The US Supply Chain will never be the Same Again!!
For those of you who know me, I am sure you would concede that I am one who tries to find something good in even the worst of times. COVID 19 is a terrible pandemic and I pray we can defeat this silent killer. My deepest sympathies go out to anyone who has been impacted in anyway, be it personal or economical.
The USA did not become the great country it is by laying down when times are most dire. It is a fact that Americans come together in the worst of times and this time will prove no different. We will defeat this virus, and when we do come out of our shelters, we will find ourselves in a different world than we left. I am not talking about remote working, distancing and general health consciousness for ourselves and others, but how America will interact and lead the World Economy. The next American Industrial Revolution is upon us and the American Small Business community will need to be prepared.
The First Industrial Revolution, created large scale manufacturing factories and processes in the late 1700’s and the USA has not looked back since! Whether it be automotive, TV, planes, technology, etc. America has the most innovative minds in the world. Capitalism has worked and we as a nation have prospered. We now must evolve to Protectionism. We can no longer fall victim to the reliance of other countries for critical supplies, as COVID has taught us. The new norm will be Made in America!
The following product groups represent the highest dollar value in America’s import purchases during 2019. Also shown is the percentage share each product category represents in terms of overall imports into the US.
- Machinery including computers: US$379 billion (14.8% of total imports)
- Electrical machinery, equipment: $352.3 billion (13.7%)
- Vehicles: $310.1 billion (12.1%)
- Mineral fuels including oil: $210.1 billion (8.2%)
- Pharmaceuticals: $128.2 billion (5%)
- Optical, technical, medical apparatus: $96.9 billion (3.8%)
- Furniture, bedding, lighting, signs, prefab buildings: $67.2 billion (2.6%)
- Plastics, plastic articles: $60.6 billion (2.4%)
- Gems, precious metals: $58.1 billion (2.3%)
- Organic chemicals: $54.5 billion (2.1%)
The above product categories account for two-thirds (66.9%) of total US imports during 2019.
America’s imports of pharmaceuticals had the fastest-growing increase in value among the top 10 import categories, up 10.9% from 2018 to 2019.
In 2019, 48% of the 2.5 Trillion the US imported came from 5 countries: China, Japan, Germany, Canada and Mexico, China being the largest. Now I have nothing against the Chinese people, I resided in Hong Kong for a few years in the late 90’s, but let’s not forget, China is a communist country. It’s not the people that are the issue, I assure you. It is the Government- the Chinese Communist Party (CCP). It is time to deal with this.
Do we want to continue to be held hostage for key supplies from a communist country? I say no and while we are at it, let’s reshape our country in the process to be even greater. A vast number of China’s exports are manufactured products for USA based companies. These companies pay to source and ship raw materials to China for low cost factory workers to produce a final product and then it is shipped to the US for consumption. It is time we build our own factories for manufacturing.
In addition to this, it is clear that at some point our politicians will finally get together for an Infrastructure Bill. President Trump stated on March 31, 2020:
“With interest rates for the United States being at ZERO, this is the time to do our decades long awaited Infrastructure Bill. It should be VERY BIG & BOLD, Two Trillion Dollars, and be focused solely on jobs and rebuilding the once great infrastructure of our Country! Phase 4”
Whether it be Investment in our infrastructure, which will be great for construction contractors, or the inevitable investment the Government will make to continue pushing Made in America, you as a small business owner should start thinking about what you will need to grow your business. Do you have the infrastructure to handle larger orders? More importantly, do you have the Liquidity!
There are finance tools available for paying for supplies, payroll, equipment rentals and receivables. There are 2 forms of Supply side Finance that are available for businesses either getting contracts for construction build, or manufacturers with large orders that need funds to pay suppliers. Both are versions of Purchase Order Finance. Other tools available are Receivables Finance. Below will highlight options that are available to any business who is performing services or selling products to another business.
There are essentially 2 versions- Traditional PO which ensures your suppliers are paid, but this traditional version does also require a receivables facility to be in place so the PO lender can establish an Inter-Creditor agreement to ensure they are paid back when an invoice is created. These facilities usually require minimal deal sizes of $500K and are solely for Supply finance and possible inventory establishment. The second version is called Mobility Finance and requires you to have an established contract. This is geared towards construction and will ensure you can pay suppliers, payroll, equipment rentals, etc.- IE Gross Margin costs.
There are 2 versions of this as well. This allows you to advance yourself funds due from your clients. The standard format of this is known as factoring, where a lender will purchase your receivables and advance you funds so you do not have to wait to get paid. This is by far and away the best liquidity program for a business that has receivables as it always ensures liquidity for your business. There are many benefits. The second version is similar to factoring as you still use your receivables for collateral, but they are pooled to create a Line of credit based on what your outstanding AR is at any point in time. Rates are fixed monthly and you need only use what you truly need.
AFS has very broad experience in these products and would be more than happy to explain more in detail with a complimentary analysis of your specific needs.
We will get through COVID, but will you be in the best liquidity position to capitalize on what will be the new supply chain world.
Alexander Financial Solutions, LLC