Global Sourcing a Way to Reduce Manufacturing Costs if You Seize the Opportunity
Global sourcing is a term used to describe practice of sourcing from the global market for goods and services across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product or service. These efficiencies include low cost skilled labor, low cost raw material and other economic factors like tax breaks and low trade tariffs.
For global companies who have already spent lots to time, energy, and money in setting up manufacturing plants and distribution systems to take advantage of these efficiencies they have increased their competitive advantages over their smaller competition. This same competitive advantage can be found in companies who provide global manufacturing sourcing that can bridge the gap between the different countries and cultures. One of those knowledge based companies is Padtech based in Delta, B.C.
Padtech transformed themselves from a 20 year manufacturing company who saw the need to make the switch from a small manufacturer to becoming knowledge based global manufacturing sourcing company. What is a manufacturing sourcing company and where does it fit in the manufacturing industries? Good question, we asked Dan Lionello, President of Padtech what the concept is and how they reduce the cost of manufacturing for its clients.
Padtech combines its expertise of understanding the manufacturing process from beginning to end and using the knowledge of manufacturing workflow to develop a process to in the last several years which combines taking a client’s engineering drawings into a common manufacturing production document, with its relationship based global network of manufacturers in foreign countries to create a “Manufacturing ecosystem” which has saved its clients anywhere from 15 to 50% on the manufactured cost of their goods.
Common examples of globally-sourced products or services include: labor-intensive manufactured products produced using low-cost Chinese labor, call centers staffed with English speaking workers in the Philippines and India, and IT work performed by programmers in India, China, and Eastern Europe. While these examples are examples of Low-cost country sourcing, global sourcing is not limited to low-cost countries.
The global sourcing of goods and services has advantages and disadvantages that can go beyond low cost. Some advantages of global sourcing, beyond low cost, include: learning how to do business in a potential market, tapping into skills or resources unavailable domestically, developing alternate supplier/vendor sources to stimulate competition, and increasing total supply capacity. Some key disadvantages of global sourcing can include: hidden costs associated with different cultures and time zones, exposure to financial and political risks in countries with (often) emerging economies, increased risk of the loss of intellectual property, and increased monitoring costs relative to domestic supply. For manufactured goods, some key disadvantages include long lead times, the risk of port shutdowns interrupting supply, and the difficulty of monitoring product quality.
It is some of these pitfalls or hurdles which have prevented many smaller Canadian companies from exploring further the potential manufacturing partnerships in other parts of the world. Padtech however, has created this system of where they become the middleman between the North American customer and its network of partners throughout the rest of world to ensuring the manufactured products live up to the specifications and quality required by its customers.
Padtech is essentially an outsourced service with a major advantage over a smaller company trying to do this on its own, it’s the relationships built by them over the last few decades in other cultures and their ways of doing business to ensure that their customers get what they want at the time they want. They have learned to build those bridges with the other cultures which in North America many companies do not take only a year to build but in some cases several years before a supplier will do business with an unknown prospect to them. Padtech simplifies the process even further by developing a framework which takes the engineering requirements and developing a blueprint which engineers in other countries can decipher and use much more easily than a standard engineering document from a company in North America. What this also does is reduce the risk in prototyping and gives more transparency to the process instead of having the whole process done in house.
For global sourcing the investigation is definitely worth the risk as globally production is growing and being able to potentially reduce the manufacturing cost while maintaining product quality might be able a strategy to improve profits at the end.
Written by Richard Wong, CMA Email: rwong@firstchoicecapital.ca
Padtech logo
Our last TEC Advisory board meeting we discussed the usual things such as how is business been this past month, what major issues are on the table & what you’re doing about it, and what major issues do your clients have at this time. Nothing out of the ordinary, except sales cycles are taking longer which leads me to ask the question how many companies out there currently have salespeople who have not been trained for those bad times? We all know its easy to sell during good times, for many it was make a couple of calls and get the deal signed, but now I would say that consensus around the table is that we haven’t seen sales cycles like this in over the past decade!
The point that was being made was that we need to start training our younger sales staff the art of sales and getting to the real needs and objectives of the prospect and letting them know that it will take longer to close sales in today’s business environment. The alternative is that are you leaning on your more experienced sales staff, or in other words people probably in their 40’s or 50’s who have been through tough economic times and know that they have to do a lot more digging to qualify prospects and know more sales techniques to better meet the needs of prospects?
Sales are tough today, do you have the right people, invested in the right systems, and training and touching customers more often to maintain those relationships? If not, your shareholders, owners, and bankers could be asking the more difficult questions of you.
Written by Richard Wong, CMA email: rwong@firstchoicecapital.ca
TEC advisory group for CEOs meeting a day ago has the opinion that the economy in general that we are still in for more of the ups and downs of the stock market and economy in general. This advisory group includes professional service providers from mergers and acquisitions specialists, human resource consultants, group insurance providers, merchant banker, investment wealth advisor, business advisory coaches, CFO advisor, to CEO mentors.
The majority of the advisors in the room have over 20 years business experience and have gone through some of the downturns and definitely say that the major difference today in coming out of this last recession is that no one seems to believe that we’re on our way to a major recovery, that the recovery will have hiccups and the economy will go up and come down, maybe averaging zero percent growth for the next couple of years, but potentially income taxes might need to rise in order to continue to pay for continued government economic stimulus.
For a lot of business owners they have experienced a time period where there hasn’t been either constant of great growth and their sales teams haven’t had to work really hard and make several pitches to a prospect before they become a customer. For some regions of Canada, sales teams are being slowed down to several months before a prospect gives the okay to a purchase. For some inexperienced sales reps this is new territory and the adage of its cheaper to get a current customer to buy than to bring in a new customer is much more relevant in today’s world.
Statistics from various agencies have shown that the economies of the world have been propped up 100% entirely from the world’s governments economic stimulus plans. We question when the stimulus plans are done, whether or not consumer confidence will have increased to the point of taking over or whether more economic stimulus dollars will be needed.
The end result of stimulus plans will always be higher taxes, and this time around I am thinking that it will be individuals’ income taxes which will increase by a few percentage points rather than business. We need business in order for their to be employees to pay their taxes is always the rationale behind increasing taxes for individuals.
We can hope that consumer confidence will grow in the near future so government stimulus won’t be necessary.
Written by Richard Wong, CMA email: rwong@firstchoicecapital.ca
Renewable energy companies including solar, wind, biofuel, and others for the first time in 2008 got more investment capital than conventional oil & gas companies. Green energy companies received more investment funding than fossil fuel companies as per a report from the United Nations.
Clean technologies including wind, solar, and others attracted over $140 billion in new investment dollars while gas & oil attracted $110 billion. Over 1/3 of the green investment dollars were for European companies. This continues Europe’s forward thinking amongst government, people, and investors on how to find ways of getting greener. They are being closely followed now, by now China, India, and other countries rather than Canada and the United States.
Some of the reasons I believe is that Europe has long been using cap and trade systems for carbon credits while in North America most of us are still trying to understand the concepts of carbon tax and cap and trade. China and India out of necessity of trying to find alternative cheaper energy and less issues of disposal and pollution have embarked on it to help continue to grow their economies in this economic downturn.
Achim Steiner, executive director of the United Nation’s Environment Program said that this recent milestone of more investment dollars attracted to renewable energy is a tipping point for for global energy versus fossil fuels. He is also encouraged by African countries like Kenya and Angola have entered into the field.
United Nations though still believes that $750 billion needs to be spent between 2009 & 2011, especially when in 2009 so far renewables energy investment has only totalled $13.3 billion.
Even with the new investment dollars the industry wasn’t immune to the stock market downturn as investment capital dropped by 51 per cent to $11.4 billion and stock prices dropped by over 60 per cent according to the Global Trends in Sustainable Energy report done by New Energy Finance (NEF) in London.
The United States though is one of the leaders in wind energy investment with over $51.8 billion and $33.5 billion for solar energy. Solar energy investment rose by over 50 percent year over year.
Biofuel was the next most popular investment at $16.9 billion but has come across environmental and political issues regarding ethanol creation at the expense of farming crops and rising food costs.
The trend in 2009 is alarming though to the United Nations as renewables energy investment as they have forecasted that current investment would lead to about $95 billion to $115 billion in new investment.
Green Investment as Per Cent of Global Economic Stimulus is shown below in the table below:
Written by Richard Wong, CMA rwong@firstchoicecapital.ca
Private company financing is in many ways easier to get as you don’t have the regulatory hurdles you would as a publicly traded company on a stock exchange. The most important reason why some companies stay private instead of going public though is being able to keep control of the business, making decisions which generally are best for the long term success of the organization.
Shareholders complain to management and directors through primarily stock performance, rather than necessarily the business performance. Stagnant growth or maintaining profits are not sexy enough for most stock analysts and shareholders, while in a private company the owners’ can think about the long term health of a company and make decisions based that way. Think of it another way, the owners’ don’t have golden parachutes, their retirement strategy is to build the strength of their companies in order to hand it down to family or sell it for a healthy profit. This kind of decision also mirrors how private companies are financed such as below:
- Credit card
- Operating lines of credit
- Operating assets lease financing
- Accounts receivable financing
- Mezzanine Debt
- Subordinated debt
- Private equity financing
These financing methods apply to start ups to established companies and each a have purpose in the growth or the business life cycle and also reflect the amount of equity a company is willing to give up in order to attain growth. The earlier stages are boot strapping a company to growth with equity being grown by the owners and the later stages are potentially giving up equity for orderly succession or exit strategies.
Written by Richard Wong, CMA rwong@firstchoicecapital.ca
Growing up in a small business environment, watching your parents work harder and harder to make a good life for us as children I believe that my parents probably worked too hard and didn’t give themselves the opportunity to maximize the value of their businesses before retiring.
Succession planning should start earlier, not at age 65 when people retire, but several years before in order to determine an exit strategy which either passes along the family business to the siblings or to get the businesses ready for sale. In Canada according to a CFIB (Canadian Federation of Independent Business) 70% of small businesses owners will retire in the next 5 years. That provides 2 business scenarios for small business owners, one, that the businesses will be hopefully passed along to one of their siblings in order to quickly deal with the succession planning issue or two, that there will be a lot of small businesses coming up for sale.
But I believe that one of the biggest hurdles to succession planning is that small business owners who have had businesses for a long period of time actually think of their businesses as being part of the family like another child and there’s the emotional tug of war on deciding to give up the business even to their children if that’s the route they choose. The more difficult decision is to decide to sell the business to an outsider and that’s probably one of the biggest reasons why people outside the business might view it as procrastination, but to the small business owner it could be more an emotional factor. My parents were already past retirement age when they decided to sell some of their businesses and hang onto a few others.
This delay hurts both the employees of those businesses as well as the owners in that their is a definite lack of plan of going forward and the owner’s passion has already waned and they’re no longer really interested in running their businesses, but don’t want to necessarily letting go.
These businesses have been profitable but the owners’ have had a hard time taking time away from the day to day running of the business, or taking a step back to look at their business at the 10,000 foot level and trying to setup their business to become saleable at the most attractive price.
A study released late last year by business transition specialists ROCG Americas found only one in 10 owners received a price for their business near what they wanted or expected. The primary reason given was improper or lack of planning.
ROCG conducted the survey in North America and found that businesses with revenues between $1 and 100 million said that they were either too busy to plan for a business sale or it was too early to start thinking about it, even though 84% of them said it was important to their retirement plans.
“Many business owners are not aware of the complexity involved in the succession planning process, particularly in executing a divestiture transaction,” says Michele Middlemore, vice-president of Aon Corp.’s M&A Transaction Advisory Group. “Almost always, they underestimate the time and work and difficulty involved in getting something like that done. More often than not, they tend to postpone dealing with it and are not prepared adequately when the time is upon them.”
Businesses should be planning 2 or 3 years in advance for the divestiture.
One of the big ideas to put in place is the movement of the value of the business is from the business owner to that of the business itself. Since small business owners are generally the drivers of the business, it’s usually been in the sales and marketing roles and this is one of the areas which has to be transitioned over to the company. This is easier said than done, in that one quite often that there isn’t the bench strength to take over and this has to be brought into the company. Their might be changes in technology which might be needed to brought into the company as well to allow to compete better.
One can look at the succession planning in a way is like embarking on a new business plan and here a corporate financial advisor can help with getting an independent valuation of a business to let owners know where the strengths and weaknesses lie and what to expect as a potential starting point for a dollar value of a business sale.
According to the Business Development Bank of Canada, business succession is a process that requires thought, planning and time to arrange and execute: “Whatever your definition of success, making the commitment to let go of the business and place it in the hands of someone else is perhaps the critical factor that ensures your business transition goes smoothly and profitably,” the bank notes.
Just remember though that succession planning shouldn’t be determined by what the economy is doing or the stock markets, but by personal circumstance, if you’re ready to retire, then you should be planning for it in advance by 2 to 3 years. The process is a complex one and is similar to building a new business plan, except that you’re trying to help build for the next set of owners’ to succeed and by doing so you and your family will get top dollar for your business you have built over the years.
Written by Richard Wong, CMA rwong@firstchoicecapital.ca
Myth 1: The value of my business can be generally determined by using an earnings multiplier of my industry. ie. 3 times EBITDA
This is the most common myth. The earnings multiplier can be useful to get an overall general value based on the industry, but it doesn’t apply to all businesses within the same industry. For example, your neighbourhood grocery store will not have the same earnings multiplier as the Safeway grocery chain. Other factors of value such as supplier influence or technological superiority will also have an impact on the company’s value compared to its peers in its industry. Further, sometimes outside 3rd parties — such as the CRA, IRS, banks, courts, trustees, and other interested parties — will not accept industry multiples to determine value.
Myth 2: Once I have an appraisal done the value will remain constant from year-to-year or period-to-period.
Businesses are not like the Canadian government savings bonds, there is competition, business environment changes, new suppliers come into an industry if it’s profitable enough, some suppliers decide to divest of themselves, some competitors give up on certain product lines, while others join the market because they think they can make more money than some of its competition.
Businesses by their very nature are dynamic, not static and given this their values can easily change from year to year.
Myth 3: Valuation methods and approaches produce an absolute value.
The truth is, if you were to have 5 business valuators value the same business, all 5 will come up with a different value. That is because each analyst may use different methods, approaches, discount rates, risk levels, and other variables to estimating the value. But, if the valuator uses sound valuation methodology and approaches then you can assume the business valuation will be reasonable.
Myth 4: We can have our accountant or lawyer do a valuation.
While these professionals seem like a good resource for assessing the value of your business, they may not be equipped with either the skill, qualifications, or experience to conduct the valuation process properly. Even if they do have proper credentials for valuing your business you may want to reconsider having them perform the valuation. The reason is there is a built in conflict of interest, since they will have an on-going interest in your business after the valuation study is completed, so there is a likelihood the value they derive for your business is biased, either high or low in favor of what you are hoping the outcome will be.
Myth 5: The Financial statements of the company are good enough to determine value.
A company’s financial statements are the basis for a business valuation, but there are many other factors that affect value. Some of these include : the competition, industry, economy, organizational structure, management, its capital assets, where along the business/product life cycle, as well as many other factors can affect the value of a business.
So you can see that in the process of a business valuation there are many factors which can determine the value attached. These business valuation myths don’t use proven methodology, and best practices in determining value. Taking the wrong approach on valuing your business can cost you a lot in terms of time, by prolonging the sale or financing process or money by not having an objective 3rd party opinion which are used to help settle law suits or prevent financing on time and on desirable terms.
Written by Richard Wong, CMA rwong@firstchoicecapital.ca
In the sale or purchase of a private company its still necessary to use best practices in order to have the parties feel good about the transaction. Using the services of a corporate financial advisor, a tax accountant, a corporate lawyer who work together as a team from the beginning will provide you with the ability to see things that are often overlooked by purchaser in a company.
In a past transaction the sole shareholder(owner) of a private company sold his shares to an independent purchaser and the capital gain realized was eligible for the small business corporation shares capital gains deduction. So far so good for both parties.
However, one of the most common issues which is misunderstood by both the purchase & seller is the “Due to/from shareholder” account. On the surface it seems like a fairly straight forward liability account, the credit balance in the account is owed to the shareholder. Here is where the 3 professional advisors, a corporate finance lawyer, the tax accountant, and the corporate financial advisor know that this is a liability like any other liability and is owed to the shareholder. Some accountants have trouble understanding this because they assume that the company had sold its shares, but the shares are separate from its liabilities.
Another effect of this “credit balance” in the Due to Shareholder account is when the new owner decides to draw money out of this account he will have been deemed to have received a “taxable benefit” under Section 15 of the Income Tax Act. Why? The withdrawal transaction isn’t a return of capital it’s a debt owed to its the former owner. The capital gain for the seller of the business in this situation is also overstated which the capital gains exemption the owner has here.
An example might help here: the seller of the business sells her business for $500,000 and the owner has a credit balance of $150,000 in the Due to Shareholder account. In the sales agreement the buyer of the business should ensure that the agreement reflects an allocation of the purchase price of $150,000 to purchasing the debt of the Due to shareholder account and the remainder allocated to the purchase of the seller’s shares. The reason is that the purchaser has a debt owed by the company to herself and when she wants to withdraw some of it, it will be tax free unlike the prior situation.
This unfortunate situation can be reversed, but if the parties use best practices and have a coordinated team of advisors working from the beginning it will save time and money for both the buyer and the seller. But sometimes, the transaction go through due to no advice for either party and the consequences are a tax project case resulting in more money spent on a tax advisor later. In a case documented in CMA magazine an accountant figured they fixed this by exchanging the debt for more shares, but caused more tax problems in the allowable business investment loss issues and failed to take into account subsection 80(2) of the income tax act which allows the debt to be settled for the fair market values of shares issued.
The lesson here is that it is easier to have a team in place before you decide to do a sale or purchase of a private business to advise you on the issues, because they’re not as straight forward as you may think. You can’t substitute the expertise of a group of advisors to help you save you money and headaches in the long run.
Written by Richard Wong, CMA rwong@firstchoicecapital.ca
Part 2: Simon Pimstone, President & CEO of Xenon Pharmaceuticals Interview
As a large part of the life sciences group in BC Simon Pimstone met with Liberal leader Michael Ignatieff on life sciences and explained the issues of funding, and you would think that it would fit in with Ignatieff’s desire to build a larger knowledge based economy and a louder opposition to the Canadian federal government’s budget would have sent that message on behalf of the life sciences community that it does have greater support, especially in the downgrade in future funding in this area.
The Canadian TV & film industry according to industry reports employed 126,900 FTE’s (full time equivalents) and the value of production was $5 billion in the 2006/2007 years. This compares to the Life Sciences industry in Canada which produced sales of $1.9 billion but the tax breaks are not equal with the Canadian federal government and provincial government film and TV tax credits allowing up to 53.5% of BC labour expenditures on a yearly basis.
BC universities produce between 3,000 to 4,000 science graduates of which many do not find employment in Canada, yet all the life sciences is asking for is a fair share of funding to continue to find cures for different diseases that helps all Canadians and the world. The public cost of educating students who end up working in another country is approximately $48 million (3,000 students * $40,000 expected cost of education * 40% funding from governments, estimated) . This a huge cost only for a single province, not the entire country where the Canadian people are funding scientists to work in other countries at the end of the day.
What’s important is not providing funding on an ad hoc basis but continued basis even if its smaller amounts to foster an environment of innovation and then onto commercialization opportunities through Genome Canada, CIHR (Canadian Institutional Health Research) and tax incentives.
Our health system is arguably one of the best in the world, some say the United States, but only if you’re willing to pay $2,000 per month.
SRED is a good funding tool starting from 1995, but really now inadequate for Canada’s life sciences sector as drug development takes much more time and money in order to recoup research funding. It is only good for Canadian controlled private corporations, (CCPC’s) which many are not anymore because they’re too large and Aspreva Pharmaceuticals & Biovail Pharmaceuticals are some of the few companies which have profits in order to recoup some of these research that takes several years to make create a single drug. A cap limit on SRED would even be more palatable to the sector ie. $100 million if they took off the CCPC eligibility requirement and the threshold are too low with barely any increases since 1995.
Even if tax incentives, to entice offices in Canada such as providing tax holidays for bringing in new manufacturing facilities where they employ 200 people which are paying income tax now where they don’t pay personal income tax for the first 2 years with a commitment for 5 years residency then people would be paying taxes and spending that income in the country and province.
Allow investments earned from life science investments in 2009 and 2010 to be exempt from capital gains tax but was ignored by the federal government in the budget. Use some of the carry forward losses that life science companies have accrued and provide a formula where say 1/2 of all carry forwards are eligible ie. 40 million and provide a cash reimbursement for 25% of the 1/2 which would result in needed funding to continue doing research to reaching the milestones.
The facts are that SRED was really designed for large company models, large drug companies, large aerospace companies, not really the Canadian life sciences sector which the majority are small companies from 5 to 150 people. The inadequacy of updating the Canadian Scientific Research & Exploration Development tax credit system is costing the Canadian economy jobs in the short and long term, but more importantly the potential cures to the various diseases and cancers out in the world.
Written by Richard Wong, CMA rwong@firstchoicecapital.ca
Orthocon, Inc.: Series B $25M
Orthocon (North Brunswick, NJ) a preclinical-stage company focused on implantable devices that deliver therapeutics to bone, closed a $25M Series B financing.
Aerovance, Inc.: Series C $38M
Aerovance (Berkeley, CA) a clinical-stage company focused on respiratory and allergic diseases, closed a $38M Series C financing. Participants include ProQuest Investments, BB Biotech Ventures, Apax Partners, Clarus Ventures, Alta Partners, Lehman Brothers, NGN Capital and Burrill & Co.
OPX Biotechnologies, Inc.: Series B $17.5M
OPX Biotechnologies (Boulder, CO) a research-stage biofuels company using synthetic biology to engineer the microbes as a renewable fuel source, added to their Series B financing bringing the round up to $17.5M. Participants include Braemar Energy Ventures, Altira Group, Mohr Davidow Ventures and X/Seed Capital.
Traversa Therapeutics, Inc.: Series B $5M
Traversa Therapeutics (La Jolla, CA) a preclinical-stage biopharmaceutical company developing RNAi delivery technologies, closed a $5M Series B financing. Participants include Morningside, Mesa Verde Venture Partners and Tech Coast Angels.
CeraPedics, Inc.: Series B $15M
CeraPedics (Broomfield, CO) a clinical stage device company focused on osteobiologic products for bony voids, closed a $15M Series B financing. Participants include NGN Capital and OrbiMed Advisors.
KeyNeurotek Pharmaceuticals, AG: Series C $10.9M
KeyNeurotek Pharmaceuticals (Germany) a clinical-stage small molecule company focused on autoimmune and CNS diseases, closed a $10.9M Series C financing. Participants include DVC Deutsche Venture Capital, IBG Beteiligungsgesellschaft and KfW Bankengruppe.
Ambrx, Inc.: Series D $10M
Ambrx (La Jolla, CA) a clinical-stage protein therapeutic company focused growth deficiency, closed a $10M Series D financing. Participants include 5AM Ventures, Aravis Ventures, CMEA Capital, Maverick Capital, Versant Ventures and Tavistock Life Sciences
