Why Many U.S. Companies Have Kept Production In China And Have No Plans Of Moving
AILSA CHANG, HOST:
With more tariffs looming in the U.S.-China trade war, American companies are growing more pessimistic about the outlook for doing business in China. But 87% of U.S. firms with operations in China say they still haven't moved production to another country, and they have no plans to do so. That's according to a new survey from the U.S.-China Business Council.
To find out why most plan to stay put, we've called up Jay Foreman. He's the CEO of Basic Fun. It's the toy company that makes K'Nex, Lincoln Logs, Cutetitos and Pound Puppies.
Jay Foreman, welcome.
JAY FOREMAN: Thank you. Glad to be here.
CHANG: So I understand that currently 90% of your products are manufactured in China. Tell me why. What benefits does China offer you to base your manufacturing there?
FOREMAN: Sure. I mean, China offers sort of a suite of benefits, if you will, which is a highly trained labor force, a well-financed infrastructure, a great safety and quality control regimen, excellent transportation and communication points and, basically, a system of production for light industrial that's been set up over a 30-year period.
CHANG: I mean, how possible would it be to replicate those conditions in, say, Southeast Asia or India?
FOREMAN: It would be really difficult. For example, if we went to Vietnam - which is a great country with great manufacturing - it's only 10% of the size of China. So if you just moved 5% or 10% of Chinese production into Vietnam, you're going to max out the capacity of their workforce, and that's going to increase prices, increase rents and make it more difficult for products to be produced there at the same competitive prices as we've been getting from China.
You can go to India, which has got a huge population base, but India's infrastructure is really not set up for this. You know, we've developed protocols, at least in the toy industry in China, where we're able to make safe, high-quality product at a great price. There's no system like that set up in India. It could take 10 or 15 years to set that up. It's taken us 30 years to build our production base in China.
FOREMAN: And then bringing production back to the United States is not possible and realistic because we don't have a labor pool here. The president is closing the borders to low-skill labor. So who's going to make the product?
CHANG: Now, if President Trump does go through with imposing tariffs on toy imports from China after the holiday season - let me ask you - could you afford to maintain most of your production in China still?
FOREMAN: Well, we really won't have a choice but to find a way to afford it. And the one way to afford it is, we will have to, at some point during the course of 2020, begin to pass the tariffs along to the consumer.
CHANG: So how much of a price hike are we talking for, say, like, a Cutetito?
FOREMAN: I think you're thinking about everything from sneakers to bluejeans to toys to flip-flops to iPhones going up 15% to 30% in the second half of 2020. And by the way, what happens when you move it to India? Mr. Trump, the dealmaker, will make a deal with China sometime in the next six to 12 months, or somebody else will be in office and they'll make a deal, while everybody's moving their supply chain to India, and then India will become the next target for trade.
CHANG: Yeah, I was going to ask you about that. How has that uncertainty affected daily operations in your company now?
FOREMAN: Well, instead of sitting down to plan on what we think kids are going to want to buy next year, we're sitting down every day taking a look at what tariffs are going to do to affect our profitability, when they're going to hit.
We have something called Fun Friday here every other week, and we talk about what's happening in the business and what's new. And usually, we talk about toys and holidays and all those kind of things. And now our employees are coming back to us and asking us how the tariffs are going to affect them, should they be planning on buying a car. Can they expect a bonus? And it's hard for us to give them a straight answer on that because we really don't know how this is all going to affect us.
CHANG: Jay Foreman is the CEO of Basic Fun, a toy company based in Boca Raton, Fla.
Thanks very much for speaking with us today.
FOREMAN: You're welcome. Pleasure to be with you today.
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