PART TWO – An Interview with the owner of a US based manufacturer and online retailer – By Karen Brady Click here for PART ONE
This company uses both CNC components produced in the US and imported components designed in the US and manufactured in Chinese factories. The final retail products are assembled in the US and sold on from their website.
Following on from the interview with ExportX’s Paul Grey, I continue my investigation into the mechanics of import/export and how the current Trade Wars have impacted his and other companies. The cause and effect beneath the headlines is already rippling across the globe and will in turn affect Amazon Sellers.
Part One drew a picture of the present situation and last year’s history of tariffs, and together with Paul’s helpful analysis, we saw how Amazon Sellers can better track and analyze their metrics, and produce accurate, organised pricing to guard their bottom line.
In this second segment, we will see the picture from a unique viewpoint: diving into the depths of the import/export process, and discovering the intricacies and knock-on effects of the current Trade War climate.
A2X – Do you think these Tariffs will affect your bottom line?
Owner – Well, certain products that we import have zero tariffs. They just don’t have a tariff. Even coming from China, but we’re still affected. We make about 40 percent of our products here in the United States using U.S. made materials, and 60 percent comes from China: cables, power supplies, light controllers, and other electronic components.
A2X – Can you explain how these tariffs still affect your bottom line?
Owner – It’s important to understand that imported goods are not just one fee: the base tariff. There’s a whole host of costs involved with bringing a product in from another country and we have very sophisticated spreadsheets that allows us to make purchases. We punch in everything by inventory, volume and weight.
He then went on to explain how he pays particular attention to cost-efficiency through his customized spreadsheet systems. This is necessary to model pricing effectively. He stressed, as indeed Paul Grey had, that the only way to do anything by container is to fill it.
A2X – In terms of pricing, are you watching your competitor’s prices. What’s your thoughts on this?
Owner – Well, you have to look at what your competitors are doing with their pricing. Eventually the cost of a tariff will show up in the prices of their products.
A2X – Some sellers are “waiting it out”, watching the costs of their next delivery of imported goods, but also some are overstocking. What about the timing, when is it right to sit tight or to pre-order? His answer was revealing, as there’s definitely knock-on effects in the market.
Owner – If you look back to the tariff on washing machines in the beginning of 2018, you saw an absolute massive rush to produce and ship all these items before the tariffs were implemented. And then if you look at the trade numbers in the fourth quarter in the United States, the trade deficit with China went way up, because of the latest tariffs.
Well this distorts the market because what happens is then there’s this lull because everything looks fine. It doesn’t look like it’s really affecting trade and then all of a sudden, it creates all this confusion.
My company was ready to order half a million dollars (worth) of stuff that we would normally have ordered right after Christmas, and it would already be in production in China. But we decided not to order. We will likely not place another order until they resolve the issue with the trade tariffs.
A2X – Can you explain a bit more about the container pricing for importers like yourself?
Owner – Well, there’s the actual on-water transfer costs: harbor freight fees, and in southern California you have about 900 and up additional fees; for example, Clean Seas environmental fee. Then there’s merchandise tax which, on the typical container, would run 6 percent of the total value.
We don’t put those numbers in, they’re put in by a broker, and it all depends upon the specifics of what’s in the container. You see, the fee is paid at the point that the container hits the ground (in the US) – you don’t pay the fee when it leaves, or what you agreed on, or what it was when it got on the water.
A2X – So, I reckon that in your world you have to buy something months before you actually get it in your hand?
Owner – Well, this is the real problem. Our containers take five and a half weeks to get here, but that’s on top of two to four month leave-cycle for actual production.
I’m a guy buying, you know, two-three-four containers a year, and these jumps in tariffs are just so unpredictable and problematic. What happens to a guy buying two hundred containers a year?
A2X – So, are you saying that ordering months ahead gives a lag in time-to-market and this, in turn, affects purchasing and production; you mean that Tariff jumps make the whole supply chain jumpy?
Owner – Like a lot of other companies, we preordered what we needed so we can make it through May, maybe June or even July, but then the last container was charged at 24 percent…things went kind of haywire! There’s a lot of this going on out there. In theory it shouldn’t be that high, so we’re still trying to resolve exactly what happened and why we were given these incorrect rates.
A2X – You say on your site that you have a “complete and personal understanding of your supply chain from end to end”. Are there any ways to workaround the tariffs, what about dropship or air freight?
Owner – OK, airfreight it, as opposed to saying, OK let’s just do the whole thing in a container? Airfreight is about six dollars a kilo, containers six cents a kilo, but if Air allows you to send a fairly light item, let’s say 100 kilograms and it’s six hundred dollars. If that’s a purchase of some key product you need to keep your operation going – then OK.
As far as other work arounds, you could move this stuff to Vietnam and then sell it to a supplier. Then purchase it from that supplier, but that creates all kinds of problems because now your tags for all your products say Made in China. They have to be relabeled as made in Vietnam or run a risk. Transshipment like that is not uncommon, but you need a high value product for the risk to be acceptable. U.S. Border Protection has extensive data on your prior orders!
A2X – What about your own Supply Chain, have your manufacturers been affected?
Owner – I’ve talked to some of my suppliers and ask them, are you getting orders, what’s happening? They tell me the number of orders has dropped off significantly, and that orders that are placed tend to be very small.
A2X – Are the specific amount of costs that tariffs represent the real problem, like 15% instead of 3%?
Owner – I have no problem paying 20 percent tariff. If you want to raise tariffs to 100 percent that’s fine. All my competitors are going to have to carry the same exact tariffs. The problem is you just have a lot of uncertainty within your business and you don’t know what’s going to happen. Should I order, should I not order, instead of just running business like normal.
He then made his point:
Owner – Here’s what every business wants. They want clear concise rules to follow. They don’t have a problem with rules in most cases. They may disagree with them but they follow them. These latest tariffs make it really confusing for business.
A2X – could you clarify at what point in time you’re going to need to assess the situation and make a different pricing strategy?
Owner – The breakpoint is right now! After Chinese New Year, and after a 2019 start with two months of low factory orders.
So, the celebration sends all the factory workers home to their families, and they may not have the job to return to. Or the workers may decide for themselves: I’ll just live at home, and I’ll get to spend time with my kids instead of being apart for a year. You see, in the city they got to pay for their apartment and all this other stuff. It’s a lot to live in a place with the highest cost of living in China. So, owners know that if tariffs are lifted they will then be swamped with orders, and then have to hire new workers off the street, train them, with all the QA problems that involves.
About the Chinese New Year: 2019 is the year of the Earth Pig – a year of diligence, kindness, and generosity. Most factories will be at full operational capacity around March 4, because while the celebration lasts between 7-10 days, all factories in China shut down for approximately one month, roughly Jan 21. Although the first employees arrive back around February 18, they tend to be sales representatives and engineers, not manufacturing laborers.
A2X – So, you’re saying that the problem for you is not a straight tariff issue?
Owner – It’s not a tariff issue. There’s so many moving parts: it’s a disruption issue. You wouldn’t think that the quality of a product is related to a tariff but they’re directly related!
A2X – What is your biggest concern going forward?
Owner – Are we going to run out of product that we absolutely need to be able to sell our product? Can I (afford to) buy that stuff via airfreight – a twenty thousand dollar or forty thousand dollar order – just have it air-freighted in?
A2X – Is that something you’ actually have to do?
Owner – That’s what we’re doing – anytime we have something that we just need right now, we just airfreight it in. That’s what’s solving our problem, but the biggest thing on the Chinese side is the disruption to manufacturing and the efficiency of their manufacturing.
I got a lot of perspective from this owner’s expertise during this interview. Like Paul Grey, he knows his business from top to bottom and has the rare ability to see both the minutiae and the big picture.
What are the true effects of Tariffs? Let’s just leave the last words to our US Owner:
“It’s not just something that’s a tax, there’s a whole bunch of permutations of things that this creates”.
Like the lead tablets found in the Mediterranean wrecks of ancient trading ships, today’s Trade agreements are the foundation of the international flow of goods. Agreements that were, and still are, negotiated to foster consistency and mutual gain. After all, protectionist tariffs aren’t new, on the contrary, the word “tariff” comes from Arabic “arrafa”, to notify.
Trade represents a cultural foundation, and giving “notice” is a good way to understand the causal relationship that tariff imposition has on that foundation. As of publishing this blog, the tariffs persist; marking the probable end of a long period of the US welcoming cheap Chinese imports into their economy. Going forward, the US consumer will probably buy less of these products, which will continue to impact Chinese manufacturing.
I think it’s clear though, that the US consumer will still need the same goods at home, and in the workplace, and that Amazon Sellers will be supplying that need for a long time to come. After all, by its very nature, Amazon is an extremely agile and adaptable commercial platform, and Sellers will continue to champion online price discovery in this competitive global reality.
Thanks for reading!
For more in-depth tax advice on the effect of US Trade Traffs on US Ecommerce sellers, browse our USA Tax Guide for Ecommerce Sellers here.