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Over these past few weeks, Supply Chain Matters and others in social and print media have been providing insights and commentary as to how quickly global supply chain dynamics are changing in value-chain networks involving high tech and consumer electronics.  In particular, we point to the PC and smartphone segment. Changing economic forces and sudden events are precipitating change, and these forces may not be to the liking of certain existing players.  The implications for the supply chain community is heightened awareness to strategic trends and product sourcing strategies, since high tech and consumer electronics supply networks may well have different landscapes of key players in the months to come. It is now crucially important to keep senior management educated as to the implications of these developments.


Our particular commentary began in June, noting key highlights from Hon Hai’s annual meeting and Hon Hai's Annual Meeting Provides Signposts for a Changed Contract Manufacturing and Value-Chain Model The eroding margins and competitive dynamics of contract manufacturing point to the strategic need to move further up in the value-chain and into the turf of some existing suppliers.  In August, the two bombshell announcements of Steve Jobs resignation at Apple and HP’s intent to spin-off its PSG division and abandon its efforts in tablet computing with the leveraging of the Palm WebOS operating system,An Industry in Turmoil- What's Ahead for PC's, which continues.  Supply chain community members residing in these networks can well relate to current conference, hallway and break room speculation as to what may be coming.


Financial media is also honing in on these developments and changing forces and the Financial Times, Bloomberg BusinessWeek and the Wall Street Journal among others have published supply chain impact articles. In late August, announcement came that Japan’s Sony , Toshiba, and Hitachi Ltd. will together merge their money-losing small liquid-crystal display operations to form a single company to be named Japan Display. In mid-September, FT published an article indicating that Samsung needs to hit the reset button and focus more on the core software that is crucial to its increased focus on high-end consumer electronics. The perceived motivation for HP’s prior decision to investigate strategic options was to concentrate more on the valued software and services element.


This week the WSJ published an article, Nokia’s Troubles Hit Suppliers (paid subscription or metered free view may be required) that correlates the market struggles at Nokia Corp. and Research In Motion to the consequent ripple effects among major suppliers. Noted was that as semiconductor chip suppliers try to find additional business beyond Nokia’s dwindling volumes, they are discovering that the two biggest smartphone players, Apple and Samsung have locked them out of the market by virtue of designing and manufacturing their own devices. A market researcher cited that Texas Instruments shipped 85 percent of its application processor output to Nokia last year, and has now TI has had to reset Wall Street earnings guidance. The HP decision to abandon WebOS also impacted TI, to the benefit of Qualcomm in the applications processor supply landscape of suppliers. What technologies and capabilities suppliers adopt and who they select as strategic business partners has major business implications. What the major OEM’s elect as continuing strategy, particularly Apple, Samsung and of course, HP, will also precipitate accelerated change.


All of these developments point to continuing turbulence among and across high tech and consumer electronics value-chains, and now more than ever, firms in these segments need to continually re-visit their strategic sourcing and supply plans for long-term implications.  The top tier OEM’s and tier one suppliers want to participate in broader swaths of the value-chain. Suppliers seek more diversity and cushioning to industry developments. Software, operating systems and after-market services are the new high margin areas while hardware seems to be becoming the orphan or the cost of entry to more profitable segments.


In July, Closed vs. Open Supply Chain- Important Senior Management Is Educated on the Implications, specifically that closed supply chains are a highly integrated set of networks where product technologies are owned by the company orchestrating the vale-chain.  Apple and Samsung are the high visibility examples today. Add the implication of service offerings and the discussions can tend to get quite interesting.


Supply Chain Matters believes that the current accelerating dynamics occurring in high tech value chains make it imperative that senior management is continually educated to developments and that strategic strategy sessions and interchange be more than just a periodic occurrence.  Sourcing, product management and procurement need to broaden the lenses of visibility to industry developments, while increasing their two-way communications with the broader supply chain management team as to what is being heard and what can be expected. Supply chain management needs to speak as one voice.


We further recommend that high tech and consumer electronics teams allocate specific time in the executive level S&OP process to an industry development and strategy discussion.


Now is the time for supply chain management to be the eyes and ears to industry movement and long-term implications.


Bob Ferrari


©2011 The Ferrari Consulting and Research Group LLC



Recently, George F. Brown, the CEO of consulting firm Blue Canyon Partners, Inc. penned an article featured in Industry Week titled Early Birds and China’s Mice.  This article is an important one for the Supply Chain Expert Community.  While we do not agree with all of the article’s conclusions, we recommend it for your reading, especially if your role involves strategic sourcing, product management or global supply chain strategy and operations.


Brown traces some of the history of product and production sourcing within China where many companies invested in the country, including the necessary joint-partnerships, in order to gain a foothold on China’s emerging growth and market opportunities. Brown coins the term, “Second Mouse firms” which are Chinese firms that were exposed to western product technology and design as well as the learning of solid manufacturing and business process competencies from their western partners.


He refers to the saying “The early bird gets the worm, but the second mouse gets the cheese,” With access to low-cost labor pools and with intimate knowledge of China’s broader middle markets where the ultimate growth for the next decade will be found, these companies can be a competitive threat. He notes that many western companies entered China’s markets targeting the top end, where western brands would prove to be most attractive for Chinese customers. Second Mouse companies have focused on the broader middle market with a willingness to engineer out unnecessary features from the cost structure and compete on ‘good enough’ buying motivations. Named examples include Haier, in the appliance segment, Geely, in automotive and Sany, in construction equipment. The notion is that each of these firms evolved from solid manufacturing and efficiency competencies who have been quick to learn and adopt.


Brown’s conclusion is that: “Ceding these (broad middle) markets to the Second Mouse firms not only most likely hands over global leadership to them, but also enhances the abilities of the Second Mouse firms to compete in the west, both as a result of the earnings from emerging markets and from their continued access to the world’s best laboratory from which to evolve products than can compete and win across the globe.” He notes that future growth will require western companies to develop the ability to compete in the broad middle segments of emerging markets like China, and with their “good enough” products, Second Mouse firms will be able to penetrate both emerging and western markets.


While the article provides some solid food for thought, our view is that the author did not take a broader perspective as to required competencies and existing environments, including constant product innovation, global based product marketing and supply chain capabilities.


If readers dwell on the companies that are truly succeeding in China and in other emerging markets today, firms such as Apple, BMW, Caterpillar, Procter and Gamble, Nestle or Volkswagen, to name just a few, they have done so from integrating all of their broad based competencies, not the least of which has been product marketing and global supply chain business process integration. It has taken Lonovo many years and some stumbles along the way to develop such competencies. Some such as Apple and BMW continue to grow exponentially because their products are attractive to many levels of Chinese and other consumers. Other such as P&G, Nestle or Volkswagen have nurtured partnerships, local design teams and supplier sourcing to be able to competitively compete in the broad middle market, or quickly adjust to changing consumer needs. 


Western companies also have to deal with the reality of protected currencies and favored trade policies.  They also need to protect their own intellectual property which may prompt a need for different product strategies in different countries or regions.


While the notion that the second mouse gets the cheese seems so straight forward, in today’s challenging markets and hyper competitive economies, companies need to view strategies in the broadened lens of integrated sales, product development, marketing and global supply chain competencies. Rising to the challenge of up and coming companies and “good enough” products requires a market-driven enterprise that can leverage any number of sales, marketing and global supply chain fulfillment capabilities.


What’s your view regarding these market trends and required competencies?


Bob Ferrari


We have provided multiple Supply Chain Matters and Supply Chain Expert Community commentaries as to whether confidentiality and safeguarding of corporate information has generally eroded for personal, individual or corporate gain.


Specifically, the issue is whether unscrupulous individuals cannot resist the temptation for personal monetary or other gain from selling certain supply chain information, especially regarding the leaking of information concerning Apple’s value-chain. It seems that any leaked information along Apple’s value-chain which can either place a supplier in a more advantageous position or uncover Apple’s strategies and intents regarding new or existing products, is worth money. Information regarding the number one supply chain and one of the world’s most valuable companies has become extremely valuable, or so it seems. More importantly, the implications to businesses and supply chain teams is far-reaching and not in the best interests of where supply chain business processes need to be.


Late last summer, an ex- global supply manager at Apple was charged with 23 counts of wire fraud, money laundering and unlawful transactions involving a kickback scheme. That individual pleaded guilty earlier this year and admitted to receiving kickbacks from six different Asia based suppliers in exchange for Apple confidential information. In June, a Chinese court sentenced three people, including a former employee of Hon Hai Precision Industry, to prison terms for collaborating to steal information from a supplier to Apple’s iPad2 products in order to get a jump on producing accessory products. The latest visible incident involves an ex-Samsung Electronics manager who leaked information to a Wall Street hedge fund manager in December 2009. Bloomberg BusinessWeek reported last week that during testimony at an insider-trading trial involving an executive at Primary Global Research LLC , this same ex-Samsung employee disclosed confidential shipping information for Apple’s iPad components, potentially causing Samsung to lose a supply contract.


There exist enough visible incidents and probably enough insider knowledge among those in the industry to know that this type of behavior continues.  For what personal gain?  Is a relatively small amount of extra money worth the ultimate ruin of your professional reputation and your family’s well-being?


The implications of these continued incidents to business costs are also wide ranging.  If you believe in any way that confidentiality has become too rigid, or something to take lighly, as the expression goes, “you ain’t seen nothing yet”.  Anyone in any role that has visibility to supply volumes will be subject to increased scrutiny and control.  Efforts to increase collaboration among suppliers will be stymied by more stringent controls around privacy and security of information. This can lead to harder work for supply chain teams and that would be a shame since so much can be gained from open sharing of important supply and value-chain information and increased business intelligence to product demand trends.


Supply managers will be the most impacted since they are the closest to the information.  Doing business with Apple already involves secrecy and strict controls, and these incidents will only make the work of dedicated supply chain professionals even harder to accomplish not only with Apple, but other companies and trading partners as well.


The message to our community is therefore to take note of the importance of confidentiality, since abuse will not, in the end, favor anyone or any organization. We believe that this is a critical issue, and community and broader awareness and commentary needs to continue.


Share your views and let’s start a constructive dialogue on preserving the best aspects of information sharing while respecting the legal confidentiality of certain information.


Bob Ferrari