Toymakers lament tariffs' pending return

Insiders warn consumers in the US will face heightened prices in 2020

The delay on tariffs on some Chinese products has given US toymakers room to breathe, but many insiders warn that the industry's relief is temporary, and that consumers in the United States are still going to face heightened prices in 2020.

Jay Foreman, CEO of Basic Fun!, a Boca-Roton, Florida-based toy and novelties company, said that it would have been "very, very problematic" for his company and the toy industry as a whole if the tariffs were imposed in September, because they will have no choice but to absorb the tax.

"Now at least for toys, if the tariffs get moved to December, at least, we don't have to have the impact on our bottom line on tariffs just now, and we have a little bit more time to plan. But of course, if and once the tariffs go on in December, then those tariffs are going to affect either our company's products or the price of toys on the shelf," he said.

Citing the impact on the holiday season, US President Donald Trump on Aug 13 announced that he is delaying tariffs on some Chinese imports ahead of Christmas.

Trump revealed earlier this month that he is putting 10 percent tariffs on $300 billion more of Chinese goods, effective on Sept 1. The duties on certain consumer products will go into effect on Dec 15.

Rebecca Mond, vice-president of federal government affairs at the Toy Association, said the tariff delay will help companies get through the holiday season, as many of them don't have products coming in after Sept 1. However, the uncertainty over Trump's trade policy has clouded business decision-making and upended investment, she said.

"We are trying to look at what is going to happen next year. Is a 10 percent tariff going to go into effect? Is it going to go up to 25 percent? So these are questions that companies are trying to grapple with now as they are looking at business for the 2020 season," she said.

The biggest concern, however, remains the possible increase in costs, she said. It will be difficult for toy companies to absorb the tariffs because the industry operates on a small profit margin.

"Any increase in costs is eating away at these narrow profit margins, then they have to look at possibly passing the increase in costs on to consumers. These price decisions are made months ahead and negotiated with their retail partners months in advance," she said.

When companies go into negotiations, they would want to set a price where they are going to make a profit off the sale. For example, if they set a price believing a 10 percent tariff will be in place, and when the tariff increases to 25 percent, then the company is going to lose out on a significant amount of profits, Mond said.

"And those profits go back into investments in the US, and into growing their workforce, going into their product line, and investing in research and development and those kinds of things. It really has this domino effect on the companies," she said.

The price of toys is estimated to go up about 5.6 percent if the 10 percent tariffs are imposed in December, Mond said.

The consumers' decision to purchase toys is closely tied to the products' prices.

"So when you see toy prices increase even a little bit, that does impact the consumers' decision whether to purchase that toy or not, more so than big-ticket items like a television or even a car," she said.

Supply chains in China

As the US-China trade dispute continues, some companies have announced plans to move their supply chains out of China to mitigate the tariffs' impact.

In an earnings conference call on July 23, executives from Hasbro, the maker of popular products such as Monopoly and G.I Joe, announced that they plan to reduce the amount of toys manufactured in China to approximately 50 percent by the end of 2020.

Foreman said he has considered moving his supply chain from China to countries such as Vietnam and India. That, however, will be not be an easy task.

"We wouldn't look to move all of our production, maybe we will look to relocate some of it, but still China has the most efficient and productive manufacturing labor force in that part of the world, and there is really no way to effectively replace the business model that we have working with China.

"We can diversify into places like India, Vietnam and Indonesia, but it won't be as efficient or as effective, and it will certainly take time," he said.

Several reasons, including the availability of labor, the cost of manufacturing and the infrastructure in China, have made it a preferred site for US companies for production.

"Over the past 20 or 30 years, China has developed an incredibly good manufacturing infrastructure by supporting not only state but private industries in building manufacturing and efficient supply chains. So we have a really excellent supply chain coming out of China, plus available labor, and reasonable price production," he said.

"Whereas in the US, for example, we have higher costs, and we don't have as much an available labor pool, because our unemployment rate is so low. Now the administration is restricting immigration, and we can't even get additional workers to come into the country," he said.

teresaliu@chinadailyusa.com

(China Daily 08/24/2019 page7)