With business around the world looking for working capital and facing a daunting wall of tight-fisted lending organizations everywhere, managers are combing their own business practices to see where expenses can be reduced, in order to divert more cash into investments.
They also need to be able to see what likely lies ahead, to plan around the trends expected in 2009 that will be impacting business and driving up costs, or otherwise affecting the finance process.
Martha I. Gabrielse, vice president of JP Morgan’s Global Trade Services office in Grand Rapids, put together a list of the top trends predicted in 2009, which she shared recently during World Trade Week activities. The trends range from a growing interest in Mexico to changing types of financial instruments, plus political shifts and government regulations, and currency markets “doing crazy things,” said Gabrielse.
One major trend driven by the worldwide nature of the economic downturn is a sharper focus on the supply chain. Gabrielse said the economic situation requires “paying close attention to the position of your suppliers,” to mitigate your risk at their end, while weeding out the inefficiencies in your supply chain to make it as efficient as possible.
To a small company in Michigan, it may seem hard to believe that a small company on the other side of the world is going through the same turmoil, but Gabrielse says count on it.
“The global credit crunch is truly a global credit crunch. The same things are happening there that you see here: loss of jobs, cutbacks, and factories getting extremely lean and trying to reduce their cost structures. It’s truly a global trend.”
That means “absolutely keeping an eye on your suppliers. Making sure they remain viable,” she said.
How would a West Michigan company know for sure that a supplier in China was in good shape?
“You need to go over there,” she said, warning that no company should ever try to gauge its foreign supplier’s health from a distance.
“Those who we see doing that well, actually have their own representative on the ground in China, interacting with their suppliers. Senior management from the company is going over frequently to visit. You maintain a very interactive relationship with that supplier,” she said.
Of course, that requires time, money and people — all of which might not have been part of the original game plan.
“That’s why sourcing from elsewhere is not just a matter of the cost of the things that you are sourcing. You have to consider all the other things you need to invest in, when you make that decision” to do business overseas.
Some companies are increasing their number of suppliers, making sure they don’t have too many eggs in one basket, “so that they have a backup supplier, just in case.”
Another method of wringing more liquidity out of standard operating procedures is “really being smart about your inventory levels,” said Gabrielse, by studying where all the inventory volumes are within your supply chain, and how quickly it moves compared to how quickly it needs to move.
“How soon am I going to use that piece or part? That has become extremely important because it is expensive to maintain a large inventory — extremely expensive,” said Gabrielse. “It’s not a good use of working capital. You could deploy that capital elsewhere to other revenue producing things — things more profitable to the company than inventory sitting on a shelf.”
“That’s why it’s important to keep ship times as short as possible, and knowing exactly how many widgets will be needed the next time.”
Mexico has become more popular to American business lately, compared to Asia, precisely because its close proximity offers a shorter supply chain.
Gabrielse said at World Trade Week that leading companies will “reconfigure their supply chains “by moving plant operations and sourcing vendors closer to home and away from Asia,” due to limited free trade agreements, high energy costs and rising labor and production costs in Asia.
“While opportunities still exist in Asia, Mexico has become an increasingly popular source for manufactured goods as companies compete on time-to-market strategies, seek financial advantages found in Mexico’s multiple free trade agreements, capitalize on Mexico’s investment incentives, streamlined custom processes and abundant English-speaking workforce.”
“The U.S. Department of Commerce reports a 7.2 percent increase from year-to-date imports through Mexico, compared to the year before,” she said.
She noted that Mexican customs is piloting a new regimen that will reduce delays related to procedures at the port of entry, decreasing logistics costs for foreign companies doing business with Mexico.
Over the last 10 to 15 years, there has been a flurry of activity in the creation of free trade agreements between various countries. Several involving the U.S. are still pending, from the previous administration, but Gabrielse is inclined to think that not much will happen soon.
“We feel that with a new administration coming in, things just tend to slow down. Everybody kind of regroups and gets the lay of the land. (Government) momentum usually does slow down when a new administration comes in,” she said.
Especially right now, with the new Obama administration dealing with critical problems such as the endangered domestic auto industry and the weak banks, the stalled housing market and wars in Iraq and Afghanistan, the indications Gabrielse and her peers in international banking have been getting are that “right now, everything (to foster international business) is on hold.”
Increasing government regulations and involvement in business — both in the U.S. and in China — are another factor impacting global business in 2009. Some will hinder some companies while opening up new opportunities for others companies. The changes include the Chinese determination to improve the safety level of products its exports.
Here in the U.S., she said, “the biggest one that our importers run into is a thing called 10+2,” she said. It is the Import Security Filing rule introduced by the U.S. Department of Homeland Security to identify ocean cargo that may pose a security threat.
Before cargo is even loaded on board a vessel bound for the U.S., the American companies must report in detail on that shipment.
“There are 10 facts” about that cargo “that have to be reported up through the chain to Customs,” said Gabrielse. “Some of these pieces of information are not necessarily at your fingertips as an importer, and so it has taken the relationship between the importer and supplier to a whole new level.”
“When you are asking people to go get more information and spend more time, and do more reporting, that equals cost. It’s much like the feeling that everyone had with Sarbanes-Oxley: ‘oh my goodness, how much is this going to cost us?'”
Sarbanes-Oxley is the 2002 federal law requiring much more transparency in a publicly-held company’s finances, the result of the sudden meltdown of major corporations including Enron and Arthur Anderson..
10+2 is “causing the same feelings in the pit of the stomachs of many of my companies as Sarbanes-Oxley did,” said Gabrielse.
Another major trend for 2009, among many companies in many countries, is the quest for more liquidity to bolster financial strength. However, that quest goes both ways.
Gabrielse noted that buyers will look to extend payment, to increase their liquidity — but at the same time, the suppliers will be trying to collect receivables more quickly — to increase their liquidity.
One financial instrument that has reappeared amid the economic turmoil is letters of credit.
“There is a resurgence in the use of letters of credit to facilitate the financing of international trade,” she said.
Letters of credit had not been as widely used in recent years because they are “cumbersome and they bring with them a lot of fees,” said Gabrielse. She explained that letters of credit were a necessary part of global trade since the time of the Roman Empire, but they are “a paper-driven process” and the electronic age made other methods of payment more convenient.
Gabrielse noted that over time, as buyers and sellers developed relationships, a lot of the sellers “loosened up their credit terms because they got to know their buyers.” They figured they no longer needed the reassurance implicit in a letter of credit, she said.
“People had relaxed, business practices had relaxed. … There are multiple factors that contributed to the reduction in the use of letters of credit,” she said “With the resurgence of people being more concerned about the credit of their buyer, instruments like this come back. A seller wants that assurance of payment when he ships.”