According to a recent Reuters article, the global economy remains at risk of a recession. Record high levels of inflation have consumers reducing or delaying their purchases or buying cheaper alternatives to goods they regularly purchase—a trend unlikely to let up in the near future.
Furthermore, the impending recession in the United States makes it unlikely that the traditional Q3 and Q4 surge in freight rates will take place.
We are not seeing seasonal freight rates increase during September/October, as is normal, which reflects the lower level of demand from Asia to the United States, as retailers deal with excess inventory and cut orders all together.
However, we are also seeing retailers planning to pull forward their early Spring buys, as they remain more conscious of Chinese New Year on January 21, 2023, and the possibility that many Chinese factories will close early in January, due to low level of orders.
We also continue to see a further softening of demand with rates from China to Los Angeles now below $6,000 per container. Rates from China to the east coast of the U.S. are below $10,000, which is also low.
The combination of inflation and a likely recession have also had a significant impact on factories in Asia. The 60 vendors we are using across China and Southeast Asia are experiencing an average order reduction of 20-30% for Q1 and Q2 U.S. customers and 50% for EU customers.
These order reductions will certainly have an impact on vendor’s flexibility and will likely lead to a consolidation of factories in the next year. This is another example of why an in-person presence is still the best way to protect your interests and avoid unpleasant surprises. Weekly visits to witness the arrival of raw materials, observe the packaging process and evaluate labor’s ability to meet production plans will go a long way.
It’s important to note that vendors remain an often-overlooked source of market intelligence, product development expertise, competitor insight, and innovation. Unlike U.S. market statistics that give REAR MIRROR VIEWS of customer demand, Asian vendors give us a FORWARD-FACING view of the next year by sharing their purchase orders, sampling, and raw material purchasing for the year ahead.
What does all this information mean for PE companies?
Interest rates will continue rising until at least Q1 2023; banks will curtail lines of credit and tighten covenants; vendors will shorten terms of trade; and customers will pay more slowly, requiring a laser-like focus on cashflow.
Those PEs with in-house expertise in managing sourcing and supply chains will develop an increasing edge over those without. The mid-tier companies that Blackford targets, acquires and exits rarely have the in-house experience necessary to ride the increasingly volatile waves of global sourcing, where everything needs re-examining, and complacency leads to elimination. Blackford has invested in developing a support team of Operating Partners that transforms its portfolio companies by driving gross margin expansion through better sourcing.
Other than boots on the ground, how can companies stay ahead of what might be to come in terms of supply chain?
- Continuous diversification
- Financial due diligence—i.e., early warning if there are cash flow problems at your suppliers
- Development of a specific point of view about freight rates, raw material prices, and supply and demand, to ensure optimal cost prices
- Treatment of sourcing as a strategic weapon
While the economy remains at risk of a recession, there are certainly preparations and precautions your company—and your customers—can take to stay ahead and alleviate future challenges.
- Cost prices of components are getting more volatile (especially freight)—Stay on top of it.
- Annual contracts are no longer set in stone, but rather the basis for a dynamic partnership with your suppliers and customers.
- Revenues will be declining; however, costs cannot be cut continuously in the current inflationary environment. That said, cost of goods sold becomes the dominant level to secure profitability through improved gross margin.
- Blackford Asia is NOT just about encouraging direct Asian sourcing; it is there to provide you with leverage when negotiating with all vendors, whether in Asia, U.S., or Mexico.
Steve Feniger has been an Operating Partner at Blackford Capital since 2020. He’s an internationally experienced CEO who’s led an IPO on the HK Stock Exchange and works with western brands and retailers to professionalize their buying and sourcing operations in Asia.