Arkansas Democrat-Gazette

Shift from China suppliers a tough task

- BRUCE EINHORN, ANGUS WHITLEY AND DANIELA WEI BLOOMBERG NEWS

U.S. companies are scrambling to line up factories and suppliers outside of China as the trade war increases the cost of importing everything from furniture to toilet paper. But for some products, it’s not that easy.

BBQ grills, luggage and mattresses are among a long list of consumer items that China has a near strangleho­ld on when it comes to supplying the U.S. While President Donald Trump’s tariffs are a potential boon for manufactur­ing rivals from Southeast Asia to Mexico, the reality is that shifting what can often be highly specialize­d production and training new workers cost time and money.

“People are moving out of China because they are panicked,” Rick Helfenbein, president of the American Apparel & Footwear Associatio­n, said in an interview in Hong Kong last week. But “certain things are really, really hard to move.”

That has retailers from Walmart Inc. to Target Corp. anxious about tariffs announced last month on $200 billion of Chinese exports, which Trump has said will be increased from 10 percent to 25 percent in 2019. The Retail Industry Leaders Associatio­n, which counts Apple Inc. and Home Depot Inc. as members, is seeking exemptions to the levies on a raft of products as companies warn that without a reprieve, they’re almost certain to pass on costs to U.S. shoppers.

That increase is already being felt in the market for luggage, with Samsonite Internatio­nal SA notifying wholesale buyers of a 10 percent price increase even before the September tariff announceme­nt. The company has said it will likely pass tariff costs to consumers. China makes more than 70 percent of the travel and sports bags sold in the U.S., making it one of the sectors most dependent on the Asian nation for supply, according to data from the U.S. Internatio­nal Trade Commission, a federal agency in Washington.

There is “no way” American importers and sellers of travel goods can avoid the new tariff, said Michele Marini Pittenger, president of the Travel Goods Associatio­n, which puts the industry’s total reliance on China at 84 percent. “Product is not easily moved, as other countries don’t have the capacity, or the capability, to produce what is made in China today.”

There are some products where China is even more dominant. The U.S. imported $353 million of bikes with 25-inch-or-less wheels last year, with 92 percent of those coming from China, according to the U.S. Internatio­nal Trade Commission. Some 90 percent of the world’s LED lighting comes from China, according to Morgan Stanley, and 85 percent of American imports of frozen tilapia fillets come from Chinese fish farms.

Trump says U.S. companies worried about the tariffs should move their production home, while a number — from power converter maker Vicor Corp. to climatecon­trol systems company Lennox Internatio­nal Inc. — are looking at shifting their supply chains elsewhere. But finding other locations to establish production of items that have been so dominated by Chinese manufactur­ers is difficult, according to Helfenbein.

Some companies can’t move because of the challenge in finding manufactur­ers outside China willing to put up with the narrow margins and stringent requiremen­ts involved in producing them, he said.

“You have to think of it from the factory perspectiv­e: You want to do what’s easiest, you don’t want to do what’s hardest,” said Helfenbein. “The only reason these businesses have hung around is people who have been in them for years are specialist­s.”

If Trump extends the tariff hit to cover a further $267 billion in Chinese goods, children’s shoes, baby clothes and sweaters would be among items that would be hard to shift production or source elsewhere, according to the American Apparel & Footwear Associatio­n.

Manufactur­ers of children’s products like cribs and swings have also weighed in, with Mattel Inc. saying they made investment­s in China to ensure suppliers comply with safety standards required to get their products into the U.S. market.

Large retailers including J.C. Penney Co. and Dollar Tree Inc. warned before the September tariff hit that companies lack feasible alternativ­es to China-based suppliers. Rerouting decades-old supply chains could take years, they argued.

Smaller businesses also lobbied the Trump administra­tion, according to comments submitted to the U.S. Trade Representa­tive before the September tariffs were enacted.

While the 10 percent tariff may be manageable for many companies — even those operating on thin profit margins — the increase next year will see companies lose the flexibilit­y to shield consumers from higher costs, said Kenneth Jarrett, president of the American Chamber of Commerce in Shanghai.

“Once you get the 25 percent tariff, that will be well beyond their profit margin,” Jarrett said. “They will have no choice but to pass those costs on.”

Informatio­n for this article was contribute­d by Edwin Chan and Hannah Dormido of Bloomberg News.

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