00:00:07 Debunking misconceptions about procurement and introducing Christian Schuh.
00:01:02 Christian’s background and experience in procurement and automotive industries.
00:02:30 The disconnect between CEOs and procurement, its reasons, and the importance of time allocation.
00:06:00 The importance of employer branding and attracting exceptional talent for procurement.
00:09:41 The role of CEOs in building relationships with key suppliers and managing procurement effectively.
00:10:58 Importance of strong alignment in procurement.
00:11:52 Role of the Chief Procurement Officer (CPO) in managing the product life cycle.
00:13:57 Importance of supplier relationships and procurement in semiconductor crisis.
00:17:02 Procurement’s need for quantitative risk assessment and hard engineering collaboration.
00:20:02 Learning from previous semiconductor crises and implications for traditional industries.
00:21:49 Deep cultural problem with companies staying in the comfort zone.
00:22:35 Analysis of the 2020 shutdown of car factories and its impact on semiconductor supply.
00:24:14 Challenges of investing in semiconductor production capacity and maintaining a balance.
00:26:20 New procurement strategies and negotiating complex financial instruments for flexibility.
00:29:56 Importance of collaborating with suppliers and giving them maximum control in product development.
00:31:42 Importance of leveraging supplier insights for competitive intelligence.
00:33:08 Tech companies commoditizing layers below them and possible supplier substitution.
00:35:52 Apple’s success and reliance on standardized components.
00:37:06 Apple’s emphasis on product differentiation through computing power.
00:38:26 The symbiotic relationship between Apple and TSMC.
00:39:14 Discussion on Apple’s choice of ARM instruction set and future implications.
00:41:38 Importance of long-term supplier relationships and learning from Intel’s decline.
00:42:19 Dealing with unforeseeable circumstances in supply chain and the importance of human interaction.
00:43:00 Analyzing the automotive industry’s semiconductor crisis in 2021.
00:43:54 Conclusion and thanks to the guest for sharing insights.
In an interview, procurement experts Joannes Vermorel and Christian Schuh discuss the underappreciation of procurement and supply chain management. CEOs typically allocate only 1% of their time to procurement, despite it accounting for over half of a company’s budget. The conversation emphasizes the need for a holistic approach to supply chain management and the importance of building relationships with suppliers. They address the semiconductor crisis, suggesting that companies invest in their procurement teams and establish better supplier relationships to optimize supply chains. The discussion also highlights the mutually beneficial relationship between Apple and TSMC, emphasizing the importance of strong supplier relationships.
In the interview, host Nicole zint discusses the topic of procurement with Joannes Vermorel, founder of Lokad, a software company specializing in supply chain optimization, and Christian Schuh, Managing Director and Senior Partner at Boston Consulting Group. Schuh is also the author of the new book “Profit from the Source.”
Schuh begins by sharing his background in procurement, starting with a project at Mercedes-Benz in 1995. He had the opportunity to work with the team that invented global sourcing at General Motors. Over the following 15 years, Schuh worked in the automotive industry worldwide. He then transitioned to working in the tech industry between 2011 and 2018, collaborating with PC makers in the US and suppliers like Foxconn. Schuh now focuses on assisting companies in automotive, engineering, and defense sectors. He also hosts a YouTube channel called “Procurement in the Park.”
The discussion moves to the fact that procurement is often underappreciated, and CEOs typically spend only 1% of their time on it, despite the fact that more than half of a company’s budget may go towards procurement. Schuh attributes this to two factors: education and culture. CEOs, especially in the Anglo-Saxon world, usually have business school backgrounds where the primary focus is on finance, marketing, and sales. Consequently, they may not have direct experience with procurement.
Additionally, Schuh highlights that popular culture, such as TV shows, books, and movies, tends to glorify finance, marketing, and sales roles, while procurement is often overlooked. There are no Hollywood blockbusters featuring procurement officers as heroes or villains, which perpetuates the notion that procurement is unimportant.
Schuh believes that CEOs should allocate 20-25% of their time to procurement instead of the current 1% (equivalent to seven minutes per day). He agrees that procurement is a critical aspect of business operations and should receive more attention from top management.
The importance of supply chain management and procurement for companies. They discussed how these functions are often underappreciated and require attention from the CEO, but it may not be feasible for the CEO to focus on everything. Vermorel suggested that a CEO can address this issue by building a strong employer brand and attracting top talent to fill these positions. Schuh added that it’s important to differentiate what can be solved with logic and what requires building relationships, especially with suppliers. They also discussed the role of the Chief Procurement Officer (CPO), who should be given end-to-end responsibility for the whole product life cycle to bring in supplier innovation early in the process. Vermorel pointed out that procurement teams should have a tight integration into the risk analysis of the company, but culture and lack of quantitative analysis are barriers to achieving this. The conversation emphasized the need for a holistic approach to supply chain management and procurement to drive profitable growth, rather than just focusing on the smallest cost.
They discuss the semiconductor crisis and its impact on the supply chain industry. Vermorel explains that two major problems in supply chain optimization are quantitative risk assessment and hard engineering, which require talented procurement teams. However, many companies struggle to lift the competencies of their procurement teams to achieve these goals. Schuh adds that companies tend to delegate the interface with the tech ecosystem to tierbanza players and let them select which semiconductors to use. This results in an unmanageable slew of semiconductors for car makers during a crisis. He suggests measuring key performance indicators and automating the supplier selection process. Schuh also emphasizes the importance of hiring talented procurement teams who can perform quantitative risk analysis and collaborate on hard engineering. Overall, the interview highlights the need for companies to invest in their procurement teams and to establish better relationships with their suppliers to optimize their supply chain.
The discussion was the importance of building relationships with suppliers. They agreed that bringing suppliers into the product development cycle is crucial and that listening to their advice can provide valuable market intelligence. However, Christian emphasized the need for control and competition for executive mindshare at the supplier level, indicating that companies win when key people at their suppliers think about their business over their competitors. He also mentioned that companies should be prepared to give their suppliers maximum control, as this is often how tech companies grow. Joannes added that the insight suppliers can provide is invaluable, and it’s a winning position if they can think more about a company than its competitors. They both agreed that building personal relationships with suppliers is key to success, and Joannes noted that having a CEO building this relationship shows a high level of commitment. Christian pointed out that successful companies are often aggressive in commoditizing the layers below them, while still maintaining tight relationships with select suppliers. Apple was cited as an example of a company that has been successful in this approach, using standardized components to innovate and create unique products. Christian also mentioned that Apple’s recent emphasis on differentiation through power and battery capacity has been a key to their success. While there was some disagreement about which supplier Apple uses for their chips, it was noted that the relationship is mutually rewarding.
The discussion revolves around the importance of the relationship between Apple and TSMC, and how it affects their respective businesses. The participants point out that Apple is heavily reliant on TSMC for chip production and that TSMC benefits from having Apple as a major customer. The two companies are said to be symbiotic, and neither can do without the other.
The conversation also touches on the differences between Apple’s relationship with TSMC and Microsoft’s relationship with Intel, as well as the importance of choosing a standardized architecture for a company’s products to enable flexibility and the potential for future changes. The importance of strong relationships with suppliers is also highlighted in light of the unforeseeable circumstances that can affect the supply chain. The automotive industry’s loss of 10 million vehicles in 2021 due to semiconductor shortages is given as an example, and it is suggested that better supplier relationships can help companies better weather such disruptions. The interview ends with thanks to the participants and a promise of future episodes.
Nicole Zint: Fantastic, thank you very much again for being with us here today. I just want to jump straight to it. One of the things that you mention in your book is how a CEO generally spends about 1% of his or her time on procurement, yet often more than half the budget of a company goes to procurement. How come procurement has become so essentially unworthy of a CEO’s attention, and what differences or changes would you propose to this time allocation for the CEO?
Christian Schuh: I think this has an educational reason and a cultural reason. Especially in the Anglo-Saxon world, CEOs are typically graduates of business schools. If you reflect on what is being taught in business schools, it’s finance, marketing, and sales. That’s mostly it. Maybe this has changed now with the pandemic and the supply chain crisis, but the current cohorts of CEOs didn’t have that experience. They likely launched their careers in finance, marketing, and sales, and this is their experience, so they never really experienced procurement firsthand. If you look at TV, books, and movies, it also doesn’t help. You have “Mad Men” and “The Wolf of Wall Street”, but I’m not aware of any Hollywood blockbuster where the hero or the villain is a CPO, so that also doesn’t help. We have thought about what would be the right time allocation. One percent, by the way, translates into seven minutes per day, so this is definitely not enough. Our recommendation to CEOs would be to spend 20-25% of their time on suppliers and procurement.
Joannes Vermorel: I do agree that procurement is often overlooked and underappreciated in many organizations.
Nicole Zint: Supply chain is underappreciated, as are digital and other aspects of business. Do you think CEOs should allocate more time to these areas, or is there another way to tackle these problems?
Joannes Vermorel: I believe there are so many things demanding the attention of the CEO that they need a meta-solution, something that addresses this class of problems. My approach would be to focus on the employer brand to attract better people for these positions. For example, Apple managed to hire exceptional talent, including a talented Chief Procurement Officer who eventually became Steve Jobs’ successor. So, attracting great talent, even for somewhat unattractive positions, is my take on what a CEO should do, rather than spending 20% of their time on procurement.
Nicole Zint: So you’re thinking more about allocating time to the hiring process?
Joannes Vermorel: If we take 20% for procurement, digital, sales, and marketing, there’s only 100% of the CEO’s time to allocate. It’s very tough. I think the market demands a lot from top management, and I’m more focused on how we can make it less demanding for them. The company should be able to perform even if the top management isn’t made up of heroes.
Nicole Zint: Christian, what do you think?
Christian Schuh: I think we need to differentiate between what can be solved with logic and what can be addressed with relationships. Digital, for example, can mostly be solved with logic. In that case, it’s probably sufficient if the CEO finds a talented leader who can fulfill the role and report to the CEO on progress.
Nicole Zint: Empowered by the CEO, but maybe it doesn’t need the CEO so much to build relationships. I think this is different when we talk about customers, especially in the B2B environment, maybe not so much in B2C. But in B2B, definitely customers demand to see the CEO, right? When needed at special events, and I think the same is true for procurement. So, procurement cannot be solved with logic alone. Procurement very much depends on the relationship. Not with everyone, right? I mean, a typical discrete manufacturing company has thousands of direct material suppliers. So we’re not asking the CEO to spend time with all of these suppliers, but the ask here is that the CEO spends quality time with the suppliers that matter.
Christian Schuh: Right, and suppliers that matter are basically two types of suppliers. One is easy to find, so these are the current key suppliers. Again, as a rule of thumb, in discrete manufacturing industries, 20 to 40 suppliers account for half of the spend. That’s manageable, and maybe not all of them are super important. But then there’s another group of super important suppliers that the company may not yet have any business with today, but that are super important for the future. So, take an automotive company, a car maker, for example. If you look at their biggest suppliers today, a lot of these suppliers will be somehow involved in internal combustion engines, right? And we know that this is not the future. The future is a completely different class of suppliers. So what we are recommending and demanding CEOs to do is to build strong relationships with the CEOs of the suppliers who are important today and the suppliers who will be super important in the future.
Build these relationships, but in strong alignment with procurement, strong vertical alignment, and strong horizontal alignment across functions. So not just go every now and then and play golf with the other CEO and discuss something, but do something that is orchestrated by the CPO. And just one more point, if you look at the semiconductor crisis, I think CEOs found this out the hard way. They were calling super important companies making semiconductors where they had no relationship whatsoever, so suddenly they found themselves in the role of a beggar with hat in hand, asking for parts, and that’s not good.
Nicole Zint: I want to ask or elaborate more on this importance of simply the human relationship between suppliers and the procurement team. And before I get to that, though, I also want to mention the role of the CPO, the Chief Procurement Officer. You also mentioned that the CPO should get the responsibility for the whole product life cycle, end-to-end. If he or she is given that responsibility, how will that affect his or her behavior or change his or her behavior?
Christian Schuh: Right now, if you look at typically discrete manufacturing industries companies, engineering is figuring out how the product should look like. Then procurement comes in and essentially is asked to find a good price for this. So, for example, if you come back to the automotive industry, if we are in the gradual evolution of the internal combustion engine, this might be fine. Probably not ideal, but at the same time, it won’t kill you, and your competitors are very much doing the same.
Nicole Zint: But now we are in this transition where suddenly we’re moving to electric powertrains and autonomous driving, so you need to bring in a lot of electrics and electronics into the company. So now I ask you, what miracle enabled the engineers to suddenly become world-class in this completely new topic? It probably didn’t happen, so if we follow this model, we will produce subpar products. It’s super important if we want to harness the innovation of suppliers to bring the supply innovation in very early in the product life cycle. So basically, as soon as product marketing people and engineers start even thinking about a product, procurement needs to be there and guide the process.
Christian Schuh: I mean, with this, the CPO would migrate from a marginal position in the company to a super central position in the company with a different, much wider mandate. In the old world, procurement is expected to deliver low cost, and in the new world, procurement is expected to deliver profitable growth, which sounds similar but is something completely different. Profitable growth means that the CPO ensures that the company is providing the right products with the right innovation from the right supplier.
Nicole Zint: Joannes, what do you think about this profitable growth versus just the lowest cost?
Joannes Vermorel: If I revisit a little bit the elements, it’s interesting because for me, if I look at the automotive industry and their problems with procurement of semiconductors, I see that in 2020, a large number of car companies in the US and Europe essentially canceled their slots for foundries, the manufacturing companies, because they were thinking the automotive market would shrink with the lockdowns. It did not happen, and their strategic analysis was plainly incorrect. Once you give up a slot, the foundry gives the slot to another company, and there were plenty of other needs for plenty of other things. So when they realized that the market wasn’t stopping, they wanted to reacquire their slots, but they were all gone.
Here we are touching on procurement’s need for very tight integration into the company’s risk analysis. And we have a problem of culture where I don’t see procurement teams doing detailed, quantitative risk analysis. That’s part of the culture and also part of the complexity. A car nowadays has something like 50 processors in it, so there is a high degree of complexity, and you may end up with a dozen suppliers. The tooling and instrumentation of those processes are very lacking. That’s the problem of having something that is very much relationship-driven – the hard, quantitative analysis of the risk assessments, like what risk you create if you decide to give up your slot. I have seen very few companies that can quantitatively assess those things, so they can take drastic moves where they cut the supply.
Nicole Zint: Something about the sort of quantitative analysis, which is what we need to reactivate this slot, what will happen? It’s not quantified. And so this whole industry realized, essentially 12 months down the road, that they had given up their slots and that there were a lot of other people, mostly the video games industry and the crypto mining industry, who had happily taken over all those slots for those foundries in Asia. So that’s really part of the problem.
The second part is procurement, when you start looking at integrating the procurement into the very design of the product. Suddenly you have a problem of culture, which is procurement becoming as much a problem of hard engineering as much as a problem of relationship with the suppliers. Your input needs to go at the heart of the product so that the product itself is engineered differently, so that you can get the cheaper supplier or the cheaper solution.
Joannes Vermorel: I see that those two things, quantitative risk assessment and hard collaboration on engineering, require procurement teams that are very talented people. Suddenly it’s not about having people that can play tough, but it’s about having people that can be very smart at a technical level. For most companies, I believe one of the struggles is that the procurement teams are not very smart, talented engineers that are capable of doing fancy quantitative risk assessment, and they are not the sort of teams that can do fancy back of the envelope soft engineering to identify the spot that would generate the most savings. I’m not saying this is not the right path, I’m just saying that there is an entire challenge to lift the competencies that you have to achieve those goals.
Christian SCHUH: Let’s talk about risk management and quantitative analysis and let’s stick to the semiconductor crisis. The mind-blowing thing is that this is not the first semiconductor crisis. The semiconductor crisis comes every three to five years. The previous one was in 2018, albeit not as severe as this one. Now you have to ask yourself, what have companies learned from the previous one? Harshly charging, I would say nothing. They have learned that it blows over and then you can continue like before.
Broadly speaking, companies in traditional industries, including carmakers and almost everything else, delegated the interface to this strange new tech ecosystem to the tier one players. They let the tier one players select which semiconductors to use for a given task, select the suppliers, and the suppliers optimized along two vectors: lowest cost for them and maximum convenience. The result was an unmanageable slew of semiconductors for carmakers. At the beginning of the crisis, carmakers generally did not know which semiconductors were being used by their suppliers and had zero relationships with the companies making the semiconductors. And now they were scrambling.
Nicole Zint: Please tell us what happened in the supply chain crisis of 2020.
Christian Schuh: I believe the information was mostly wrong, and so the car makers were playing catch-up. You could blame procurement alone for this situation, but I think this goes much deeper. This is a very deep cultural problem where companies simply want to stay in their comfort zone, which is typically more mechanical or electromechanical. They prefer to outsource all the hassle to other companies.
Joannes Vermorel: We disagree with your assessment of the situation. Our analysis of what happened in 2020 is a bit different. The car makers went into a shutdown of their factories around April-May 2020 and then communicated to their suppliers that they would catch up in 2020 by working over the summer. However, the suppliers didn’t believe them. The CFOs of these suppliers were concerned about building up inventory for semiconductors. They canceled the slots, which were then happily picked up by other companies.
This, in our opinion, falls into a kind of data analytics problem but also a relationship problem. What is the level of trust between the OEM and their suppliers? We’re back to the issue of relationships. The problem was the risk of inventory, where the tier one supplier had the option to keep buying semiconductors. They were lacking good options because you’re completely right about the successive crises in the semiconductor industry.
The core reason for this is fairly simple. Investment to have production capacity in the semiconductor industry is absolutely gigantic. For example, TSMC announced that they will invest over the next 10 years $500 billion. The investments are enormous. Once you have the products, they’re fairly cheap to produce, but you have to reserve the capacity. If you don’t, somebody else will step in and take it for you.
In the case of the automotive industry, our analysis matches yours. The problem was the stock in the tier one supplier. How do we somehow share the risk of keeping this stock? The car manufacturers were shutting down indefinitely, and the tier one supplier faced a situation of taking on all the risk without any reward. They were not being paid by the car manufacturer in any way to preserve the option to restart at any point in time. There was a problem of negotiating the price of the optionality. Here, we are getting into the realm of quantitative risk analysis, which is done in finance all the time.
Nicole Zint: You can buy options, you know, the fact that I may or may not do something, and my hesitation has a price. But this is a sort of very sophisticated negotiation. Suddenly, it’s not about the old school procurement—give me the lowest price per unit period and maybe an MOQ (minimal order quantity). It is negotiating options, which is relatively complex financial instrument, not super complex, but more complex, and that requires maybe new classes of procurement teams. It’s not the same level of game that is being played in terms of procurement when you go into negotiating options and planning for many scenarios and how to ensure that your suppliers are properly incentivized to cover for not one scenario but many scenarios.
Joannes Vermorel: I think again this has an analytical angle that you outlined, but again it’s a relationship angle. So imagine the CEO discussion that I outlined before. If the CEOs of the carmakers have this very good relationship with the CEOs of the top suppliers, the current top tier of suppliers that account for half of this demand, which probably are the ones that have the semiconductors, and then had an agreement with them to say, “Okay, we won’t push you through all these negotiations and business reward things. We will run on a long wave and we incentivize you on the performance of our company.” So, make sure that we can sell the best products at the highest price, at the highest volume to our customers. We will incentivize you for that, right? And then maybe the tier-one players would have taken a different approach in 2020, to say, “Okay, for those companies, those customers where we have this arrangement, we continue stocking semiconductors even though they forgot telling us that.”
Nicole Zint: So, speaking of this old school approach to suppliers, which is essentially playing hardball and only going for the cheapest suppliers, is that always a bad strategy, Christian?
Christian Schuh: No, I think you can do it right. People sometimes misunderstand me as going soft on all suppliers or being collaborative with all suppliers. I’m almost saying the opposite, right? I’m saying figure out who of your suppliers really make a difference, and it’s a small number. It’s probably the 30 or 40 I talked about today, and then maybe the same number of suppliers that will be super important in the future. But having said this, I’m also saying that all the others don’t matter really. So you adjust your relationship to the supplier based on how important they are, and be totally transactional with all the others. Let’s do something very simple: we measure KPIs. What is the price performance? What is the delivery performance? What is the quality performance? What is their sustainability performance, maybe something else? We measure this. So if they increase in the KPIs, they get a bigger share of the business. If they decrease, they get a lower share of the business. That’s it, no negotiation, nothing, no interaction, no human interaction, nothing. You can completely automate this.
And then, coming back to the hiring star people into procurement, if you do away with filling in forms and systems, which is super boring, we can focus on what really matters.
Nicole Zint: Automate all of this and then you have star players who really change the environment for the company with suppliers that matter. You also mentioned that it’s important to join forces with your suppliers so they’re part of your product development cycle. In fact, when you do this, how much control should you give to your suppliers?
Christian SCHUH: Maximum control. But keep in mind, we’re talking about the ones that matter. In the end, this is a competition for executive mindshare at the suppliers. You win if the key people at your suppliers spend more time thinking about your business rather than the business of your competitors. Bring them in early, make sure to listen to them, and solicit their advice. If you say, “I want to launch this product,” listen to them when they express concerns because they work with other companies. You can harvest market intelligence by listening to your suppliers. Also, tell them that if they perform, they will automatically have the follow-on business. Tech companies, for example, meet the suppliers on a quarterly basis with super high-level engagements and steer swim lanes. There’s a very broad swim lane for the main supply and then maybe one or two smaller, narrower swim lanes for other suppliers. A-players know if they perform, they will have the business. This is how companies like Foxconn grew tremendously from a supplier making connectors to a 200-billion-dollar company.
Nicole Zint: Joannes, what do you think about what Christian is saying? How much control should suppliers be given?
Joannes Vermorel: I believe that the insight your suppliers can give you about the market is very valid. It’s a kind of competitive intelligence that is invaluable because it’s literally insider knowledge. So, I very much agree that leveraging that to the greatest extent is very good. I also agree that if you can have your suppliers thinking more about you than their other clients, it is a winning position. By the way, I believe this is also true for software, not just hardware. If you can do that with enterprise software vendors that are kind of suppliers, and if those people can think about your use case more compared to all the other use cases they have at hand, that is very much strategic. In this regard, indeed, having the CEO building personal relationships is the sort of thing that cannot happen without a very high-level demonstration of commitment.
Now, what is also very interesting is that when I look at tech companies, they play this game, but at the same time, they are also incredibly aggressive and successful in ensuring the commoditization of the layers below them. For example, Microsoft essentially completely commoditized the PC industry. There was IBM having the whole chain, and then Microsoft came.
Nicole Zint: Joannes, we see that big companies like Microsoft and Apple have been successful at commoditizing their supply chains. Can you elaborate on how they achieved this?
Joannes Vermorel: Yes, Microsoft and Apple have managed to commoditize their supply chains for their greater benefits. For example, Microsoft had a strong relationship with many vendors, and their operating system became a standard. Similarly, Apple is now focusing on their ARM processors, which gives them the flexibility to change suppliers if they wish. They can be ruthless in their approach, and they can potentially wipe out their suppliers if needed. This strategy of organizing a commoditization underneath them is very powerful.
Nicole Zint: So, as these companies commoditize their supply chains, how does this affect the suppliers’ position and the relationships between the companies?
Joannes Vermorel: When companies like Apple and Microsoft engage in these tactics, it can create a sense of vulnerability for their suppliers. They may worry about being put in a weak position where they can be replaced down the road due to standardization and commoditization. This can lead to tension in the relationships between the companies and their suppliers.
Nicole Zint: Christian, you mentioned in your book that the key to Apple’s grand success is that they put their suppliers at the core of their business. What role has their technological breakthrough played in their success, especially in the PC industry?
Christian Schuh: Apple’s success in the PC industry can be attributed to their ability to configure standardized components in an innovative way, resulting in unique products. They focus on industrial design and own the entire tech stack, not relying on companies like Microsoft for the operating system. Using relatively standard components, such as memory, connectors, and camera modules, allows them to double down on value where it makes a difference.
Lately, Apple has been focusing on differentiating their products by the computing power they offer relative to battery capacity. They have been successful in doing this with the iPhone and, more recently, with their MacBook laptops, which now use the M series chips.
However, I slightly disagree with Joannes on how they treat their suppliers. While Apple initially shopped around for suppliers like Samsung and TSMC, they have been more consistent with their choice of suppliers since around 2015 or 2016.
Nicole Zint: Exclusively doing this with TSMC is a mutually super rewarding relationship, right? So TSMC, as I said, invested $40 billion in capex last year, and they can do this because they have this reliable revenue stream from Apple. Apple has prime access to the latest process nodes, right now it’s five nanometers, very soon it will be four or three nanometers, and this is a totally symbiotic relationship. I don’t believe that Apple can break away from TSMC without doing enormous damage to their business, and at the same time, TSMC cannot drop Apple without doing enormous damage. So right now, those two are married to each other, and I don’t see this ending anytime soon.
Joannes Vermorel: Yes, but you see, one of the differences, if I have to say, for example, Apple TSMC versus Microsoft Intel, is that by choosing the ARM instruction set for the CPU, they are in a position where there are other manufacturers for the same instruction set. ARM is just doing the blueprint for the ARM chips, but fundamentally, it’s other companies that produce those chips. So, if we think further away, they are in a position where their CPU is fundamentally on the ARM instruction set with half a dozen other companies who can potentially step in. That was not the case for Microsoft and Intel. It took AMD to basically copy the instruction set of Intel and have AMD doing Intel-compatible chips for this to happen. With ARM, the interesting thing is that you already have, right from the start, half a dozen companies that produce those ARM chips.
So, Apple picked one for the best chips because of the blueprint, but how small can you execute it? Indeed, it’s TSMC. But I also see an element of ruthlessness, which is going for an architecture that is standardized, independently from the chipmaker, so that essentially, 10 or 20 years down the road, you can potentially change your mind. And this is happening pretty much at all layers. So yes, go super deep with one supplier, while already thinking 10-20 years ahead about the time when you want to break away.
By the way, Microsoft has actually tried with Windows RT to break away from the Intel instruction set, but it didn’t work. They had too much ecosystem that was entangled with it, and Windows RT was a commercial failure. I’m not sure if there are that many people who even remember that; it was like five years ago. Nonetheless, I agree with you on the importance of the relationship. But there is, again, I believe, what you can get with an incredibly smart procurement team, is that they can also play the super long game, which is the super profitable relationship for the next five years, and then 20 years down the road, the pathways if suddenly you’re with a company that lost its edge, that is a bit like Intel, which was really the leading company at the hardware side at the end of the 90s, but it’s not that much on the leading edge 20 years later.
Nicole Zint: So we’re rounding towards the end of our episode, and sort of towards the last question here. Essentially, in very unforeseeable circumstances, when those hit, and I think the last two years have been quite the example of when something unforeseeable has happened, and we end up on these so-called outliers in the supply chain, how can a good relationship with your supplier essentially save you in that situation? How important is it that you have this human-to-human interaction with your suppliers? How does that differentiate you from other companies?
Christian Schuh: I think it’s crucial. I don’t want to name too many names, but if you look at the automotive industry in 2021, the industry lost 10 million vehicles due to semiconductors. If you look at company by company, how much they lost, there are a couple of companies that basically fulfilled their production plan, but they’re operating in the same environment, right? This tells you that some of them are doing this a lot better than others. Even though this comes down to an analysis, knowing how to do it better, and having better teams, but ultimately, it comes down, in my view, to better relationships with your suppliers, not just your tier-one suppliers but also the suppliers further down in the supply chain.
Nicole Zint: Christian, thank you very much for sharing your thoughts and insights. It was very helpful and indeed very interesting to discuss this topic that you also outlined in your book. Thank you for being with us, and thank you for tuning in. We’ll see you next week.