How a US company tried to escape Donald Trump's China tariffs: You are preparing for war

When Larry Sloven heard last year that US tariffs threatened his Chinese electronics business, he knew that setting up shop elsewhere would be a slogan rather than an adventure.

The 70-year-old had spent half his life building supply chains in southern China to produce goods for US box office retailers. But he had never switched at a short notice, with tariffs hanging over his head.

"It's the hardest thing I've ever had to do in all my 30 years in business," said Sloven, president of Capstone International HK Ltd, a division of Florida-based Capstone Companies.

"You have packaging, assembly, overhaul, labor, overhead, components, logistics, transportation," he said. "I went very fast from first gear to fourth gear."

Sloven, a native of Long Island, New York, cut his teeth in Asia in the 1[ads1]970s by purchasing lighting products from Japan. He then moved to Taiwan and then mainland China, producing and buying electrical products for AT&T and Duracell, before becoming the sales agent for sports retailer Dick & # 39; s.

He joined Capstone in 2012 to manage the network of Chinese manufacturers from Hong Kong.

Rising labor costs and tighter regulations in China had already led him to consider moving the business elsewhere in Asia. But the trade war forced its hand.

Through dozens of interviews and telephone exchanges, Whatsapp and email exchanges over the course of a year, Reuters documented Slovenia's quest to cancel its supply chain operation, an effort that involves many close calls, bureaucratic headaches – and some good luck.

Sloven is just one of thousands of entrepreneurs who have been forced by the trade war to grow their business in China in the largest supply chain change of a generation.

Companies like Capstone contribute over $ 200 billion in US purchases of China-made electronics and machines annually.

Due Dilligence

When Washington introduced the first tariff rates in July 2018, Capstone's core products, such as battery-powered LED bulbs and motion-activated lighting, were not on the list.

Nor were there any Capstone prototypes that Slovenia looks to the future of the company: "smart furniture" as a mirror that acts as a touch screen with internet access. [19659004] But his instinct was that the US-China ties took a turn for the worse.

"You don't know what's coming next in China," he said.

He set his sights on Thailand as the site of a possible production base. It was difficult to obtain raw materials locally, but at least they had no import duties. Establishing a business in Thailand was also cheap and fast, and some of the work could be subcontracted.

An American trader in Thailand introduced him to various local companies that could help.

"I want to be able to make products in Thailand," Sloven said at the end of last summer. But, he added, "it's not going to be easy."

In September, US President Donald Trump gave him an even better reason to move.

The total value of US customs duties on Chinese goods was expanded from $ 50 billion to $ 250 billion, placing Capstone's LED products across a 10% fee.

Smart furniture, if manufactured in China, would take a hit.

Immediately, a survey by Amcham China, representing US companies, revealed that a third of its members had plans to change the purchasing of components or mount some goods outside China.

Slovenia's efforts in Thailand appeared to have paid off. After many meetings he found a furniture factory and an installer outside Bangkok who could help him.

Both had international experience and expanded to meet growing demand from US companies. And while smart furniture was new to them, they were confident that they could pull it off and be ready to invest. The companies cannot be named because of agreements that were not disclosed.

After a site visit in February, Sloven ordered components for his smart mirror to Thailand. In mid-March, the Capstone engineers showed how to assemble.

"I'm not worried," Sloven said in February. "I give him the information step by step," he said, referring to his Thai partner.

Although Sloven became more optimistic, it seemed that the rate of leaving China would slow down as 2019 began.

Trump and President Xi Jinping of China had declared a cautious ceasefire at a group of 20 summits in Buenos Aires, and it seemed to hold. Officials on both sides hinted at a deal before a March deadline, and the threat of tariffs rising to 25% seemed remote.

But Slovenia adhered to its plan.

"I don't think it's going to be a trade war, but it doesn't change things," he said at the time.

Moving Slowly

The March deadline was over, but tariffs remained unchanged. It gave Slovenian respite.

He planned a series of pilot runs to test how well the Thai factory handled assembly. He also needed to prepare for labor rights and environmental standards audits required by US retailers.

He estimated that it would take at least another six months.

"I'm going to start moving on a small scale because they're not going to do it right away," Sloven said. "As much as they say: 'Oh, I can do this right now' – I don't take that chance."

More investment in tools and molds was also needed, but the Thai companies agreed to bear the costs.

Whatever happened to the trade war, the Slovenes felt covered.

"You are preparing for war," he said. "You are ready if you are attacked."

Re-Negotiating China

Sloven also had work to do in China.

His suppliers in Shenzhen, Dongguan and Guangzhou were confident the trade conflict would blow over and were reluctant to negotiate agreements that would ship components and raw materials overseas for assembly.

But Sloven continued to continue with the Thailand plan, worried about the toll the trade war took in China. [19659004] In early April, Slovenia invited Reuters to meet its commercial lawyer, Sally Peng of Sandler, Travis & Rosenberg.

Peng described how Chinese factory floors were emptied when workers were laid off. Few owners had the expertise or resources to automate or find new export markets, so most of them ran it out hoping for a trade. They "lose money every day," she said.

"They think it will eventually come back," Sloven said.

"I think within five years it will all be gone," Peng replied.

Investor Call

On the same day Sloven met the lawyer, his Florida 2018 bosses announced results that reflected the effects of the trade war. Net income came to $ 12.8 million, down from $ 36.8 million in 2017. Net loss was $ 1 million, a turn from a $ 3.1 million surplus.

"Capstone faced challenges in 2018 unlike any in history," Chief Financial Officer Gerry McClinton said.

Meanwhile, the development of the smart mirror was in full swing. The prototype was considered a success at an electronic show in Las Vegas in January, and a public relations agency and marketing firm were hired to advertise the new product.

Then Trump set tariff rates at 25% on May 10.

For Sloven – and many others – the level of urgency sprang up again. That month, a survey by AmCham China and AmCham Shanghai showed how many companies that had moved production or were considering doing so jumped 40%.

To speed up the matter, Slovenia introduced the Thai collectors for its Chinese suppliers. [19659004] He wanted to set the rules of the game and then let them interact independently. These meetings had to go well, otherwise everyone could fall apart.

In luck, he discovered that the two sides had something in common.

"The Thai guy, his family was from China originally, so he spoke a certain dialect. And the factory in China – my supplier – and him speak the same dialect," Sloven said. "What a home run!"

After months of digging in the heels, the Chinese company finally withdrew and agreed to supply Sloven in Thailand.

Audits, Logistics

With its supply of components and raw materials secured, the next big step was the audits.

35 percent of the product had to be made in Thailand for the product to be considered Thai, and thus excluding US tariffs.

A certificate from an independent auditor would prove it, but the audit usually takes four to five weeks.

"I know what I need to do, but getting the information is overwhelming. These are questions about the supply chain that everyone in the world is going to have to face," Sloven said.

Logistics was another concern for Slovenian. Shipping to the US from Thailand takes 8-10 days longer than it does from China.

Despite the extra cost and time, Slovenia believes that it will be able to make the product at the same price as in China without the tariff rates.

And in the middle of summer 2019, Sloven was convinced that most of his challenges had been overcome, and that the smart mirror was to be sent on schedule on October 1.

But he allowed, "it will always be hiccups".

(Except for the headline, this story has not been edited by NDTV staff and published from a syndicated feed.)

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