Today, Gartner published its annual regional listing of what the analyst firm considers to be ten of the best supply chains in the Asia-Pacific region. Gartner conducts this ranking as a supplement to its Top 25 Global Supply Chain Rankings that are traditionally announced in the fall. According to Gartner, while most of these regionally-based supply chains still need to elevate their supply chain capabilities to compete on a global level, many have dramatically improved their position.
The published ranking for Asia-Pacific Top Ten supply chains were noted as:
- Samsung Electronics (ranked 6th in 2014 Top 25 global ranking)
- Lenovo Group (ranked 16th in 2014 Top 25 global ranking)
- Toyota (reported to have moved up three places in the top ten Asia-Pacific and up 22 places in global ranking but not in current 2014 Top 25 global ranking)
- LG Electronics
Overall, Supply Chain Matters believes that this ranking reflects how we would have voted if we were part of the external or peer voting panel. Samsung is especially noteworthy since by many accounts its supply chain is supporting more product and perhaps process innovation than that of its arch competitor, Apple. It is quite interesting to note the appearance of three automotive OEM’s in the Asia Pacific ranking while there are no automotive OEM’s ranked in the global Top 25 rankings. We have been especially impressed with Honda’s global manufacturing sourcing strategies that have helped the company overcome currency challenges and better service global product demand.
At least three of the Gartner Asia-Pacific top ten, namely Samsung, Lenovo and Hyundai practice some form of supply chain vertical integration strategies.
However we were somewhat quite taken-back by the appearance of Sony’s in this top ten ranking, given its profitability challenges in the past few years. Sony has also been aggressively outsourcing parts of its television and certain parts of its consumer electronics supply chain to contract manufacturers in order to aggressively reduce costs. Gartner’s own admission is that Sony is lagging behind some of major competitors.
Again, we are shocked with the lack of recognition toward Foxconn Technology (Hon- Hai Precision), the world’s largest contract manufacturer by revenue and output volume. Foxconn is a major supplier and serves as the lead contract manufacturer for Gartner’s consistently ranked number one global supply chain of Apple. This CMS’s ability to respond to Apple’s intense product innovation requirements as well as rapidly scale volume production is highly noteworthy. We remain highly curious as to why Flextronics does not appear in this top ten regional ranking, let alone the global ranking, but then again, social responsibility strategies concerning workers may be a weighting factor. Another supply chain worthy of consideration is that of TSMC, the world’s largest semiconductor manufacturer.
Supply Chain Matters has featured commentaries on many of Gartner’s ranked top ten Asia Pacific supply chains. They can be accessed by utilizing our Search box: i.e. Samsung supply chain.
At Supply Chain Matters, we relish when elements of the Wall Street community recognize the critical link of supply chain performance and responsiveness with supporting positive product brand and business outcomes. Thus we were attracted to this week’s posting by Motley Fool concerning what is often rated as the number one supply chain: Is Apple’s Supply Chain a Risk to the Company?
The overall concerns raised in this commentary should not be new news to our community, especially those that often follow Supply Chain Matters. The commentary observes that the supply chain is more difficult than it appears (really!), even though the definition of what is incorporated in supply chain is somewhat simplistic. More importantly is this commentary’s linkage of a corporate culture that is product innovation driven, and how that impacts supply chain responsiveness.
We have brought forward that dimension in many of our Apple supply chain commentaries, the most frequent addressing how last-minute product design changes on the pending iPhone 6 impacted ramp-up production schedules or the current aggressive plan to introduce a new 12.9 inch iPad in Q1 .
A somewhat novel aspect to this commentary is calling attention to the fact that Apple CEO Tim Cook, having come from a background in supply chain, should have been aware of supply chain risks. Our response is: Of course he is aware, and he, in-turn has obvious high expectations in his supply chain partner network to rise to challenge, as they have before.
There is speculation among Wall Street investors as to the scope and breadth Apple’s pending product announcements scheduled next week, along with the market availability of these products in the upcoming holiday focused quarter. In its conclusion, the Motley Fool commentary kind of throws supply chain ‘under the bus’:
“As Apple continues to bring new and exciting technologies to its products, at times there will be delays in both supply and manufacturing processes. In addition, Apple’s going to take its time bringing a cohesive, end-user-focused, product to market. It isn’t always fast, but it’s worth waiting for.”
Supply Chain Matters and many of our community would most likely have a different perspective. A supply chain supporting innovative products as its prime business outcome must be designed to support agility, flexibility and responsiveness to constant product changes and new product introduction cycles. It is not a supply chain driven solely by lowest cost dimensions, but rather scale and responsiveness dimensions.
The good news is that once in a while, Wall Street can appreciate supply chain capability, even as some activist investors constantly strive to destroy years of investment and resources in supply chain capability.
Supply Chain Matters has featured many ongoing commentaries regarding electric powered automotive manufacturer Tesla Motors and its bold “gigafactory” strategic supply strategy. Our last commentary published in mid-August on this topic reflected on the high frenzy of lobbying and proposed incentives among various U.S. states to be designated as the designated site for this massive factory, but the betting for the final site was leaning heavily towards a particular site, that being Nevada.
This afternoon, the formal announcement regarding the chosen site for this massive $5 billion supply facility will be made but business and general media has already running stories concerning disclosed the site, which is an industrial complex near Reno Nevada.
Let’s re-visit the four strategic objectives outlined in our mid-August commentary in light of today’s expected announcement:
Bold supply chain vertical integration
As more information comes to light, there is no doubt in the lens of Supply Chain Matters that Tesla has elected a bold vertical integration strategy. The massive scale of this facility is targeted at reducing the unit costs of lithium-ion batteries by 30 percent. Current reports now cite the statistic that at total capacity, capable of supplying up to 500,000 electric vehicles per year, the plant capacity exceeds than all of the entire automotive industry’s current lithium-ion battery supply needs. However, other information now coming to light indicates that Tesla’s supply strategy extends beyond current automotive industry needs, and could include electric storage needs for public utility, alternative energy or other industry needs.
There are new reports that the Nevada site selection has considerations for being powered by solar, wind and/or geothermal energy methods. as well as being a potential supplier of electrical storage to Las Vegas casinos and entertainment complexes.
Proximity to key commodity supply and transport networks
The site itself is rather close to supplies of the all-important raw material of lithium supply. A report posted on SiliconValley.com observes that Rockwood Lithium, the only operating bulk lithium supplier in the United States could easily supply needed raw material. The sire itself, to be located within the Tahoe Reno Industrial Center is approximately a four hour drive from Tesla’s primary Fremont assembly facility, and does provide for rail services.
A well trained and technically savvy workforce
Currently, Nevada has one of the highest unemployment rates in the United States. No doubt, the State of Nevada probably included workforce training incentives to staff the new facility. This facility is expected to be highly automated, but previous estimates pegged overall employment at 6500 at full capacity.
Subsidies that may well defray the overall cost burden.
In its reporting of the Tesla Nevada site selection, the Wall Street Journal noted: “Nevada likely offered Tesla one of the largest incentive packages in the history of the U.S. automotive industry.” Reports reinforce Tesla’s prior statements indicating expectations that the designated states would defray upwards of $500 million of this facility’s total $5 billion costs. The Governor of Nevada is expected to convene a special session of that state’s legislature to finalize details of the overall incentives package. We’ll know in the coming days the details of such subsidies, but as noted above, early indicators point to a substantial package.
Tesla is a company whose boldness extends across its entire value-chain. Today’s announcement of Reno Nevada as the site as one of the largest single factories ever constructed in the United States is a testament to such boldness and initiative. The race to a 2017 volume production now begins.
Yesterday, Supply Chain Matters posted a commentary relative to ISM’s August PMI report noting continued positive momentum for U.S. manufacturing. Beyond just parroting of business and traditional media regarding the news, we raised caution on important warning signs relative to sustaining such momentum.Today’s published edition of the Wall Street Journal adds more evidence of caution, observing that many U.S. manufacturers have neglected to invest in replacing aging capital equipment.
The WSJ cites a recent Morgan Stanley report indicating that the average age of industrial equipment in the U.S. has risen above 10 years. Growth of all types of capital spending by U.S. firms increased 3 percent in 2013, and is forecasted to be 3.8 percent this year. These levels are far below the Morgan Stanley historic average of 8 percent.
Instead, firms are investing in acquisitions, stock buy-back programs and capital investments in other faster growing economies in Asia and Latin America. The WSJ cites a Dealogic statistic which indicates that in the first-half of this year, firms have shelled out $80.7 billion for acquisitions, compared to $69.5 billion in this same period of 2013. That equates to the potential of a lot of capital equipment investment.
Of more concern, geopolitical events are changing rather quickly. China’s huge market potential has increasingly become more challenging for foreign based manufacturers. In a separate news report, The WSJ cited a recent survey conducted by The American Chamber of Commerce in China, whose members include manufacturers, which indicated that 60 percent feel less welcomed in China, compared with a 41 percent sentiment a year ago. Responding to a new added question as to whether respondents feel that foreign firms are being singled out for attack, 49 percent indicated yes. Europe’s manufacturing sector still remains in doldrums while Latin American countries, with continue to be challenged with global currency and inflation challenges. Mexico seems to be the new exception.
Thus, previous manufacturing capital investment bets within emerging economies may be sidelined at this point because of fast changing global events. That places even more dependence on U.S. manufacturing resources, hence the growing need to continue to invest for added productivity and newer U.S. based equipment.
Business media is alive with today’s headlines concerning the August report of U.S. manufacturing activity. The ISM PMI Index for August was reported as 59, almost two points higher than the July reading and the highest level in three years. Even more optimistic, the all-important New Orders index increased to 66.7, the highest level since April 2004. The production index also rose to its strongest level since May 2010. Of the total 18 industries surveyed in the ISM PMI Index, 17 showed positive gains, which is extraordinary.
If you have been receiving our Supply Chain Matters Quarterly Newsletter, (automatically distributed to registered readers) we regularly report trending of major global PMI indices across the globe. In our trending, the U.S. PMI has consistently led most other regions for the past 4 quarters. Thus, U.S. manufacturing momentum is indeed a significant headline.
However, before our U.S. based readers get too carried away with euphoria, there are still important changes and supply chain re-building initiatives required. In a recent Supply Chain Matters commentary, we noted how Mexico will likely become a significant manufacturing and export hub for the global automobile industry, to include its own supplier component network. The recent efforts by Wal-Mart and others to added significant monetary commitments for sourcing more products in the United States have uncovered needs for re-building globally competitive component supplier networks in areas such as shoes, apparel, consumer electronics and other direct-labor intensive industries seeking to nearshore products within the U.S.. Logistics and transportation infrastructure is currently struggling to support such momentum, particularly rail, barge and trucking.
Yes, the current continued surge of U.S. manufacturing is noteworthy, but much work remains to insure continued sustained momentum in the coming months and years. Addressing the rebuilding of supply chain network ecosystems in key industries and rebuilding long overdue logistics and surface transportation networks remain important priorities.
In a previous Supply Chain Matters commentary in early July, we noted a rising tide of production sourcing investments in Mexico among global based automotive OEM’s. Automotive OEM’s BMW, Honda, Mazda,Volkswagen’s Audi Group, and a partnership among Nissan and Daimler had each announced Mexican production sourcing decisions that amounted to billions of dollars of investment. In our commentary, we pointed to significantly more attractive direct labor rates, tariff-free access to markets, foreign currency challenges and global logistics as all contributing to the attractiveness of Mexico as a prime product export center.
This week featured news of yet another global based automotive producer electing to source production in Mexico. South Korea based Kia Motors, an operating division of Hyundai Motor, announced its intention to also invest in a $1 billion automotive assembly plant in Mexico with capacity to produce upwards of 300,000 vehicles.
Obviously, such a trend implies that a global production strategy is at-play within these moves. Despite a large amount of excess production capacity across Europe, European automotive OEM’s elected to invest. We can now observe that Asia based OEM’s, are joining the sourcing tide for electing Mexico. Additionally, when a concentrated group of OEM’s make such significant investments in a particular geographic region, the supply chain supplier ecosystem follows, creating the basis of a self-contained value-chain ecosystem that further contributes to cost and supply chain efficiencies for the region.
As noted in July, with the current strategic sourcing attraction of Mexico, global automotive OEM’s gain even more flexibility in determining the most profitable supply chain sourcing and production paths to support global demand or offset currency fluctuations. Mexico itself has the opportunity to evolve as a major global hub of automotive exports beyond North America.
The obvious loser in this tide is expansion of U.S. based automotive production. While U.S. based OEM’s such as Ford and General Motors balance their production investments among the specific global region supporting a consumer market, they have not tended to position U.S. manufacturing capability as an export weapon. Global based OEM’s have attracted to the U.S. southern region where local governments and their political leaders have provided very attractive monetary incentives and promises of right-to-work laws that inhibit organized labor unions.
The current wave of announcements targeting Mexico is now a clear sign of a far broader wave of strategy unfolding, since such sourcing spans previous smaller, low-margin models and now includes a broader range of production sourcing that include mid-range and luxury models. Thus U.S. manufacturing resurgence concerning automotive production is tempered by the rising tide of Mexico which will become a far larger global production and export presence. Cudo’s to Mexico’s leaders in providing the incentives and infrastructure to fuel such attractiveness.
Do not misconstrue that in this commentary, our intent is to not advocate pro or con organized labor, or legislative incentives that lure automotive OEM’s to certain regions, but rather to point out how such considerations can and do motivate sourcing decisions.
There is obviously a lot of learning to be gained for U.S. and local state legislative leaders and perhaps that learning is too late when it comes to global automotive supply chain capability.