You may not be familiar with Xiaomi, but you likely will be soon enough. Xiaomi is a Chinese smartphone maker. It sold its first smartphone in 2011 and is already the third biggest player in the market. It also holds the distinction of being the most valuable tech start up going — yes, even more valuable than Uber. (See here and here for more.)
How did they get so big so fast? Mostly by being cheap. Their phones offer a level of value that, say, Apple cannot touch. A new iPhone without a contract with a carrier (i.e., without a subsidy) will set you back at least $600. If you want more storage and a bigger screen, that creeps up to near a thousand dollars. Xiaomi’s phones top out around $500 and they have offerings under $150.
So how does Xiaomi manage to offer so much for so little? That is the topic of a TechCrunch article (This Is How Xiaomi Keeps The Cost Of Its Smartphones So Low, Jan 19). Now part of their success is due to their distribution strategy. In China it sells only on-line. Hence, it can cut retailers or carriers out of the equation. But that is not the only factor. How they mange their product line and purchasing (and consequently their supply chain) also makes a difference.
[Hugo] Barra [the company’s VP of International] explained that Xiaomi is able to make price concessions thanks to the combination of a small portfolio and longer average selling time per device.
Importantly, Xiaomi continues to sell older devices (and tweaked versions of them) at reduced prices even after it releases newer models.
“A product that stays on the shelf for 18-24 months — which is most of our products — goes through three or four price cuts. The Mi2 and Mi2s are essentially the same device, for example,” Barra explained. “The Mi2/Mi2s were on sale for 26 months. The Redmi 1 was first launched in September 2013, and we just announced the Redmi 2 this month, that’s 16 months later.”
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I cut my academic teeth doing work on supply chain contracting. I consequently found a BBC report on pay-to-stay payments interesting (Premier Foods accused over ‘pay and stay’ practice, Dec 5). The subject of the report is Premier Foods, a large UK manufacturer with several food brands. Premier had the chutzpah to effectively ask its suppliers for bags of cash. Here is what the firm’s CEO wrote.
[Chief Executive Gavin Darby] wrote: “We are aiming to work with a smaller number of strategic suppliers in the future that can better support and invest in our growth ideas.”
He added: “We will now require you to make an investment payment to support our growth.
“I understand that this approach may lead to some questions.
“However, it is important that we take the right steps now to support our future growth.”
But when a supplier raised questions in an email about the annual payments, another member of Premier’s staff replied.
“We are looking to obtain an investment payment from our entire supply base and unfortunately those who do not participate will be nominated for de-list.”
You can contemplate the lovely Britishness of “nominated for de-list” while watching this video on the subject.
I should note that Premier Foods has since backed off its demand after the negative press following this report (see here).
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Ford has a new version of its F-150 pick up coming out. That per se isn’t all that exciting to me, but everyone says that thus truck is a big deal because of it represents a shift from steel to aluminum. Here is how Dan Neil put it in the Wall Street Journal (Detroit’s Big Three Are Returning to Excellence, Jan 17).
But now, without further eloquence, the news: Ford changed the game this week when it unveiled its aluminum-intensive pickup truck, the 2015 F-150, that is as much as 700 pounds lighter than a comparable steel-bodied vehicle. In an industry that celebrates the power of small numbers and incremental weight savings, 700 pounds is a staggering figure, and it is weight savings that directly and proportionally improves hauling and towing capacity and fuel economy, which are prime metrics in the truck segment.
Wait, Upper West Sider, don’t rush off to the wine column. To the casual observer, the anticipated 3 mpg (20%) increase gained by Ford’s high-tech “light weighting” (a term of art) may seem marginal, but I assure you it is a figure of immediate and national consequence. … By virtue of the hundreds of millions of miles rolled up by the F-series annually, you are looking at the single biggest real-world advance in fuel economy in any vehicle since the Arab oil embargo.
So all that aluminum gives us a game changer — and not just in the realm of fuel economy. Automotive News reports that it has major implications for Ford dealers and their body shops (Ford dealers will gear up to fix new F-150, Feb 3). Ford’s collision marketing manager (that’s just a great job title) says that 80% of repairs on the new F-150 can be done in a standard body shop but that other 20% is going to require special capabilities — in part because aluminum dust reacts badly with steel parts so aluminum work must be kept physically separate from the rest of the shop. All told, a dealer needs to spend 30 to 50 grand in order to be ready for the F-150.
How is Ford going to make that happen? (more…)
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A few months ago I had a post on stair-step incentives. These are incentive schemes that car manufacturers offer dealers that essentially pay rebates on cars that have been sold once sales cross a specified threshold. In that post, I noted that these schemes had the potential to skew competition in local markets:
If you and I own competing dealerships across town, I have a serious leg up on you if I am the first to reach a threshold. I can price more competitively since I know that I am guaranteed to get a rebate while you are still striving to make the threshold. Note this makes everything all that more sensitive to how individual dealer thresholds are set. If mine were skewed low while yours were too high, it’s game over and I eat your lunch.
Obviously, from a dealer’s perspective, this is an issue. Dealers don’t necessarily know how car makers set their targets. They, for example, may be basing targets on national trends that may not apply locally. Further dealers may be facing challenges that the automakers don’t know (e.g., a top sales person just left). Even if a dealer knows how his target was set, he may not know what the target is for a neighboring dealer of the same brand or what is happening with a competing brand. Hence, he could be blind sided when a competing dealer reaches her threshold and starts pricing very aggressively. Is there an easy answer to this dealer’s conundrum?
Enter the New Hampshire state legislature. (more…)
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The early years of my research career were largely focused on supply chain contracting with some focus on the auto industry. I am consequently a sucker for any good story about how automakers use their terms of trade to bend dealers to their will. Thus I read a recent Automotive News article on stair-step incentives with interest (GM stair-step aims to juice Chevy sales, Aug 19). Stair-step programs are dealer-based incentives based around quotas. A car manufacturer may offer a dealer three targets, say, 50, 100 and 125 units. If the dealer sells 50 cars in a specified time period (often a month), he will get, say, $500 per car rebated back to him. If he gets to 100 units, he would get something like $1,000 back per unit and then a bigger number if he goes over 125. So stair-step schemes offer bigger and bigger rewards as sales go up. The actual mechanics of plans can differ. For example, the increased rebate from crossing higher and higher levels may go back to early sales. For example, crossing from 124 to 125 in my example, may mean getting the top reward on every car sold that month. The other complication is what actually counts toward the target. Stair-steps may apply only to some models or to a wide set of models. The article notes that Chevy’s current program is exceptionally broad.
Sales of 2014 and 2013 Impalas, Camaros, Cruzes and Sonics are eligible under a GM stair-step program for August. The program pays dealers escalating bonuses as they hit factory-set sales thresholds. Sales of 2013 Malibus also are included; the 2014 model of the mid-sized sedan goes on sale this fall. …
Dealers say it’s unusual for GM to include so many nameplates in one stair-step program. Some also were surprised that the incentive includes the redesigned 2014 Impala, which has won critical praise since its May debut, including being rated the top sedan by Consumer Reports.
So why are stair-step programs interesting?
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If you look at what it costs an automaker to build a vehicle, purchased components are going to represent a big, big chunk. How an automaker deals with its suppliers and how it chooses just who is going to make what is then critical to its overall success. Automotive News has a pair of stories that highlight how two carmakers are taking somewhat different approaches to managing purchasing.
First up is Chrysler which is opting for a kinder, gentler approach to sourcing. Specifically, it is floating the idea of assigning some parts without putting them out to bid (Chrysler pilots no-bid contracts on new minivan, Aug 5). Essentially, Chrysler is willing to guarantee that a supplier gets the work if it is willing to share a significant amount of financial data.
Chrysler Group is using its next minivan to pilot a collaborative, no-bid purchasing system that guarantees favored suppliers a profit but requires them to open up their financial books. …
The presourcing arrangements between an automaker and supplier are designed to allow both to cut engineering costs, build trust and improve long-term planning. They are common among suppliers at Honda Motor Co. and Toyota Motor Corp., but haven’t caught on among domestic suppliers. …
Long-term, no-bid agreements give suppliers more predictable revenue, allowing them to invest with reduced risk. And suppliers say they provide their best technology to automakers that are loyal to them and offer the best profit opportunities.
For automakers, the no-bid agreements help ensure an uninterrupted flow of parts and access to a supplier’s best technology.
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A dollar today is worth more than a dollar tomorrow so it is not surprising that firms would prefer to defer paying suppliers for as long as possible. As the Wall Street Journal tells it, many large firms like Procter & Gamble and DuPont are working to redefine “as long as possible” when it comes accounts payable (P&G, Big Companies Pinch Suppliers on Payments, Apr 16).
What began as a way to preserve cash when markets dried up a few years ago has become a means of freeing up money to fund expansions, buy back stock and support dividend payouts at a time of lackluster sales growth and shrinking profit margins.
P&G is actually late to this game. It currently pays its bills on average within 45 days, faster than the 60 to 100 days that other consumer products makers and large companies in other industries generally take, according to industry experts. The company is looking to move its payment terms to 75 days and recently started negotiations with suppliers, people familiar with the matter said.
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