6192009

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The Global IT Supply Chain

• How do you access it and how do you make money?
• Bob Graham
• Managing Partner, Ridge Partners LLC.

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Todays topic.

• So..
• Thanks for inviting me to the conference.
• Lets get a feel for the group.
• Manufacturers
• Designers
• Exporters
• Importers
• Services
• Support, Legal, etc.
• I am going to talk about what I know the global
  IT supply chain, how it came about, and how we
  all make money from it?

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A Fact !!

• There are no Interns wandering around
  manufacturing plants at Dell!!
• They dont have any manufacturing plants.
• They dont have any significant engineering
  anywhere.
• They specify product for others to engineer.
• They are a marketing company.
• They buy 50 billion in stuff a year.
• How do I get a piece of the action?
• PS the same is beginning to hold true for IBM.

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The Dell Supply Chain for a Server

• Dell specs the server using input from Intel and
  Microsoft and then.
• The CPU comes from a company in Taiwan that makes
  it in China, using designs from Intel.
• The monitor comes from China, but is designed in
  Japan.
• The storage is designed in Massachusetts, but
  built in Ireland, using components from Korea and
  China, which in turn where designed in Singapore
  to a spec from a company in Scotts Valley,
  California.
• The final product is assembled in Arkansas or
  perhaps Mexico using an order from a web site.
• And shipped by everyone.
• And the money is collected in Ireland, because
  the taxes are lower there.
• The whole customer experience is over the
  internet and probably has no involvement with any
  Dell employees.

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The Issue

• What do I have to do to be part of this design
  and supply chain and make some money?
• If I had the answer Id be rich
• Naturally..

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So

• First, a little history about the Global IT
  supply chain and how it became global.
• What does todays supply chain look like?
• What are the opportunities?
• Questions and Conversation.

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The History 70s and 80s

• The IT business started out market based.
• Manufacturing was market based with sourcing and
  design decisions centralized.
• Markets where closed, you where either in our
  out.
• Major issues where content laws, taxes, and
  import duties.
• This started the process that US companies off
  shore and internationalized them.
• IBM was a leader in this area.
• We all copied IBM.
• The US helped the process by taxing companies to
  death.

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The History The late 80s

• New technology was introduced, mainly
  semiconductors and disk drives.
• Capital costs where so high that market based
  strategy fell apart.
• Very few companies could support an integrated
  solution for a single market.
• Markets consolidated into regions, US, EU, Japan,
  while others left out.
• Countries, other than the US, and the third world
  used low company taxes to get more manufacturing
  done in their markets. Design and engineering
  followed.
• Countries and markets changed their strategy to
  virtual content.
• Low tax countries with good infrastructure won!
• High tax countries and those that failed to adapt
  lost!

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The History The 90s

• Free trade in IT developed in the OECD. Tariffs
  went away. Content requirements stayed, but
  became less important. It was NAFTA before NAFTA.
• The internet was in place in the early 90s and
  time went away. The internet became a customer
  interface and a lot of other things went away.
• The IT market commoditized. Horizontal
  integration.
• Further technology and cost issues lead to the
  development of specialized firms around the
  world.
• The supply chain became fragmented.
• Global Logistics became a reality.
• The industry moved to US dollars and US contract
  law.

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Where are we today?

• Technology is almost completely commoditized.
• Large firms add value through the integration and
  software which became the products.
• IP is crossed licensed between technology
  companies.
• Quality became measurable and consistent.
• Design companies became separated from
  implementation companies.
• Capital costs became key.
• Labor, with the exception of services, became
  insignificant, except for skilled labor.
• Government cooperation, tax, import/export, and
  skilled labor became key factors in investment.

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Where are we today?

• Countries and Regions specialized.
• Singapore became a storage center.
• Taiwan, low end development.
• Korea, memory products.
• Ireland, Software and Semiconductors.
• China Malaysia, Low cost manufacturing.
• India, Software.
• US, Corporate headquarters, Design, Finance, and
  strategy.
• Japan, Semiconductors.
• Europe and South American missed the boat.
• Market based product differentiation in IT has
  disappeared.

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What will be the next wave?

• The services business is globalizing.
• Over half the world speaks English. The largest
  English speaking country in the world is India.
• Telecoms and the internet take away time and
  distance.
• The downturn has focused everyone on costs.
  Capital costs are key.
• The engineering business is globalizing.
• The US is the center of product creation.
• But the implantation is all over the world.

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What does this mean for the future?

• First
• More stuff will move to the Global environment
  and it is unlikely that this will change.
• Secondly
• US companies still invent the best stuff in the
  world. But will make it elsewhere.
• Lastly
• Companies need to understand their customer and
  adapt to the global environment.

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First

• Why is the stuff moving to the global
  environment?
• The US government does everything it can to get
  commodity companies to move off-shore.
• High company taxes at the federal and in some
  cases the state level.
• Poor general education systems affecting the
  availability of general labor.
• Intense regulation with an adversarial attitude.
• Implementation of social policies with
  significant costs.
• In my State, California, an anti-business
  environment coupled with a milk the cow
  philosophy.
• No proactive export strategy.

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First

• Why is stuff moving to the Global Environment?
• Countries are pulling like crazy.
• Low company taxes.. In many cases 0
• Cheap capital. (Notice, I didnt say labor.)
• Well educated general labor forces.
• Outstanding second level engineering resources.
• Strong emphasis on English.
• Supply base has already moved there.
• In the global economy over 50-80 of the IT
  demand is outside the US. In commodities it is
  near 90.

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Second

• US companies still companies invent the best
  stuff in the world.
• Great college system produces the best minds in
  the world.
• Lowest personal tax rates in the Western world.
• Great financial system for all aspects of growth,
  venture through corporate.
• Rule of law is good, despite litigation.
• Best infrastructure in the world.
• Personal freedom.
• The best and the brightest move here.

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Lastly

• Companies need to understand their customer and
  adapt to the Global environment.
• You customer will go global.
• Watch their every move and try to anticipate them
  and work them.
• Find partners where you dont have strength,
  country or region..
• Take the time to know their new environment and
  the people that manage it for them.
• Global companies will stay with suppliers even if
  distances get long. Remember the internet and
  great logistics.
• US companies developed most of the stuff in high
  tech, and the global supply base knows we have
  the expertise. They like and respect American
  companies and people.

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Where are the Growth Segments

• Industries that we have seen growth in
• Services, both here and abroad
• As customers globalize the services issue becomes
  and on the table business discussion for
  manufacturers, if only on a regional basis.
• Software
• The larger growth is in low end software
  solutions for OEM markets.
• Storage systems, both hardware and software.
• Storage is still an incremental IT sale and has a
  declining cost. Hardware has returned to growth.
  Services are growing at 10-15
• Low end Servers including Blade Servers.
• Again, a cost reduction play in the IT community.
  
• The largest player is here in NC, IBM and they
  are buying everything on the outside.
• All the support products that go into these
  products.

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Regional Growth

• North America signs of Life
• Services, Storage, some distribution.
• Europe slow and potentially receding.
• West, little growth. Some services.
• East, growth in low end systems and telecoms.
• China, Taiwan, etc. the hot spot.
• Storage, Low end Servers, test equipment,
  semiconductors.
• India A supply source.
• Outsourcing, software development.
• Southeast Asia some growth
• Design, test equipment, regional management.
• Japan little growth
• Software, telecom

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Some Case Studies Responsive Ireland

• Ireland changed from an internal economy to an
  open economy in the late 70s
• Offered companies 0 taxation which eventually
  became 10
• Became a center of manufacturing, assembly and
  distribution for Europe in the 80s.
• Invested heavily in education.
• Began to loose the assembly and distribution
  business to Holland due to location and taxes.
  (Holland offered 5 tax).
• Responded by offering incentives to companies to
  run EU based financial centers in Dublin.
• Retooled the labor force and became the software
  developmental and distribution center for Europe.
• Went from poverty to the 5th highest standard of
  living in the world.

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Case Study Progressive Singapore

• In the 70s after independence from Malaysia it
  became an assembly center for disk and memory
  product.
• Based on a low tax scheme and grants.
• Began massive investment in education.
• Encouraged immigration.
• In the 80s it incentives companies to move
  manufacturing to Malaysia as a strategy.
• Offered further tax grants, (0-10 tax for 10
  years, plus sites), to companies to start
  engineering and headquarters activities.
• Realized China was important and established an
  off shore manufacturing center in Shanghai to
  help companies move to China.
• Today, 7th 8th highest standard of living in
  the world.

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Thank You