Chapter 9

Mobile: If It's Tuesday, It Must Be Xiamen

The National Science Board's Science and Engineering Indicators 2010 report is chock full of facts and figures about the global technology landscape and it summarizes:

In fact, we live in a world where economists are furiously rethinking global trade and deficit definitions to handle scenarios like these:

Of course, if it was just iPhones and iPads, it would be one thing. China has become the technology manufacturing, or at least the assembly, hub for the world. More broadly, BRIC (Brazil, Russia, India, and China) has become a commonly discussed acronym in technology circles.

The “BRIC Wall”

Max Henry graduated from France's ISG business school, but he has spent the past two decades in Asia. He is a publisher of various Asian technology magazines. In a recent issue of CHaINA magazine the focus was on two second-tier Chinese cities—Xiamen and Qingdao.³

In many ways, though, Henry is a high-end tour guide to facilities in such cities. Every few weeks his Global Supply Chain Council organizes field trips to plants and ports across China. It could be to Juijang on the southern shores of the Yangtze River with visits to the solar photovoltaic manufacturer Sornid and the helicopter manufacturer Red Eagle. Another trip could be to Qingdao (better known to many in the West as Tsingtao—as in the beer), host to Haier Group, one of the world's largest home appliance manufacturers, and GERB, which focuses on vibration control in heavy machinery, equipment, structures, and trackbeds. Perhaps it could be to Xiamen on the southeastern Chinese coast where Dell has a factory for the booming local China market as does Philips Lighting Electronics, which is focused on next-gen LED and other lighting. Or it could be to Chengdu in western China, home to Intel assembly and testing facilities, and to Giant, the largest bicycle manufacturer in the world.

Western China is poised to become even more influential, as China seeks to build out the next generation of the Orient Express. A few years ago it would have been a pipedream, but with China aggressively deploying high-speed trains within its borders, the possibility of extending them to connect Asia and Europe looks more and more realistic.

As we saw in the HP case study in Chapter 2, Asia and Europe are excited about a rail service between Chongqing and Duisburg, Germany, covering nearly 7,000 miles in 13 days. That is 26 days quicker than the current rail-sea combination, and considerably cheaper than the air option. It should get even quicker as China shares its growing high-speed rail experience with countries along the path.

A research paper looked at the economics compared to the alternatives available today and estimated rail transport could be significantly cheaper than the commonly used combination of air and sea.⁴

China, of course, is going through explosive growth and has its share of inflationary and labor issues. In a survey eight years ago, the American Chamber of Commerce in South China found that 75 percent of its members were focused mainly on export markets. By last year, that number had flipped: 75 percent of 1,800 respondents now say their manufacturing operations in China are focused on serving the Chinese market. That's mainly because China's workers are steadily getting richer.⁵

Foxconn, the largest electronics contract manufacturer in the world, has over a million employees in China.⁶ It assembles iPads and other devices for Apple (and has brought Apple scrutiny with a spate of employee suicides and plant explosions). It does similar work for many other high-tech companies. Given labor dynamics in China, Foxconn is exploring a diversification with sizable investment in Brazil.⁷ Even more significantly, it is looking to robots to do simple and routine work such as spraying, welding, and assembling. “The company currently has 10,000 robots and the number will be increased to 300,000 next year and 1 million in three years.”⁸

China is increasingly also looking to move up-market. “The U.S. has worried about China producing cheap goods—they really should be worried about China producing better goods,” said Bruce Rockowitz, the chief executive of Li & Fung, the largest trading company supplying Chinese consumer goods to American retail chains.⁹

Brazil is looking to replicate China's success with high-tech manufacturing and R&D.

“At first glance Florianopolis, in southern Brazil, resembles the quintessential picture postcard resort. It has become one of South America's most popular destinations, a magnet for sun seekers. But for all its hedonism, Florianopolis has its gaze firmly fixed on something altogether more serious—becoming the regional technological powerhouse. Sapiens Parque science park is the $1.3 billion (£81m) brainchild of the Brazilian government, as part of a wider $24 billion (£15bn) initiative to promote science and technology in the country.”¹⁰

Russia is also pitching its wares: “Boeing, Cisco, Intel, Microsoft, and MIT are key partners in Russia's high-tech Skolkovo Innovation Center (Skolkovo), which opened yesterday its American beachhead in Silicon Valley along with OAO ROSNANO and the Russian Venture Company (RVC). The new Russian Innovation Center will serve as U.S. representative office of the three organizations. It will promote and coordinate high-tech partnerships and scientific cooperation in the IT, biomedicine, energy efficiency, nanotech, nuclear, and aerospace sectors among top Russian and American companies, venture capital firms, and academic and scientific institutions.”¹¹

Then there is Novosibirsk. Already a major Russian high-tech hub, if the northern branch of the China–Europe train becomes reality, its Siberian remoteness could become much less of an issue. “None of our programmers in Novosibirsk are programmers by education,” says Intel's Chase. “They are physicists, chemists, biologists, mathematicians. They are first of all scientists. Secondly, they learn how to program, as an afterthought. This combination is extremely powerful.”¹²

India is taking a slightly different tack. With its software competency, it is much better positioned for the global R&D/product engineering services market, which Mukesh Dialani, analyst at the research firm IDC, expects to reach an estimated $57 billion by 2014. He defines those services as “the taking over of the research and development of a product company's value chain (in part or full) by a third-party service organization.”

Dialani provides examples of such services:

These are very different from IT services Indian offshore firms have typically specialized in. Many customers started with them for Year 2000 remediation and have used them since for their SAP, Oracle, and other application maintenance. Many customers want a “separation of church and state.” They want the product manufacturer/assembler like a Foxconn to be separate from the design team.

India-centric vendors such as HCL Technologies, QuEST, Symphony Services, Wipro, Persistent Systems, and others have sizable product engineering practices. HCL says it has been involved in all major commercial aerospace programs around the world in the past decade, including the Boeing 787 program described in the case study in this chapter. It has also created a smart home automation solution AEGIS, which is a multi-platform gateway that controls, among other things, multimedia, energy monitoring, HVAC, and security. QuEST provides companies like Caterpillar 3D modeling and other product engineering services. Symphony Services does product development work for a wide range of technology vendors like Adaptec, Lawson Software, and Motorola. Wipro has a joint venture with GE Healthcare and a large set of patents around wireless networks and Bluetooth technologies. Persistent Systems, which develops software for over 300 customers, most of them technology vendors, says it has delivered over 3,000 software product releases in the past five years.

Beyond BRIC

Over the past few years, Accelerance, based in Silicon Valley, has seen U.S. demand for offshore software development shift markedly from traditional markets such as India to nearshore destinations like Costa Rica, Colombia, Mexico, and Argentina. “For small to medium-sized U.S. companies, nearshore is most often the way to go,” says Andy Hilliard, President of Accelerance. “Nearshore software development firms have had time to benchmark best practices from offshore and they provide attributes like proximity, time zone alignment, and cultural compatibility that offshore can't match. Though nearshore rates are 10 to 20 percent higher than offshore, on a project basis clients can still save in excess of 50 percent, while significantly increasing their control and ability to collaborate on projects.” Accelerance has developed a Global Software Outsourcing Network that provides clients exclusive access to prescreened offshore or nearshore outsourcing providers in over two dozen countries. As an example, Accelerance helped the software vendor Ariba partner with a firm in Costa Rica. Ariba had plenty of experience developing software in the United States and India, but it wanted to distribute its agile software development efforts and diversify its global software development locations beyond India.

EPAM Systems offers several software customers like Oracle, Microsoft, Novell, and SAP an Eastern European option with a wide range of talent in Russia, Hungary, Poland, Belarus, and Ukraine.

The Japanese tsunami in early 2011 showed how many components in high-tech devices still come from Japan. “The IHS iSuppli teardown analysis of the iPad 2 so far has been able to identify five parts sourced from Japanese suppliers: NAND flash from Toshiba Corp., dynamic random access memory (DRAM) made by Elpida Memory Inc., an electronic compass from AKM Semiconductor, the touch screen overlay glass likely from Asahi Glass Co., and the system battery from Apple Japan Inc.”¹³

Looking ahead, Apple set off all kinds of market speculation when it announced in early 2011 it would spend about $3.9 billion as prepayment for components from three companies, without specifying the suppliers or the parts. The research firm iSuppli speculated it was for displays made by LG, Toshiba's screen unit, and Sharp. These are Korean and Japanese companies.

Foxconn, mentioned earlier, is Taiwan-based, and a number of other Apple components come from Taiwanese suppliers. Flextronics, another large contract manufacturer like Foxconn, has Singapore roots. Jabil, another contract manufacturer headquartered in Florida, has shown adeptness in using facilities in diverse locations such as Mexico and Malaysia. Both Flextronics and Jabil also provide a wide range of warranty and repair services for their customer products. Then there are other Taiwanese players like Pegatron, a spinoff from Asus and Quanta.

The National Science report referenced previously uses the term Asia-9 as promising science and technology countries—India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Thailand, Taiwan, and Vietnam. The report also compliments Israel, Canada, Switzerland, and South Africa.

Behind the phenomenal success of the Microsoft Kinect is an Israeli company, PrimeSense, which licenses the hardware design and chip used in the Microsoft product.

The Globalization of Data Centers

For services that Google, Amazon, Apple, and others provide for our searches, streaming music, storage, games, and other applications, we are seeing other countries factor as locations for their data centers.

Google has turned a former paper mill in Hamina on the Gulf of Finland into a data center. “It had to trawl back through 30 years of seawater temperature records, and employ a large amount of thermal modeling to ensure it could cater for the effects of the wind, direction of the tide and ebb and flow, as well as seawater temperatures and density of the seawater before it could devise a solution that would work for a data center. It also had to consider seawater's corrosive properties.”¹⁴

Similarly, Google decided on a data center in Belgium where the climate “will support free cooling almost year-round, according to Google engineers, with temperatures rising above the acceptable range for free cooling about seven days per year on average. The average temperature in Brussels during summer reaches 66 to 71 degrees, while Google maintains its data centers at temperatures above 80 degrees. So what happens if the weather gets hot? On those days, Google says it will turn off equipment as needed in Belgium and shift computing load to other data centers. This approach is made possible by the scope of the company's global network of data centers, which provide the ability to shift an entire data center's workload to other facilities.”¹⁵

Ireland has emerged as a major hub with the growth of cloud computing. It hosts “huge data centers powering the global cloud operations for two of the largest players in the sector, Amazon.com and Microsoft. Dublin also hosts major data centers operated by Digital Realty Trust and facilities for IBM and SunGard, among others.”¹⁶

Dell is building a network of data centers around the world, including one in Australia, as it grows its own cloud services.¹⁷ Japan, Singapore, and Hong Kong contain most of the data centers in the Asia-Pacific region. “While the facilities in Japan are mainly to support its domestic market, Singapore and Hong Kong are competing to be the preferred location for hosting data centers for service providers that serve MNCs in the region.”¹⁸

Dell will find it follows a path already taken by Interxion, which was established in 1998 in the Netherlands. The company manages 28 data centers, covering 13 cities in 11 countries.

What Old World?

Across the world, technology is allowing cities to reinvent themselves. A prominent example is Eindhoven in the Netherlands. It is called the City of Lights because of its much longer association with Philips Lighting than Xiamen described earlier. More recently, it has earned the title of the world's “smartest city” as a protoype of a Western city learning to stay relevant in the world of BRIC and Korea and Taiwan.

Beyond Eindhoven, the National Science report above speaks well of the European Union in general: “Its innovation-focused policy initiatives have been supported by the creation of a shared currency and the elimination of internal trade and migration barriers. Much of the EU's high-technology trade is with other EU members. EU research performance is strong and marked by pronounced EU-supported, intra-EU collaboration. The EU is also focused on boosting the quality and international standing of its universities.”

Conclusion

To become a tech elite, you have to be a Marco Polo and a Gulliver—bravely explore a fast-changing world. Suppliers and captive units in exotic locations can provide unique competitive advantages. But they can also make much more complicated the supply chain and product development cycles. Let's next look at how Boeing used a global supply chain for its new 787, and how it used HCL Technologies as a “glue” to bond many of those widespread elements.

Case Study: The Boeing 787 and HCL Technologies

You are driving north of Seattle and hear a giant Boeing 747 approaching. Then you do a double take. This one does not have the distinctive hump of a 747. The hump actually extends across most of the length of the plane. It is a Dreamlifter, a specially modified 747 with a massive cargo capacity of 65,000 cubic feet and takeoff weight of up to 800,000 pounds.

The Dreamlifter is the primary means of transporting major portions of the new Boeing 787 from suppliers in Italy, Japan, and many other countries to the final assembly site in Everett, Washington. This has allowed Boeing to reduce delivery times to as little as one day from as many as 30 days it would normally take via sea and ground transport. This is one of countless innovations Boeing implemented around the manufacturing of the 787—branded the Dreamliner.

The involvement of so many suppliers across the globe has been criticized, especially given the repeated delays and related increased costs on the 787 program. The reality is Boeing's main competitor Airbus had already shown that large sections of a plane could be made in four countries—Britain, France, Germany, and Spain—and then assembled in France or Germany.

Boeing CEO Jim McNerney has acknowledged, “In retrospect, our 787 game plan may have been overly ambitious, incorporating too many firsts all at once—in the application of new technologies, in revolutionary design-and-build processes, and in increased global sourcing of engineering and manufacturing content.”²⁰

When the 787 program was kicked off in early 2003, Boeing was adjusting to new market realities.

The 787 plane itself has many innovative features, and the savings expected from a streamlined supply chain allowed Boeing to price aggressively. That made the 787 the fastest selling airliner ever designed. By 2007 Boeing had announced firm orders for 544 airplanes from 44 airlines.²² While the delays since have led to several canceled orders, Boeing says it is sold out through the end of the decade. In late 2011, as Boeing showcased the plane as part of a launch “Dream Tour,” there were enthusiastic crowds across the globe.

The use of composite materials in the fuselage and the wings, the sweptback aerodynamic wings, and the more efficient engines are expected to combine to deliver 20 percent better fuel performance than a similar sized 767 of today. The plane promises flight ranges of up to 8,500 nautical miles, unusual for a mid-sized jet but critical as passengers increasingly demand non-stops across the globe.

And passengers enjoy improvements, such as:

• The LEDs allow the crew to adjust the lighting to match different phases of the flight. The light is fairly standard during boarding and while cruising. During meals it is adjusted to warmer tones. Once you're done eating and want to tilt the seat back and relax, the cabin can be bathed in a relaxing lavender hue. When it's time to sleep, the lights are turned way down.²³
• The cabin will feel less dry (humidity twice as high as on current planes), because the 787 cooling system will be driven by electricity. An electrical system makes it easier to humidify the cabin air because it's not starting with the hot, dry air from the jet engines common in most planes.²⁴
• The superior strength of the composite fuselage will allow the passenger cabin to withstand higher pressurization at an altitude of 6,000 feet instead of the usual 8,000 feet. Passenger comfort is shown to increase significantly at lower cabin altitude pressure.²⁵
• An active gust alleviation system will improve ride quality during turbulence.

A major innovation passengers will not see but will benefit from is Boeing's use of HCL Technologies to provide software engineering services for the 787 program. Since HCL had already been involved with a number of its tier-one suppliers like Rockwell Collins, GE Aviation, and others both for hardware systems and software development, it offered a unique opportunity of synergy across the fragmented supply chain. HCL was designated the preferred software services company for the entire 787 program.

HCL has long had an R&D bent. It developed the first indigenous microcomputer in India in 1978 (the same time as Apple did) and developed the indigenous relational database at the same time as its global IT peers. HCL also says it developed its multiprocessing UNIX-based OS kernel in the late 1980s, a few years ahead of Sun and HP, which of course, commercialized it far more successfully.

Says Sandeep Kishore, Executive Vice President for the Engineering and R&D Services unit at HCL Technologies, “We have done over 750 projects in the aerospace industry covering avionics, engineering design, and extensive testing. We have been involved in all major commercial aerospace programs across the globe in the past decade. Under this umbrella agreement with the Boeing Company, HCL worked as the engineering services partner of choice with multiple sub-tier companies on the 787 program.” HCL's services were utilized by these airborne systems suppliers across all the major design elements of the 787 such as common core systems, open systems architecture, and e-enabled architecture.

Some of the key systems that HCL was involved with included electric power generation and distribution systems, remote power distribution systems, air management systems, integrated surveillance systems, display and crew alerting systems, common data networks, and pilot controls.

HCL leveraged its offshore infrastructure and processes to ensure that almost 80 percent of the effort was delivered from its engineering design centers and labs in India.

To help test these systems that were being built all over the world, HCL helped build automated test equipment, load generators, test simulators, and data banks by remotely integrating with the labs of the Tier 1 suppliers during off-peak hours and ensuring optimal utilization of costly test lab infrastructure.

There were several advantages of having HCL across the board working with all its partners for the 787 development for Boeing. First off, it minimized compatibility issues that come from integration of multiple subsystems. It also made sure that HCL cross-leveraged the knowledge and learning on the 787 program across suppliers to speed up the development process.

Says Kishore, “We estimate HCL had some level of involvement and contributed to developing and validating almost 40 percent of airborne software. At peak, over 900 HCL engineers worked with Boeing and 10 of its sub tier partners from the U.S., Europe, and Australia.”

Meanwhile, Boeing had a flight test system that needed to be enhanced to test the different versions of the 787. The test system had evolved over several decades and Boeing wanted to migrate the system to a modern architecture that could also potentially be airborne in future versions. HCL assisted in the rehosting of this flight test system.

Another major initiative at Boeing is the Test Operations Center (TOC). The TOC is a 32,000-sq.-ft. facility at the Flight Test Center at Boeing Field. The heart of the TOC is a 2,000-sq.-ft. control room, nicknamed the “bubble,” with 6 × 16-ft. screens displaying the status of aircraft in the test fleet. The room brings together engineering, flight operations, and maintenance staff. The TOC is open three shifts a day, with flight tests during daylight hours, ground tests during second shift and maintenance taking place during the third, overnight, shift. In addition to Boeing employees, the TOC is designed to house employees from suppliers and the FAA. HCL played a key role in development of the visibility applications and the database that are part of the Test Operations Center.

In another innovation, HCL also agreed to tie a portion of its compensation for work with the tier-one suppliers to sales of the plane. So, while Boeing has suffered from the delays, HCL is also sharing in some of that pain.

CEO Jim McNerney summarizes: “While we clearly stumbled on the execution, we remain steadfastly confident in the innovative achievements of the airplane and the benefits it will bring to our customers.”²⁶

As ANA and other charter airlines roll out the 787 on their routes, passengers are finding the cleanest air of any airplane ever built (the air has the same microbial content of outside air with its filters with an efficiency of 99.97 percent) and when they glance out of their 18 5-inch-tall 787 windows, the largest on any commercial plane, and which have electronically adjustable electrochromic dimmers, the production delays are a memory from the past.²⁷

In the meantime, Boeing has learned plenty about how to manage a globally distributed technology supply chain.