Trade war puts new strains on America Inc's factories in
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[August 20, 2018]
By Samantha Vadas, Adam Jourdan and Anne Marie Roantree
SHENZHEN, China/SHANGHAI/HONG KONG
(Reuters) - Larry Sloven arrived in southern China three decades ago,
just as the region was taking off as the low-cost manufacturing center
of the world. Since then, he has exported millions of dollars of goods,
ranging from power tools to LED lights, to some of America's biggest
That era may now be coming to an end.
For years, Sloven has seen profits whittled away by rising costs,
tighter regulations and Chinese government policies aimed at building a
more sustainable and services-oriented economy that have squeezed
But the final straw may be the prospect of tariffs stemming from a trade
war between the United States and China, and a world of more
"It's been step, by step, by step. And it's been getting more and more
expensive to produce products in China," said Sloven, president of
Capstone International HK Ltd, a division of Capstone Companies, from
Deerfield Beach, Florida, a maker of consumer electronics goods.
Manufacturers have been feeling the squeeze as China shifts its
priorities from lower-end manufacturing to high technology industries as
part of a broader bid to upgrade its economy.
But with tariffs looming, "everybody finally woke up to the extent that
'maybe I should face reality'," he said. Manufacturers were increasingly
worried that "the next group of tariffs would be the killer".
Sloven is now stepping up efforts to trim his exposure to China,
diversifying into growing manufacturing centers like Thailand.
"Thailand, Vietnam, Malaysia and Cambodia are countries that have
potential opportunities," he said. "However, it's not going to be as
easy as many may think. And you don't know what's coming next in China."
Interviews with over a dozen manufacturers from medical device makers to
agricultural equipment firms illustrate how companies exporting to the
United States are now rethinking their calculations about making goods
"Before the tariffs came on board, we were looking to move about 30
percent of our production from China to the United States," said Charles
M. Hubbs, European director at Premier Guard, a medical products
manufacturer, citing reasons such as rising wages, a shrinking workforce
and soaring costs.
"With the latest tariff development, assuming those tariffs will go into
effect, we'll probably be moving about 60 percent of our manufacturing
out of China to the United States."
Other companies are closely reviewing their options.
"In the current tariff environment, it's only natural for companies like
ours and others to be internally reassessing the impact and taking steps
to mitigate that," said a senior China-based executive with a major U.S.
Moves could include "limiting additional sourcing from China, shifting
sourcing to other countries, or bringing work back to the United
Mid-level officials from the two countries are set to hold trade talks
this week in Washington, although the gap between the two sides over
U.S. demands for greater market access remains wide.
SUPPLY CHAIN THREAT
The escalating tit-for-tat trade war between the United States and
China, with President Donald Trump threatening to impose tariffs on
Chinese-made goods, could have huge implications for heavily integrated
and globalized supply chains.
For some, the impact has been obvious and direct.
Georgia-based AGCO Corp <AGCO.N> told the United States Trade
Representative that tariffs would make the farm equipment it makes in
Changzhou, a city in China's Jiangsu province, "price uncompetitive" in
the United States.
Maroon Group, a chemical maker from North America, said it would be
"priced out of the market", a concern echoed by Goodman Global, a unit
of Japan's Daikin Industries <6367.T> that assembles air conditioners in
Houston from Chinese-made parts.
Some firms have already made their moves. The furniture makers At Home
Group Inc <HOME.N> and RH <RH.N> have said they will cut back production
Others are trying to adjust supply chains. DSM China Ltd, part of the
Dutch nutrition firm Royal DSM, is looking to replace U.S. soybeans with
new ingredients such as pea powder it can source locally to avoid
Beijing's retaliatory import duties.
Rising risk from the trade tensions "gave us good impetus to check out
how we look at the whole business", said Bernard Cheung, director of
global strategic marketing at DSM China.
For some, the response has been dictated by where they sit in the supply
U.S.-based GMM Nonstick Coatings has moved some production to India
after a 30-40 percent drop-off in China orders for advanced chemicals
used to coat American household kitchenware brands such as George
Foreman and Baker's Secret as those clients move some production out of
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A woman works on
packaging bicycle rim steels for export at a workshop of a company
manufacturing sports equipments in Hangzhou, Zhejiang province,
China June 4, 2018. REUTERS/Stringer/File Photo
"This tariff thing is adding extra friction to being in China and it's
making the decision" to shift production "quite easy for U.S. sourcing
departments," said Ravin Gandhi, GMM's chief executive.
$2 TRILLION QUESTION
There are still plenty of manufacturers staying in China for now,
especially those targeting the huge domestic or regional market, Gandhi
China still has the best infrastructure, supply chain networks and
engineering talent, a major hurdle for potential rivals seeking to lure
firms away with lower costs, according executives interviewed by
In terms of scale, China cannot be easily replaced: it has a
manufacturing output of around $2 trillion, according to a Brookings
Institution report in July, the world's largest.
Bird, a Santa Monica, California-based scooter start-up, wrote in a
submission to the Office of the U.S. Trade Representative in June that
it was "unaware of any U.S. producer of electric scooters that can
manufacture to Bird's scale and needs".
Keith Siilats, the head of Bytelogics, another U.S.-based scooter
start-up that manufactures in China, said it was hard to shift
production from China. Instead, he expects to absorb the higher costs
for the moment and plans to develop European operations less vulnerable
to tariff pressure.
China's manufacturing sector will not vanish overnight, but a shift is
inevitable, said Dan Krassenstein, Shanghai-based director of Asia
operations at ProconPacific, which makes around 3 million specialized
industrial shipment bags.
He said manufacturing was moving to South Asia and Southeast Asia in
search of cheaper labor costs and as Beijing discourages polluting,
The tariff escalation "is just going to accelerate it", he said.
Five years ago his company made all its products in China. Now, a
quarter are made in India and 5-10 percent in Vietnam.
DOING THE SUMS
In Southern China's Pearl River Delta, the cost of renting industrial
and commercial space has surged around 80 percent in the past eight
years, while companies have complained of soaring labor costs.
"Production costs are cheaper in the U.S. than in China," said Yuan Juyou,
deputy head of marketing at Wonderful Group, a ceramics maker. "Even though
labor costs are more expensive, we have automated a lot of processes. Plus
electricity, land, these kinds of costs are cheaper than China."
Wonderful, a unit of the Chinese manufacturer Marco Polo, began shipping
products from its new factory in Tennessee in June.
Regional rivals are also starting to sense an opportunity to step up and into
China's competitive space. Thailand is actively promoting itself as a regional
manufacturing hub, offering incentives such as an exemption of up to eight years
on corporate income tax for certain industries and exemptions on import duties
for some raw materials.
The country's corporate income tax rate of 20 percent also ranks it as the
second-lowest among countries in the Association of Southeast Asian Nations,
according to Thailand's Board of Investment.
Thailand is already a major center for some electronics and components, and the
government plans a series of industrial zones to push development of target
A China-ASEAN free trade deal also helps mitigate the trade-war risk for
companies trading with both the United States and China.
"The Thai government is making it very easy now to move down there," said Sloven.
"The Chinese government embraced manufacturing back in the day. But now, they're
not looking for growth in the product business. They're looking for high-tech,"
"It's a bit like when a wife comes to a husband and says, 'I don't love you
(Reporting by Samantha Vadas in SHENZHEN, Anne Marie Roantree in HONG KONG, Adam
Jourdan, David Stanway, Brenda Goh, John Ruwitch in SHANGHAI, Elias Glenn in
BEIJING and Holly Chik and Maggie Liu, Sue-Lin Wong in DONGGUAN; Editing by Anne
Marie Roantree and Philip McClellan)
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