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Companies like Capstone contribute more than $ 200 billion annually to US purchases of Chinese-made products.
When Larry Sloven learned last year that US tariffs were threatening his e-commerce in China, he knew that setting up elsewhere would be a tedious job than an adventure.
Aged 70, he had spent half of his life building supply chains in southern China to produce products for major US retailers. But he had never remodeled one at the last minute, with tariffs hanging over his head.
"It's the hardest thing I've had to do in my 30-year career," said Sloven, president of Capstone International HK Ltd, a Florida-based division of Capstone Companies.
"You have packaging, assembly, audit, manpower, overhead, components, logistics, transportation," he said. . "I went very quickly from first to fourth."
Slovenian, originally from Long Island in the state of New York, made his way in the 70s in Asia by buying lighting products from Japan. He then moved to Taiwan, and then to mainland China, where he manufactured and purchased electrical products for AT & T and Duracell, before becoming a buying agent for Dick & # 39; s sporting goods retailer. ; s.
He joined Capstone in 2012 to manage his network of Chinese manufacturers in Hong Kong.
Rising labor costs and tighter regulations in China have already led him to consider relocating his business elsewhere in Asia. But the trade war forced him.
Through dozens of interviews and telephone interviews, Whatsapp and emails over the phone for a year, Reuters has documented Slovenian's quest to uproot its supply chain operations, a effort involving many close calls, bureaucratic headaches – and luck.
Slovenia is one of the thousands of entrepreneurs who have been forced by the trade war to end their business operations in China as part of the largest supply chain change in a generation.
Companies like Capstone invest more than $ 200 billion annually in the purchase of electronics and machinery made in China.
Due Dilligence
When Washington imposed its first tariffs in July 2018, the main Capstone products, such as battery-powered LED bulbs and motion-activated lighting, were not on the list.
Some prototypes of Capstone, which Slovene considers as the future of society, also did not appear: "smart furniture" as a mirror that also serves as a touch screen with access to the Internet.
But his instinct was that US-China relations were deteriorating.
"You do not know what will happen in China," he said.
It turned to Thailand as a site of a possible second production base. It was difficult to supply local raw materials, but at least they did not charge any import duties. The creation of a commercial entity in Thailand was also fast and inexpensive, and some of the work could be outsourced.
A US trade official in Thailand introduced him to various local businesses that could help him.
"I will be able to make products in Thailand," said Sloven at the end of last summer. But, he added, "it will not be easy."
In September, US President Donald Trump gave him an even better reason to move.
The total value of US tariffs on Chinese products increased from $ 50 billion to $ 250 billion, putting Capstone LED products at the center of the levies by 10 percent.
Intelligent furniture, if it is made in China, would take a hit.
Shortly after, a survey conducted by Amcham China, which represents US companies, showed that one-third of its members were considering replenishing components or assembling products outside of China.
Sloven's efforts in Thailand seem to have paid off. After many meetings, he found a furniture factory and a fitter outside Bangkok that could help him.
Both had international experience and were expanding their activities to meet the growing demand of US companies. And while smart furniture is new to them, they were confident they could pull it off and were willing to invest. Companies can not be named due to non-disclosure agreements.
After a site visit in February, Sloven ordered components from its smart mirror that would be shipped to Thailand. In mid-March, Capstone engineers showed the factory how to assemble them.
"I'm not worried," said Sloven in February. "I give him the information step by step," he said, referring to his Thai partner.
Even if Slovenian became more optimistic, the urgency of leaving China seemed to ease in early 2019.
Trump and Chinese President Xi Jinping have declared a cautious truce at the Group of 20 summit in Buenos Aires, and that seems to hold. Officials on both sides proposed an agreement before the March deadline and the threat of a 25% tariff increase seemed far off.
But Sloven was sticking to his plan.
"I do not think there will be a trade war, but it does not change anything," he said at the time.
Slowly moving
The March deadline had passed, but the rates remained unchanged. This gave Slovenian leeway.
He has scheduled a series of pilot tests to test the quality of assembly of the Thai factory. He also had to prepare for audits of labor rights and environmental standards required by US retailers.
He estimated that it would take at least six months.
"I will start acting on a small scale because they will not be able to do it immediately," said Sloven. "As much as they say," Oh, I can do it now – "I will not take that risk."
Additional investments in tooling and molds were also needed, but Thai companies agreed to bear the costs.
No matter what happened with the trade war, Slovenian felt covered.
"You are preparing for war," he says. "You are ready if you are attacked."
Renegotiation of China
Slovenian also had work to do in China.
Its suppliers in Shenzhen, Dongguan and Guangzhou were certain that the trade dispute would be resolved and they were reluctant to negotiate agreements to send components and raw materials overseas for assembly.
But Sloven continued to put forward the Thai plan, worried about the negative consequences of the trade war in China.
In early April, Sloven invited Reuters to meet with his trade lawyer Sally Peng of Sandler, Travis & Rosenberg.
Peng described how Chinese factories were emptied when workers were fired. Few owners had the expertise or resources to automate or find new export markets. Most of them were coming out in the hope of a trade agreement. They "lost money every day," she said.
"They think everything will eventually come back," said Sloven.
"I think in five years everything will be gone," replied Peng.
Investor appeal
The same day, when Slovenian met his lawyer, his superiors in Florida announced results for 2018 reflecting the effects of the trade war. Net revenues were $ 12.8 million, down from $ 36.8 million in 2017. Net losses were $ 1 million, compared with earnings of $ 3.1 million.
"Capstone has been facing unparalleled challenges in 2018," said CFO Gerry McClinton.
Meanwhile, the development of the smart mirror was in full swing. The prototype was considered a success at an electronics show in Las Vegas in January, and a public relations agency and a marketing company were hired to advertise the new product.
Then, Trump raised the tariffs to 25% on May 10th.
For Slovenian – and many others – the level of urgency has rebounded. This month, a study conducted by AmCham China and AmCham Shanghai indicated that the number of companies that had moved their production or were planning to do so had exceeded 40%.
To speed things up, Sloven introduced the Thai assemblers to its Chinese suppliers.
He wanted to define the rules of the game and let them interact independently. These meetings had to go well, otherwise everything could collapse.
In a stroke of luck, he discovered that both parties had something in common.
"The Thai, his family was from China, so he spoke a certain dialect, and the factory in China – my supplier – and he speaks the same dialect," said Sloven. "What a homerun!"
After months of getting out, the Chinese company finally gave in and agreed to supply Slovenian to Thailand.
Audits, logistics
With its secure supply of components and raw materials, the next big step was audits.
Thirty-five percent of the product was to be manufactured in Thailand for the product to be considered Thai and therefore exempt from US tariffs.
A certificate from an independent auditor would prove it, but the audit usually takes between four and five weeks.
"I know what I have to do, but getting the information is staggering – these are supply chain issues that everyone will have to face," said Sloven.
Logistics was another concern for the Slovenian. Shipments to the United States from Thailand take 8 to 10 days longer than from China.
Despite the additional costs and time, Slovenian thinks that he will be able to manufacture the product at the same price as in China without the tariffs.
And in the middle of the summer of 2019, Sloven was convinced that most of his problems had been overcome and that the smart mirror would be delivered on schedule by 1 October.
But, he admitted, "there will always be hiccups".
(With the exception of the title, this story was not changed by NDTV staff and is published from a syndicated feed.)
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