Tariff Talk: Is it Time to Leave China?
With tariff’s in full swing I am seeing many importers frantically making appointments with their customs brokers, tax attorneys, logistics agents, as well as us, their sourcing agent, all trying to make sense of the increase in costs attributed these tariffs. Unfortunately, everyone is taking a hit on this, and no matter what solution business owners end up taking, all are bound to lose something in the short term.
In this article, we are going to go over critical topics you should be taking into account as you begin to decide what the best solution is for your business. There is no one size fits all solution, but fortunately, you do have options, and your future is not bound to be as doom and gloom as it may feel at a time when your business is playing the part of a pawn in a global economic war that will have no winners.
Let's start by managing some expectations here. If you’re reading this, it most likely means your business is affected; it also means you’re past the point of taking advice from marketing buzzwords and are smart enough to know a single article is not your tax-free card. From one business owner to another, I support you in your time of trouble, and I am rooting for you to make this time a mere blip in your overall finances.
Something that should be kept in mind as you’re working to understand the chaos and new costs involving tariff’s in the United States is that everyone is taking a hit. Your options are simple, pass the costs down to the customer, or shoulder the fees on your end. While this might sound damning, your competitors are most likely dealing with it too. While you may decide it is best to shoulder the burden and maintain your status amongst the Amazon shoppers as the best price in town, your competitor may opt to keep their margins and know their sales velocity will shrink. Only you can define which is more sustainable for your business model.
Can you negotiate with your factory?
Talking with your factory about the added costs you are incurring is always a good idea. Keeping a factory informed on your business can help align you better as a team. You may only get sympathy from them, but it is a good idea to let them know you’re losing money due to reasons beyond your control. In some instances, your factory may be able to shave off a couple of cents per unit, but with all factory negotiations, be careful with your negotiating since you don’t want the factory making up for the costs regarding the quality or cutting corners.
In the past week, I reached out to about 30 factory owners and workers that I have a close relationship with. I asked them all the same question, “If a client came to you asking to help shoulder some of the costs imposed by the trade tariff’s, would you do so?” Some responded that it would depend on the profit margins and the customer, where others identified that if it were something they agreed to only be a short time circumstance, no more than two or three orders, then they would entertain it. The more open ones told me, they might agree to such arrangement, but find a way to add the costs back into the product anywhere they could.
What I learned from these conversations was to tread carefully in your discussions. If a factory sees you as a valued customer, they might be willing to shave a small percentage off your product, but if they don’t, it could also mean their margins are so low that you’re already getting the best possible price.
Should you look outside of China?
In short, you should always be looking for alternative manufacturers. Even if your product is being made incredibly well, never place all your eggs in the same basket, when it comes to manufacturing. Usually, this means to have a lineup of potential factories throughout China, but now, more than ever, it should also mean getting quotations for factories in other countries as well.
There are many tips circling the internet on how to find factories internationally, and with Alibaba on the world stage, I always recommend starting filtering your results to include all countries except China. Once you’ve exhausted the China-based online databases that list international factories, your next option is to search the counties name along with your product category. So, if you’re currently manufacturing textiles in China, Google search: 'textile manufacturers in insert country name' to see what databases you can identify in each region.
Below is a list of 12 countries that have made a name for themselves for manufacturing consumer products, and might be worth looking into.
- European Union
- United States
- Republic of Korea
Just because a factory is not a Chinese factory does not automatically qualify them. Perform the necessary steps to validate each factory you speak with, and be sure to invest in factory audits before placing orders beyond samples. China has become notorious for poor quality manufacturing not only because of their standards but also because they produce the most volume. Other countries deserve the same scrutiny placed on Chinese factories, so move forward with caution.
Can you manufacture your products domestically?
It is worth investigating in domestic manufacturing, but there will be a good chance the costs won’t add up.
I was visiting a factory yesterday in Dongguan on behalf of a client, and I was auditing the work this factory was performing on an order of Bluetooth speakers that were going to the US retailer Five Below. As I was inspecting the assembly line, I was mesmerized by one worker's job of putting the little rubber pads on the four corners of each speaker base. With the outer speaker casing moving slowly across the conveyor belt, this one worker had metal tweezers that would pluck a single pad off the sticker sheet and place it into each corner.
This one worker is a piecemeal worker, meaning he gets paid per speaker. It is possible for him to reach overtime, but on an average, this gentleman will take home roughly $575 each month, if his factory is producing at their optimal efficiency. In total, about 3 dozen workers are working at this price fulfilling a single order of 40,000 speakers.
By the time these speakers reach the shelves at Five Below, they will have paid roughly $2.05, where they will sell them for $5.00. If you calculate the numbers, take into account minimum wage in the US, it would be impossible to make this order work and have Five Below hold to their name and core value.
As I said before, it is worth investigating if your product can be made domestically, but it your products rely on the inexpensive labor costs China has to offer, this tactic may prove impossible.
Can you afford to wait out the trade war?
There are many reasons companies choose China to manufacture products. Big companies will make headlines if they successfully pull off moving their manufacturing to other countries, and this is beginning to happen more and more, but you need to ask yourself if your importing level is large enough to leave China. One of the reasons China is awesome for e-commerce is their low order quantities and access to a treasure trove to generic products you can customize as your own.
I’ve heard much chatter over the years from clients searching for alternative countries to manufacture their goods. Every time I hear this, my response always remains the same, “give it a shot!”. In the past five years of manufacturing products in China on behalf of my clients, and having manufactured over 100M dollars worth of combined goods, I can count on one hand the number of clients that left China to have their same products made in a different country.
What you should not do.
I want to leave you with a final piece of advice on exactly what not to do. Regardless of how tempting it may be, please don’t try to dodge these tariff’s using illegal tactics. As you have conversations with your factories regarding the tariff’s, they may mention they could help you by changing the documented costs of goods, thus allowing you to pay a lower tax. You may read of other tactics where you can ship your products to other countries to change the shipping labels, or you may learn of different nefarious strategies that can help lower the tax. All of these things are not worth the risk. It is illegal, it is a felony, and you will get caught.
Anyone who has had multiple container examinations or audits can tell you; there is no set standard the United States Customs and Border Patrol use when inspecting a shipment, and while one tip you may find on the internet may seem appealing, if it is illegal, avoid it. The United States Federal Government is not something you want to go up against.
If you have unique questions about your current productions or like talking about the joys of manufacturing, feel free to reach out to me at email@example.com.