New Balance Exec Talks Sourcing Amid Today’s Capital Crunch
There are many forces affecting today’s sourcing environment. Interest rates are clocking in at a 20-year high while minimum wages in production countries are up. Consumer demand has weakened, which is driving prices down and saddling suppliers with excess capacity. Brands and retailers are pushing supplier payment terms to the limit, creating a serious working capital crunch, while ESG demands refuse to be ignored. Meanwhile, many brands can’t resist the urge to turbocharge style offerings in hopes of piquing consumer interest.
But when money gets more expensive, the cost of bad decisions is multiplied.
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“With the cost of capital being more than double what it was a year ago… you have to make choices… and topics that were never front and center now are,” said Jason Kra, president of LF Markets USA at Li & Fung, who took the stage with Guido Schlossmann, president & CEO, Synergies Worldwide, and Duncan Scott, senior vice president, strategic sourcing & quality, New Balance Athletics Inc. for “The State of Sourcing” panel, moderated by Peter Sadera, editor-in-chief, Sourcing Journal.
“As the interest rates go up, companies tend to push back on upstream suppliers for longer terms—90 to 120 days. And that becomes a real impact on a lot of vendors and a lot of countries where their interest rates are 5 to 7 percent more for borrowing than it is here in this country,” said Kra. “So, you’re looking at a 10 to 15 percent borrowing rate, yet you’re sitting on that for a longer period of time. [That means] there’s less capital to invest in projects like ESG, [plus] less capital for buying raw materials and operating machinery… and since you can’t pass through inflation in a weak demand environment, that gets passed onto supplier margin.”
In the wake of more expensive capital and manufacturers being asked to hold more inventory, the panel predicted more supplier pain.
Schlossmann, who has been based in Asia for the past 13 years, has his ear close to the ground in production countries. “I foresee that there will be a lot of factory closures before Chinese New Year in China, and most probably in Myanmar,” he said, adding that large factories in Southeast Asia “that didn’t control overhead amid Covid expansions” will be in the most difficult situation, while mid-sized manufacturing groups will fare better.
Geopolitics are forcing many companies to step up their migration away from China if they haven’t already, but creating China-like efficiencies in Cambodia, Vietnam or Bangladesh isn’t always easy. “Where we have high interest rates and currency devaluation, it is very challenging for the factories to invest in new technology to make them more efficient,” said Schlossmann. And while Chinese workers and companies have been taking their knowhow to neighboring countries, “finding efficiency partners is much more difficult than just seeking out lower wage partners.”
While companies are at least partially diversifying their factories—be it around the world or via nearshoring/onshoring, like New Balance’s five plants in Massachusetts and Maine—75 percent of raw materials continue to come from China, putting brands at increased risk, said Kra.
Brands also must make choices amid the capital crunch, as “basic economics 101” stipulates that companies make money via margin, cash flow or growth. And the further down the supply chain you push it, higher borrowing costs get built into the cost of goods. “So a dollar at that end gets amplified,” Scott said. “But if you actually keep your terms a little shorter than others, you enable your suppliers potentially to offer lower costs. That was never an option before, but now it’s essential.”
But there are pockets of opportunity.
With interest rates high, people might put off that car or home purchase, but they might be more drawn to a “$150 or $250 mid-range name-brand item,” said New Balance’s Scott, who also pointed out how industry pressures will drive efficiencies to offset those same pressures. Call it the necessity of invention.
