Part of an ongoing series that looks at changes one year after the global trade wars ignited.
Finning International Inc. chief executive officer Scott Thomson has this advice for other executives looking at the ongoing chaos surrounding global trade: “Your views need to change every six months.”
Heeding that advice might explain why the world’s largest Caterpillar dealer has been making partnerships to supply equipment to data centres, with one set to launch in 2020. Data centres have largely been unaffected by Brexit and trade spats, existing as they do in the largely tariff- and tax-free digital economy.
Over the past year, billions of dollars have been poured into data centres worldwide. Most recently, Equinix Inc., a data centre multinational based in Dallas, Texas, in July announced a US$1-billion joint venture with GIC Private Ltd., Singapore’s sovereign wealth fund, for six new hyperscale data centres targeting Frankfurt, London, Amsterdam, Paris and Dublin.
Finning’s partners have yet to be named, but the company said that data centres are one of its strongest areas of growth right now, particularly in Ireland, since Finning is looking to offset some of the costs of doing business as traditional international trading gets squeezed by tariffs and other protectionist measures.
Other areas of the world hold different concerns for Finning. For example, it does not have a massive operation in South America, although its revenue in the region grew by 25 per cent this past quarter. Much of any continued growth depends on China. Chile, where Finning is based, makes up 30 per cent of the world’s copper supply while 35 per cent of the world’s copper demand is concentrated in China.
“When you see the increasing rhetoric between China and President Trump, it does create somewhat of an uncertainty for our end customers when they think about deploying capital,” Thomson said.
Finning International is the world’s largest Caterpillar dealer.
With the only global consistency being uncertainty, it’s a wonder that multinational dealers and retailers aren’t suffering more. Finning’s second-quarter net income came in at $88 million, up from $81 million a year ago, partially because of a five-per-cent staff reduction and the $241-million acquisition of mobile refuelling service 4Refuel, 90 per cent of which is based in Canada.
At the same time, Thomson realizes that part of Finning’s success comes from lowered expectations.
“We’ve also recognized that our revenue probably isn’t going to grow at the rate it was last year, so we’re going to be very cautious around our cost structure,” he said. “We’re coordinating with CAT in mitigation plans in order to get parts, particularly in European countries where we sourced about 15 per cent of our overall parts.”
Other multinationals, such as Aldo Group Inc., are also shifting their global procurement strategies.
The shoe retailer has always been a product of globalization. Aldo’s founder, Aldo Bensadoun, was born in Morocco, grew up in France, immigrated to the United States and ended up in Montreal, where he earned a business degree at McGill University.
He got his start selling clogs from Italy within retailer Le Château Inc. in Montreal in 1972. Aldo expanded to Europe in 1985, and entered the U.S. in 1993, the year before the North American Free Trade Agreement was signed. It opened an Asian office in China in 2011.
Aldo has never made a shoe in Canada, but it now employs about 1,200 people at an airy campus on the outskirts of Montreal, where employees track fashion trends, design new models and figure out how to get shoes and accessories to stores in more than 100 countries.
An Aldo store in Chicago, Illinois.
The closely held, family-owned company does not disclose sales figures, but Bloomberg News reported in 2014 that Aldo, and its founder, were worth more than $1 billion.
That success is not to suggest Donald Trump’s decision to trigger an era of deglobalization is causing some problems at Aldo.
“It’s not something we had to deal with in the past,” David Bensadoun, Aldo’s chief executive, said. “It’s really been in the Trump era.”
For example, the handbags Aldo sells come from China and they’re on Trump’s latest tariff list.
“We’re going to work hard to see how we can absorb it and not affect retail prices, but if we do get the 25-per-cent hit, we will have to increase retail prices for our customers,” Bensadoun told Financial Post last September. “We happen to produce quite a lot in Cambodia, Vietnam and in Europe and so we have an ability to move sourcing around, but when you move sourcing, it’s like six to nine months to move it. You can’t move it overnight. We’re reacting and we’ll adjust as we need to.”
Since that interview, Trump has announced a further 25 per cent tariff in May. Aldo, along with dozens of other global footwear companies, signed an open letter decrying these tariffs.
“This significant tax increase, in the form of tariffs, would impact every type of shoe and every single segment of our society,” the letter reads.
When the Financial Post reached out for comment, the company replied, “The Aldo Group is a multinational organization and has a diverse sourcing portfolio. We will be adjusting prices as needed in reaction to the tariffs.”
We will be adjusting prices as needed in reaction to the tariffs
Aldo Group
Sometimes the effects of trade wars have more indirect victims, such as Canada Goose Holdings Inc., which has become increasingly reliant on the Chinese market in the past year for growth. Upper and middle-class Chinese make up a third of the luxury item market globally, and Canada Goose opened its first store in Beijing in December 2018.
Canada Goose’s stock dropped 4.2 per cent after China recently devalued the yuan, and it could see further downward movement if U.S.-China tensions escalate further.
On August 14, Canada Goose posted 2020 Q1 losses that were smaller than analysts had feared, largely thanks to its increasing reliance on e-commerce and company-owned retail outlets.
Parkas in a Canada Goose store in Montreal.
In fiscal 2019, the company grew annual revenue by 36.3 per cent in the U.S. and by 60.5 per cent in the rest of the world. For the first time, the rest of the world brought in about the same amount of revenue as Canada did at roughly 35 per cent.
However, gross profit margins fell to 57.5 per cent from 64 per cent and missed analysts’ estimates of 61.6 per cent.
At the same time, there are aspects of global trade that are an upside for Canadian multinationals.
NAFTA really isn’t an issue for Aldo, since it doesn’t source any of its shoes or accessories in North America. In that way, it’s a model for how companies could hedge against the agreement’s collapse. The Comprehensive Economic and Trade Agreement between Canada and the European Union has been a boon for Aldo and its Canadian customers.
Since Aldo produces in Europe, CETA has allowed Canada to become the cheapest place to buy Aldo products, according to Bensadoun.
“We’ve just always kind of subsidized the Canadian consumer. We’ve always been more price sensitive here than anywhere else. Now with (CETA) we’re able to do that and help control prices for the Canadian consumer.”
Despite the uncertainty, Finning’s Thomson, naturally, is hopeful regarding the prospects for the rest of the year and beyond.
“I’m more optimistic than I was six months ago and I’m hopeful I’ll feel more optimistic six months from now.”
With files from Kevin Carmichael
Financial Post
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