Coronavirus And Cannabis Businesses: A Catalyst For Natural Selection?
By Arnaud Dumas de Rauly, CEO of The Blinc Group and Chair of the ISO & CEN Vaping Standards Committees.
In 1859, Charles Darwin set out his theory of evolution by natural selection as an explanation for adaptation and speciation. This is the case with the Covid-19 coronavirus which evolved from its original form as part of its own Darwinian adaptation. (Coronaviruses range from the common cold to MERS and SARS).
Cannabis is a nascent industry affected by the usual external forces: political, economic, sociocultural, technological, legal, and environmental. None of those factors can be controlled, yet there were certainly mitigation processes that should have been implemented.
Natural selection was bound to happen in this “perfect storm” comprised of the cannabis market “bubble,” the vaping crisis and now this novel coronavirus outbreak. As Darwin might agree, those cannabis businesses that survive will be the fittest ones, stronger than ever, and having adapted, the most likely to thrive in the new industry environment.
Most cannabis companies purchase ancillary products from China, whether they know if or not, and are affected by this outbreak on multiple fronts, both internal and external, including:
- Staffing Issues
- Procurement/manufacturing Issues
- Shipping Issues
- Communication Issues
Unless the outbreak gets out of hand in the Western economies, staffing challenges are mainly impacting Chinese suppliers for now. Beijing wants all of the manufacturers to be back online as of March 1rst. The problem is that they are putting the burden on the provinces, on the cities, and on the industrial parks.
As an example of the common factory reopening paper trail – Beijing has a list of three documents that are required for approval to reopen; the provinces will add another three documents to that; the city then adds another three documents; and finally, the industrial park also adds three more documents. That's a total of 12 documents that manufacturers need to provide to commence operations.
Another issue, which we’ve seen over the past few weeks, is the lack of key personnel. If key managers of assemblers or manufacturers who have obtained approval are not back to work yet, there will be performance issues. This is the “stay home, don’t get sick, and get back to work” conundrum.
Imagine if the quality control manager or the quality assurance manager hasn’t made it back to the factory because of travel restrictions. In many cases, the manufacturer will not stop taking orders or wait for him/her to be back to start production. This might lead to QC or QA issues during manufacturing which in turn might either impact production schedules, timing of clients’ orders or the manufacturers’ capacity to keep up the pace. In some cases, less scrupulous manufacturers will skip these steps altogether and still try to deliver potentially non-compliant products to cannabis businesses in the US and Canada.
This is why experienced and thought-leading businesses have set up their own QA and QC teams on the ground in China in order to be able to prevent or mitigate these issues. Doing so not only helps streamline production on a day to day basis, but also acts as a redundancy measure during situations like the coronavirus outbreak.
Another added value resides in the possibility for these internal QA/QC teams to assist and educate manufacturers. Until this week, Blinc’s QC team has been filling in for one of our manufacturers’ internal team until they return, thus enabling streamlined production during this outbreak. Not to mention that this approach builds more trust and more front-of-the-line opportunities for future projects.
One of the biggest issues with relying on China as an exclusive industry supplier is that most cannabis companies are contracting with assemblers, despite the fact that they are referred to misleadingly as “manufacturers.” To illustrate this distinction: assemblers buy raw material and subcomponents from other manufacturers (e.g., 304 stainless steel, ceramic, LEDs, etc.), yet the critical complexity resides in the fact that one assembler can have hundreds of suppliers, which exponentially increases the potential for supply chain failures, even under optimal circumstances.
Cannabis businesses in the US or Canada end up not knowing anything about these raw material suppliers: the quality of materials, their manufacturing standards or their Quality Management Systems. Furthermore, for a majority of the smaller raw material suppliers, the virus outbreak has delayed the their reopening for a few weeks.
Some organizations cope far better than others with both the prospect and the manifestation of unquantifiable risk. It’s not about having in common a secret formula or identical processes for dealing with risk, but about sharing a critical trait: resilience.
As Yossi Sheffi says, supply chain resilience isn’t merely the ability to manage risk; it’s about a firm’s ability to manage risk to position themselves better than competitors to manage—and even gain advantage from—external force disruptions.
As intuitive as this approach might seem, building redundancies into your supply chain isn’t a priority in the cannabis industry. For the past few years, it’s been only about land-grabs, market share and go-to-market. Recently, the transition to quality control and safety focus has been the priority. While those are all steps in the right direction, a big principle of building a sustainable business is achieving recurring revenue. How can you have recurring revenue if you cannot confidently source your key ancillary products (cartridges, batteries, packaging, etc…)?
Aside from redundancy, adopting standardized processes allows a lot more flexibility. The ability to move production from one assembler to another by using interchangeable and generic raw materials in many products, relying on similar and even identical designs and processes across the board will go a long way towards mitigating the issues encountered during a viral outbreak.
As an example of risk mitigation, which utilizes our 10+ years’ experience working with Chinese assemblers and manufacturers, Blinc built a roster of two major and two minor suppliers for each raw material or subcomponent used on our production lines. As an example, just after Chinese New Year, one of our major suppliers of 304 medical-grade stainless steel was operational but not at full capacity. We were nonetheless able to complete our purchasing with one of our minor suppliers, which allowed production to resume on schedule.
Analysts are still crunching the numbers when it comes to the full impact of the COVID-19 coronavirus on shipping, but the signals so far indicate a bleak outlook in the short term, with the potential for prospects’ brightening in the coming months, depending on China’s economic recovery.
“It is inevitable that world port throughput will suffer a large contraction in the first quarter of the year, but the question is now whether we can expect a v-shaped recovery later this year or something else entirely?” says Drewry, an independent maritime research consultancy.
This contraction is mostly due to how the virus has slowed down manufacturing and that some approvals for re-opening factories still haven’t been given, hence affecting the output of Chinese manufacturers. The common thought is that shipments aren’t allowed out, but keep in mind that without goods, there are no shipments.
The shipment method most frequently used in the cannabis industry is airfreight. We all know that commercial aircraft have been grounded, and a lot of airline companies have reduced, if not stopped, routes to and from China. Most of the on-demand products, in smaller quantities, however, are shipped through commercial airlines (or specialized freight airlines like DHL and UPS).
As illustrated above, the issue with the coronavirus outbreak has mostly impacted the pre-carriage forwarders and of course the sea/air freight.
Spots on pre-carriage forwarders and flights/ships are rare and building redundancies in terms of logistics comes down to building relationships with shipping businesses and/or offering to pay an extra 20% for shipping. Selecting and having multi-year relationships with multiple Chinese forwarders goes a long way in being able to ship products out of the country. In some cases, at the peak of the outbreak, Blinc has been able to route shipments directly from a factory in Shenzhen to Hong Kong, therefore bypassing any potential slowdowns from mainland China.
Lack of communication is always a bad thing, no matter what industry. There are some situations where external forces like the current coronavirus outbreak just add to the confusion when it comes to proper, on-time and expectation setting communications.
To be clear, Chinese New Year disrupts imports every year. A little background will shed some light here. Each January, up to 30% of the Chinese workforce leaves early to return to their families who remain in the villages, and then, during the 10 day holiday, all of China is shut down as a result. Finally, up to 30% of the remaining workforce doesn’t come back to work, and this labor disruption is further enabled by a volatile job market in China and, in particular, in Shenzhen.
Therefore, while Chinese New Year is technically only 10 days, the annual holiday strains the supply chain for nearly two months and complicates communication between parties. When you add the virus outbreak to the mix, along with the quarantines and factories opening asynchronously, a perfect storm for communication breakdown results.
An easy way to mitigate this challenge is by controlling the supply chain. When businesses speak directly with not only their assemblers but also with their raw material suppliers, they are better able to prepare themselves and their clients for any potential negative impact. Transparency is the key here: by building those relationships and that level of trust throughout the entire supply chain, cannabis businesses are best able to inform and set expectations for their clients, in turn giving them a chance to put redundancies in place and avoid major setbacks.
In addition, yet not surprisingly, building relationships and communications channels with local Chinese governments are also critical in building resilience in the supply chain. As the COVID-19 outbreak in China was raging during this past Chinese New Year, having open and ongoing discussions with Guangdong province and Shenzhen/Boa’an deputies proved to be hugely important in the factories’ receiving approval to re-open. For example, Blinc, in coordination with two of our factory partners, offered to dedicate two full production lines that would otherwise have been reserved for our products, to create facemasks for Chinese citizens and thus were able to ensure that they were able to re-open for manufacturing on February 10.
The bottom line is that the cannabis industry (just like the alcohol industry) is practically recession-proof. On the other hand, just as Darwin’s theory of natural selection would predict, some unprepared businesses will be so adversely impacted by external changes that they will not be able to continue operations. The survivors should reap a competitive benefit and a hard won education from these back to back crises, as what doesn’t kill them makes them stronger.
Lead image by Ilona Szentivanyi. Copyright: Benzinga.
The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
© 2020 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.