US small business owners struggle to diversify from China manufacturing
Skills, lower costs and integrated logistics network give Chinese suppliers edge
NEW YORK -- Small and midsize U.S. businesses are finding it increasingly difficult to relocate production away from China, despite the heavy tariffs imposed on imported Chinese goods by Washington with the intent of shifting manufacturing back to domestic soil.
Companies say China not only offers low-cost labor, but crucial raw materials, locally produced machinery and general expertise.
"My factories are staffed with wonderful people who do a fantastic job ensuring our high-quality standards are met," said Beth Benike, CEO of Minnesota-based Busy Baby, who considered manufacturing her baby products domestically but found it impractical. "We will be out of business before we can get up and running anywhere else."
For years, educational toy company Viahart's founder Molson Hart has struggled to move production out of China and onshore it to the U.S.
In 2016, a Texas injection molder that could make Viahart's Brain Flakes product provided a quote that would have raised the cost of his goods by 210%. In another effort last year, Hart was unable to secure a steady supply of plush filling and find affordable labor to produce his TigerHart plush toys.
The Texas-based business halted all imports when U.S. President Donald Trump threatened a 145% duty rate on Chinese goods in April. The company's inventory is estimated to last until October. Production costs in the U.S. also began to climb because raw materials came from China.
"The tariffs either didn't help these things or made them worse by, for example, increasing the price of the machine we were going to buy by 145%," Hart told Nikkei Asia. For now, much of Viahart's toy production remains in China.
American factories also required much larger order volumes, which Benike's small business could not afford.
"Because U.S. manufacturers have such high expenses, they need to require their clients to produce in large volumes to make their businesses work," Benike said. "We are simply too small to produce in high volumes."
Elenor Mak, the founder of Jilly Bing, which sells Asian American dolls, produces her premium vinyl dolls at a factory in the southern Chinese city of Dongguan. The doll's accessories come from the same factory, but hair and other components for the doll come from different suppliers nearby.
Like many other American business owners, Mak chose China for its integrated supply chain and expertise to ensure consistent high quality for her $68 dolls.
"The making of these dolls is incredibly precise and requires a diverse set of highly specialized skills," Mak said.
Some Chinese manufacturers have shifted operations to countries such as Vietnam, in response to American trade policies and rising labor costs in China. But Mak is keeping production in China.
"There are no premium doll factories with the right experience and pricing," she said. "China is still my only viable option."
Benike also has no intention of moving production outside of China, a move that could take several months and cost thousands of dollars just to create new molds.
Kyle Chan, a postdoctoral researcher at Princeton University studying China's industrial policy, told Nikkei Asia that a stigma still exists among the average American toward cheaply produced Chinese merchandise. But Chan said the quality of goods coming from China has improved tremendously, and many American businesses recognize this expertise and skill.
China became a manufacturing powerhouse over the past two decades, accounting for more than one-third of output globally. Factories made finished products from apparel to home appliances, as well as the widgets and components needed to make them, creating a comprehensive network of supply chains conveniently located in one country.
Chan underscored the importance of such a large network of suppliers in China to any business operation.
"What makes production in China so competitive is not just from a cost standpoint, but also a flexibility and responsiveness standpoint," he said. "American businesses are able to survive because of the adaptability and flexibility of their counterparts in China."
Small businesses are mired in uncertainty because of the tariffs. Trump in mid-May cut the levies on Chinese goods to 30% amid bilateral talks. And after flip-flops by Trump on his trade policies -- announcing new rates and calling them off soon after -- the U.S. Court of International Trade on Wednesday blocked the sweeping tariffs as an overreach of presidential authority. But then, an appeals court reinstated many of the tariffs on Thursday.
Owners of these businesses are holding off from any decisions due to the volatility over the past two months. But many of them have been burdened with rising costs that threaten their survival, and they face difficult decisions -- from raising prices to layoffs -- as trade uncertainty lingers. Capital decisions also are on pause.
Small businesses employ nearly half of U.S. workers and are a critical part of American economic growth. They account for one-third of the total value of goods imported, the U.S. Chamber of Commerce reports, and many operate on tight profit margins.
Since the world's two largest economies came to a temporary agreement in early May to slash duty rates from 145%, many Chinese factories received orders to resume manufacturing.
But mom and pop shops that rely on Chinese suppliers said that manufacturing hubs are prioritizing orders from large corporations, leaving them with little chance to have their goods produced and shipped to the U.S. by August, when the tariff rate is expected to rise again.
Adding to their woes, trans-Pacific shipping rates have skyrocketed, in line with demand, to more than $3,000 per forty-foot container.
A report this month by the bipartisan Joint Economic Committee of the U.S. Congress found that employment at businesses with fewer than 10 workers has dropped 3%, or by 366,000 jobs, since the start of Trump's second term.
Confidence among small businesses has declined, too. The National Federation of Independent Business's Small Business Optimism Index fell to 95.8 points, below the 51-year average of 98. Retail was among the lowest levels of optimism among four industries.
"Small business optimism declined in all four industry sectors, but most notably among small retailers and manufacturers, largely due to more pessimistic views about future business conditions, supply chain disruptions and ongoing labor quality concerns," said Holly Wade, executive director of the NFIB Research Center.