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From Tailwinds to Headwinds: How to Survive in a World of Crushed Margins

From Tailwinds to Headwinds: How to Survive in a World of Crushed Margins

The past decade has been marked by a number of favourable conditions, known as tailwinds, that have helped to boost business profits and margins. These tailwinds have included factors such as low energy costs, cheap labour, a strong dollar, and easy access to capital. However, as we move into 2023 and beyond, many of these tailwinds are disappearing, and businesses will need to adapt to a new reality of crushed margins. The COVID-19 pandemic has accelerated this shift, as it has disrupted global supply chains and caused an economic downturn, leading to changes in consumer behaviour, increased inflation, and a weaker dollar.

Just in Time Inventory is Gone

The COVID-19 pandemic has highlighted the vulnerability of just-in-time inventory systems, which rely on a constant flow of goods and materials. With supply chain disruptions, businesses have been forced to build up emergency inventories to ensure they are not caught short. As a result, CFOs will need to rethink their inventory strategies and build in more resilience going forward. This is particularly important in light of the de-globalisation trend, which is seeing companies bring production back closer to home to reduce dependence on overseas suppliers.

Cheap Energy is Gone

Over the past five years, the low cost of natural gas has provided a significant boost to business margins. However, as we move into 2023, this tailwind is no longer present, and businesses will need to find ways to manage rising energy costs. The disappearance of cheap energy is likely to be felt across a variety of industries, from manufacturing to transportation.

However, it is important to note that while rising energy costs can be a challenge for businesses, it can also be an opportunity for countries like Libya. With large reserves of oil and natural gas, Libya is well positioned to benefit from higher energy prices, as it will have the ability to export its resources at a higher price, allowing it to generate greater revenues and support economic growth.

Labour Costs are Rising

If the economy remains strong, wages are likely to surge, and this will put pressure on businesses’ margins. The power of labour is at 10x 2015-2020 levels, and strikes and union membership have exploded, all fuelled by inflation. Businesses will need to find ways to manage these rising labour costs, such as by automating processes, outsourcing, or investing in productivity-enhancing technology.

A Weaker USD is Pushing Up Import Prices

The US dollar has been weakening in recent years, which has made it more expensive for dolarised countries to buy goods overseas. This is particularly challenging for manufacturers, who are facing rising costs for the raw materials and components they need to produce their products. Businesses will need to find ways to mitigate this, such as by sourcing materials locally or finding ways to reduce their dependence on imports.

The End of QE is Crushing Margins

The quantitative easing (QE) policies of the past decade have helped to keep interest rates low and boost business profits. However, with central banks now tightening monetary policy, businesses are facing a higher cost of capital. This is particularly challenging for companies that have been borrowing at low rates and now face higher interest payments. As a consequence, companies that were borrowing at 1-3% now borrow at 3-9%, forcing zombified businesses to disband. Businesses will need to find ways to adapt to this new reality, such as by cutting costs, increasing productivity, or finding new sources of revenue.

Adapting to Crushed Margins

In conclusion, the 2010-2020 tailwinds that have helped to boost business profits and margins are disappearing, and businesses will need to adapt to a new reality. Key takeaways are inventory, energy, labour, import prices, and capital costs have changed. Businesses that can find ways to mitigate these challenges and adapt to the changing landscape will be best positioned to succeed in the years ahead.

As businesses navigate the disappearing tailwinds of the past decade, it is important to consider potential partners and resources that can help them become more resilient and thrive in the changing landscape. The Euro-Libyan Trade Center can be a valuable resource for businesses looking to expand their operations in Libya, offering a range of services such as sourcing materials locally and connecting with potential partners and investors. Additionally, it provides guidance on navigating the legal and regulatory landscape in Libya, which can give businesses a competitive edge and help them survive the waves of change in the post-tailwind era.

Championing Synergistic Growth

The Euro-Libyan Trade Center (ELTC), is a non-partisan, non-profit trade promotion agency working in cooperation with the GUCC to strengthen economic relations between Europe and Libya.

ELTC strategically positions itself as an enabler of transcontinental economic activities, offering a structured platform for entities with vested regional commercial interests. We are dedicated to enhancing operational capacities, broadening market access, and heightening the competitive index of enterprises within the region.

For tailored organisational strategy consultation, kindly reach us at +44 207 193 5556 or submit an inquiry via the provided contact form.

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