Shipping snags prompt firms to mull China retreat
Game maker Eric Poses last year created The WorstCase Scenario Card Game, making a wry reference to the way the coronavirus had upended normal life.
He had no idea.
In a twist that Poses never could have predicted, his game itself would become caught up in the latest fallout from the health crisis: a backlogged global supply chain that has delayed shipments around the world and sent freight costs rocketing.
Worst-Case Scenario, produced in China, was supposed to reach U.S. retailer Target’s distribution centers in early June. Instead, the games were stuck for weeks at the Port of Seattle and didn’t arrive until mid-July.
“It’s consuming my life,” said Poses, who started his Miami Beach, Florida-based toy company All Things Equal in 1997, selling games from the trunk of his car. “You do everything right. You produce on time. You’re psyched about your product.”
And then … unforeseeable disaster.
Like other importers, Poses is contending with a perfect storm of supply trouble — rising prices, overwhelmed ports, a shortage of ships, trains, trucks — that is expected to last into 2022. The experience proved disturbing enough that Poses is reconsidering a cost
saving decision he made five years ago: to shift production of his games and toys out of the United States to China. Now, he thinks, it might make sense to bring production back — at least to Mexico, if not the United States — to protect him from the risks of relying on factories an ocean away in China.
“I’m willing to make smaller margins,” he said, “if it means less anxiety.”
Other American companies are making similar calculations: 52 percent of the U.S. manufacturing executives surveyed by the consulting firm Kearney said they have started buying more supplies in the United States in response to COVIDrelated supply disruptions. Forty-seven percent said they plan to reduce reliance on supplies or factories from a single country; 41 percent specifically said they wanted to cut their dependence on China.
And not just because of the virus-related bottlenecks in shipping, severe as they are. Companies are worried, too, about becoming caught in the crossfire of a trade war between the United States and China, the world’s two biggest economies.
The conflict began when President Donald Trump imposed taxes on $360 billion worth of Chinese imports to protest Beijing’s combative effort to surpass American technological dominance.
But neither Chinese leader Xi Jinping nor Trump’s successor, Joe Biden, appears to be in a hurry to seek peace.
“The whole relationship is in bad shape,” said Rosemary Coates, a longtime consultant to companies wanting to establish factories in China.
In America, there is bipartisan frustration over China’s sharp-elbowed trade practices — which, critics say, includes cybertheft — as well as its crackdown on civil liberties in Hong Kong, repression of Muslims in Xinjiang and bullying of neighbors in South and Southeast Asia.
“Are we in a 21st century version of the Cold War? Yes,” said trade lawyer Michael Taylor, a partner at King & Spalding. “The endgame is not nuclear annihilation. The endgame now is economic dominance.”
For decades, companies have piled up profits by moving manufacturing to China and other low-wage countries, then exporting their products back to the United States. They have also held down costs by keeping inventories to a minimum. Under a “just-in-time” approach, factories buy materials only as they need them to meet orders.
But relying on distant factories and keeping inventories threadbare is risky. In March 2011, an earthquake and tsunami damaged auto parts plants in northwestern Japan. The resulting parts shortages temporarily idled car plants around the world, including some in the United States — a sobering reminder that lengthy supply chains are vulnerable to disruption.
Then came Trump’s trade war. Importers scrambled to reconfigure their supply chains and find alternatives to Chinese factories after Trump imposed stiff tariffs on goods from China.
But they’d never seen anything like what COVID-19 inflicted on global commerce.
As countries locked down and families took refuge at home in February and March last year, companies sold off inventories and canceled orders from suppliers. And the economy did, in fact, collapse: In the United States, gross domestic product, the broadest measure of economic output, fell at a 31.2 percent annual rate from April through June 2020 — the worst quarter in records dating to 1947.
Then something unexpected happened.
“What nobody knew was that when you send everybody home, the first thing we all do is shop” online, said Lewis Black, CEO of Almonty Industries, which mines the rare metal tungsten. “You had, on one hand, inventories being run down and manufacturing ground to a halt, and on the other, people were spending like crazy.”
Fueled by pent-up consumer demand, especially as vaccines allowed economies to reopen and families to get back outside again, growth roared back. The U.S. economy expanded at a stunning clip — a record annual rate of 33.8 percent from July through September 2020 — and kept chugging along, most recently registering a healthy 6.5 percent annual growth rate from April through June this year.
Suddenly, companies were overwhelmed with orders they couldn’t meet.
“They had an oops moment,” Black said.