prior case of the numerous Johnson & Johnson product recalls, an internal audit pointed to cuts in key quality conformance resources as the catalyst.
Many companies have painfully discovered that indeed, traceability is the key to food safety as well as protecting the brand. Europe now has a pointed reminder to that principle.
Earlier this year, Supply Chain Matters wrote of the uncharacteristic supply stumble for Procter and Gamble, specifically related to the market introduction of its new Tide Pods laundry detergent. Our byline was that in these challenging business times, even superior rated supply chain organizations can experience a supply snafu.
The supply snafu involved the market introduction of the newly branded line of Tide Pods, a capsule blended laundry detergent that was originally planned for market introduction in August of 2011. P&G product management had to push the market entry date to early 2012 due to production supply challenges that limited how much supply that would have been available at retail outlets to support a broad product launch. Meanwhile, P&G’s competitors in the home laundry market segment were given a market opportunity to perhaps garner market-share in the one-dose, convenience segment, which is more profitable than the bulk laundry detergent segment.
We can now share an update to this former P&G challenge with Tide Pods. A mid-December article published on AdvertisingAge notes that P&G is now projecting first year retail sales of $500 million for the Pods product offering. This article notes: “… a major feat considering that of the 1,500 new consumer-packaged goods launches tracked by SymphonyIRI in 2011, only 21 percent reached one year sales of even $50 million. Moreover, because of product scarcity, P&G has not offered promotions on the premium-priced Pods, so discounting hasn’t had a role in its success.”
The article goes on to note that supply shortages still linger and that smaller bag packs remain on allocation to retailers. Despite all of these challenges, P&G’s supply chain and product marketing teams have successfully managed to garner a 73 percent share of the unit-dose market segment including notable retail outlets such as Wal-Mart. All of this has been accomplished as sales in the broader laundry detergent segment are actually down 0.2 percent.
Once again, the cross-functional efforts of P&G teams have turned the challenge of supply adversity into a major market win.
That qualifies for a hearty 2012 thumbs-up award from Supply Chain Matters.
At the beginning of January, Supply Chain Matters commented on certain signs of supply chain structural changes that were being attempted by noted disruptors Google and Walmart. We specifically observed how Google, having muscled its way into branded smartphones announced that it planned to sell such phones directly to consumers, bypassing major carriers and electronics retailers. By establishing an online store, Google planned to offer an ‘unlocked version’ of its Nexus One phone for $529 which consumers could purchase and later enable with a wireless carrier of choice.
From the get go, Google experienced multiple issues related to consumer difficulties in purchasing and activating phones. Google’s worldwide contract manufacturer, HTC of Taiwan, was also placed in a rather difficult position to attempt to support worldwide fulfillment and returns generated from online store purchases. Now, nearly four months later, the initial results of this attempted disintermediation are presenting themselves. A recent Financial Times article, Google backtracks on phone strategy, (free preview sign-up or subscription required) indicates that the company has decided to sell the Nexus One in Europe through mobile operators rather than its online store. A Google spokesperson notes: “We have decided that the best and fastest way to get Nexus One into the hands of European consumers is through our partners.” The article further quotes industry analysts as noting that the wireless carriers can make or break a device, and Google is not an exception. One analyst speculated that Google sold just 135,000 units in the first 64 days. Google is of course, refusing to disclose any sales numbers.
In a related development, a posting on SiliconValley.com notes that Google indicated that it is dropping plans to produce a version of its Nexus One smartphone for Verizon Wireless, the U.S.’s largest mobile carrier. A Google spokesperson noted that the new Droid Incredible, a smartphone Verizon will begin offering this week with the same Android operating system and made by the same manufacturer as the Nexus One, made production of a Nexus One for Verizon superfluous.
In our view, Google’s ill conceived product marketing strategy coupled with a not well thought out supply chain fulfillment and channel partner strategy have all come home to roost. I suppose it would not shock readers if I described Google as “arrogant” but attempting to go it alone in worldwide distribution and marketing of smartphones tips arrogance to a new dimension. Google needs to invest in people who understand all the tenets of responsive global supply chain management vs. just being disruptive for the sake of making a statement.