SVB’s Collapse, Inflation Hit Contract Manufacturers Hard
Silicon Valley Bank fallout has had drastic implications throughout all of industry, and the full implications of it have yet to be fully understood. Already, President Joe Biden has urged federal regulators to take steps to tighten up the banking system, and Congress is currently in talks of presenting new regulations or regulatory powers to reinstate some of the rollbacks supported by the previous administration.
One of the sectors hit hardest by the collapse is tech, which comprised a large portion of SVB’s clientele. This included tech companies, startups, tech investors, and, notably, contract manufacturers. Although the FDIC took the unprecedented step of fully insuring deposits for SVB’s customers, this does not mean that customers such as contract manufacturers do not have significant challenges ahead of them moving forward. Such challenges will take the form of fewer banking options, as well as increasingly restricted access to capital.
What Happened?Somewhat ironically, SVB’s issues stemmed from a desire to mitigate investment risk, choosing to adopt a long-term, low-risk, high-yield strategy following the mass influx of capital they received during the COVID-19 pandemic. By investing in seemingly safe assets such as bonds, the idea was that this would, over time, present the greatest return for customers for the least risk.
The issue occurred, however, when rapid inflation overtook the bond rate of return, which devalued investments and, in the case of a large bank run, forced SVB to sell their long-term bonds at a loss. The capital pool quickly dried up, leading to the bank’s seemingly overnight collapse. The shock was so quick and so severe, that other institutions that adopted similar investment diversification strategies are going to be much more risk-averse when it comes to any practice that involves capital divestment.
Loan Options Limited for Contract Manufacturing
It is this risk aversion that is going to affect contract manufacturers the most. Contract manufacturers typically operate on a razor-thin profit margin between 3% and 5%. As a result, their options to acquire additional capital for equipment upgrades, expansion, or other growth initiatives are almost exclusively dependent on their relationship with lenders — typically small- to medium-sized banks. In this environment, which has seen a drastic increase in loan delinquencies in the real estate market as a result of high inflation, such banks are going to be extremely cautious offering substantial lines of credit to companies with limited available capital.
Complicating the issue further is the increasing demands of OEM partners. Often, when considering new equipment purchases, contract manufacturers do not have an option. In order to draw in new clients and meet the rising expectations of current ones, equipment such as surface mount technology and printed circuit boards assembly products are a requirement, or else clients will seek out other options in the competitive contract manufacturing marketplace. If the contract manufacturer needs capital, and banking institutions are unwilling to offer it, where are they going to get it?
A Proven Solution for Contract Manufacturers Seeking to Free Up Capital
The answer is trusted, independent third-party supply chain partners. Partstat, for example, offers proven inventory management solutions that can free up tied-up capital for contract manufacturers while providing friction between the contract manufacturers and their OEM partner. For example, especially during a chip shortage, contract manufacturers can present to their customers Partstat’s inventory ownership solution. Through this system, Partstat would purchase any critical inventory needed for the contract manufacturer, without either party needing to spend any upfront capital. As a result, the contract manufacturer preserves their capital, the OEM maintains a strong relationship with their partner, and production continues as scheduled without any delay caused by inventory shortages. In this environment, it is the most effective way for contract manufacturers to realize capital, and some of the largest, well-known companies in the world have partnered with Partstat to take advantage of it.
Economic times are currently uncertain, but the benefits of an inventory ownership solution are certainly not. To see if our solution is a fit for your inventory needs, contact one of our Partstat representatives. We’d love to show you how much capital you can realize.