One of the most topical issues going on in the Australian landscape at the moment is our trade relations with our biggest trading partner, China. What Businesses Can Learn About the Concentration Risk?
Everybody has seen the press, everybody can see what’s going on.
In essence, China has imposed a range of tariffs onto Australia, in what would appear to be political moves, but let’s not get into the politics side of it. The bottom line is, we sell more goods to China than any other country around the world. China has now placed an enormous amount of restrictions on our exports, and fundamentally limiting the amount of trade we can do with them.
What Can Australia and China Trade Tensions Teach us as Business Owners about concentration risk?
The trade statistics came out the other day showing that our wine sales into China dropped 98 percent in the last quarter because of these tariffs!
This is quite phenomenal, it’s a move that has a devastating impact on the industry and an impact on the country as a whole.
So what’s the lesson here for us as business owners?
This actually touches on one of the most critical risks that we talk a lot about in business, which is concentration risk.
It’s our belief that you shouldn’t have too much concentration on any one supplier, customer, or even employee or person in your business. So if we take Australia’s example, China represented broadly about 40 percent of all of our exports. Now, 40 percent of all your sales going to one customer is highly, highly concentrated. And we can see the impact when that relationship is either impacted in the short term or potentially even impacted in the long term.
So, if you’re looking for a little bit of a guide for your own business, I’ll always suggest to my clients to try to minimise their largest customer down to about 15 percent of revenue.
Now, can it go a bit higher than that? Sure it can.
Once it gets to about 25 percent, however, we start to see a bit of a red flag. Of course, once you get up to sort of 40-50 percent it’s red lights and sirens!
It’s here that you see the risks just start to amplify. And of course, that really impacts the value of your business.
So as you move forward, have a think about how to diversify those suppliers, and how to diversify those customers. And it’s not to suggest that you should certainly sell less to your biggest customer.
It’s more about how do you start selling more to new customers and start opening up new channels and new markets.
The Australia and China trade relationship has certainly given us some food for thought as a country and we should also take this on board as business owners.
We hope that will help you in your business.
To your success!
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