World Trade - February 2009 - (Page 33)

back to historic stateside production centers, like North Carolina, where IKEA opened a factory in 2008. Higher transportation costs probably helped speed the industry’s quicker transition. As for high tech, China is still a work-in-progress. South China has welcomed ﬁrms like Hasee in Shenzhen, which makes 100,000 laptops a month which retail for less than $400. Auto production and sales have risen by double-digit percentages over the last six years, but that growth slowed to under 10 percent in 2009. Buried beneath the statistics are real stories of real businesses involving real supply chains which suddenly ﬁnd themselves in jeopardy. Like that of the toy sector. The toy business has been hit particularly hard. Chinese factories produce more than 80 percent of the toys sold in the United States. U.S. toy companies outsourcing production in South China, mostly Guangdong province, began feeling the pinch a little over a year ago due to a string of compounding economic factors: the appreciation of the Yuan against the dollar, cuts to export rebates, rising labor costs, and rising costs for fuel and raw materials. Add the losses and costs from recalls of lead-laden toys in 2007, and the subsequent consumer wariness about the safety of Chinese products, and you have all the makings of a perfect storm. The cost pressure of doing business in China has dominated investor concerns for some time. During Hasbro’s third quarter conference call, CFO and COO David D. R. Hargreaves warned investors that labor costs had risen a striking 30 percent over the same period last year. And although oil prices have come down from their highs over the summer, the price for resin—a petroleum product that represents between 10 and 15 percent of costs of good sold at Mattel—has continued to climb, offering little hope that commodity prices might decline. Costs for increased testing have also risen as manufacturers seek to regain consumers’ trust, and ready their products for new safety standards that go into effect in 2009. As a result of falling orders, more than 1,000 factories closed in Guangdong province in 2008, with new bankruptcies adding to the total each day. In October, Chinese customs ofﬁcials reported that half of the country’s toy workshops had closed. The numbers are somewhat misleading, according to several observers who say many of the shuttered workshops were small factories that didn’t’ represent a signiﬁcant portion of the area’s potential output. But the instability is real, and has resulted in outbursts of labor unrest, with riots at several factories staged by workers with grievances over unpaid wages. Despite the gloomy news, many analysts are sanguine about the near future of making U.S. toys in China. “Orders are probably going to stay in China for now, but there are fewer orders because demand has fallen substantially,” says Erik Autor, international trade counsel for the U.S. Retail Federation. The infrastructure is already in place, and quality control concerns are even more of an unknown quantity in places like Vietnam and India. Robert Herriott, director of international and regulatory affairs at the Toy Industry Association, takes the view that there are still plenty of factories to do the work, and that any instability from the contraction won’t have a Assuring Consumer Safety From the China Supply Chain If one sector stands to beneﬁt from the turbulence in Chinese toy production, it’s the testing industry. Revenue from testing alone has risen 60 percent— with much of that growth coming from China. “Our business in China has expanded, no question,” says Gene Rider, President of Intertek Consumer Goods North America, a leader in quality and safety inspections. Revenue from testing alone has risen 60 percent—with much of that growth coming from China. Intertek has anticipated the leap-frogging movement of Chinese production, building new labs as soon plants open. “We’re following the trail,” Rider says. He was there when Intertek opened its ﬁrst ofﬁce in Shenzhen in 1988, when the former village (now 10 million people strong) had just over a million residents. Intertek opened a large scale toy testing facility in neighboring Guangzhou in March 2008 and plans to be ready when and if production moves further inland. Intertek offers quality control services from the granular level of individual tests, to writing factory speciﬁcations and big picture process assessments that stretch from the drawing room to the shipping container. Customer education has become an important service given new rules from the U.S. Consumer Product Safety Commission. “The big challenge is that some of the interpretations actually cause excessive testing, which is not good for our customers,” Rider says. He works on developing programs that “meet the intent of regulation and assure a high quality product without adding a lot of extra costs.” There’s no such thing as an instant cure for quality and safety problems, Rider underscores “Quality is a process and it’s a process that has to be deﬁned and has to be constantly veriﬁed. The process is what gives you the quality and safe product.” Rider says the new rules imposed by the Consumer Product Safety Improvement Act of 2008 are good in that they force companies to know their supply chain and understand the underlying causes of problems. That means paying closer attention to design, the real source of most recalls, Rider says. “The big change is that before you were obligated to say that you met safety standards. And it was assumed that you did,” he says. “Now you’re obligated to prove that you do. [Toy companies] now understand that they really, really need to get it right up front.” ripple effect on U.S. businesses. “I don’t envision a true disruption because of this,” he says. In fact, the economic downturn may offer a brief reprieve for U.S. toy companies in China. In response to the historic drop in exports, the People’s Bank of China has allowed the Yuan to fall against the dollar. And in November, labor ofﬁcials announced they would allow factory owners to delay making minimum wage adjustments. The government has also increased VAT rebates on raw materials purchased for manufactured products headed for export. Outside factors WWW.WORLDTRADEMAG.COM 33 Intertek Consumer Goods North America http://WWW.WORLDTRADEMAG.COM

Table of Contents Feed for the Digital Edition of World Trade - February 2009

World Trade - February 2009 Contents Taking Stock in America Confronting Corruption in Latin America Supply Chain Watch Tradewinds Where's the Goods? Where's the Money? Hope on the Horizon Managing Fleets in Turbulent Times The Impact of China's Economic Slowdown on U.S. Supply Chains The Fuel Volatile Supply Chain Getting the Most from On-the-Fly Transactions Managing Supply Chain Risk by Managing China Sourcing Capacity OECD Global Economic Outlook for 2009 'Natural' Agricultural Monopolies No More

World Trade - February 2009

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