These past couple weeks have not provided positive news across consumer electronics supply chains.  This week, the latest quarterly earnings and financial advisories from key players provide a common picture of declining demand and concerning outlooks.

Panasonic Corp. forecasted its biggest annual loss in ten years, not only attributed to the continued effects of a strong yen, but declining sales in its television and semiconductor chip operations. Panasonic is cutting its annual television sales target to 19 million units, from a previous 25 million, and has included a whopping 404 billion yen ($5.2 billion) restructuring charge to re-structure its TV and semiconductor businesses.

Sony Corp., which has occurred seven consecutive annual losses in television manufacturing, finally announced its major restructuring.  Sony’s TV businesses will be divided into three groups, LCD operations, high volume contract manufacturing, and development of next-generation smart televisions. Also noted in the Bloomberg article is that rival Toshiba has had a 10 billion yen operating loss in its TV business for the six months ended in September.

Our previous Supply Chain Matters commentaryconcerning Sony reflected on how that company’s supply chains remain in turmoil not only from the continuing decline in its television unit, but also the disruption caused by the March earthquake and tsunami in Japan.   Sony recorded a $66 million charge for incremental expenses directly related to earthquake damage, repair and inventory write-off.  Thus far, it is unclear as to whether Sony’s other consumer electronics businesses such as digital imaging will be impacted by the flooding that occurred in Thailand. In our August commentary we speculated that difficult decisions and further dramatic announcements would be forthcoming, and this week, they came for the TV unit.

Another significant participant in consumer electronics value chains is contract design and manufacturer, Hon Hai Precision Industry.  Hon Hai indicated earlier this week that while total revenues marginally improved, its Q3 earnings dropped 9 percent fueled by further investment in expansion of operations to more interior parts of China.  However, the company noted that visibility to new orders remains poor, indicating trouble among its OEM clients. The company’s liquid crystal display unit, Chimei Innolux Corp. reported a Q3 loss due to severe LCD price erosion brought about by slowing television unit demand.

Finally we call readers attention to an insightful analysis performed by Mark Gomes of Pipeline Data LLC, featured on Seeking Alpha. Analyzing the early signs of the supply chain impacts resonating across consumer electronics as a result of the floods occurring in Thailand, along with the implication for long recovery times, Mark warns of a deluge of more impacts and earnings warnings.  Mark notes: “ ..my company (Pipeline Data LLC) forecasts that the implications will be very damaging for most of the tech sector.” Mark’s analysis point to pending 60 million unit shortfall of hard disk drives in the coming months, as existing inventories is exhausted. This is projected to impact large computer and data storage vendors such as Apple, Dell, EMC, IBM and HP, along with other providers who rely on PC and storage sales.

These are troubling times in consumer electronics, and supply chain planning and fulfillment teams need to be diligent to ongoing industry and component developments since the picture of demand and disruption is changing dramatically.

Bob Ferrari

© The Ferrari Consulting and Research Group LLC and Supply Chain Matters. All rights reserved.

No sooner had we posted our Supply Chain Matters and Supply Chain Expert Community posting on Monday, A Supply Chain In Turmoil- What’s Ahead for PC’s, than the first significant salvo announcement comes to light.

Reuters and other media are reporting that Japan’s Sony Corporation, Toshiba Corporation, and Hitachi Ltd. will together merge their money-losing small liquid-crystal display operations to form a single company to be named Japan Display. Adding more twist is that the new venture will be backed by $2.6 billion of funding from The Innovation Network Corp. of Japan, a government backed agency who will take a 70 percent ownership stake in the combined entity, while each of the merging companies will hold a 10 percent ownership stake. The goal is to complete the merger by 2012 and list the new company as an operating entity by March of 2016.

The Reuters story notes that the announcement is a response to competitors such as Japan’s Sharp Corp, Taiwan’s AU Optronics and South Korea’s Samsung Electronics which are outpacing industry competitors and garnering a good share of long-term supply contracts. The obvious supply chain dominant force is Apple who buys a lot of small LCD’s to support its smartphone, player and tablet products.  Rumors have been circulating that Apple has plans to ramp-up iPad production levels to 10 million units per quarter, while the iPhone is experiencing healthy sales volume in China, which imply a lot of displays. Sharp is rumored to receive a considerable investment from Apple while Samsung has key supply agreements with other high volume smartphone clients including its own smartphone division.

Another twist to this Reuters story is the notation that Hitachi had been in separate talks with Apple’s prime contract manufacturer Hon Hai Precision Industry (Foxconn), about a joint LCD panel venture with Hitachi.  In our recent Supply Chain Matters commentary regarding Hon Hai’s Annual Meeting, we made note of another LCD joint venture with Sharp. Apparently multiple bets are being covered.

At first take, we view two significant takeaways from this announcement.

The first is how government funding was leveraged to insure industry survival of a chosen few providers.  How do you think Sharp feels knowing that three of its Japan based competitors garnered the political influence to provide a competitor that equates to over 21 percent of the market for small and medium-sized displays?  One would suppose that Japan’s leaders viewed this in the same context as perhaps the U.S. bailout of Chrysler and General Motors, to compete against rival Ford Motor Company.  The one nix however was that more jobs and more supply chain capability was at stake in the U.S. and the timing was in the depth of the past financial crisis in 2008.  It is not likely that this action would happen in the current political environment of a government spend crisis.

The second is the most obvious for our supply chain community, the actions and buying influence  power of certain supply chain dominants such as Apple and select others, and how that cascades to volume and profitability pressures in associated supply chains. HP’s announcement and uncertainty concerning its PC and mobile computing business compounded with the business challenges for Nokia and RIM will likely precipitate other announcements in the days to come as the shift from PC to mobile products drives more strategic supply chain decisions.

Bob Ferrari

The following commentary can also be viewed and commented upon on the Supply Chain Expert Community web site.

Supply Chain Matters has previously penned ongoing commentary regarding the supply chain related challenges of Japanese consumer electronics provider Sony.  Supply chain community members can’t help but observe the multitudes of business challenges that have been a part of Sony these past months. The devastating earthquake and tsunami that occurred in northern Japan in March impacted a number of Sony production facilities. A series of multiple large-scale computer hacking attacks directed squarely at the company’s online communities created considerable financial harm and eroded consumer trust  Sony’s television business has not achieved profitability for the past seven years. A tops-down directive to slash supply chain costs remains to make a significant impact on bottom-line results.

In our commentary in March of last year, we noted how the company’s television business was planning for an aggressive market share attack for the coming fiscal year, planning a 70 percent ramp-up in production, to 25 million units, for the fiscal year that ended in March 2011. Sony’s senior management continued to take an aggressive stance on returning the business to profitability, thus creating a conflict for television.  Sony has closed 20 percent of its manufacturing plants, including the closing of four of Sony’s eight television production plants, and eliminated 20,000 jobs. In our commentary in November, we noted that Sony’s CFO, Masaru Kato indicated that the company had no intention of being “adventurous” in its supply chain management and that “pushing products into the market without consumers is not the business we are in.” The company slashed inventory and began an aggressive plan to outsource additional television manufacturing outside of Japan.  Production outsourcing agreements surrounding the company’s Slovakia and North American facilities have been struck with global contract manufacturer Foxconn Technology Group. Senior management also entered into joint manufacturing ventures with industry rivals.

Sony recently released its fiscal Q1 quarterly earnings (June ending) and the results were not optimistic. While operating income was reported at $340 million, the company reported a net loss.  Sales for the quarter declined 10 percent, with the consumer business unit recording a 17.9 percent decrease in sales.  The company acknowledged that operations were negatively affected by the earthquake, with $66 million recorded as incremental expenses directly related to damage, repair and inventory write-off. Lower LCD television sales were noted compared to the previous forecast in May.  The financial press echoed headlines that Sony has cut its profit forecast for the remainder of the fiscal year by 25 percent, while management has called for more supply chain cost reductions, including further outsourcing of production. Meanwhile, Sony executives continue to re-iterate the importance of the television business to Sony’s strategic direction.

An article published in Bloomberg BusinessWeek notes that as of two months ago, Sony was optimistically forecasting an annual production output of 27 million units for the current fiscal year.  Sony’s annual production forecast has now been lowered to 22 million units, a 19 percent reduction in a matter of two months. The magnitude of the change raises speculation on the effectiveness of Sony’s executive level S&OP planning.

Another business and management re-organization is in the works and we all have to wonder that the company’s television related supply chain and S&OP planners have been suffering from whiplash. Eroding market conditions, severe competition, overly optimistic forecasts and an unprecedented earthquake event have all taken a toll. Of more concern, Sony has been surrounded by competitors who have closed the gap in innovation and quality perception. A strategy of market share gain has been subsumed by that of lower cost, market share defense, while the overall market remains challenging at best.  The precipitous events of financial markets this week have not helped to improve consumer confidence and sensing the market is ever more critical.

Some difficult decisions lie ahead for Sony’s senior executive and supply chain teams, and Supply Chain Matters anticipates further dramatic announcements. One thing is clear however, over optimism needs to be replaced with more pragmatic, forward oriented and fact-based decision-making. The forecasting logic of the past needs to be replaced with more responsive planning that is tuned to the realities of Sony’s markets. A lot is at-stake.

Industry and community members are welcomed to share their observations.

Bob Ferrari

We continue our Supply Chain Matters commentaries regarding the evolving global supply chain impacts concerning the devastating earthquake and tsunami that struck Japan on March 11. Reports today are noting that Sony Corporation has restated production at the last of the 10 Japan factories that were damaged as a result of the disaster. The Tagajo production facility which produces Blu-ray disks resumed limited production today.  Restoration was in-line with a plan announced in late April.

An article published in the printed Financial Times (paid subscription required) also makes note that direct damage for Japan’s manufacturers has been substantial.  A survey conducted by Japan’s Nikkei business newspaper has pegged direct disaster-related costs for listed Japanese companies at Y2, 000 billion ($25 billion).  Thus far, corporate reports of direct losses have been in the range of $4-$5 billion.

Meanwhile, Nikkei reports that the port of Serndai accommodated its first foreign vessel, a Panamanian-registered coal carrying ship, on noon Friday, eleven weeks since the day of the disaster. While the port was able to accommodate some shipping in April, concerns about high radiation levels from the badly damaged Fukishima Daiichi nuclear power complex caused foreign vessels to avoid the port. The newspaper also reported that Sendai International Airport is currently anticipating the hosting of international flights in late June.

Bob Ferrari

There are many facets for how manufacturers identify and mitigate significant supply chain risks.  These often include operational or event-driven risks, but what happens when your prime distribution center for all of Europe can no longer receive product because of an ongoing product patent dispute?

Last week , customs officials in the Netherlands seized tens of thousands of Sony’s  PlayStation 3 game consoles because of trading ban handed down by a Dutch court.  LG Electronics secured this legal 10 day injunction against Sony because of an alleged patent infringement concerning the PlayStation’s Blu-ray video technology. According to published news reports, Sony and LG are also engaged in patent disputes in the U.S. as well, which involve flat screen televisions and smartphones.

What makes this situation a bit extraordinary is the high tech companies tend to resolve these patent disputes through adjustments to  technology cross-licensing and value-chain agreements and not outright injunctions. An injunction targeted in the Netherlands is obviously with some knowledge of Sony’s European supply chain distribution network for PS3. The Netherlands is Sony’s primary distribution center for all of Europe, accounting for upwards of 100,000 monthly PlayStation units shipped throughout all of Europe. Since the injunction is only enforceable in the Netherlands, Sony is now scrambling to find a temporary alternate distribution point in Europe, and is assuring European retailers that there will be no interruption in shipments.

Supply chain risk does take on different dimensions, especially when others know of your value-chain footprint.  Having a supply chain crisis, business continuity and response team in place is always a prudent investment.  High tech companies like Cisco already understand this important tenet of supply chain risk mitigation.

Bob Ferrari