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With nearly all hardware for cannabis vape products sourced from China, the coronavirus outbreak highlights how delicate the supply chain is for marijuana businesses in the sector.
Industry analysts estimate 90%-95% of all components that comprise a cannabis vaporizer are manufactured in factories in Shenzhen, China, and of the remaining 5%-10% of supplies that might be sourced domestically, U.S. manufacturers lack the ability to serve the cannabis market.
So when the coronavirus outbreak began in Wuhan, China, in December 2019 – eventually causing factories to halt production of vape hardware – cannabis companies had few alternatives as they waited for factories to resume operations.
Today, some of the factories are back in operation, alleviating part of the concern over disruption to the supply chain, but they aren’t operating at full capacity.
One reason Chinese factories are underproducing is that many of the nation’s factory workers are still reluctant to return to work due to fears of contracting the virus. Other workers have found themselves quarantined.
“We’re going to be looking at a few weeks of delays in raw material,” said Arnaud Dumas de Rauly, founder and CEO of New York-based The Blinc Group, a cannabis vape hardware manufacturer.
Delays are expected in marijuana packaging, plastics and extraction and cultivation equipment – not just vaping hardware.
Need for redundancies
Dumas de Rauly’s Chinese partners had the capability to ship him batteries and cartridges for vaping devices in the past few weeks, but the Chinese factories are operating at about 50% of typical production, he said.
The cannabis companies most vulnerable to this supply disruption, according to Dumas de Rauly, are those that:
- Own a single Chinese hardware-production factory.
- Partner with only one factory.
“If they don’t have redundancies built in, they’re not able to pivot,” he said.
Dumas de Rauly’s company works with four Shenzhen-area contract manufacturers, which he credits for his company’s ability to restart production after the Chinese New Year in early February.
“We have two major and two minor manufacturers for raw material,” he said. “By diversifying our source of supply, we’ve been able to be up and running.”
U.S. cannabis companies seeking domestic providers will remain hard-pressed to find any suitable options, according to Dumas de Rauly. The mom-and-pop U.S. hardware companies aren’t scalable and struggle to keep pace with the innovation and automation occurring in China.
If every supplier has weeks of delays, that’s fewer domestic sales being made, and he’s confident his connections in China will still be able to secure the necessary hardware.
Dumas de Rauly said many of his competitors’ suppliers are not back online.
Yet at least one other cannabis company, Tilt Holdings, a Massachusetts-based cannabis company with a focus on technology, announced its subsidiary – Jupiter Research, which is a vaping technology company – is back in operation after Chinese New Year and “minor delays” from the coronavirus.
Mark Scatterday, CEO of both companies, said in a recent statement that ocean and air shipments are en route from China.
“The coronavirus outbreak in China has caused production delays across all industries, including ours, which produce products in Shenzhen and other manufacturing hubs,” he said. “Jupiter’s customer’s orders are being produced and shipped.”
Weak buying power
An added factor hamstringing cannabis companies is the lack of economy of scale in purchasing orders.
Tobias Rich, vice president of supply chain for Natura Life + Science, a Sacramento, California-based vertically integrated cannabis company, pointed out that many marijuana companies are not well capitalized enough to purchase “millions of units” and ride out the supply disruption.
“You can’t advance-order enough to back up the supply chain and stock up,” Rich said. “Everyone’s living hand to mouth.”
Rich has looked into sourcing some other materials from companies in California, but his business would pay a premium to buy anything when supplies are this scarce. For vape hardware, he has no other option beyond getting it from Asia.
“All of the vape relationships are really challenging,” Rich said.
By way of other examples, a cannabis tincture-filling machine the company purchased from China is stuck there, unable to ship.
Another machine that makes softgels has arrived, but the tech worker required to set it up cannot travel from China to the United States.
How to strengthen the chain
While not many options exist for domestic alternatives to add redundancies when it comes to vape hardware, there are steps a cannabis company can take to manage its supply chain.
Beau Whitney, a Portland, Oregon-based cannabis consultant and founder of Whitney Economics, suggests companies should:
- Set up systems to monitor inventory and know when to order materials.
- Ensure they have an alternate supplier in place.
- Establish audit rights to evaluate the financial viability of any manufacturing partner.
“If a whole bunch of supply is coming from one source, you’re at risk,” Whitney said.
He stressed the importance of knowing the lead time for necessary materials. That should help to manage the company’s cash flow.
A cannabis company also shouldn’t provide the lion’s share of one supplier’s revenue. In the event something goes wrong and the company can’t order enough to keep the factory solvent, both parties are out of luck.
Whitney advised businesses to plan ahead for what might happen if the supply chain is disrupted so they can make up for the lack of supply and take care of customers’ needs.
For example, if a retailer is expecting a vape company’s products, but they’re delayed, figure out a solution and make it up to the store owner by cutting a deal on prices when the supply returns.
“Then you retain those relationships and strengthen them,” Whitney said. “That lost market share, you may be able to get it back, but it’s going to cost you.”
Bart Schaneman can be reached at firstname.lastname@example.org
For more of Marijuana Business Daily’s ongoing coverage of the coronavirus pandemic and its effects on the cannabis industry, click here.