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.
Since our last Supply Chain Matters commentary regarding developments related to the recent factory building collapse tragedy in Bangladesh, events seem to be moving rather quickly. In our last commentary, we further noted a report of yet another factory fire. It is now reported that this factory contained clothing destined for Zara.
Tragically, the death toll involving the Rena Plaza collapse now exceeds 1100 persons, with many more with injuries, branding this as the single largest factory tragedy in many years, and certainly the most noteworthy concerning the apparel industry.
On Sunday, the textile minister for the government of Bangladesh indicated that that government will begin talks with labor groups and factory owners to agree to higher minimum wage guidelines that could be retroactive to May 1. However, the Wall Street Journal reports that this may only be a gesture since the majority of factory owners oppose the increase because consumers have become too accustomed to cheap clothing.
Yesterday, some of Europe’s largest and most agile retailers, along with others, agreed to sign a five-year legal agreement designed to improve safety conditions among Bangladesh garment factories. Reported to be among those retailers are Hennes & Mauritz (H&M), Inditex, the parent of Zara, Primark, Tesco PVH Corp, the parent of Calvin Klein and others. The accord calls for refraining from buying apparel from manufacturers who fail to meet prescribed safety standards.
However, some major U.S. retailers were missing from this agreement including Wal-Mart, Sears Holdings, Gap, JC Penny and others. According to separate reporting by WSJ, Gap indicated it would not sign the agreement because the current language provides liabilities in U.S. courts. No doubt, in-house lawyers are having their influence heard. Wal-Mart is reported to be one of the largest customers for clothing produced in the country.
Efforts among retailers and contractors to improve the overall working conditions in Bangladesh factories are all positive signs. However, without the collaboration and direct support of the country’s biggest customer, Wal-Mart, these efforts will not, in our view, have the teeth to change the supply chain business culture within Bangladesh. To be a global leader in retail implies leadership in supply chain and corporate social responsibility. Apple and other OEM’s are demonstrating leadership commitment in the consumer electronics area and Wal-Mart needs to step-up as well for clothing and apparel.
Consumers themselves have to leverage their influence through their buying actions. Much of the current reporting and editorial in business media these past days continues to reinforce that cheap clothing has become too much of the expectation from all of us. We are not as consumers cognizant of where our apparel originated and under what conditions it was produced. Many retailers are perhaps betting that this behavior will continue as the current news cycle passes to the next event.
Our community takeaway is that some supply chain organization will hopefully demonstrate that fashionable and trend setting clothing can be provided in safe factories, in a timely fashion, and at a reasonable cost. Others will then surely jump on the bandwagon.
Supply Chain Matters featured a previous commentary specific to global consumer electronics manufacturer Sony, and its recent report of fiscal year-end earnings. We noted, as did others in media, that forty of Sony’s top executives, including its CEO, decided to forgo end of year bonuses amounting to 30-50 percent of their compensation because the company failed to keep a promise to return the group’s consumer electronics division to profitability for the current fiscal year that ended March 30. We observed that many CEO’s and top executives are very comfortable with awarding themselves large bonuses and double-digit increases in total compensation in spite of operating results. Some have done so while taking major cost cuts from supply chain related operations.
As a means of more evidence, we further wanted to call our readers attention to an article published in the May 6-May 12, 2013 edition of Bloomberg Businessweek titled Some CEOs Are More Equal Than Others, which adds more credence to a growing skew in executive compensation. (paid subscription required for the full listing of rankings) Bloomberg editors subtitled this article noting that companies were supposed to be disclosing the pay gap between CEOs and their employees, but they have not.
Bloomberg staff compared the disclosed CEO compensation mandated by the Securities and Exchange Commission, including salary, bonus, changes in pension accrual and value of stock awards, with U.S. government data on average worker pay and benefits by industry. The result was a ranking of 100 companies with the highest CEO-to-worker compensation ratios. The ratios range from 1795 CEO-to-worker Ratio for the number one ranking to a 299 CEO-to-worker Ratio for the number 100 ranked company. In the context of the manufacturing and retail industries, the Bloomberg ranking of sectors ranked by CEO compensation bulge were noted as:
Rank 1- Communications
Rank 2- Industrials
Rank 3- Health care
Rank 4- Consumer discretionary
Rank 7- Materials
Rank 8- Consumer Staples
Upon further review, we placed a supply chain & B2B lens to this listing and noted some further observations:
- Three of the top ten ranking include retailers and/or service providers. JC Penny tops the list (with a 1795 CEO to worker ratio) but its CEO was recently discharged because of poor profitability performance among other issues. There are many retailers in the Bloomberg listing of CEO pay disparity and yet many of these retailers are scrambling to meet the new competitive dimensions of an multi-channel online world. Some others of mention: Target (#13), Wal-Mart Stores (#18), Macy’s (#20), Lowe’s (#74), Gap (#75), Kohl’s (#83), Home Depot (#92). Retailers are constantly challenged with razor thin margins yet it would seem that pay at the top provides a different set of measures.
- We contrasted the 2012 Gartner Top 25 Supply Chains with this Bloomberg listing. Nine of Gartner’s Top 25 appear in the Bloomberg 100 ranking, specifically in Gartner ranking order: McDonald’s (Bloomberg #66), Procter & Gamble (#72), Coca Cola (#22), Intel (#100), Wal-Mart Stores (#18), Colgate Palmolive (#87), Nike (#8), Caterpillar (#73), 3M. Either their supply chains teams contributed to CEO performance objectives or other financial metrics such as overall supply chain cost, return-on assets, major supply chain outsourcing or other factors led to the Gartner ranking.
- We have noted the many challenges and dysfunctional nature of pharmaceutical and health care supply chains in numerous Supply Chain Matters commentaries. Industry players in the Bloomberg listing include McKesson (#12), Medtronic (#31), Pfizer (#47), Abbot Laboratories (#53), Baxter International (#70), CVS Caremark (#77).
- Readers of this blog are well aware that we have featured numerous commentaries related to the continuing global supply chain challenges of Boeing. Yes, that company is listed as #86 with a 314 CEO to Worker Ratio.
- Finally, the Bloomberg listing feature two global transportation and logistics services providers: FedEx (#67) and UPS (#88).
While these types of CEO pay rankings come with a lot of built-in, subjective or other emotion, the take-way for us was contrasting the gesture of the Sony executive team with many of the companies listed in the Bloomberg Businessweek ranking of CEO compensation ratios.
Perhaps more gestures of CEO and senior executive pay for performance actions are in order.
Then again, CEO’s march to their own set of norms and expectations.
For our part, we will highlight for our readers, any supply chain or B2B developments (positive or not so positive) that involved companies with the top CEO pay disparity rankings.
There is unfortunately another update to the condition of severe overcapacity and the resulting market and shipper dynamics involving the ocean container transport industry.
Industry leader AP Moller-Maersk has according to a recent Wall Street Journal report, kicked off a new “arms race” in ordering 20 new triple-E container vessels valued at $3.8 billion. These ships can carry upwards of 20,000 20 foot containers and according to statements from Maersk, will consume 35 percent less fuel consumption per container than the current standard 13,000 container vessels scheduled for delivery to other shipping lines.
Of course, one has to wonder about the marvelous math of spreading savings across roughly 54 percent of additional capacity at a standard list price contract shipping rate. In that light, the WSJ reported that the decline in ocean container freight rates in the past six months was three times as fast as in 2011 when a previous price war broke out among the leading carriers. All but seven of the largest shipping lines have lost money in 2012 according to a reported analysis by Alphaliner. The WSJ noted that last month, Maersk CEO Soren Skou warned that the industry is on the verge of another price war unless excess vessels are not taken out of service, especially on the Europe-Asia corridor. Freight rates in that sector alone dropped by 6.5 percent according to the latest Shanghai Containerized Freight Index.
The industry paradox of big-bucks chicken now enters yet another chapter. Industry leader Maersk obviously wants to continue to initiate an industry advantage by investing in even larger ships. This will obviously precipitate other responses from existing lines, and the spiral of gross overcapacity could carry itself way into the future unless the industry comes to its financial and operational senses. More mega-ships equates to needs for even larger and more efficient port facilities. In the past six months, labor disputes involving U.S. west and east coast ports, as well as the most recent Port of Hong Kong, centered on, among the usual wage issues, calls for increased port efficiency and automation needs.
As freight rates continue to soften in 2013, container carriers will incur more severe financial challenges. Adding new long-term financial commitments for even larger ships adds more burdens not only for the shipping industry but for global logistics infrastructure.
Something has to give, and when it does, it will not at all be attractive for the industry. Large global shippers and global product sourcing professionals can currently bask in the current eroded freight rate environment but had better be aware of the longer-term implications that will invariably occur.
©2013 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.
As the Q1 earnings and economic forecast cycle winds down it should be somewhat clear to supply chain teams that the planning for product demand and associated resources across the Eurozone, and in some cases, China, will continue to be challenging at best.
Last week, the International Monetary Fund trimmed its forecast for total European output to a negative 0.3 percent this year. The agency also trimmed its 2013 forecast for global-wide growth from 3.5 percent to 3.3 percent.
As Supply Chain Matters has noted in our previous commentary concerning global output activity, PMI levels for Europe continue to trend further downward. Uncertain signs are now appearing concerning China. The Wall Street Journal reported today that industrial profits in China for the March timeframe rose just 5.3 percent, down from the 17.2 percent growth rate posted for the first two months of this year.
Financial media reporting reflecting on the latest Q1 quarterly results from manufacturers have specifically taken note on the negative aspects of the Eurozone. Some of the examples across various tiers of industry supply chains include:
- Dow Chemical reporting a 12 percent decline for sales volumes across Western Europe.
- Air Products and Chemicals reporting a 5 percent decline in European revenues with a reduced outlook for the remainder of the year and prompting the need to cut additional costs.
- General Electric, who was one of first multinational companies to warn of European trouble signs last year, recorded a 17 percent decline in European sales. GE indicated that the contraction was broader and worse than initially thought.
- The Wall Street Journal recently reported that five of the biggest auto manufacturers in Europe reported grim Q1 performance. This included an uncharacteristic 26 percent decline in operating profits at Volkswagen, a 12 percent revenue decline at Renault SA, and a 6.5 percent revenue decline for PSA Peugeot Citroen. Ford Motor Company reported a $462 million operating loss in the region, and despite initial bold efforts to close 3 European factories, expects to take a $2 billion loss by year-end. Even German premium brands such as Mercedes and BMW have begun to feel the effects of slowdown in both the home German and other Eurozone markets, as well as in China. BMW is now forecasting a single digit increase in China auto sales vs. a 40 percent increase last year.
- Global consumer goods company Unilever, previously demonstrating a rather agile and broad support for global product demand also felt the effects of a slowdown in Europe among its various product offerings.
- Global apparel and footwear producer Nike indicated a 20 percent decline in operating profits concerning China while restaurant services provider Yum Brands reported a 41 percent decline in Q1 operating profits in China following media accusations of antibiotic use by its suppliers.
All the above are continued reinforcement that supply chain organizations must be able to refine supply chain planning capabilities. The ability to plan in more finite segments, by country, region and individual product area are obvious. Scenario-based planning and more insightful business intelligence by country are ever more important.
While the current news of contraction remains negative there will as we all know, eventually be a bottoming. Some individual countries may bounce back earlier than others. Similarly some markets and product segments may rebound quicker than others. The key is to be able to assess and determine when it occurs before your competitors. With capacity and resources continuing to be cut-back across the Eurozone, it is equally important to have adequate lead time to plan for additional resource needs, when the time comes.
While contraction is the overriding headline for Europe, there will come an eventual bottoming and upturn. Will your organization or S&OP process be able to determine that point quicker than your competition?
The two most visible and perhaps most competitive global supply chains have been those of Apple and Samsung. Both companies have now formally reported their latest financial results with the implications pointing to needs for added tests for both associated supply chains.
Apple’s report of its Q2, FY13 earnings narrowly met extremely high market expectations. The consensus opinion from equity analysts was that while the company reported adequate total revenues, profit growth is definitely slowing, and the company is feeling the effects of a highly competitive market involving its products. Apple disappointed with product news, with CEO Tim Cook indicating that very exciting new products would be announced later this calendar year. To appease grumpy shareholders, the company announced a massive $100 billion two year buyback of the company’s stock while increasing the cash dividend by 15 percent.
Highlights of the quarter included an 11 percent increase in total revenues while net income of $9.5 billion, fell for the first time in a decade. Very closely watched gross margin came in at the lower end of guidance at 37.5 percent with a forecast indicating possible additional erosion in the coming quarter. Senior management attributed the erosion in margins to product mix, with more iPads being sold vs. the more profitable iPhone products. On the slightly more positive side, revenues for the iTunes store were reported to be $2.4 billion, up 28 percent, while revenues for the Apple Retail Store came in at an impressive $5.2 billion, a 19 percent increase. There are now a total of 403 retail stores with 151 outside of the U.S.
On the unit volume side, 37.4 million iPhones were sold, an increase of 6.5 percent from the year earlier quarter. Unlike the holiday quarter that was somewhat supply constrained, senior management reported a total of 11.6 million units now in channel inventory, roughly 4-6 weeks of expected sales. On the tablet side, 19.5 million iPads were sold, an increase of 7.7 million from a year ago, with an acknowledgement that the company sold significantly more of the iPad Mini model. Volume growth in iPods and Macs were on the negative side.
Given the current financial and business picture, Apple’s supply chain remains under considerable challenge. These past weeks have featured numerous information leaks which indicate a push-out in new product release schedules involving a new iPhone and possible other new products. Supply Chain Matters has further noted major supply sourcing shifts in the works as Apple sheds its dependency away from arch rival Samsung.
More importantly, the Q2 results, in our view, now reinforce a shift to a supply chain emphasis that is more focused on increased cost efficiency. This is a strategy that can be attributed to a typical mature consumer goods company that values stockholder dividends over market and product agility, where supply chain costs are constantly scrutinized and where volume leverage is a big deal. This new emphasis is quite different for Apple, and one that is not conducive to a market that values product innovation and earliest time-to-market. As we have noted in previous commentaries, Apple suppliers were conditioned to expect multiple product changes at multiple times, and were further expected to be able to ramp-up rather quickly to be able to reap the benefits of participating in explosive unit volume growth. That high ramp strategy drove high cyclical direct labor needs and consequent high profile challenges regarding labor and overtime practices across China based suppliers. This new emphasis on cost efficiency will inevitably lead to an increased emphasis on productivity and further production automation.
This week, arch rival Samsung Electronics reported its fiscal Q1 earnings with the banner headline of a 54 percent rise in operating profits and 42 percent growth in net profits. Revenues rose by nearly 17 percent, in-line with previous guidance. Its largest business segment that of cellphones and telecommunications accounted for 74 percent of total operating profit.
Samsung maintained its leadership in the smartphone market segment. The Wall Street Journal quoted market research firm Strategy Analytics as indicating that Samsung’s smartphone shipments grew to 69.4 million units in the quarter, giving it a market share twice that of Apple. The company has more agile in its product introduction schedule, announcing the new Galaxy S4 last month, with worldwide availability occurring this month. There have also been information leaks that indicate that Samsung is also working on other new products, similar to those rumored for Apple, including a new electronic watch.
Regarding the new S4, The Financial Times reported yesterday that the company has confirmed it is having difficulty in meeting worldwide supply commitments to support the global product launch. A company statement indicates that more pre-orders were received than previously forecasted, and Samsung was having difficulties in ramping-up supply in such a short period. Last week, the company announced that considering additional sourcing of mobile memory chips from SK Hynix. Readers will recall that Samsung practices a more vertically focused supply chain, sourcing many of its own key components including processor, memory and display.
Samsung’s vertically integrated supply chain has served that company well in its ability to continuously refresh innovation in products, quickly ramp products to enormous global wide volumes and deal with multiple global channel partners. While current revenue and volume growth is showing strain, the prime focus has by our view, always been on agility and market responsiveness, with a byproduct of efficiency. Vertical integration provides more control of component design and target cost parameters. With its current market and volume momentum, the Samsung supply chain will likely continue with its current emphasis toward agility and control of major supply components.
Thus, the two most visible and highly competitive global supply chains are in the process of moving toward different strategic needs supporting different expected business outcomes. Which ultimately garners the most success is a matter of time. One thing is certain, 2013 will be noted as a key milestone and turning point for each.
© 2013 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.