Octet’s Senior Working Capital Specialist, Joe Donnachie sat down to chat to us about Australia’s current importing and exporting challenges, and the key risks associated with foreign trade.
When it comes to current risks in international trade facing Australian import and export companies, few are bigger than our general overreliance on a single country – China – as our primary supply chain source.
Leading up to 2020, it made at least some sense for the majority of Australian importers to use China as their sole source for importing goods. However, we’re now rapidly learning that there are several risks associated with ‘putting all our eggs in one basket’.
These risks range from foreign exchange fluctuations to delays, and from freight costs to the inability to travel to build relationships or even vet suppliers.
A 2020 study by UK think tank, the Henry Jackson Society examined the dependency of US, the UK, Canada, Australia and New Zealand on imports from China. It looked at 5,914 categories of goods imported and found that Australia was strategically dependent on China for 595 of the categories, more than any of the other countries.
Below are some of the most common impacts these trade over-reliance issues can have.
Foreign exchange fluctuations
The past 18 months have seen foreign exchange fluctuations of up to 30%. Companies that predominantly trade in USD saw the market drop down to 55c in March 2020, and then go back up to over 70c.
Swings of this magnitude make it essential to manage exchange rate fluctuation risk appropriately. Failing to do so will significantly cut into an organisation’s bottom line.
The cost of freight
Some customers have reported freight cost increases of up to 400% since March 2020. Two factors have influenced this jump: the domestic stay-at-home economy, plus increasing trade tensions and tariffs.
Firstly, in the COVID-related stay-at-home economy, many Australians are now in a better financial position than they were last year. Between JobKeeper, early superannuation withdrawals and rent delays, a significant number of Aussies have access to extra cash.
Add to that the general lack of holidaying, and the result is an increase in major home-related expenditure – often for bulky items like furniture, white goods and DIY construction materials. This has led to a huge demand for imports into Australia, and the containers are piling up.
On top of this, trade tensions are rising with the country we’ve been over-relying on as an import source – China. This has led to the financial issue of huge tariffs on certain Australian exports, and the logistical issue of containers stacking up on our shores. Shipping delays and increased costs have both become a problem, resulting in greater risk within international trade than in previous years.
To mitigate this risk, we’re seeing many Australian businesses switching to domestic suppliers. This means they no longer need to factor in exchange rate fluctuations, plus they gain a level of reliability that offshore businesses can’t provide.
Domestic suppliers are usually more expensive, yes, but many businesses are happy to pay a premium for greater reliability in the current climate.
Lack of visibility due to closed borders
Once upon a time, when businesses were dealing with overseas suppliers, the first step would be to fly to the relevant country and visit the factory in person. This helped to build more concrete relationships, and also ensured that the products or materials met the necessary quality standards.
With borders being closed, business travel simply hasn’t been possible for the past year; and less transparency has often meant a lower level of trust in the importing and exporting world, and greater general risk in international trade.
Overdemand and raw materials shortages
Another huge issue is the overdemand for certain types of products, such as PPE and construction materials. Meanwhile, the entire country is experiencing a lack of certain raw materials, thanks, in part, to global shutdowns. Polymeric diphenylmethane diisocyanate (PMDI) which is used in the production of adhesives and foams, as well as other organic chemicals, are in short supply.
This means that suppliers – both within Australia and overseas – are finding it difficult to meet consumer demand. And in turn, this has created supply chain issues for many Australian companies, even larger ones that normally command great purchasing power.
Australian import and export businesses can navigate these challenges
To manage your risk in international trade, it’s important to pay attention to your overall supply chain. Things have changed over the past year. Previously, bigger suppliers (and buyers) would dictate terms, but that’s just not the way things work in this uncertain period.
Instead, the dynamic has now shifted to focus on building good business relationships, including intelligent, mutually beneficial, trading terms.
Supporting the supply chain
Imagine a company, STAR HARDWARE AUSTRALIA, is struggling due to local lockdowns slowing Australian cabinetmaking. If they try to push out their supplier’s payment terms to benefit their own business, the supplier might end up simply falling over. Net result: the company just lost a source for their product.
So, instead of trying to bully their supply chain for better terms, STAR HARDWARE would be better off searching for ways to proactively and sustainably support them.
One way to do this is by using Octet’s Trade Finance facility to take advantage of any supplier early payment discounts that can be negotiated. This benefits both parties:
- The supplier gets funds quickly, so they can continue to meet all of their day-to-day costs.
- The buyer has access to the capital for quick payment, guaranteeing their stock. And often, the early settlement discount is enough to zero out the cost of the Octet facility.
Increasing visibility and transparency
Octet’s Supply Chain Platform can also help to increase security and trust in an environment that prohibits meeting suppliers face-to-face.
As a buyer, using the platform gives you peace of mind that we’ve taken responsibility for onboarding and verifying every supplier. You might be stuck in Australia, but we have a team on the ground in Shanghai that can head out, meet with your suppliers and do background checks. Our team ensures that each supplier has all the relevant trade documentation.
And because the platform is multilingual, it facilitates clear communication with your suppliers once they’re verified. Plus, we also digitise the letter of credit process before any transaction can occur, meaning that all transactions are verified and approved by both parties right throughout the process.
Meanwhile, your supplier knows that our Supply Chain Platform guarantees their payment. Again, this creates a secure and efficient trading environment for both parties.
Solidify your supply chain
In a volatile global trading environment, managing your import and export risk starts with being financially prepared. Taking measures to support your supply chain and secure sustainable working capital solutions can protect you from both supply shortages and fraud.
Get in touch to discuss how our solutions can help your growing business.
Disclaimer: The following comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as at the date of publication and are subject to change without notice.
