Hubble Contacts in an Era of Isolationism
Hubble Contacts is a fast-growing startup company that sells contact lenses as a subscription offering. Will its reliance on a manufacturer in Taiwan affect its growth prospects during the Trump Administration?
Hubble Contacts in an Era of Isolationism
In 2016, close friends Ben Cogan and Jesse Horowitz founded Hubble, an e-commerce startup that sells daily contacts as a subscription offering. [1] [2] After meeting every few weeks to discuss startup ideas, Cogan and Horowitz felt they had landed on a massive opportunity to disrupt the contact lens industry by offering contacts at half the price of companies like Johnson & Johnson. [3] In its first full year of operation in 2017, Hubble will earn more than $20M in revenue. [4]
Central to the company’s success has been strong management, an outstanding performance marketing engine, and a strategic supply chain operation. While Hubble’s supply chain has been an efficient platform for the company to produce its affordable contact lens offering, the company’s reliance on a Taiwanese manufacturer represents a significant risk as the geopolitical landscape has shifted towards isolationist movements that have targeted free trade.
Hubble’s Supply Chain – Are Challenges Coming?
Hubble has a simple supply chain that consists of a manufacturer in Taiwan, a freight forwarder, a fulfillment center, and a packaging center. [5] The company’s manufacturer, St. Shine, is one of the largest producers of contact lenses in the world. [6] In 2016, Hubble signed an exclusive contract with St. Shine to sell daily contacts in the United States. [7] While the relationship has provided the company with a strategic avenue for growth, the business has begun to feel the effects of President Trump’s “America-First” strategy, in which President Trump claims that America will “no longer surrender this country or its people to the false song of globalism.” [8]
With the Trump Administration’s decision to abandon the Trans-Pacific Partnership (TPP), Hubble will incur a 2.2% tariff on goods entering the country from Taiwan, versus no tariff in a world where the TPP progressed. [9] [10] Hubble’s business model rests on its ability to produce contacts cost-effectively from St. Shine. During the 2016 presidential election, Donald Trump campaigned on a trade war against China, in which he called for as much as a 45% tariff on imported good from China. [8] In recent months, President Trump has softened his tone towards China and recognized the “One China” policy, which has worried Taiwan that the United States “might be tempted to sacrifice its interests in a grand US-Chinese bargain.” [11] While it is unclear how US foreign policy will unfold under the Trump Administration, a retreat away from America’s long-standing tradition of free trade inevitably puts Hubble at risk.
Despite this risk, aside from the 2.2% tariff, Hubble has yet to deal with significant problems from isolationism. Cogan believes that geopolitics are ultimately difficult to manage and that as a fast-growing startup, the company has so many other challenges in front of it that isolationism is not its top priority. [12]
While Hubble remains an early-stage startup, the company’s explosive growth and the shift in geopolitics will likely require the team to confront challenges related to isolationism earlier than they anticipate. Hubble will require a robust supply chain strategy that will enable the business to thrive in the face of a changing global economy. To prepare for this challenge, Hubble should consider the following recommendations.
- Eliminate the Risk of a Single Point of Failure – Even though a trade war with Taiwan may be less likely than other nations, Hubble should develop relations with a robust set of domestic and global partners that are unlikely to incur increased trade tariffs. With its exclusive relationship with St. Shine, the company’s success is inextricably linked to the factory being allowed to manufacture and distribute products in the United States. Diversifying this risk may become essential in the coming years.
- Develop a Business Plan for Domestic Manufacturing – While Hubble should continue to use St. Shine’s Taiwanese operation as its primary manufacturer, the company should work with the manufacturer to explore building a factory in the United States over the coming years. Creating American jobs and boosting American manufacturing would likely welcome tax benefits, eliminate potential tariffs, and reduce freight costs that are subject to volatile spot rates. [13]
- Prioritize Global Isolationism as a Board-Level Issue – Although much is yet to be determined for the future of free trade in Asia, the potential risk for increased tariffs is significant. Hubble should monitor this threat with careful attention and discuss as a board regularly.
Going Forward
In its first year of business, Hubble has achieved a tremendous amount of success. As Cogan and Horowitz scale the company, they will inevitably confront significant challenges in a fast-moving global economy. As a high growth startup with limited resources, should they assume business as normal or develop a full-fledged plan to confront isolationism? How likely will Hubble and similar US-based startups with foreign operations be impacted as a result of policy shifts from the Trump Administration?
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Sources:
[1] Hubble Contacts, “Hubble Contacts – Why We Started Hubble,” YouTube, published August 2, 2017, [URL], accessed November 2017.
[2] Burt Helm, “How Facebook’s Oracular Algorithm Determines the Fates of Start-Ups,” New York Times Magazine, November 2, 2017, [URL], accessed November 2017.
[3] Ibid.
[4] Amy Feldman, “Hubble Contacts Wants To Do For Contacts What Harry’s Did For Razors,” Forbes Magazine, March, 20, 2017, [URL], accessed November 2017.
[5] Ben Cogan, phone interview by author, New York, New York, November, 10, 2018.
[6] Ibid, Feldman.
[7] Ibid, Feldman.
[8] “The New Nationalism,” The Economist, November 19, 2016, [URL], accessed November 2017.
[9] Peter Baker, “Trump Abandons Trans-Pacific Partnership, Obama’s Signature Trade Deal,” New York Times, January 23, 2017, [URL], accessed November 2017.
[10] Ibid, Cogan.
[11] Kausikan, Bilahari. “Asia in the Trump Era.” Foreign Affairs, vol. 96, no. 3, June 2017, pp. 146–153., www.foreignaffairs.com/reviews/review-essay/2017-04-17/asia-trump-era
[12] Ibid, Cogan.
[13] Willy Shih, “Fuyao Glass: America’s Sourcing Decision,” HBS No. 9-618-007, (Boston: Harvard Business School Publishing), accessed November 2017.
A great real world look at the impact of isolationist agendas on startups looking to improve services for everyday Americans.
Many interesting solutions are offered to manage the growth of Hubble in a world where trade barriers to the US go up yet one potential solution is missing – Hubble simply stop serving the US market. Canadians, Europeans and the emerging wealth in Asia could all benefit from this excellent service. Much is discussed about the potential impact of the Trump agenda on jobs but is this an insight into a world where Americans will miss out on great new technology and services when the trade barriers go up?
I think that it’s difficult for a start-up with limited size and influence to be worried about international trade policies (unless there is a known law/deal change that is imminent); it’s a risk that they can’t afford to take as a high priority. However, to echo Jonathon’s point above, if the product is honestly high quality and cheaper, it should have plenty of avenues for distribution in other parts of the world where there aren’t as high tariffs. So, if I were Hubble, the hedge I would be looking for to mitigate these risks are in the form of international expansions via a sales force/distribution channels in other countries (potentially a country which there is virtually no risk of trade barriers).
Really interesting to read this right after reading Ryan’s Airbnb/Cuba post – he pointed to entrenchment as the primary solution to isolationist pressures. I wonder whether Hubble is implicitly taking this tact by just continuing to focus on growth. Even so, diversifying their supplier base seems like an excellent recommendation, to the extent that Hubble can find similar manufacturers.
I would be remiss if I didn’t think that the sole supplier strategy was a risky proposition to begin with. Potential tariff’s aside, I think that exploring a dual-vendor/sourcing strategy would be key. I understand the qualification process is stringent, but at some point, St. Shine would reach capacity and there would need to be another vendor.
Perhaps this would be the right time to raise a round of outside funding and vertically integrate, building a facility in Mexico or Puerto Rico. The costly macciadora laws that had prevented Mexico from gaining manufacturing jobs have subsided as tax code experts have found ways to minimize value leakage and Puerto Rico is the fifth largest area in the world for pharmaceutical manufacturing. There are significant corporate tax benefits to being a Puerto Rican domiciled company versus even a Delaware domiciled company. In addition, pharma jobs on the island have been fleeting in recent years given the “brain drain” to the mainland and unemployment is at a relative high. I would highly recommend evaluating the Puerto Rican route, as it seems to be a good fit to the proposed issue, however the cost of labor issue might still be a problem.
Very interesting to read about a growing US startup having to proactively think about global political risks. You mention that Hubble’s supplier, St. Shine, is one of the largest contact producers in the world. Though Hubble is growing quickly, I’d imagine they’re far from the only contact lens company relying on St. Shine, so its possible that any change to US-Taiwan trade policies will affect the contact lens industry as a whole.
Perhaps this could be re-framed as an opportunity for Hubble rather than a threat. If they’re able to switch to an independent supplier in a different location (or maybe even own their own factory, a la Harry’s Razors), they could build in a cost advantage if isolationism persists. While other bigger companies struggle to rebuild their supply chains, Hubble could continue to operate as is. The contact lens industry is heavily consolidated in the U.S. (http://www.euromonitor.com/contact-lenses-in-the-us/report), which is what makes it so ripe for disruption in the first place, and Hubble’s biggest advantage might be its ability to completely redesign its supply chain from the ground up at a much lower cost than its deeply entrenched competitors.
This is an interesting topic with relevance to a massive range of companies of all sizes. This case brings the complexity of healthcare as well, but I wonder if that may actually benefit Hubble. Hubble’s website suggests that they had selected St. Shine because it was a respected supplier that already had FDA approval. The fact that St. Shine secured this approval suggests that they have likely had interest from other US companies who may also be able to go to bat to preserve the trade relationship or prevent high tariffs. In the short-term however, the plan for Hubble to explore and secure a more diversified supply chain should be a priority.
(https://www.hubblecontacts.com/pages/contacts)
Very interesting case example that represents a challenge for not only startups but established corporations in this era of nationalism.
For this particular case, I find two points particularly interesting:
1. Although with the abandonment of TPP and its 2.2% tariff, I am not convinced that that in itself is worthwhile for Hubble (or other companies) to invest in manufacturing in the US. Manufacturing in US requires significant upfront capital expenses, as well as a continuous stream of higher wages. Despite the 2.2% tariff increases, it still may not make business sense to shift manufacturing to the states, particularly for a company like Hubble who simply contracts the manufacturing from St. Shine.
2. The fact that Hubble’s manufacturing is in Taiwan, specifically, is particularly interesting. In December 2016, Trump faced a lot of criticism for having a phone call with the Taiwan president, the first known US president correspondence with the Taiwan government since 1979 [1]. Especially with Trump’s recent recognition of “One China”, how supplier relationships with both Taiwan and China will pan out depends greatly on how Trump continues to act towards both the Chinese and Taiwanese government.
[1] Anne Gearan, “Trump speaks with Taiwanese president, a major break with decades of U.S. policy on China,” Washington Post, December 3, 2016, https://www.washingtonpost.com/world/national-security/trump-spoke-with-taiwanese-president-a-major-break-with-decades-of-us-policy-on-china/2016/12/02/b98d3a22-b8ca-11e6-959c-172c82123976_story.html?utm_term=.f704a36aa670, accessed November 30, 2017
I really like Jonathan’s point above. It seems very unlikely that either Hubble or its board can have serious influence over how the trade policy ends up, and it would be absolutely catastrophic if the company were to continue growing and then have its supply shut off. Why not just go to another region while servicing the existing US population. I’d focus my marketing dollars in a non-US region (see if St. Shine will give you an exclusive in another reasonably attractive market) for now until there’s additional clarity in order to build up a safe alternative while continuing to use the existing supplier.
Really interesting read and likely not a unique challenge to US start ups looking to offer consumers a better value proposition than entrenched brands through disintermediation. While I agree with Jono’s point that exploring new markets is a potential solution to unfavorable US policies, I question whether this is actually a viable option (at least in the near term) given the existing team and expertise of the founders in particular. Both Jesse and Ben are first time founders with previous experience working in the US. I’m also not sure that other markets have the same level of comfort with business models like Hubble’s (i.e. traditional brands / providers vs. DTC e-comm based subscription models). Companies like Harry’s, Smile Direct, Everlane, Dollar Shave, etc. have done a lot of the education in the US for this type of model, which may fall on Hubble in new markets and require a different go-to-market strategy for the company.
This article was especially interesting to me as a previous (short-lived) Hubble customer. Great job providing a detailed and thorough look at the impact of isolationism on a young start-up.
I have a couple of main reactions:
1. I agree with Isabel in that exploring new markets outside of the U.S. may not be viable, but for different reasons. First: Contact lenses are actually regulated medical devices that require FDA regulation, and the founders have mentioned that they had to navigate through a tricky thicket of rules [1]. As a young, small startup, I don’t think Hubble will have the bandwidth or expertise to manage navigating the potentially more complicated regulations elsewhere. Second: Hubble has developed a network of business relationships with doctors within the U.S. medical community; if it were to expand elsewhere, it would need to start all over in a country likely with completely different dynamics and structure [2]. However, I do see potential in Canada, where they are already planning to enter soon [2].
2. I fundamentally believe that you need to have a good product before you are ready to expand, and my experience suggests that Hubble still has a long ways to go on improving the customer experience. Their website and customer support are lacking, and I think there’s a risk of prioritizing the wrong issues that may be better to have larger, more mature companies fight for and solve.
3. There may be wiggle room in their pricing. Currently, Hubble contacts cost less than half of competitors which is impressive for sure, but even if they pass the 2.2% tariff onto the consumer, they will still be priced very competitively [1]. That said, there is still risk in relying only on one manufacturer, and in line with the thoughts above, I think they should start scoping out relationships with other manufacturers and creating a proposal for vertical integration.
[1] https://ownersmagazine.com/hubble-contacts-ben-cogan-jesse-horwitz-interview/
[2] http://www.businesswire.com/news/home/20170828005092/en/Hubble-Contacts-Closes-Series-A-III-Financing-Support
This article points out the key conflict at the center of the current debate over isolationism: it is becoming more and more complex to take an isolationist stand as the world in general, and supply chains in particular, become more globalized. The options proposed in the article and comments can be summarized as 1) go completely domestic; 2) go completely international and cut out the US altogether; or 3) hedge and make sure your supply chain is diversified to eliminate single points of failure. Option 2 is interesting and something that US companies should be more concerned about in the current political climate. While option 3 seems the most practical, it reminds me of our volatility discussion around United Airlines: the more countries in your supply chain, the more exposure you have to isolationist taxes, tariffs, or outright bans. I strongly agree with John’s point that this is a board-level issue that requires constant attention and a nimble approach to risk mitigation.
Really interesting perspective from an early stage company. I agree with Hogan that it is really difficult to have this topic be a priority for a fast growing, early stage company with so many other issues. I think at a higher level, input / raw material costs are a major driver of business success and so rather than drill down on isolationism at a Board level, it likely is more efficient for the Board to consider a broader set of issues that may likely impact input costs. To that point, the Company would likely be well served to diversify its supplier base or at least to look for other ways to derisk the potential for geopolitical events or idiosyncratic company events with its supplier. It is likely unrealistic for Hubble to get in the business of building its own factory and vertical integration seems inefficient given the Company’s focus and core competency. To Jonathan’s point above about supplying European and Asian markets, I wonder if the Company could take steps to better understand what it might look like to serve customers in those markets directly from its manufacturing facility in Taiwan to minimize costs related to shipping into the U.S. As opposed to thinking about just what the company can do domestically, the Board would be well served by having a global perspective and thinking hard about the scope of international opportunities.
I agree with the comments above that it’s unrealistic for Hubble to build its own factory – and further, I think this takes them outside the core of what they are trying to do well and differentiate on, thus making it unwise from a strategic perspective. On the point of “what they are trying to do well”: I think Hubble is still far to early stage to be worrying about the what-ifs of isolationism. They are not yet established enough to even be sure they’d have to deal with adverse regulations in 3, 4, 5 years, and they are far too small to fight that fight alone. If I were them, I would put this issue on the very long-term radar, and in the meantime focus on growing and gaining scale as fast as possible.
Hubble seems to be another example of a business model reliant on sourcing in China/Taiwan and selling in the US market. Manufacturing is a completely different play and they should stick to their strengths and therefore not think about bringing manufacturing in-house. I do however see a large untapped market outside the US, especially in Asia where Hubble can build brand equity and serve a growing set of affluent consumers. I also see their reliance on the largest manufacturer of contact lenses a big risk and I see value for them to diversify their supplier portfolio.