JIUJIANG, China / NEW YORK, July 2 (Reuters) – Hammered by tariffs, pandemic disruption and rising costs, some global manufacturers are reducing reliance on Chinese factories and moving assembly lines to Vietnam, Malaysia and in other countries at lower cost, or even Japan.
But Ryan Gunnigle, the CEO of Kids2, is swimming against the tide. The Atlanta-based baby toys and products maker recently opened the first phase of a factory on the banks of the Yangtze River in central China at a cost of $ 20 million.
China’s dense supply networks, consistently competitive labor costs, and growing domestic market have proven to be too powerful.
âIf you make wood furniture, Indonesia is great,â Gunnigle said. “But for us, being central in China simply outweighs the advantages of other markets.”
Gunnigle, who oversees a five-decade-old brand, has seen some suppliers and competitors relocate to other countries – only to return to China after finding that the costs in their new locations were too high or they had to be. faced with labor shortages and difficulties in finding suppliers.
âThere is definitely a riskâ in building a new factory in China, he said. “But our products have sewing, electronics, steel, plastic – and all of those things go together well in China.”
For many American companies operating in China, the prospect of decamping to another Asian market was not a serious idea until 2018, when mounting tensions between Washington and Beijing escalated into a trade war marked by punitive tariffs on the market. tit for tat.
Some Southeast Asian countries have seen a chance to attract American businesses with the prospect of lower labor costs and calmer political waters. Even Japan, a G7 economy, has taken action by offering to pay Japanese companies to leave China.
The pressure on American companies to reconsider investing in China peaked under the administration of former President Donald Trump, but it is not expected to dissipate much under his successor, President Joe Biden.
US Treasury Secretary Janet Yellen said last month she expects full “decoupling” in some areas of economic relations with China in order to protect US national security. read more And the leaders of the Group of Seven recently announced plans to work more closely to contain China’s economic influence.
“I WILL BECOME RICH”
Southeast Asia’s biggest advantage over China is that the labor costs are lower, said Jack Sun, general manager of the Kids2 factory in Jiangxi province, which has approximately 450 employees and currently produces approximately 10% of the company’s products.
“But the supply chains are not good. In China you can buy anything.”
Finding workers in central China is also easier and cheaper than on the richer coasts, where most foreign investment has been concentrated. And a factory in China also facilitates sales to some 400 million middle-class consumers in its domestic market.
Kids2 launched its products on Alibaba’s e-commerce site (9988.HK) Tmall on May 18 – a date that, as Sun mentioned, sounds like âI’m going to get richâ in Chinese. Gunnigle expects 30% annual sales growth in China in the first few years after 2022.
Chinese President Xi Jinping is personally working to boost domestic consumption and reduce dependence on foreign markets in the face of growing tensions between Beijing and its trading partners.
Kids2 is among companies that have been hit by tariffs on a range of manufactured goods resulting from the trade war between the United States and China. The company said it has paid $ 6 million in tariffs on Chinese imports since April 2018.
Most of these tariffs remain in effect. Meanwhile, production challenges in China continued to intensify as the onset of the coronavirus pandemic disrupted the flow of goods.
Yet China managed to keep its factories operating for most of last year, even as other places battled shutdowns to curb the spread of the virus. Chinese exports, after a short-lived decline in early 2020 during the country’s COVID-19 shutdown, have increased year-over-year for 12 consecutive months through May, including a record increase of nearly by 155% in February, according to Chinese customs data.
Gunnigle said his own board has raised questions about whether he should look elsewhere, but he is convinced that the investment in a new factory and design operations in China – part of an overhaul of the company’s product development system – is essential to remain competitive.
At the start of the pandemic, foreign companies said the disruptions added pressure to diversify away from China.
Yet a survey released in June by the European Union Chamber of Commerce in China found member companies are now strengthening their positions in joint ventures and offshoring supply chains despite long-standing concerns about limited access. to the market and unequal treatment in China.
Kids2 has long relied on joint ventures with Chinese toy producers and will continue to work with those sources, Gunnigle said. But the new design and manufacturing operation that the company has built in China and owns outright gives more power to manufacture products, act quickly to organize the production process and invest in the necessary machinery, he said. he declares.
The plant’s injection molding machines, which inject molten plastic into parts for brightly colored cribs and walkers for toddlers, were further automated this year by the in-house engineering team, reducing manpower required by nearly 60% and cutting costs much more than other local vendors have, Sun said.
And on the assembly line, located on the other side of the factory, the screwing, riveting, and wrapping process can be even more automated without too much hassle, Sun said.
Having more control over how products are made creates many benefits. About 40% of Kids2’s business is now e-commerce, which means designing toys to minimize size and weight and support shipping is more important than ever.
Controlling the production process also makes it easier for the company to create products that rely on common parts, reducing tooling and other costs. For example, the plastic cradles for Kids2 swings and high chairs are made using the same injection mold.
David Butler, the company’s in-house chief designer, said the other reason for more control over production is to involve designers more directly in decisions that will influence assembly line setup.
âWe used to design more on an ad hoc basis,â said Butler, with the designers coming up with a new toy or accessory, and then the manufacturing team deciding how to produce it. “Now that we have our own factory, we design differently – with more interchangeable and modular systems. That’s how IKEA designs products.”
Reporting by Timothy Aeppel and Gabriel Crossley; Editing by Dan Burns and Paul Simao
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