Firms are outmaneuvering

How U.S. and Chinese firms are outmaneuvering Trump in trade war

Manufacturers move offshore, dodging tariffs

By ADAM BEHSUDI and HE HUIFENG

This story is part of an ongoing series on U.S.-China relations, jointly produced by the South China Morning Post and POLITICO, with reporting from Asia and the United States.

President Donald Trump’s tariffs on Chinese imports are having the desired effect of driving production out of China — but not to America.

Less than a month after the Trump administration hit $200 billion worth of Chinese imports with a 10 percent tariff, Hong Kong-based furniture maker Manwah Holdings broke ground on an expansion of a facility outside Ho Chi Minh City.

The company, which specializes in reclining chairs and sofas that have become a fixture in middle-class American living rooms, purchased in June what was already one of Vietnam’s largest furniture factories. By next year, it will be the biggest.

Some 9,000 miles away from the deepwater ports of China and new factory towns in Vietnam, American retailers are grappling with how much of the tariffs they can absorb.

Gao Jian, of the Vnocean Business Consulting Service in Vietnam, said he has guided about 40 Chinese enterprises per month to the more than 50 industrial parks he helps recruit for so far.

“Some companies can absorb a 10 percent tariff, but a 25 percent [tariff] would eat up their entire profit,” Gao said. “They would have to relocate and shut down their factories in China.”

Even though U.S. companies pay the duties when they bring in imports, the additional costs are usually passed right along to customers. As a result, many regard tariffs as taxes on consumers.

Manufacturers like Manwah are trying to blunt the tariffs for their clients. Makers of common American goods are moving production to Vietnam and other countries where Trump’s tariffs on China don’t apply. Even as Trump and President Xi Jinping meet this week to discuss trade tensions, companies both in the U.S. and China aren’t waiting to see if they call a détente.

Companies with thousands of factories in China are now racing to relocate out of the mainland, which seemed the only practical solution to avoid losses from higher tariffs that could take effect in a little more than a month. Earlier this week, Trump said it was “highly unlikely” that he would hold off on increasing the tariffs.

Executives of all types of companies are weighing what to do if the trade standoff lasts long. A recent survey by business consulting firm Ernst and Young found that more than half believe tariffs will remain in place until 2020 or later. About 84 percent are reviewing their supply chains, and 51 percent said they have already made changes.

In Asia, dozens of intermediary firms seeking commissions are more than eager to help manufacturers find real estate, employees and permits to move to Vietnam.

Zhang Diansheng of Hang Sinh Business Service Center in Ho Chi Minh City said his team has guided more than 80 manufacturers to various industrial parks since September, when the latest round of U.S. tariffs took effect, though only eight have so far applied for licenses to do business there. Still, the increased interest is already inflating land costs and exposing a shortage of skilled labor in the Southeast Asian nation.

To be sure, China is still regarded as the best manufacturing base for higher-end industrial products because of its extensive infrastructure and large number of skilled workers, according to Emily Guo, the secretary-general of an industry manufacturers’ coalition in China. Chinese manufacturers are expected to retain this advantage for years to come, but they will invest heavily in automation in the near future to offset soaring costs, she added.

“We found there are also many problems for manufacturing operations in Vietnam, like labor recruitment, worker management and supply. For those high-end products, we think China still has irreplaceable advantages,” she said.

Trump’s trade war against China is the result of building frustration with the Communist nation’s practice of forcing U.S. companies to hand over valuable technology and intellectual property in order to do business there. Some of Trump’s most hawkish advisers, and even the president himself, view the struggle as a long-term fight against China’s ascent as an economic power.

"If your conclusion is that China taking over all of our technology and the future of our children is a stupid fight, then you are right, we should capitulate," U.S. Trade Representative Robert Lighthizer asserted during a heated Senate hearing earlier this year.

The reality for many companies, though, is that the trade conflict could drag out for years or escalate quickly on Trump’s whims.

Already, about $200 billion worth of Chinese goods, which includes a range of furniture items and other consumer goods, are scheduled to see tariffs increase from 10 percent to 25 percent as of Jan. 1.

Combined with the initial $50 billion in Chinese imports that were sanctioned in July and August, 25 percent tariffs will apply to about half of all imports from China. Over the last several months, Trump has threatened to slap tariffs on all Chinese goods many times, a threat he repeated in an interview published Monday.

“I think we could get to the middle of 2020 and have 25 percent across the board U.S. tariffs on Chinese goods,” said Derek Scissors, a resident scholar and China expert at the American Enterprise Institute, a think tank in Washington. “If your supply chain runs through China, you have to at least consider the possibility of diversification.”

Foes of the tariffs, which include most major business and industry sectors, have argued that the additional costs are making it more expensive to sell to consumers and manufacture in the U.S.

A study released this week estimates that in 2030, the U.S. economy would contract by 0.70 of a percentage point and China would drop by 2.25 percentage points as companies shift production because of tariffs.

The study, commissioned by Koch Industries, a politically influential company that has waged a public campaign against the tariffs, assumes a 25 percent duty on all Chinese goods would remain in effect. (Other nations stand to collectively gain 0.65 of a percentage point in gross domestic product.)

Luring factories to Vietnam

Uncertainty is forcing companies in China to look at moving production. Strategic Sports, a leading helmet production company in Dongguan, Guangdong province, China’s manufacturing hub, is part of an industry that has escaped tariffs for now.

After analyzing public comments, the U.S. Trade Representative decided in September to exclude nearly 300 products — mainly consumer goods from China — from the last batch of tariffs. Items exempted include smartwatches, bike helmets and highchairs.

Despite the reprieve, Strategic Sports’ owner, Norman Cheng, is ready to diversify by investing in a new factory with about 500 workers in Vietnam early next year.

“A lot of buyers are increasingly offering orders for factories in countries like Cambodia and Vietnam, due to the trade war,” said Cheng, who has 3,000 workers in China making 40 product lines.

The term “trade war” is becoming the main sales promotion slogan for attracting new tenants to Vietnamese industrial parks. It is especially attracting small- and medium-size factories that make furniture, textiles and electronics in China’s Pearl River Delta and Yangtze River Delta regions, the country's main export production hubs.

Manwah Holdings, the furniture enterprise, which has over 18 million square feet of manufacturing space in mainland China, moved quickly to launch its ambitious expansion in Vietnam.

By July, the company will build eight new factory buildings, as well as six new 12-story apartment buildings to house workers in a rural hamlet two hours north of Ho Chi Minh City, said Simon Siow, general manager of Manwah’s new manufacturing in Vietnam.

Siow said the company expects to expand to have 3,000 workers by the first quarter of next year with the capacity to export 1,200 containers of goods to the U.S. every month. By 2020, it aims to employ 8,000 and 9,000 workers and export about 3,500 to 4,000 containers monthly.

Still, there is skepticism that Vietnam will be able to fully replace production in China. Even for companies that build sofas in the U.S., most of the raw materials, including the upholstery kits and steel hardware, which are also subject to tariffs, come from China.

“At some point, the whole industry is going to come to terms [with the fact] that there’s just not enough capacity domestically, there’s not enough capacity in other parts of the world and Vietnam today doesn’t have the capacity that China has,” said Kevin Castellani, director of corporate communications at Manwah USA.

For now, the company still hasn’t decided how it will assist its retailers “or if we’ll even be able to help our retailers, come the 25 percent tariff,” he said. “We’ll make that decision when it happens and there’s always hope that it won’t happen.”

Calculating the costs consumers can bear

Importers and distributors, especially in the furniture industry, are confronting the hard truth that the U.S. president’s tariff strategy of bringing production back to the U.S. may not be compatible with a reality that has forced manufacturers to shift production overseas to ensure the low prices that shoppers demand.

The International Home Furnishings Representatives Association, which represents furniture manufacturers and retailers, commissioned a survey of its members asking them what would happen if the tariff increased to 25 percent. Only 10 percent through manufacturers would build plants or expand production in the United States.

Schewel Furniture, a fifth-generation family business, employs 700 people and operates 50 stores in Virginia, West Virginia and North Carolina, primarily in smaller towns and cities. The company’s customers have an annual median household income of about $35,000 to $40,000, so even a small price increase can turn away buyers.

“We don’t really have the capacity as a family-owned company to do economic analysis and modeling in terms what are we going to have to do to respond to this,” said Matt Schewel, director of store operations for Schewel Furniture Company, based in Lynchburg, Va. “We’ll probably raise prices and continue with our current suppliers while looking for other options.”

Two of the retailer’s top four best-selling upholstered furniture products are being hurt by the tariffs, Schewel said. A 25 percent tariff would add about $150 to the cost of its best-selling recliner sofa, which now sells for $750.

Schewel, who had been a reporter covering trade policy in Washington before joining his family’s operations, is preparing as best he can for an escalation in the tariffs, but it’s made buying decisions more difficult.

At last month’s furniture market in High Point, N.C., a major industry show that occurs twice a year, he said the store’s trusted supplier for leather furniture was quoting three different prices — dependent on how the tariff situation shakes out.

Schewel said his company is considering three options, each of which presents challenges: keep buying Chinese-made furniture and pass the extra costs on to the consumer, which is likely to result in lost sales; try to buy more product from Southeast Asian countries, where capacity or quality is not assured; or buy more U.S.-assembled products, which may be too expensive for the store’s core customers.

For now, the plan is to import as much inventory as possible before a potential tariff escalation, Schewel said.

“This is who Trump is. This is his negotiating strategy,” he said. “Some [retailers] are optimistic it’s going to work. I am not.”

In reality, furniture makers today rely on a global supply chain to make their goods.

In the late 1980s and early 1990s, American furniture makers largely made their product in the U.S. But by the early 2000s, U.S. furniture factories were shuttering rapidly as the allure of China’s low cost of production became impossible to resist.

Paul Huckfeldt, chief financial officer of Hooker Furniture, recalled having to shut five plants in five years. The company is the fourth-largest source of furniture in the U.S., according to industry magazine Furniture Today.

“It was retailers’ demands,” he said. “The perception was that imported product was a better value, and once the supply chain was built out, it happened really quickly.”

The Martinsville, Va.-based company still has about 1,000 American workers. But it imported 87 percent of its furniture from factories in China and Vietnam in its 2018 fiscal year. Huckfeldt said the tariffs have forced the company to negotiate price concessions from suppliers but it will also resort to raising prices.

“Should the tariffs go to 25 percent, we’re actually actively investigating moving production out of China. That’s not easy,” he said. “It’s skilled labor, you don’t just pack up and move.”