International

How Tariffs Lead Toymakers To Redraw Asia’s Supply Chains

Importers around the world continue to reel from ongoing trade disputes that are redrawing supply chains — perhaps permanently — throughout Asia, causing importers and their suppliers across countries like Vietnam and South Korea to scramble.

The supply chain changes are opening up new trade opportunities for small to medium-sized businesses (SMBs), but analysts warn importers face a new round of risks with shifting supplier bases.

When the U.S.’s latest round of Chinese tariffs was announced earlier this year, top toymakers in the country began to brace for impact. The 10 percent tariffs would hit about $300 billion worth of Chinese imports that included laptops, smartphones, video games and toys.

Slated to take effect Sept. 1, the tariffs would have come during prime shipping season for toymakers’ holiday preparations. Only days after the tariffs were announced in August, the United States Trade Representative (USTR) decided to delay them until mid-December, sending shares for top toymakers Mattel and Hasbro up.

In a statement at the time, Hasbro said the delays would help consumers avoid knock-on costs ahead of the holidays.

“We believe this will help mitigate the impact on U.S. consumers this holiday season, and we value the additional time this provides our company to make further progress on our global sourcing plans,” the company noted.

Meanwhile, Mattel noted in its September earnings call that “tariffs have had a de minimis impact … and are not expected to have a material impact for the rest of this year.”

Analysts warn, however, that even with the delay, those tariffs could negatively impact toymakers in the longer-term.

“There could be more downside if the tariffs wind up being implemented and maintained over the full 2020 year, since the magnitude of impact is still largely to be determined,” Morningstar Senior Equity Analyst Jamie Katz told Barron’s in a report last month.

Racing to Shift Supply Chains

Mattel CEO Ynon Kreiz said during the company’s earnings call that the company is collaborating with its retail partners to discuss how tariffs would impact their industry, and whether it will be the retailers or the toymakers absorbing the costs.

But rather than passing those tariffs onto retailers and, ultimately, consumers, some toymakers and other importers are looking at potentially more permanent changes to avoid the impact of trade disputes: redrawing trade routes to avoid China altogether.

Hasbro’s shifting “global sourcing plans” include that strategy, with aims to reduce its reliance on China. Currently, about two-thirds of the company’s sourcing activity is based in China, Barron’s reports said, a figure Hasbro aims to cut to 50 percent by the end of next year.

August reports in The New York Times said the company will look to relocate its importing activities to vendors in India and Vietnam. But the toy industry is far from the only sector deploying this tactic as trade tariffs impact a plethora of products.

Analysis from S&P Global Market Intelligence’s trade data unit Panjiva published in April found an array of U.S. retailers have lowered their reliance on China-based suppliers in the first quarter of 2019, including The Home Depot, IKEA and Target, as well as players in the home appliances sector. At the same time, sourcing from Vietnam, South Korea and Mexico increased, particularly for products like refrigerators and automobile parts.

Samsung Electronics also made headlines for its supply chain adjustments amid ongoing trade disputes between Japan and South Korea, also expected to cause long-term changes to supply chains throughout Asia.

Global trade tariffs are “driving a major rethink of global supply chains,” said Harvard Business School Professor Willy Shih in a Forbes article earlier this year.

An Opportunity for SMBs

This supply chain “rethink” is opening up possibilities for smaller traders across southeast Asia with the potential for long-term gains.

Earlier this year PingPong Managing Director Kenny Tsang spoke with PYMNTS’ Karen Webster about the opportunity for SMBs in the region to embrace demand for cross-border trade. It’s also an opportunity for FinTechs and service providers to prepare those businesses to meet upcoming demand as more businesses shift their supply chains away from China, perhaps permanently.

“You have to have people on the ground,” Tsang explained of SMBs’ working to meet the needs of foreign corporate buyers. “You have to do business in their culture and their language. That is super, super important.”

Offering convenient payment options, discounts, promotional deals and other “fringe benefits” will be key to enabling these SMBs to secure long-term contracts as the overseas buyer pool increases.

No Quick Fix

Changing supply chains from China to markets like Mexico and Vietnam may not alleviate importers’ tariff woes, The New York Times warned in its August report, with the White House considering trade tariffs with both of those countries.

Further, adjusting supply chains throughout Asia are far from a quick fix. Overhauls in sourcing partners can cause a surge in vendor risk exposure. One South Korean chipmaker told reporters earlier this year that shifting out of Japan, for example, is far from a straightforward process.

“These materials, they are not something that we can find at another store and buy quickly,” the source said. “Even if we find alternatives to Japan, we have to conduct tests to make sure the quality is good enough to make chips at a high yield.”

This is also particularly true in industries like toys, which require adherence to strict safety standards. China, experts say, has enough experience meeting those demands, whereas other sourcing markets across Southeast Asia largely have not.

“What we see in terms of standards is that China is way above countries like Bangladesh, Malaysia and Vietnam,” said Sebastien Breteau, CEO of supply chain auditing company QIMA, in an interview with The New York Times. He added that importers’ haste in relocating their supplier bases can magnify the risks of working with unfamiliar suppliers.

“We built this business with China over the last four or five decades,” said Steve Pasierb, president of The Toy Association, in another statement to The New York Times. “It’s going to take a decade to move.”

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