Steve Madden is shifting handbag production to Cambodia, Techtronic Industries is moving vacuums to Vietnam and Flex is looking to make speakers at new production centres from Mexico to Malaysia.
The escalating US-China trade war is pushing China-based manufacturers and their US clients to rethink the complex and extensive supply chains that bind the world’s two biggest economies closely together.
“While China will remain an important part of our global manufacturing platform for the next decade, we have accelerated the ramp-up in other low-cost countries and the US,” said Joseph Galli, chief executive of Techtronic, which makes the majority of its power tools in China and generates three-quarters of its revenue from the US for products including Hoovers. “The focus on Vietnam in the short term is offsetting the future tariff impact we might see in the US.”
The Trump administration has so far levied 25 per cent tariffs on $50bn of Chinese industrial goods and is considering putting similar tariffs on another $200bn of Chinese exports, punishing Beijing for “unfair trade practices” including forced technology transfers and intellectual property theft.
Most consumer goods have been left off the tariff lists to reduce the pain felt by US consumers. But manufacturing and retail executives fear that, with Beijing and Washington both refusing to concede, the range of affected products could widen.
Clara Chan, the head of a lobby group for 150 Hong Kong manufacturers that employ more than 1m people in China, said that the while factory executives were used to managing disruptions from rapid wage rises to spikes in raw material prices, the scale of the uncertainty connected to the trade war made it a “very different” challenge.
“This is a moment for the manufacturing industry to think about how to diversify risk, whether to upgrade products and add more value or expand production to other regions,” said Ms Chan, president of the Hong Kong Young Industrialists Council and chief executive of a metal production business in China.
China is by far the world’s biggest exporter of manufactured goods. But some factory owners began moving production to other developing countries such as Bangladesh, Cambodia and Vietnam over the past decade in search of cheaper wages and a hedge against the political and economic risk that comes from reliance on one country.
Factory owners and US buyers say the trade war will intensify this shift.
When handbags were included on the proposed $200bn tariff tranche, it sent US executives scrambling to look at alternative production sites outside China.
Steve Madden, which started moving some of its handbag production from China to Cambodia three years ago, told investors recently that it was working on a plan to double its Cambodian production next year to about 30 per cent of its total, in addition to considering price rises in the US.
Michael McNamara, chief executive of Flex, which produces electronics for everyone from Bose to Google, believes it is “inevitable” that companies will reduce their reliance on China, although it will take time.
“Long term, we believe many customers will request a more regional manufacturing footprint to shorten their supply chain and reduce the risk of tariff impacts,” he said on an earnings conference call.
But unless companies have existing relationships with factories, suppliers and governments, it is difficult to jump into new developing markets where investment laws are often unclear, and labour and environmental standards lax.
Spencer Fung, chief executive of Li & Fung, which helps US retailers including Walmart and Kohl’s source their goods from factories around the world, said that while “a lot of people are desperate to move out of China”, it can take one or two years to stabilise production in a new country.
Vietnam has been at the heart of many companies’ “China plus” manufacturing strategies in recent years, attracting investments from the likes of Samsung, the South Korean electronics group, Daikin, the Japanese air conditioning group, and Techtronic.
Many apparel makers producing for fashion brands in Europe and the US have also moved from China to Vietnam. Sheng Lu, an assistant professor of fashion studies at the University of Delaware, said there were few spare workers or production facilities left. “If you’re not in Vietnam at this point, you’re probably too late,” he said.
Larry Sloven, an executive at Capstone, which sells China-made LED lighting in the US, said it was much easier to move sewing machines to a new country than to replicate the complicated network of suppliers needed in the electronics industry.
“Everybody is looking for a way to hedge but it’s not that easy,” he said. “Think about all the components that go into making an electronic product — they all come from China.”
Tariffs — and uncertainty about the direction of US-China relations — have unnerved manufacturers, but executives say China is likely to retain its dominant position.
Despite losing some market share to lower-wage countries, China still accounted for 35 per cent of global clothing exports last year, compared with just 6.5 per cent from Bangladesh, 5.9 per cent from Vietnam and 1.6 per cent from Cambodia. It is in a similar position for office and telecoms equipment, according to the World Trade Organization.
Rather than fold in the face of pressure, Mr Fung said he expected Chinese factories to respond by looking for ways to boost competitiveness, from automation to developing higher value-added products.
“I don’t think if you’re a factory owner in China you will just let business go and shut the door; they’re going to start sharpening their pencils,” he said. “I don’t think you’ll see capacity reduce drastically in China.”
Retailer’s profit margins under threat
Responsibility for paying the Trump administration’s tariffs will officially fall on the US importers of the affected products.
But executives say that the pain is likely to be spread out along the supply chain, from consumers at one end to Chinese factories at the other.
Of nearly 200 US companies that mentioned tariffs in their recent earnings calls, 47 per cent said they would raise prices for consumers, according to Panjiva, a research unit of S&P, the credit rating agency.
As tariffs are charged on wholesale import prices, before retail mark-ups, consumer prices will not need to rise by the same percentage as the tariff to cover the cost.
For example, Edward Rosenfeld, chief executive of Steve Madden, said on an earnings call that “back of the envelope math” suggested that retail prices would need to rise about 3.5 per cent to offset a 10 per cent tariff.
But with the US retail market struggling, analysts said retailers were unlikely to pass on all the costs to consumers, in any case.
“Except for some high-end brands, many mass market retailers won’t dare increase prices significantly,” said Sheng Lu, an assistant professor of fashion studies at the University of Delaware. “They have to find some way to absorb the tariffs.”
He predicted that profit margins at retailers were likely to suffer as a result.
Larry Sloven, an executive for Capstone, which sells Chinese-made LED lighting to US hardware stores, agreed that big price rises would seriously damage the US consumer market, to the detriment of all players.
“So everybody is going to have to chip in a bit: retailers, importers and manufacturers,” he said.