Breaking News
0

'You prepare for war': how one U.S. firm tried escaping Trump's China tariffs

Stock MarketsAug 20, 2019 09:39PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. Migrant worker from Myanmar tests the quality of a monitor on a TV assembly line at a factory in Bangkok

By Anne Marie Roantree

HONG KONG (Reuters) - When Larry Sloven heard last year that U.S. tariffs threatened his China electronics business, he knew that setting up shop elsewhere would be a slog rather than an adventure.

The 70-year-old had spent half his life building supply chains in southern China to produce goods for big-box U.S. retailers. But he had never reshuffled one on short notice, with tariffs hanging over his head.

"It is the hardest thing I've ever had to do in all my 30 years in the business," said Sloven, president of Capstone International HK Ltd, a division of Florida-based Capstone Companies.

"You've got packaging, assembling, auditing, labor, overheads, components, logistics, transportation," he said. "I went from first gear to fourth gear very quickly."

Sloven, a native of Long Island, New York, cut his teeth in Asia in the 1970s sourcing lighting products from Japan. He then moved to Taiwan and then mainland China, making and sourcing electrical products for AT&T (NYSE:T) and Duracell, before becoming a buying agent for sporting goods retailer Dick's.

He joined Capstone in 2012 to manage its network of Chinese manufacturers from Hong Kong.

Rising labor costs and tighter regulations in China had already led him to consider moving the business elsewhere in Asia. But the trade war forced his hand.

Through dozens of interviews and phone, Whatsapp and email exchanges over a year, Reuters documented Sloven's quest to uproot his supply chain operation, an effort entailing many close calls, bureaucratic headaches - and some good luck.

Sloven is just one of thousands of entrepreneurs who have been forced by the trade war to upend their business operations in China in the biggest supply chain shift in a generation.

Companies like Capstone contribute over $200 billion in U.S. purchases of China-made electronics and machinery annually.

GRAPHIC: China's top exports and imports from U.S. - https://tmsnrt.rs/2KVYxbp

DUE DILIGENCE

When Washington imposed the first tariffs in July 2018, Capstone's core products, such as battery-powered LED bulbs and motion-activated lighting, were not on the list.

Nor were some Capstone prototypes that Sloven sees as the future of the company: "smart furniture" like a mirror that doubles as a touchscreen with internet access.

But his instinct was that U.S.-China ties were taking a turn for the worse.

"You don't know what's coming next in China," he said.

He set his sights on Thailand as the site of a possible second production base. Sourcing raw materials locally was difficult, but at least they carried no import duties. Setting up a business entity in Thailand was also cheap and fast, and some of the work could be subcontracted.

A U.S. trade official in Thailand introduced him to various local companies who could help.

"I will be able to make products in Thailand," Sloven said at the end of last summer. But, he added, "it's not going to be easy."

In September, U.S. President Donald Trump gave him an even better reason to move.

The total value of U.S. tariffs on Chinese goods was expanded from $50 billion to $250 billion, putting Capstone's LED products in the crosshairs of 10% levies.

Smart furniture, if made in China, would take a hit.

Soon after, a survey by Amcham China, which represents U.S. businesses, showed that a third of its members were planning to shift the sourcing of components or assemble some goods outside of China.

Sloven's efforts in Thailand appeared to have paid off. After numerous meetings, he found a furniture factory and an assembler outside Bangkok that could help him.

Both had international experience and were expanding to meet increasing demand from U.S. firms. And while smart furniture was new to them, they were confident they could pull it off and were ready to invest. The companies cannot be named because of non-disclosure agreements.

After a site visit in February, Sloven ordered components for his smart mirror to be shipped to Thailand. By mid-March, Capstone engineers were showing the factory how to put them together.

"I'm not concerned," Sloven said in February. "I'm giving him the information step by step," he said, referring to his Thai partner.

Even as Sloven grew more optimistic, the urgency to leave China seemed to abate as 2019 began.

Trump and President Xi Jinping of China had declared a cautious truce at a Group of 20 summit in Buenos Aires, and it seemed to be holding. Officials on both sides were suggesting a deal before a March deadline, and the threat of tariffs rising to 25% seemed distant.

But Sloven was sticking to his plan.

"I don't think there's going to be a trade war, but that doesn't change things," he said at the time.

GRAPHIC: SE Asia factory activity holds up better - https://tmsnrt.rs/2HhYaaf

MOVING SLOWLY

The March deadline passed, but tariffs remained unchanged. That gave Sloven breathing room.

He scheduled a series of pilot runs to test how well the Thai factory handled assembly. He also needed to prepare for audits of labor rights and environmental standards that U.S. retailers require.

He estimated that would take at least another six months.

"I'm going to start moving on a small scale because they're not going to be able to just do it immediately," Sloven said. "As much as they say, 'Oh, I can do this right now' - I'm not taking that chance."

More investment in tooling and moulds was required, too, but the Thai companies agreed to bear the cost.

Regardless of what happened with the trade war, Sloven felt covered.

"You prepare for war," he said. "You're ready if you're attacked."

RE-NEGOTIATING CHINA

Sloven also had work to do in China.

His suppliers in Shenzhen, Dongguan and Guangzhou were certain the trade conflict would blow over and were reluctant to negotiate deals that would send components and raw materials abroad for assembly.

But Sloven kept pressing ahead with the Thailand plan, concerned about the toll the trade war was taking in China.

In early April, Sloven invited Reuters to meet his trade lawyer, Sally Peng of Sandler, Travis & Rosenberg.

Peng described how Chinese factory floors were emptying out as workers were laid off. Few owners had the expertise or resources to automate or find new export markets, so most were riding it out, hoping for a trade deal. They were "losing money every day," she said.

"They believe that eventually it will all come back," Sloven said.

"I think within five years, it will all be gone," Peng replied.

GRAPHIC: Trade flows redirected away from China - https://tmsnrt.rs/2P6b2qb

INVESTOR CALL

The same day Sloven met his lawyer, his bosses in Florida announced 2018 results that reflected the effects of the trade war. Net revenues came in at $12.8 million, down from $36.8 million in 2017. Net losses were $1 million, a swing from a $3.1 million profit.

"Capstone faced challenges in 2018 unlike any in its history," chief financial officer Gerry McClinton said.

Meanwhile, development of the smart mirror was in full swing. The prototype was deemed a success at a Las Vegas electronics show in January, and a PR agency and a marketing company were hired to advertise the new product.

Then Trump hiked tariffs to 25% on May 10.

For Sloven - and many others - the urgency level bounced back up. That month, a survey by AmCham China and AmCham Shanghai showed the number of firms that had moved production or were considering doing so leaped above 40%.

To speed things up, Sloven introduced the Thai assemblers to his Chinese suppliers.

He wanted to set the rules of the game and then let them interact independently. Those meetings had to go well, or all could fall apart.

In a stroke of luck, he discovered the two sides had something in common.

"The Thai guy, his family was from China originally so he spoke a certain dialect. And the factory in China – my supplier - and him speak the same dialect," Sloven said. "What a home run!"

After months of digging in its heels, the Chinese company finally relented and agreed to supply Sloven in Thailand.

AUDITS, LOGISTICS

With his supply of components and raw materials secured, the next big step was the audits.

Thirty-five percent of the product had to be made in Thailand for the product to be considered Thai, and thus exempt from American tariffs.

A certificate from an independent auditor would prove that, but the auditing usually takes four to five weeks.

"I know what I have to do, but getting the information is mind-boggling. These are supply chain issues that everyone in the world is going to have to face," Sloven said.

Logistics was another concern for Sloven. Shipping to the United States from Thailand takes 8-10 days longer than it does from China.

Despite the extra costs and time, Sloven thinks he will be able to make the product for the same price as in China without the tariffs.

And by the middle of the summer of 2019, Sloven was confident that most of his challenges had been overcome and that the smart mirror would ship on schedule on October 1.

But, he allowed, "there's always going to be hiccups".

'You prepare for war': how one U.S. firm tried escaping Trump's China tariffs
 

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments
Tanusree Mukherjee
Tanusree Mukherjee Aug 20, 2019 11:16PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Please don't waste our valuable time by writing things that won't work out ever. You can't *****your own country's business by letting people import everything from other country! It's stupid. US is making billionaire by sending money to other country and people in America are losing their expertise and opportunity in their own country! US must not allow import more than 10% of the trade deficit with each and every country. Not everyone needs to be billionaire. In fact all these billionaires really don't pay tax. No need to make China rich. Rather than wasting American tax dollar by feeding illegals , start manufacturing clothes,  electronics and each and everything that we import from China  here in America again. Why a whole nation should depend on that huge import? It doesn't make any sense. Give immigration visas to people who has expertise in the specific fields.
Jack Zhang
Jack_A Aug 20, 2019 10:34PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
I wish this works out, and no more trade war with other Asian countries
archie cheah
archie cheah Aug 20, 2019 9:39PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Chinese competitors would be pressured to occupy the factory and aggressively fill the void to continue selling with a better version for the same price with a weaker yuan.
Paul Manefee
Paul Manefee Aug 20, 2019 9:29PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
20 years ago, before US was duped into believing that China was heading toward democracy and invited China into WTO, China had nothing, US made China rich with all the foreign investments and US technology, with the help of greedy Corporate America, now it’s time to unwind decades of miss-steps
David Wong
David Wong Aug 20, 2019 9:29PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
If it is not a country, then how come they have the second biggest economy fast becoming the number one.
Tanusree Mukherjee
Tanusree Mukherjee Aug 20, 2019 9:29PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
David Wong  China is already no 1 in doing fraud. lol.
David Wong
David Wong Aug 20, 2019 9:29PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
If it is fraud then how come their 5G is ahead of the US?
Jack Zhang
Jack_A Aug 20, 2019 9:29PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
some always talk nonsense, don't bother with it at all, it's wasting time.
Wai Chong
Wai Chong Aug 20, 2019 8:53PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
No one ever thought of making products in the USA? This is just moving one trade deficit to another. It's still deficit... And you will need another set of tariff all over again... Let's say you move to Vietnam, Vietnamese would not have the money to buy more goods from the USA cos they're more expensive and Vietnam doesn't need those corns and soy beans like China. Never mind... Think before you do...
Paul Manefee
Paul Manefee Aug 20, 2019 8:53PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Thai is better, at least it’s not an authoritarian country like China
Wai Chong
Wai Chong Aug 20, 2019 8:53PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Paul Manefee Vietnam is authoritarian... if anyone forget.. LOL
Jae Ung Hwang
Jae Ung Hwang Aug 20, 2019 8:29PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
lol?
Steven Ownz
Turtle_Steven Aug 20, 2019 8:20PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
let me sum up the long story to you in 1 sentence, a US firm hires anywhere but the US. lmao! it is not a US firm if its only operation in the US is consist of selling. it is more like a Chinese firm ran by a American.
David Wong
David Wong Aug 20, 2019 7:55PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
I do not believed any of these. There is no way you can produce outside of China at a lower cost. Only China has the infrastructure, the skill, the people to lroduce at high quality and at a low cost.
Jae Ung Hwang
Jae Ung Hwang Aug 20, 2019 7:55PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Sir, you are wildly mistaken.
Paul Manefee
Paul Manefee Aug 20, 2019 7:55PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Yeah David, don’t forget that China had nothing 20 years ago before US invited China into WTO, US had made China rich, it can sure be unwind
David Wong
David Wong Aug 20, 2019 7:55PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
It is easy said then done. China has 1.4B consumers. In the world of business, consumers are king. China has 300M middle class, the size of the US population, so the future still looks bright and companies will continue to invest in China. Warren Buffet said, it is a matter of time when their economy will become *****than ours. Billionaire Ray Dalio will look to do business in China and so will many investors. Investors go where the money flows.
dan mat
dan mat Aug 20, 2019 7:49PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
poor man... I've almost cryed
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email