What are the risks and opportunities of international trading for manufactures?

In today’s uncertain world, manufacturer and producer businesses like yours face uncertainty on a number of fronts. Customers are becoming ever more demanding, leading to shifts in buying trends. International trade wars are sparking fears of another global downturn. And the COVID-19 pandemic has impacted nearly every business in some way, with lasting uncertainty and new ways of working.

As a finance professional, this means your role will undoubtedly have evolved in recent times. No longer simply responsible for managing key finance initiatives, you’re a protector of the business. As the treasurer at a Mid-Market Enterprise in the packaging industry tells us, “A key role I undertake is forecasting and projecting business performance against the budget, reporting directly into our CFO. I am accountable for creating action plans whenever we are off budget.”

To keep the business working effectively, you need to safeguard against unpredictable movements in the market, stabilising your finances in volatile times. Sometimes it can feel like you spend all your time just keeping the plates spinning. However, where there’s disruption, there’s always opportunity.

With forward-thinking strategies to create strong, flexible finances, you can not only help your business survive such volatility, but actually thrive and expand into new markets. This is essential if you’re going to succeed and gain a competitive advantage. But it also comes with risk.

Working with international businesses brings even more unpredictability. There are unfamiliar operating cultures to get used to. Foreign businesses have different payment infrastructures. And there’s a greater chance of late- or non-payment. So, how do you widen your horizons without exposing the business? We spoke to a number of global manufacturing and production businesses about expanding into other markets, what issues they faced and how they overcame them.

Working with businesses in foreign markets means you’ll have to deal with foreign currencies. And this can have a significant impact on your business. Firstly, foreign exchange (FX) rates are always shifting, so, even if the price of materials remains stable, when the rate changes you could suddenly be paying either more or less for the same thing. It can work in your favour, or it can have a detrimental effect on your profit margins. As one manufacturer of retail and consumer goods says, “The FX rate is always a concern. We constantly need to minimise our costs – our competitors are overseas suppliers who can undercut prices because sometimes they pay less tax than we do.”

To protect your business, it’s essential to create robust FX strategies that take this into account. You need to be able to react to the market – minimising risk when the markets aren’t in your favour. Equally, you need to take advantage of better times, reacting to positive fluctuations and reaping the rewards.

Despite this, many businesses say they don’t have the right strategies in place to carry out this kind of ‘hedging’, which means they could be missing out on such opportunities. “We are not a very large company,” says one treasurer at a mid-market enterprise in the packaging industry, “so it would be difficult to do anything like complex hedging. We just have to take the risk, and we know this costs us.”

Too many organisations see this FX risk as a barrier to positive opportunities. However, no matter how big or small your business is, hedging against the potential impact of FX disruption can have positive benefits.

It’s not only FX risk that your company could be exposed to when working with partners in foreign markets. Trading volatility abounds between different countries. Sanctions are always being imposed and lifted. And pacts between trading countries are changing regularly. The knock-on effects can have wide-reaching consequences. So, being able to reliably forecast and plan for disruption is essential for any business.

Indeed, as a producer or manufacturer, your business could easily be impacted by the effects of geopolitical risk, as consumers lose confidence and sales drop. As the CFO of a luxury goods manufacturer tells us, “Political stability and volatility affects us indirectly. If growth falls a few percentage points in one market, it will really affect our target audience’s purchasing power.”

Clearly there are financial rewards for companies that branch out into new territories. But you need to be resilient to geopolitical disruption. To do this, some businesses are investing in technology – improving their efficiency to drive agility and healthier margins.

When you expand internationally, you open your business up to new threats. You could suddenly find yourself with longer, more complex supply chains to monitor and manage. And you could face a change in consumer trends, as buyers become more demanding. They want the newest products, the best quality, and all at the lowest prices. And as consumers become more socially conscious, they’re also demanding products manufactured in more sustainable ways.

This doesn’t necessarily need to have a negative effect on your business. In fact, get ahead of your competitors and you could create a USP that drives sales and profits. However, achieving this could have a noticeable impact on your supply chain. As you source materials from different suppliers, look at minimising your environmental impact, and seek deals with new retailers. As the CFO at a mid-market enterprise in apparel manufacturing says, “Over time people will transact more locally. People are increasingly thinking about sustainability and with my footprint, do I really need to be travelling those distances?” To really future-proof your business, you need to be agile enough to diversify your modes of production to meet these changing needs.

Diversifying your sources of supply not only helps you develop more sustainable production practices, it can also help to safeguard your business in other ways. Firstly, with a larger roster of suppliers, it’s easier to maintain supply. Limit yourself to just one, and should they encounter problems, you could see your supply chain grind to a halt. So, it pays to keep your options open. As the group treasurer at a large corporate that sources raw materials internationally tells us: “We’re trying to diversify the sources of our products and reduce dependency on just one source.”

However, sourcing new suppliers can be a headache in itself – especially when working across global regions. As well as overcoming the different social barriers, you need to ensure new partners are financially stable, economically viable and able to collaborate effectively. The group treasurer continues, “We rely on basing production in countries with reliable, stable economies that are open to business and where people are knowledgeable and experienced.”

To minimise this risk, some businesses are implementing a digitised supply chain between themselves and their partners. This kind of set-up gives you better insights into every part of your supply chain, so you can see what’s happening at every stage. And with this increased visibility and transparency, you can work more collaboratively with partners, ensure cash flows efficiently through the chain, and detect and fix potential problems before they even arise.

By widening your pool of suppliers, and introducing technology to give you better insights, you can greatly reduce the risk of expanding into new territories. This in turn can lead to richer partnerships, improved production processes, more favourable deals on raw materials, increased sales and higher profit margins.

To really grow your business, expanding into new global territories can offer significant rewards. And with the right strategies in place to protect your business, it can be very lucrative. However, it’s important to have a few key questions in mind: What effect could fluctuating exchange rates have on your bottom line? Are you able to source materials and manufacture products to meet consumer demand for increased sustainability? And do you have the right insights to predict disruption before it happens?