In the backdrop our previous Supply Chain Matters commentary related to Boeing and its decision to shortly assemble new 737 commercial jets in China, we provide another related development.
In November of 2014, we called initial attention to the announcement that Boeing had initiated a multi-billion long-term supply agreement with Japan based Toray Industries for the supply of carbon fiber composite material. This ten year strategic supply agreement was initiated to provide continuity of supply of carbon fiber material needed for the production of Boeing’s 787 Dreamliner and new 777X aircraft. Apparently Boeing is now considering a supply risk strategy regarding this strategic material.
Last week, The Seattle Times reported that Toray Composites America (TCA) celebrated the completion of a fifth production line at its plant near Tacoma Washington, but further warned that additional expansion will center on other U.S. east coast and overseas investments.
Noted in this Seattle Times report is that each pre-preg carbon fiber assembly line requires a $100 million investment and 14 months of rigorous testing before such line is qualified to produce high specification material. With the addition of this fifth assembly line, executives at parent Toray in Japan now indicate that any further investments will be directed at the existing TCA facility located in Spartanburg South Carolina.
Toray has purchased an additional 400 acres of land with plans to build a $1 billion fully integrated composites production facility that will span precursor chemical to finished carbon fiber tape. According to the article, Toray has signed additional supply contracts with Bell Helicopters and Brazilian jet producer Embraer.
A Toray executive is reported as indicating that diversifying supply in South Carolina is a desire by both Toray and Boeing to insure supply continuity, in the event of a shutdown at the Tacoma based facility. More revealing are statements by this same executive indicating that Boeing’s longer-term thinking centers on the labor cost intensity associated with manufacturing this material in the U.S. , with an eagerness to transfer some composite supply sourcing to perhaps India, which has a growing demand for new commercial aircraft, and could provide more attractive labor costs.
In the lens of Supply Chain Matters, this may be an additional indication that growing demand for new commercial aircraft within specific Asian countries may include additional provisions for more supply chain presence and value-add activity.
In April a front page published article by The Wall Street Journal reported on Wal-Mart’s increased pressures on North America based suppliers to squeeze costs. The retailer informed suppliers involved in a wide range of purchased categories to forgo any additional investments in joint marketing and focus the savings on lower prices to Wal-Mart. In July, Reuters reported efforts to impose added fees affecting upwards of 10,000 U.S. suppliers. Contract renegotiation letters were mailed to respective suppliers that included amended contract terms along with added fees to warehouse products at Wal-Mart DC’s. At the time, a Wal-Mart spokesperson indicated to Reuters that these fees were a means for sharing costs of growth and keeping consumer prices low. Not all of the 10,000 suppliers would face the higher charges due to existing payment arrangements afforded these suppliers to utilize existing Wal-Mart distribution centers.
Last week, Bloomberg reported that Wal-Mart’s Suppliers Are Finally Fighting Back, indicating that some of the larger suppliers are saying no to these new cost squeezing measures. Some suppliers reported that the new fees are impacting their own bottom lines, while several firms are reportedly hiring attorneys to further pursue matters. The Bloomberg report indicates that two large, unnamed suppliers have refused to accept such terms. A senior vice president at Kantar Retail, which advises some Wal-Mart suppliers, is quoted as indicating: “It looks as though they (Wal-Mart) are trying to have it both ways and trying to pad their own margins where they are facing cost pressure.”
Regarding the report, a Wal-Mart spokesperson indicated to Bloomberg that the global retailer is willing to now negotiate with suppliers and will take into account prior history with a supplier, as well as quality of the products. The spokesperson further indicated that the retailer may encourage some suppliers to seek low-interest loans through an existing financing program, implying that those suppliers that do not agree to new terms may find their Wal-Mart business affected.
The report observes that smaller and even larger suppliers have the most at-stake in their ability to be able to push-back. “A smaller supplier, notified of the fees late last month and given two weeks to accept, said it won’t be able to make a profit on its Wal-Mart business under those terms unless it fires workers or cuts wages and benefits.”
From our Supply Chain Matters lens, these ongoing supplier developments related to Wal-Mart are indeed part of the realities for certain retail industry players who can leverage their sheer scale of buying power. On the other hand, it defeats more positive initiatives.
Wal-Mart’s ongoing initiative to purchase an additional $50 billion in U.S. sourced products over the next ten years could be a casualty of its ongoing supplier management efforts. Many of these newer suppliers will not only need the retailer’s long-term buying agreements and shared distribution facilities, but the ability to make meaningful profit in order to sustain their presence in the U.S.
Wal-Mart stated goals are to simplify supplier relationships and develop a broader U.S. supplier base. However, from our lens, cost-sharing tactics for having it both ways defeats such strategic objectives and places supplier relationships in the context for always on the ready for the next shoe to drop.
Supply Chain Matters has featured previous commentaries concerning GT Advanced Technologies, an advanced technology sapphire glass supplier that experienced some of the perils in being a supplier to Apple, particularly in a new product development phase.
In October of 2014, this advanced technology supplier was unexpectedly forced to file for Chapter 11 bankruptcy protection when Apple suspended its supply contract. The news reportedly wiped out in upwards of $1 billion in equity value when the news broke. A further casualty was a 1.3 million square foot advanced sapphire glass production facility near Mesa Arizona that included more sophisticated glass fabrication furnaces and was supposed to ramp-up to supply sapphire glass requirements for various Apple products including the iPhone.
Since that time, information leaked from bankruptcy court filings pointed to a tense supplier relationship that GT Advanced described as “an onerous and massively one-sided deal. “The supply agreement eventually ended when Apple withheld a product development process payment. GT was forced to lay off in excess of 700 employees at the Arizona production facility, which Apple has since announced will be converted into a world-class global command data center. Apple itself invested the sum of $439 million in the GT Advanced relationship.
On Monday of this week, after exiting Chapter 11 protection, the supplier has now announced that it will be reducing its workforce by an additional 40 percent in order to “right size” its cost structure. According to a published report by The Wall Street Journal, GT Advanced had about 1000 employees when it filed for bankruptcy.
As we observed in prior commentaries, product innovation involves time sensitive collaboration for product design and test changes as well as supply chain production ramp-up needs. That is why product design process information is quickly becoming the new requirement for inclusion within end-to-end supply chain business and collaboration networks.
The perils of being an Apple supplier include a high risk-reward ratio. That includes having the capability of high agility in the wake of what others would view as rather difficult obstacles. That tendency dates back to the era of Steve Jobs who instilled a perfectionist culture for design engineering. Also with Apple come huge scale and the potential for financial reward. In the case of GT Advanced Technologies, the risk-reward strategy continues to have an apparent far different outcome.
In July, we updated Supply Chain Matters readers concerning Tesla Motors construction of its $5 billion massive gigafactory, which when completed, will provide the capacity to be the single largest battery manufacturing volume plant in the world. Once more, the plant is located in the United States, an area that many thought impossible for sourcing such a plant.
Tesla’s strategy is bold, involving supply vertical integration. Given that a considerable portion of the cost-of-goods sold (COGS) for an electric powered automobile involves its batteries, the strategy is to control the bulk of the value-chain. The massive scale of this facility is targeted at reducing the unit costs of lithium-ion batteries by 30 percent.
Since the state of Nevada site selection announcement in 2014, a far broader strategy has been unfolding, one that extends beyond automotive supply chain needs, including the power storage needs of homes and businesses. The site was chosen because of its close proximity to supplies of the all-important raw material of lithium as well as to the Tesla factory in California. While the highest concentrations of lithium are mined in Bolivia and Chile, there are supply sources in the western U.S. and Mexico.
Last week, there was a significant joint announcement regarding one source of raw material supply for this new battery production plant, that being lithium hydroxide. Tesla announced that it had secured a five-year strategic long-term supply agreement through a partnership with mining firm’s Bacanora Minerals Ltd and Rare Earth Minerals PLC. The two suppliers have formed an entity termed the “Sonora Lithium Project Partners.”
According to a published announcement from Alberta Canada based Bacanora: “The Sonora Lithium Project Partners are working to develop a mineral-rich, lithium-bearing clay deposit into a planned low-cost, sustainable and environmentally conscious mining operation.” The announcement further estimates that the mine and processing facility will have an additional capacity of 35,000 tonnes of lithium compounds, with a scaling potential of up to 50,000 tonnes annually. That is a considerable supply, somewhat equating to global supply needs. The Sonora Lithium Project itself consists of ten mining areas in the northeast of Sonora State.
The supplier is further required to reach certain performance milestones and pass product specification milestones. A key milestone is noted as the ability to supply lithium hydroxide in accordance with the volumes and timeframes that will be established by Tesla. To do so, Sonora Lithium Project Partners will be tapping lithium supply from Bacanora, along with additional supplies located in Northern Mexico, owned by partner REM. The Mexico site will mine lithium from mineral-rich clay.
The electric automaker will additionally purchase specified minimum tonnages in accordance with an agreed-upon pricing formula which is described as below market pricing.
Noted is that this new agreement will form only a portion of Tesla’s lithium-based feedstock needs. The remainder will likely come from other mining suppliers which imply that Tesla has an active supply risk mitigation strategy for lithium feedstock.
The agreement requires that Sonora Lithium Project Partners raise additional financing to design and construct this mine and processing facility. That implies additional time required for fund-raising, permitting, construction and volume production. Thus, we strongly suspect that initial gigafactory lithium supply will come from other sources. However, the Bacanora announcement indicates that the Sonora Lithium Project will rapidly accelerate mining and development efforts.
In the spirit if its founder and CEO, Elon Musk, Tesla consistently makes bold moves in its product designs, detailed manufacturing, and now with its supply vertical integration strategies. It is going to be quite interesting to observe how all of this unfolds.
There has been much reporting within social and business media regarding the potential industry supply chain disruptive effects of the recent massive warehouse explosions that affected the facilities adjacent to the Port of Tianjin.
It is rather important and crucial that industry supply chain and sales and operations team obtain meaningful and insightful information regarding what is happening on the ground as well as the potential short or long-term supply chain impacts, if any.
We at Supply Chain Matters are disappointed to observe that certain technology and service providers are attempting to utilize this tragic incident as a backdrop to product marketing outreach campaigns. Neither should technology providers suddenly become news outlets.
Not good ideas by our lens.
Supply chain technology providers should instead continue to educate on the benefits of the technology they provide and allow industry supply chain teams to receive clear, unfiltered and unbiased insights and information from informed and educated sources.
One of the better Tianjin perspectives Supply Chain Matters has reviewed to-date ia a published white paper: The Aftermath of the Tianjin Explosions: A Global Supply Chain Impact Analysis, authored by supply chain risk management provider Resilinc.
While this 24 page white paper does include some product marketing, along with requiring registration, the bulk of the report provides meaningful and insightful information related to potential immediate, near-term, medium and longer term supply chain impacts.
The paper concludes that the less apparent ripple effects of the warehouse explosions will be felt weeks, months and even years to come.
The paper provides meaningful background information regarding this vital logistics and manufacturing hub, which services industry needs of automotive, commercial aerospace, high-tech, petrochemical and general industrial manufacturing supply chains, among others. It further outlines important mapping of industrial manufacturing and supplier concentrations within close proximity of the explosions, based on a mapping of over 30 sites in a 2-10 mile radius of the blast. Four large industrial zone districts are adjacent to the port, with the port serving as what is described as the largest free trade zone in northern China, and the second largest Vehicle Processing Center for importing and exporting of automobiles.
On the topic of near-term ripple effects, the Resilinc analysis predicts that extensive delays can be expected for most companies and sites moving products through Chinese ports as government agencies deal with the after-effects of a regulatory environment needing extra attention.
There are predictions that Tianjin port operations will only begin to resume normal operations by approximately mid-September, and that any containers now at the port will be inaccessible for the next two months, even if they are intact. Resilinc indicates that for any suppliers located within 2-15 miles of the explosions, companies may presume 12-16 weeks of delays.
Long-term impacts outlined related to the ripple effects of increased regulatory actions impacting certain industry sectors including the location and storage of goods near large population centers.
Regarding potential long-term impacts, the paper cites Chinese media as indicating the economic cost of Tianjin crisis could be as high as $8 billion.
If your organization is dependent on operations, logistics partners, suppliers or service providers in the Tianjin area, we recommend you review this report which can be accessed at the following Resilinc web link. (Some personal registration information required)
Our high tech and consumer electronics supply chain readers may recall that Japan’s Sharp Corp., and specifically its LCD screen business unit has had months of financial struggle. One of the important significant factors related to Sharp is that it serves as one of the four Liquid Crystal Display (LCD) and flat panel screen suppliers to Apple, including screen supplier for the iPhone. Sharp has had a track record of innovation in LCD technology but a rather rocky financial history as well
This week, Reuters is reporting that its informed sources indicate that tie-up talks involving contract manufacturer Hon Hai Precision (aka Foxconn Technology) are now in-progress. The Financial Times also published a similar report. Hon Hai declined any request for comment by Reuters and FT.
Initial talks between Hon Hai and Sharp actually began in 2011, after both firms had established a joint technology partnership. In 2012, there were many business and social media reports indicating that Hon Hai was prepared to take an equity stake in Sharp’s LCD development and factory operations, but with implications that Hon Hai would become Sharp’s largest shareholder and have the ability to assume some strategic management control of Sharp. A further implication was that Apple, through its relationship with Hon Hai and Foxconn, was willing to invest in Sharp’s longer term supply, but that component strategies would cede to Hon Hai. The Hon Hai investment did not occur in 2012, because of Sharp’s deteriorating stock price and the threat of too much outside control.
During that same period, Japan’s Sony Corporation, Toshiba Corporation, and Hitachi Ltd. together merged their money-losing small LCD display operations to form a single company, Japan Display, backed by $2.6 billion of funding from Innovation Network Corp. of Japan, a government backed agency. Japan Display is currently another of the LCD component suppliers to Apple, and the combined operations and infusion of significant new capital likely cemented that relationship.
According to this week’s Reuters report, the latest proposed tie-up would spin-off Sharp’s display unit and possibly includes additional cash injections from other outside entities such as the state-directed Innovation Network Corp.
The two firms continue to jointly operate the advanced large LCD production facility located in Western Japan.
Interesting enough, in 2012, Apple rival Samsung opted to provide a $110 million lifeline investment for Sharp. The deal was reported to provide Samsung with a 3 percent stake, along with gaining access to leading-edge IGZO display and other technology. Business media reports at the time speculated that Samsung’s investment was an attempt to stem Apple’s strategic influence on Sharp.
In late June, Supply Chain Matters called attention to a published report from The Wall Street Journal indicating that Sharp senior management had struck a last-minute deal with the firm’s bankers to provide an additional $1 billion plus lifeline, the second in three years, in exchange for restructuring measures that included exiting the North American television market and a 10 percent workforce reduction. Also noted were the market prices for LCD panels remain in significant decline as other suppliers turn more to China based smartphone manufacturers for revenue needs. The WSJ cited data stemming from market research firm IHS indicating that 5 inch HD smartphone panel components prices have dropped nearly 60 percent from Q1 2013 through mid-year.
This legacy of Sharp represents the perils for being a leading-edge LCD technology provider in today’s high tech and consumer electronics sector. Product OEM’s such as Apple and others demand the latest breakthroughs in technology and more automated manufacturing processes, in return for orders representing volume scale. However, in a technology area where multiple suppliers fiercely compete for the same high-volume OEM business, and a cutthroat environment where severe amplitudes of supply and demand imbalances force prices to dive quickly, the need for constant capital becomes paramount. That may be the legacy of Sharp’s LCD unit.
If this reported tie-up were to occur, it would provide another significant milestone in Hon Hai’s prior strategic plan to move away from a sole focus on the slim margins of contract manufacturing, and more towards a supply chain vertically integrated high-tech and consumer products manufacturer that can control multiple key component supply tiers.