Border taxes: a new form of disruption
Ingenious: Of an action, composition, etc.; showing cleverness, talent, or genius.
I’ve had immense pleasure in discovering podcasts that suit my temperament and interest. When I find one that’s been in existence for a while, I binge listen to all past episodes and eagerly await the next one. There are some like ‘The Moth’ where I feel like I’m stepping into a theatre listening to people narrating stories of their lives, sometimes mundane but funny, sometimes tragic and often brave beyond belief. Some, like Tim Harford’s ’50 things that made the modern economy’ are short and informative about things we take for granted. His latest one on clocks, accurate time-keeping and Greenwich Mean Time (GMT) is also instructive. It brought back memories about one of the best books I’ve read: ‘Longitude’, by Dava Sobel, which describes John Harrison’s quest to make the first chronometer to determine longitude.
The principle of standardising time via GMT reinforced the immense economic potential to be extracted if one ensures uniformity or standardisation or makes proprietary a function or service. If that uniformity can scale globally to become the universal standard it could become a perfect cash-generating quasi-monopoly. Microsoft through its Windows platform, Google through its search algorithms or Facebook with its network effects are all good examples. Somewhat similar was the effect of standardising the twenty foot equivalent unit (TEUs) which containerised shipping and turned well-located ports into monopolies in several countries.
But how does one try to organise this uniformity in a product that by definition is customisable, and at most times unique and different? Take the case of window shutters, blinds and shades. Shutters are usually frames with accordion type fixed or operable louvres made of wood (generally) or glass, sometimes fabric. Blinds and shades with slats of plastic or metal controlled by cords also help regulate light or temperature. In most countries with organised home improvement retail stores, you do get readymade blinds and shades which can be cut to the size you need. But they are usually low-end and generic in nature. For the higher-end sophisticated blinds and honeycomb shades or the stylistic wooden shutters, providing choice of colours, shapes and fitting to different home sizes means they have to be custom-made.
This is exactly what a holding of ours in Taiwan, Nien Made Enterprises (NM), has achieved. I am not suggesting that the shutters, blinds and shades it manufactures are industry standard or a monopoly. Its products by their nature, especially at the high-end, need customisation. It’s the uniqueness of NM’s business process devised to meet this challenge that is of note.
The company does sell basic, low-priced generic products through Home Depot. In that segment, usually price is the only variable that customers look at. With a view to create barriers to entry against competitors, NM has installed cutting machines in stores and trained staff to enable the retailer to provide for specific-sized, commodity-priced mass market products. Those machines are fabricated by NM and given to Home Depot free of cost, which essentially act as a barrier to entry. However, NM works with multiple dealers and interior designers (who are often the key decision influencers) for the higher-end products. The company has an online ordering system that channels small orders directly from the dealer/designer to automated large scale production factories in China and Cambodia. The shutters, slides and shades are manufactured, processed and shipped by air to the customer within 7-10 days of placement of the order. That way NM meets or beats the one parameter – time – that a local neighbourhood carpenter or factory might compete on. With several hundred process improvements made to the manufacturing process over the years, NM’s products are extremely competitive (even after paying air freight charges for delivery) while the quality is second to none. If proof is needed, these ratios bear them out.
After the housing market collapse in 2008 in the US, we have seen a slow and painful recovery in new starts. The good news for NM’s products is that apart from use in new builds, the market for renovations and rebuilds is doing extremely well. Theoretically, the life of shutters can be 10 years while shades and blinds could be 5-7 years, hence a replacement market helps too.
Adjusting to border taxes
The danger to this business model lies in the possible protectionism through a US border tax adjustment policy. Close to 85% of shutters, blinds and shades sold in the US are imported either from China or Mexico. When quizzed on the potential impact, management has not much to offer at this point – clearly the development is newish and tentative. But in the worst case, it is disruptive to the model they have built over the years. NM does have some land in Texas where it wants to expand its distribution capacity. The company might have to resort to final assembly and packaging in the US if driven to the wall. I do think that is not as easy – managing an assembly plant in the US is a very different proposition from managing one in China. The US culture, cost base, management talent and work force are variables that they have not thought about yet.
It would be naïve of me to suggest that there are no risks given the political rhetoric in the US, but perhaps it would be folly to sell off a business that seems to be doing well just on that toss of a coin. The saving grace seems to be that the legislative process and the pulls and pushes of various lobby groups in the US will mean that it is unlikely we will see much progress on a border tax till 2019, at the earliest. It’s a risk I have to bear in mind, but if the border tax were to become a reality, many other businesses would face a similar fate in Asia; a prospect possibly far more difficult to digest for the region.