This is a premiere week for the global aerospace industry and their associated global supply chain partners. This week, the Paris Air Show, a weeklong gathering of a who’s-who of the industry is underway along with the contest for booking orders for new aircraft.
Business media has already positioned this year’s show as the continuing battle between Airbus and Boeing for industry domination for new, more technology advanced and energy efficient wide-body jets. In a previous Supply Chain Matters commentary late last week, we noted the well-timed inaugural flight of the Airbus A350. The reality remains, however, that both of these premiere global aerospace providers have over eight years of current order backlog, and the pressure to ramp-up production output levels is building with each passing month. Any new orders booked this week by either or both of these manufacturers adds to individual and collective supply chain pressures.
The spotlight is not only on the two industry giants but on the other highly competitive segment of single-aisle, more fuel-efficient regional jets. That battle pits Bombardier, Embraer, Mitsubishi and COMAC vying for airline operator attention and new orders. They each share supply chain partners with either Airbus or Boeing.
We were especially curious to note an article in yesterday’s Wall Street Journal that described Airbus CEO Fabrice Bregier new emphasis on efficiency and empowering factory managers with more independence for delivering aircraft on-time and on-budget. Last year, Airbus, the operating group of parent EADS, posted an operating profit margin of 4 percent. That is roughly half of Boeing’s recorded operating margin of 9.6 percent in the same period.
Readers from the high-tech industry OEM community may scoff at such margins, given the double digit margins that they encounter. Then again, high tech OEM’s do not want to own production assets and elect to transfer that burden to contract manufacturers who have to manage in single-digit operating margins.
Mr. Bregier has tasked Airbus teams to improve operating margin to 10 percent within the next two years. The plan is to eliminate complexity as much as possible and to allow factory managers to run their operations as a streamlined business with the ability to make independent decisions. That’s a tall order given the complexity, dominance and influence of engineering and product design teams.
Our aerospace industry readers may well question whether the 10 percent operating margin goal within the next two years is really a stretch goal given the current operating pressures, complexity and complex culture of today’s aerospace industry. Consider that Airbus’s 4 percent profitability came on a total revenue base of €39 billion ($52.3 billion). That is the testament to a rather complex, engineering-driven supply chain with lots of opportunities for added efficiencies and more streamlined suppy chain related decision-making.
Both the WSJ and The Financial Times have declared that for Airbus and Boeing, a new emphasis on profitability is largely dependent on efficiency rather than which manufacturer books the most orders this week and in the weeks to come. That is perhaps a new reality that limitless order flows may be waning and that the industry may perhaps be reaching too much adsorption of new aircraft.
One of the time-tested principles of change management relates to the fact that change only comes when management teams set specific goals as to which metrics and behaviors need to change and subsequently call attention and measure such goals. For aerospace leaders Airbus and Boeing, the corporate culture and executive bonus system is perhaps too focused on declaring industry leadership based on orders booked.
Supply Chain Matters concurs that this may well be the time for the aerospace industry to shift the focus and the measurement systems toward improved production efficiencies, more streamlined decision-making and broader end-to-end supply chain intelligence.
Aerospace industry readers are welcomed to share their perspectives on whether the shift toward supply chain efficiency and more streamlined decision-making is doable given today’s operating norms and management approaches.
Today marked the successful completion of the maiden first flight of the Airbus A350 XWB aircraft, and the beginning of a final phase toward production. The aircraft completed its four hour maiden flight from Airbus’s corporate airfield near Toulouse France amid lots of fanfare. The timing of this maiden flight coincides the opening of next week’s Paris Air Show, one of the largest aerospace industry bazaars where lots of airline, industry and aerospace supplier executives gather to view the latest aerospace products and to conduct lots of deals. The theater is well-timed and well-chosen.
Readers can view a series of videos of this maiden voyage by visiting the dedicated A350 first flight web site. There are some great videos that outline the supply chain flows and advanced final production process of this aircraft on the Airbus web site. We enjoyed watching them and they are very well done.
The A350 is the Airbus response to Boeing’s 787 Dreamliner and 777 series aircraft. It is built with composite fiber materials in its fuselage structures and is equipped with two Rolls Royce Trent XWB engines featuring cutting-edge materials and cooling technologies claiming 25 percent less fuel consumption than prior generations. According to Airbus’s web site, the engines themselves are slighter larger in diameter than those that power the huge A380 but they are actually lighter in weight, quieter, and the lowest in carbon emissions. Similar to Boeing’s 787, the supply chain is global, but not as extended. Having had the opportunity to observe developments concerning the ongoing customer introduction of the 787, Airbus elected not to utilize lithium-ion batteries as backup power.
Similar to Boeing’s 787, challenges concerning the overall supply chain lengthened original product development and market release plans. In November of 2011, the CEO of Airbus’s parent EADS expressed a personal apology in announcing a delay in the originally planned A350 program. The market introduction was pushed back from late 2013 to first half of 2014. In the announced delay, Airbus noted: “we have to bring mature components to the assembly line and to get mature components we need a bit more time.” At that time, The Financial Times speculated that Airbus had concluded that certain supplier components were not of acceptable quality and it was necessary to “stop and fix” the program, which was characterized as a bold but practical decision. At that time, Supply Chain Matters praised the decision, noting that it was far more important to fix any supplier readiness issues earlier than later in the program, when the stakes are far higher. We have since learned that Airbus has added advanced technology to insure that engineering and supplier teams collaborate virtually working with electronic designs and 3D renderings of designs and component parts.
This far, Airbus has garnered 613 firm orders for the A350 from 33 airline and leasing customers. Many of the customers are the emerging airline industry disruptors like Qatar, who are aggressively augmenting long-distance lift capacity and not shy about exhibiting aggressive demands and negotiating skills. They recognize that they are players in explosive emerging markets where air travel will expand quickly, and new, more efficient aircraft need to be ready on-time to meet this demand.
This maiden flight is the prelude to a series of 2500 flight hours of rigorous test flights involving five separate aircraft that should culminate in aircraft certification. The Airbus plan is to have first customer ship to inaugural customer Qatar Airways by the second-half of 2014. In our view, that is a critical milestone for the A350 supply chain community, since the Dreamliner has apparently moved beyond its battery failure issues and is in its production ramp-up stage. As readers know, the Dreamliner program is over three years late, and customers are feeling the financial effects. Meeting the revised A350 time-to-market plan assures that customers have options to meet their planned operational scheduling and financial savings milestones. As our aerospace industry readers also are fully aware, the new wave of combined production ramp-ups involving Airbus, Boeing, Bombardier, Cessna, Embraer and COMAC are both a blessing and enormous stress. Any glitches and or hiccups have implications.
Supply Chain Matters extends its thumbs-up recognition to the entire extended A350 global supply chain community for reaching today’s very important milestone.
We look forward to posting future updates regarding successful production ramp-up and look forward to perhaps taking part in the A350 flying experience on a future journey.
In November of 2012 Supply Chain Matters made the observation that Apple had begun to actively pursue its own supply chain risk mitigation and supply chain segmentation plan. Apple elected to dual source some of its contract manufacturing needs with the use of Pegatron, one of Taiwan’s largest contract manufacturers, as a second assembler of the iPad Mini, along with the iPhone 4.
Today, the Wall Street Journal is reporting (paid subscription or free metered view) the same premise, that Apple has elected to dual source its contract manufacturing needs. In essence, Apple is exercising its own supply chain segmentation and risk diversification strategy electing to source production and assembly of a low-cost iPhone expected to be offered later this year, along with the current production requirements of the iPad mini. The WSJ declares that this is the end of the monopoly that Foxconn Technology Group has held in the production of the bulk of Apple’s products.
Of more interest, the WSJ reports that Pegatron was willing to accept thinner profit margins in courting Apple’s massive business. Pegatron’s revenues are a mere one-third the size of Foxconn. While Foxconn has been forced to deal with rising tensions concerning supplier responsibility audits related to factory working conditions and wage rates, driving-up its costs to serve Apple, Pegatron has been able to escape much of that visibility, at least up to this point. There was an explosion incident at a Pegatron subsidiary in December of 2011 that was related to production of Apple components. All of that may change rather quickly in the coming months. In its reporting, the WSJ revealed that Pegatron experienced a challenging learning curve in meeting the volume production requirements of the iPad mini last year and that Foxconn ended up producing the bulk of volume. Those of you with constant supplier management challenges can take some comfort that the leading recognized supply chain also experiences similar challenges.
Also reported was that Foxconn was becoming increasingly frustrated with the growing complexity of Apple’s product designs which were adding to the challenges of high volume production. We all tend to know that Apple does not tend toward design for supply chain practices, opting instead for the most innovative design and coolest functionality. In the past, the personality of a Steve Jobs tended to dominate such frictions, but that was before the current explosions in output volumes and need to service broader global distribution channels. The WSJ states that CEO Cook is “placing a higher premium on risk diversification.” The timing is important since other sources across Wall Street equity analysts have noted recent Apple product patent applications pointing to new consumer electronics gadgets such as an iWatch or iPen. If Apple again makes a market splash in innovative but smaller consumer electronics products, its supply chain will need a segmentation strategy to manage volume ramps, changing distribution channels and needs to maintain higher product margins.
We may now know the real reason as to why Foxconn declared in February that it was freezing all further hiring in China. At the time, business media attributed this hiring freeze as an indication of weakening demand for Apple products. Some of that may have been true, given that the next wave of Apple mobile products is due out later this year. However, WSJ reported that Pegatron now plans to increase its China based workforce by about 40 percent as a result of the enhanced Apple relationship and the need to produce higher volumes of lower-cost iPhones. This is an indication of a workforce shift among contract manufacturers. Market research firm IDC just increased it global forecast for electronic tablet market consumption by an additional 39 million units in 2013. Much of this, in our view, we be consummated by the attraction of lower-cost tablets.
It will be interesting to track the fortunes of both Pegatron and Foxconn as they each reach a crossroads in business strategy. Current speculation is that Foxconn could well pursue branding and production of its own line of Apple accessories or other related electronic components as it frees-up dedicated capacity for Apple. Pegratron, on the other hand, has an enhanced learning curve and ramp-up phase in dealing with the challenges of Apple and its product design requirements.
Both should be interesting supply chain team hallway conversations in the months to come.
The All Things Digital blog recently featured a summary of a teardown analysis of Samsung’s newest S4 Galaxy smartphone. This teardown analysis was performed by research firm IHS which pegged the total material cost of the U.S, version at slightly above $237 contrasted to a market entry price of $639 without carrier subsidies.
IHS and All Things Digital again confirm what we at Supply Chain Matters have observed for some time, the advantages that Samsung gains from sourcing many of its key Galaxy S4 components from Samsung’s internal component businesses to include the LCD display touch screen components, camera and wireless broadband chips.
The latest teardown also uncovered that Samsung is producing four different phone variants to support worldwide consumer fulfillment. The IHS teardown noted specific sourcing difference among both the Korea and U.S. model variations. The U.S. version sourced the main applications processor chip with Qualcomm while the Korea and other geographic versions contain Samsung’s processor chip. In the graphics imaging processing chip, the U.S. version features a Fujitsu chip, while the Korea model relies on functions embedded in the Samsung sourced applications processor. Supply Chain Matters believes that both of these are examples of risk aware sourcing strategy, insuring that there is more than one strategic supplier for important key components.
Samsung’s recent report of quarterly earnings indicates that over 70 percent of current operating profits stem from its mobile business, which includes smartphones, electronic tablets as well as conventional mobile phones. Its component businesses such as semiconductor chips, LCD displays and components contributed the remaining profit. Equity analysts are astute to note that three years ago, the contributions were reversed. With product margins steadily decreasing in the lower tiers of consumer electronics value-chains, the supply chain vertical integration strategy undertaken by Samsung has paid a handsome return to date while providing the cash to fund more innovation in components.
The Wall Street Journal recently pointed out that while other companies cut-back on production related capital expenditures during the past market turndown, Samsung boldly continued investing in product, value-chain and factory innovation. That strategy has allowed Samsung to now become a peer level competitor to Apple, and in some cases, lead in overall global volume output.
Supply chain vertical integration may or may not apply to various industry or company strategic plans. But, where it is being applied in Korea based firms such as Samsung, General Electic and Hyundai, it is contributing to positive business outcomes.
In late December, this author penned a guest blog commentary on the Supply Chain Expert Community site titled: More Definitive Signs of a Changed Contract Manufacturing Model in High Tech. The premise of my commentary was that as the advantages of cheaper direct labor rates continue to evaporate in low cost manufacturing regions such as China, existing contract manufacturers have no choice but to move more upstream in the customer’s value-chain to maintain profitable margins.
My takeaway for high tech and consumer firms was that if these firms feel that continuous product design and innovation, coupled with close proximity and communication with manufacturing is of strategic advantage, than they may want to re-think strategic direction regarding use of a CMS. If on the other hand, individual product design alone is perceived to be the sole strategic advantage, with the majority of the value-chain outsourced to an offshore, full-service CMS provider, than continue to pursue the full contract manufacturing services model such as Apple and other consumer electronics brand owners employ. A recent evolving example of this strategy is Sony, who after many years of unprofitable results in its consumer electronics businesses such as televisions, has finally shed its strategy for owned design and manufacturing and is transitioning quickly to a contract manufacturing services strategy for production.
A slightly different variation of this model is underway in Europe. The Financial Times has featured an article concerning Turkish television contract manufacturer Vestel, a subsidiary of Zorlu Holding, which currently produces 18 percent of the TV’s purchased in Europe, second to Samsung. This contract manufacturer hosts one of the largest single production sites of televisions in Izmir, which employs upwards of 12,000 workers.
Vestel does not sell many televisions under its own brand names but rather dedicates roughly 80 percent of its production to other consumer electronic brands for retailers such as Dixon’s, Sainsbury’s, Tesco and Argos. Surprisingly, this manufacturer was rather slow to embrace newer flat-screen technology, concentrating instead on lower-cost cathode ray tube technology. Not surprisingly, the company is losing market share in an increasingly challenging European consumer market. Revenues have remained flat and operating earnings have declined 79 percent.
Vestel has now embarked on plans to get more involved in the design phases of the value-stream, positioning itself as more of an original design manufacturer with plans to more than double its staff of engineers to 2000. The goal is to be positioned to produce one in four televisions sold in the EU by 2015.
In the FT article, its CEO declares that the company remains more comfortable in positioning itself as a manufacturer, but does not rule out opportunities for further brand expansion. Its current owned brand includes Telefunken. The company is also exploring entry into manufacturing of smartphones and electronic tablets as well.
The contrast to global based CMS providers such as Foxconn is obviously quite different in terms of scale and presence. Reliance on regional retailers offering private brand consumer electronics is quite different than the likes of a global based consumer electronics brand. At the same time, providers such as Foxconn understand the very important relationship they have with their OEM brand owners, where trust and collaboration are very important, and where any threat of producing one’s own brand comes with its own risks. That risk lies in scale and volume, as well as automation and labor costs advantages.
Turkey may well have current labor cost and some manufacturing scale advantages but product innovation, value-chain adeptness and consumer brand loyalty are becoming more weighted advantages.
It has been six days after a tragic building collapse involving multiple garment factories in Bangladesh. The death toll continues to rise as hopes of finding any remaining survivors is fading. The final death toll could be staggering.
We again join other voices in the shock and sadness of this incident.
Our Supply Chain Matters initial commentary this latest incident noted an environment of see no evil, tell no evil among retailers and other contractors for apparel sourced across Bangladesh. We joined other voices in urging the apparel industry to initiate a serious call to action regarding current global sourcing practices and supplier standards.
Since that time, business and global media has provided much more attention to conditions and challenges involving the apparel industry and its current sourcing practices. On Tuesday of this week, the Wall Street Journal published an article (paid subscription or free metered view) that indicated that the factory owners involved in the recent building collapse were under enormous pressures to produce orders because ongoing political unrest and work stoppages has scared off buyers. It quoted the Bangladesh Garment Manufacturers and Exporters Association as indicating that $500 million in orders had been lost as a result of the earlier turmoil. It described how retailers and customers, as in previous incidents, were denying that valid orders ever existed for the subject factories. Italy’s Benetton Group initially denied any connection to a destroyed factory but later had to acknowledge a relationship after labor groups found labeled clothing and production documents in the damaged building. Other global based retailers and customers were also mentioned, some in denial.
However, we would like to call special attention to our readers to an Opinion column published in today’s edition of The Financial Times which is titled Business must take the lead on Bangladesh’s Working Conditions. (Paid subscription or free metered view) This opinion piece penned by John Gapper is in our view, is well written. It urges western companies to not take the current easy path to withdraw sourcing from the country but instead come together to collectively raise overall standards. Gapper notes that it is easy to forget that even in the U.S., there was a previous history of inferior working conditions and garment factory fires, which helped to establish the International Ladies” Garment Workers Union and subsequent improved health and safety laws.
He calls for retailers to stay in the country and keep providing jobs for women which has helped to collectively raise the poverty levels across Bangladesh by almost 30 percentage points. Workers in the country earn an average of $37 a month, and are a bargain based on current global rates. The World Bank estimates that productivity among the most run-well factories is on par with China, while wages are one-fifth of China’s average. There are far more garment factories in the country and Gapper quotes a McKinsey survey that indicates that 50 to 100 of the total 5000 garment factories have “very high” compliance standards and he argues that this presents an opportunity to improve standards without threatening overall global competitive advantage.
The editorial outlines two other actions including retailers banding together to push the Bangladesh government to overcome corruption, and to open the doors to labor unions. That latter imperative is arguably going to be the most controversial and contested.
The argument presented by this FT editorial s that the industry itself can play a big role in getting the country out of severe poverty, while developing a safer environment of working conditions. It is unacceptable for hundreds, and perhaps thousands of workers to perish in preventable industrial tragedies.
For our part, we do not dispute the difficult challenges that lie in apparel sourcing within low-cost manufacturing regions. But, at the same time, retailers and contractors cannot continue to turn a blind eye or hide behind sub-contracted chain of custody regarding unsafe working conditions. Neither can global social responsibility standards continue to be ignored.
As consumers of apparel and clothing, we need to insure that we are willing to pay a higher retail price to retailers who adhere and enforce safe working conditions in global factories that they do business with. We need to stick with brands committed to helping factory workers to work their way out of severe poverty and provide for their families, while working in safe factories or distribution centers.
As a supply chain community, we need to get more serious about our responsibilities to foster more diligent and dedicated labor social responsibility practices across the globe and to stand for good practices vs. a few additional points of product margin, or giveaway promotions.
It would be a real shame if the industry walks away from Bangladesh because it is the easier solution.