Nanoleaf is a true Canadian success story, and its CEO Gimmy Chu couldn’t be more proud.
The company‘s origins date from when Mr. Chu and two co-founders first worked together on a University of Toronto solar-powered car challenge. With some Kickstarter funding, they reunited in 2012, to start a business making a highly efficient light bulb. From those humble beginnings, they’ve now built the company into one of the world’s largest manufacturers of smart lighting products.
But in 2019, Nanoleaf’s export growth is being challenged due to a trade dispute that has nothing at all to do with its home country – namely, Washington’s trade dispute with Beijing.
“What’s going on now in world trade has a lot of impact. We’re Canadian, we do most of our business with the United States and our products are put together in China,” says Mr. Chu, “The biggest impact on us is the trade war between the U.S. and China.”
The trade uncertainty is causing Canadian manufacturers such as Nanoleaf to rethink how they do business, manage their financing and organize their supply chains, says Nick Fisher, Regional Head of Business Development, Ontario − Global Trade & Receivables Finance, HSBC Bank Canada.
“Whether it’s looking for new buyers or new suppliers, Canadian companies are open for business and open to new ideas,” Mr. Fisher says. “While Nanoleaf and many other companies are still sticking with China to provide raw materials and finished goods for North American consumers, Canadian corporates are looking at alternate markets to assist within their supply chain.”
Kamala Raman, Senior Director Analyst with the Gartner research firm, cautions that “the situation is particularly critical for companies that rely directly or indirectly on a Chinese supply chain to meet customer demands in the United States.”
“U.S. importers already report additional costs of $6-billion (U.S.) a month in customs duties due to tariffs, and many companies announced financial impacts as a result of the trade tensions,” she says in a recent Gartner article.
The U.S. has already imposed tariffs on steel and aluminum coming from Canada – which will be dropped after a resolution was agreed on May 17 – and on some $200-billion (U.S) worth of goods coming from China. U.S. President Donald Trump further raised tariffs on goods from China on May 10 after the deadline passed on a trade agreement with Beijing.
However, finding new supply chain partners beyond China is not that simple.
“What we are seeing with some of our clients is that with the move to newer markets for sourcing of products creates additional challenges and a strain on working capital,” HSBC’s Mr. Fisher explains. “This is due to increased transit time from those [new] markets and a reduction in previously favourable supplier terms.”
When supply chain partners change, “now both the suppliers and clients are dealing with partners with a lack of history between each other, and other clients that are importing goods earlier than normal in fear of increased costs in the future due to the potential of even higher tariffs later,” he says.
This drives up costs all along the supply chain. “It results in higher carrying costs and expenses related to the transport of those goods and the storage of that inventory for a longer period of time than in the past,” Mr. Fisher says.
Nanoleaf’s Mr. Chu explains the difficult position the company is in: “If we sell a product at $199, in the first wave of tariffs we just ate most of the cost increase ourselves, and our partners ate a portion of it. We thought we’d just wait it out and see how it all works out.” But there will be a point when the price of everything simply goes up for everyone if tariffs keep rising or remain indefinitely, he adds.
Although they are now being removed, the cross-border tariffs on steel and aluminum have been affecting supply chains in Canada for some companies, Mr. Fisher says. “We have [a client that is] a steel trader within Ontario that has had to rethink its key suppliers in the U.S. due to tariff concerns.”
The ongoing trade disputes are causing clients to use their working capital differently, Mr. Fisher says. “Clients who ship directly to the U.S. for sale to U.S. retailers are concerned about further increases in the future and are using their working capital to support higher inventory levels and increased expenses for goods,” he says. “This is because those goods are being brought to third-party warehouses for storage much sooner than normal. In some cases clients are using third-party warehouses for the first time and this creates additional logistical and operational concerns.”
There are additional concerns when shifting supply chain markets to avoid continuing uncertainty, Mr. Fisher adds. These can include higher freight costs, a decline as production methods might shift, and the unforeseeable consequences of entering new markets to find suppliers.
Talking with experienced worldwide finance experts can be key. “A bank such as HSBC with a global footprint can provide advice and solutions,” Mr. Fisher says. “We can offer specialized expertise in trade and receivables finance.”
While there are risks in switching suppliers, the shift to alternative markets also presents opportunities, he notes. For example, companies may find better suppliers that offer better terms in new markets.
“The question a company should ask is, what is the most appropriate strategy to use to assist them with their individual circumstance,” he adds. “When dealing with your bank, it should never be a one-size-fits-all approach, but rather a detailed conversation on what makes your business unique. A financing package should work the same way.”
Manufacturing, tariffs and trade turmoil
- Canada’s largest trading partner is the United States, but meanwhile, Canada imported nearly $55-billion (U.S.) in goods from China, mostly manufactured goods.
- On June 1, 2018, U.S. President Donald Trump imposed a 25-per-cent tariff on steel imports and a 10-per-cent tariff on aluminum imports from Canada, the European Union and Mexico. They were dropped on May 17.
- In the meantime, Canada, U.S. and Mexico have negotiated a new free trade deal, the United States Mexico Canada Agreement (USMCA), to replace NAFTA. The agreement has yet to be ratified by any of the three countries.
- Nanoleaf’s CEO Gimmy Chu says the USMCA will not bring many changes to their cross-border business. More important is that NAFTA already enshrines free trade, enabling him to keep his HQ in Canada rather than the U.S. with minimal friction in managing his supply chain, which originates in China.
- Of more concern to manufacturers is the trade war between the U.S. and China, which the U.S. escalated on May 10 with new tariffs. HSBC advises that companies with Chinese supply chains need to consider shifting working capital to support new circumstances, such as higher expenses and the need for storage.
Advertising feature produced by Globe Content Studio and sponsored by HSBC Bank Canada. The Globe’s editorial department was not involved.