World Trade - February 2009 - (Page 35)

Hasbro and Jakks, which still concentrate most of their production in South China. Jason Hilbourne, a mechanical engineer in Portland, Oregon, decided to go into the toy business early last year. He designed a family of plush robots, which he calls Bunk Bots, and went looking to for factories in China. He started his search in Shenzhen, where he’d previously sourced production of high-tech projects like MP3 players. But the prices were too high: about 20 percent higher than those he found in Kunshan, west of Shanghai. Hilbourne got his ﬁrst shipment in November, and with it a lesson in quality control. About ﬁve percent of the Bunk Bots were actually bunk, mostly because of cosmetic embroidery imperfections. Even though he had visited the factory and conducted extensive tests, something went wrong. Hilbourne’s supplier has found a new factory—which he will also visit—but the experience has left him apprehensive. “When the supplier tells me we’re choosing this factory and I’m sitting at my desk in the U.S., I’m concerned that there’s this unknown factor.” The move inland is one supported by the Chinese government, which hopes to get a better grip on currency ﬂuctuations and insure long-term growth by fostering more value-added production near the ports of South China. The government has imposed restrictions on the kinds of businesses that can open, pressuring “processing trade” manufacturers—which convert raw materials into export products with minimal assembly— to move further inland. The cost savings inland are signiﬁcant, particularly for labor. Average wages can top 1000 Yuan per month in the toy factories of Dongguan in Guangdong province, according to Chen Zhou, a professor of supply chain logistics at Georgia Tech. Further inland, average wages often fall by half, Zhou said. And yet, moving inland comes with it’s own set of costs. Spurred by an economic meltdown few anticipated or planned for, then pushed ahead by China’s economic planners, the necessity of moving hasn’t arrived with much lead time. Factory owners face higher start up costs in the interior. U.S. companies, meanwhile, must tackle the inevitable confusion of ﬁnding trustworthy factories and suppliers in a new location. Moving inland also means a longer cultural commute compared to the expat-heavy cities on the coast, with less of a connection to infrastructure and fewer skilled managers. Chamorro says companies need to calculate the coming risks associated with doing business in a ﬂoundering economy. “The economic crisis hasn’t hit yet,” he says. “Those orders for Christmas are typically placed nine months ago.” Factory mangers will be under pressure to do higherquality work and keep prices low while faced with high labor and commodities costs. The pressure comes especially from U.S. retailers like Wal-Mart, which recently eclipsed Toys R Us as the largest toy seller and has a reputation for exacting painful price point concessions. Under these conditions, factory managers will be tempted to sacriﬁce quality. “They will cut corners,” Chamorro says. The shortcuts and mistakes won’t always be easy to spot. Chamorro says factory managers are “real good at knowing how to make a bad situation look good.” The necessity of hedging against risk and trying to keep retail prices low means tightening the supply chain, reigning in SKUs and carefully monitoring inventories to avoid deeper discounts at retail level. Changing consumer behavior also comes into play. As ﬁckle buyers look for new toys, the quicker turnover of products means a quality problem can be devastating, even without safety issues that require a recall. The price of testing, added to other rising costs, will hit smaller companies much harder. Leong, of Hogwild Toys, says the added expense has forced his company to raise prices, which, inevitably, will push some retailers away. “We are stuck between two heavy rocks,” Leong says. “Right now we have no choice. The reaction will be less sales…in the next two quarters. I hope that the economy will recover after the third quarter.” With about two dozen labs in China certiﬁed by the Consumer Product Safety Commission, there’s little competition to bring down testing prices. Leong says he jokes with factory owners. “Shut down your operation and move into lab. That will be the next business that is booming.” WT Angela Valdez is a freelance writer in Arlington, VA. For reprints of this article, please contact Cindy Williams at williamsc@bnpmedia.com or 610-436-4220 ext. 8516. 35 WWW.WORLDTRADEMAG.COM 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

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.