Supply bottlenecks is one of the main drivers behind price rises and inflation fears. The summer heat waves have taken their toll on the real economy: new factory closure in different part of China due to the heatwave in the province of Sichuan and in the city of Chongqing. Companies such as Toyota Tesla or Intel are being hit with factories or key suppliers in Sichuan. In a world of bottlenecks and supply disruptions, all companies are not born equal. A minority like Amazon, TSM, Apple or Tesla manage to adapt quickly and manage to maintain output. But a majority are suffering because they under-invested in the past like Intel. Many, like Toyota are hindered by their just-in-time manufacturing model. We quickly review hereafter a couple of interesting success stories in the tough new world of manufacturing.

1-      Good old cost-cutting (Amazon)

Echo is Amazon smart speaker and at the same time its Trojan horse into its 200 million Prime member’s home.  Echo uses Alexa, an artificial intelligence-driven cloud-based service that responds to voice commands to play music, order goods, read news, and perform other functions.

Echo is also being designed to become the hub of electrical appliances as the internet of things (IoT) -- which can connect everything from cars and cameras to vacuum cleaners and home heating.  To smooth Echo adoption, Amazon decided to cut its price from $50 to $37. To achieve this aggressive goal, they decided to cut the number and cost of parts. They are using old semiconductors and switched aluminum used for the box to plastic. According to The Nikkei Asia, the cost of components used for Echo fell from $60 to $24.

2-      Geographical diversification of the manufacturing base away from China (Apple, Google …)

Apple is in talks to make Apple Watches and MacBooks in Vietnam for the first time. Apple suppliers Luxshare Precision Industry and Foxconn have started test production of the Apple Watch in northern Vietnam with the aim of producing the device outside of China for the very first time. Vietnam is already Apple's most important production hub outside of China, producing a wide range of flagship products for the American company, including iPad tablets and AirPods earphones. Other US leading tech companies like Amazon, Google or Dell have moved away from China into Vietnam. The Chip Act passed last week in the US is designed to support new chip manufacturing in the US. Europe and Japan have similar plans.

3-      Improved execution on the factory floor (Tesla)

As indicated in a previous post, Tesla is 100% focused on the supply side at the floor level. Problem solving is done bottom up with a lot of trials. Tesla has significantly reduced its reliance on chips thanks to better architecture and smart use of software. For Elon Musk, chip shortage has morphed from a threat into an opportunity.

 

It is taking time for the economy to find a post-covid new equilibrium. In 2022, unexpected external shocks have been adding insult to injury: war in Ukraine, lockdowns in China and more recently heatwaves and, in their wake, plant closures in China, bottlenecks in inland navigation. Companies need to adapt quickly and swiftly. Execution, speed, a good grab of logistics, ability to listen, to think out of the box and take quick decision on the ground have become critical. Old organizations burdened by top-down decision making and huge and heavy reporting lines and consultant-inspired conformism are at pains. Investors and analysts need to factor in these criteria in their approaches and models. Echoing Pierre Dac (or Churchill or Marx (Groucho)) : “Forecasting is becoming more difficult particularly when it concerns the future”.