NEW YORK (CBSNewYork) – Due to tariffs, pandemic-related disruptions, and growing costs, several global businesses are reducing their reliance on Chinese facilities and shifting production to lower-cost countries such as Vietnam, Malaysia, and even Japan. However, Ryan Gunnigle, the CEO of Kids2, is swimming against the current. The Atlanta-based toy and infant product manufacturer has completed the first phase of a $20 million plant on the banks of the Yangtze River in central China.
China’s complex supply networks, still-competitive labor rates, and expanding domestic market became too strong to resist.
“If you’re looking for a place to make wood furniture, Indonesia is a terrific place to go,” Gunnigle remarked. “However, being central in China exceeds the benefits of other markets for us.” Gunnigle, who controls a five-decade-old company, has seen some suppliers and competitors set up shop in other countries, only to return to China after discovering that the expenses in their new sites were too expensive or that they were unable to locate suppliers due to labor shortages. He stated that “there is undoubtedly a risk” in constructing a new facility in China. “However, our products include sewing, electronics, steel, and plastic, all of which are well-combined in China.”
The thought of relocating to another Asian market was not a real consideration for many American companies working in China until 2018, when mounting tensions between Washington and Beijing erupted into a trade war marked by punishing tit-for-tat tariffs.
With the potential of lower labor costs and calmer political waters, some Southeast Asian countries saw an opportunity to entice American companies to relocate. Even Japan, a member of the G7, got in on the act by offering to compensate Japanese companies for relocating to China. The pressure on American businesses to reassess their investments in China reached a fever pitch during former President Donald Trump’s administration, and it is unlikely to subside much under his successor, Joe Biden. Last month, US Treasury Secretary Janet Yellen stated that in order to defend US national security, she anticipates full “decoupling” in some sectors of the economic relationship with China. In addition, the leaders of the Group of Seven recently declared plans to collaborate more closely in order to limit China’s economic dominance.
‘I’M GOING TO BE RICH.’
The major advantage Southeast Asia has over China is cheaper labor costs, according to Jack Sun, general manager of the Kids2 factory in Jiangxi province, which employs roughly 450 people and produces about 10% of the company’s products.
“However, supply chains are ineffective. You can buy everything in China.” It is also easier and less expensive to find labor in central China than on the affluent coasts, where much foreign investment has been concentrated. In addition, having a facility in China makes it easier to sell to the country’s nearly 400 million middle-class consumers. On May 18, Kids2 launched its items on Alibaba’s e-commerce site Tmall, a date that, as Sun pointed out, means “I’ll get rich” in Chinese. Beyond 2022, Gunnigle expects a 30% annual increase in China revenues in the first three years. In the face of escalating tensions between Beijing and its trading partners, China’s President Xi Jinping is personally driving an attempt to raise domestic demand and reduce reliance on international markets. Kids2 is one of the companies that has been harmed by tariffs on a variety of manufactured items as a result of the trade war between the United States and China. Since April 2018, the company has paid $6 million in tariffs on Chinese imports, according to the company. The majority of the tariffs are still in force. Meanwhile, as the coronavirus epidemic disrupted the flow of commodities, the challenges of producing in China have increased. Despite this, China managed to keep its factories running for the majority of last year, even while other countries faced lockdowns to prevent the virus from spreading. According to China Customs data, Chinese exports have risen for the past 12 months on a year-over-year basis, including a record surge of about 155 percent in February, following a brief decline in early 2020 during the country’s COVID-19 lockdown. PRODUCTION CONTROLGunnigle admitted that his own board has questioned whether he should be looking elsewhere, but he believes that investing in a new plant and design activities in China, as part of a redesign of the company’s product development system, is critical to staying competitive. Foreign businesses claimed disruptions increased the need to diversify away from China early in the outbreak. Despite long-standing complaints about limited market access and unfair treatment in China, a poll conducted in June by the European Union Chamber of Commerce in China indicated that member companies were increasingly expanding their positions in joint ventures and onshoring supply chains. Kids2 has traditionally relied on collaborative ventures with Chinese toy manufacturers and will continue to do so, according to Gunnigle. But, he said, the company’s new design and manufacturing operation in China, which it owns completely, provides it more power to manufacture things, manage the production process rapidly, and invest in needed machinery. The factory’s injection molding machines, which squirt molten plastic into parts for bassinets and brightly colored toddler walkers, were further automated this year by the in-house engineering team, lowering labor requirements by nearly 60% and cutting costs much more than other local suppliers, according to Sun. Sun said that the screwing, riveting, and packing processes on the assembly line, which is located on the opposite side of the factory, can all be automated without difficulty. Gaining better control over the manufacturing process has numerous benefits. E-commerce now accounts for about 40% of Kids2’s revenue, making it more vital than ever to create toys that are small, light, and easy to ship. Controlling the manufacturing process also makes it easier for the corporation to develop products that rely on common components, lowering tooling and other costs. The plastic cradles of Kids2’s swings and high chairs, for example, are all created with the same injection mold. Another rationale for having more control over manufacturing, according to David Butler, the company’s internal chief designer, is to involve designers more directly in decisions that would influence how assembly lines are configured. “We used to create more as one-offs,” Butler said, referring to the process of designers creating a new toy or accessory and then the manufacturing team selecting how to make it. “We design differently now that we operate our own manufacturing, with more replaceable and modular systems. It’s how IKEA creates its items.”/n
