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Shipping snags force US companies to retreat from China

He had no idea.

Poses was wrong to predict that his game would be caught up in the latest health crisis. A backlog global supply chain has delayed shipping around the globe and caused freight costs to soar.

Worst-Case Scenario was produced in China and was expected to arrive at Target's distribution centers in the United States in June. The games were instead stuck at the Port of Seattle for several weeks and didn't arrive until mid July.

Poses said that "it's consuming me," after he started All Things Equal, a Miami Beach-based toy company, in 1997. He sold games out of the trunk his car. You do everything perfectly. You deliver on time. You are excited about your product.

Then there is the unforeseeable catastrophe.

Poses, like other importers, is facing a supply problem that will last until 2022. This includes rising prices, overcrowded ports, shortages of ships, trains and trucks, as well as rising prices. Poses was so disturbed by the experience that he is now reconsidering a five-year-old cost-saving decision: to shift his toys and games production from the United States to China. He thinks it would be sensible to bring production back to Mexico (if not to the United States) to avoid the dangers of being dependent on factories in China.

He said that he was willing to accept smaller margins "if it means less anxiety."

Similar calculations are being made by other American companies: 52% US manufacturing executives polled by Kearney reported that they have increased their purchases of supplies in the United States to address COVID-related supply interruptions. 47 percent of respondents said they would reduce their dependence on one country's supplies or factories; 41% said that they were looking to reduce their dependence on China.

Not just because of the severe shipping bottlenecks caused by viruses. The United States and China are the two largest economies in the world, so companies worry about getting caught up in a trade war.

To protest Beijing's efforts to overthrow American technological dominance, President Donald Trump placed taxes on Chinese imports worth $360 billion.

Xi Jinping, the Chinese leader, and Joe Biden, Trump's successor seem to be in a rush to find peace.

Rosemary Coates, a consultant who has been helping companies to set up factories in China for many years, stated that "the whole relationship is in poor shape."

America is frustrated by China's trade practices that are egregious. This includes cybertheft, criticisms claim, and crackdowns on civil liberties in Hong Kong and repressions of Muslims in Xinjiang. There is also bipartisan dissatisfaction in America.

Are we now in the 21st century Cold War? Yes," stated Michael Taylor, a trade lawyer and a partner at King & Spalding. "The endgame does not involve nuclear annihilation. Economic dominance is the endgame.

Companies have built up huge profits over the years by moving production to China and other low-wage nations, then exporting back to the United States. Companies have reduced costs by reducing inventories. Factory orders are met by factories only when they require them.

Relying on distant factories and reducing inventories is dangerous. An earthquake and tsunami destroyed auto parts plants in Japan's northwestern region in March 2011. Parts shortages caused temporary inactivity at car plants all over the globe, including some in the United States. This is a stark reminder of how long supply chains can be disrupted.

Trump's trade war followed. After Trump placed stiff tariffs on Chinese goods, importers had to reconfigure their supply chain and look for alternatives.

They had never witnessed anything similar to what COVID-19 did to global commerce.

In February and March 2018, families fled to their homes as countries closed down. Companies sold off inventories and cancelled orders from suppliers. The economy actually collapsed: From April to June 2020, the United States' gross domestic product (the broadest measure of economic output) fell at 31.2% annually -- the worst quarter since 1947.

Then, something unanticipated happened.

Lewis Black, CEO at Almonty Industries which mines rare metal tungsten, stated that "what nobody knew was that we all shop online when we send everyone home." "You had inventories being reduced and manufacturing stopped. On the other hand, people were spending insanely."

Growth surged due to pent-up consumer demand and vaccines that allowed families to return outside and economies to reopen. The U.S. economy grew at an incredible pace -- a record rate of 33.8% between July and September 2020 -- and continued to grow, with the most recent growth rate of 6.5% from April through June.

Companies were suddenly overwhelmed by orders that they couldn't fulfill.

Black stated, "They had an oops moment."

Tom Derry, CEO, Institute for Supply Management, a group of purchasing managers, said, "It's a typical case of overreacting at the front end and having to play catchup." "No one could have predicted the strength of the demand .... Supply simply can't keep pace."

Companies scrambled to meet rising demand and the price of raw materials rose. The price of oil has risen more than 70% in the last year, while aluminum's value is up 55%. Tin prices have risen by more than two-thirds. According to Plastics Exchange, the price of high-density polyethylene blow-molded plastic, which is used in bottles, fuel tanks, and other products, has risen 157%.

As companies attempted to book shipping containers, freight costs also soared. The Baltic Dry Index, which tracks shipping costs, has risen more than 700% from mid-May 2020.

It was difficult to get products on container ships. However, that was not the end of the problem. The cargo arrived at ports and overwhelmed them.

Richard Gottlieb, CEO at the consultancy Global Toy Experts, stated that the ships couldn't be moved. They were backed up. Do you remember that terrible moment when your plane lands and there is no open gate? Containers have experienced the same thing.

This is why supply chain disruptions are paralyzing many businesses.

Elmer Schultz Services is a Philadelphia-based company that repairs and maintains equipment for restaurants and other clients. It is facing maddening delays in getting parts. Backordered parts used to take 7-10 days. It now takes 3-4 weeks.

Kirby Mallon, president and CEO of Elmer Schultz as well as the Trade Group Commercial Food Equipment Service Association said that it was frustrating to tell customers we couldn't fix their oven for three to four weeks.

Things got worse because of glitches. Ever Given, a huge container ship, got stuck in the Suez Canal for a week in March. This cut off shipping between Asia-Europe. A resurgence in COVID cases in May caused Yantian, the fourth busiest port in the world, to be closed for one month. It is located near Shenzhen, China's manufacturing center.

If everything goes according to plan, you will make more money if you let someone else do your manufacturing. Taylor, a trade lawyer, said that you can make more money if there is more risk. "That risk is supply disruptions and labor issues, quality control, theft, and theft of your intellectual property.

Importers attempted to figure out how much they could pass on the higher costs to their customers. Mindscope Products, near Los Angeles, owner George Balanchi is trying to keep the retail prices of his toys, which include remote-controlled cars and the Jabberin Jack talking pumpkin, from rising.

He said, "It's difficult."

He said that it is easier to raise prices online. Mindscope's radio-control stunt vehicle has been raised to $22.99 online from $19.99. He plans to increase the price to $24.99 next time.

Companies who have resisted the temptation to move production overseas now have an advantage. They don't need to wait for their products across the ocean -- or determine if they can pass on to customers any import taxes that were levied at the U.S. frontier.

Taylor stated that Taylor was right when he said, "The guys who persevered through the difficult times while their competitors had large profit margins now seem like they were smarter"

Make-A-Fort, a Kansas-based company, is one of the most fortunate. Kent Johnson, co-founder of Make-A-Fort, decided to manufacture his products in the United States. These cardboard fortresses are easy to assemble and great for kids to play in. He was not a fan of the long lead times for overseas manufacturing. He desired more control over the product's quality and was able to visit the assembly lines frequently.

He wanted to keep American jobs.

He said, "We started doing it at disadvantage." "We were just a little lucky. "We don't have many supply chains."

He said that freight costs are rising in the United States but nothing compares to the rapidly increasing cost of shipping containers.

Mursix Corp. is a manufacturer of precision metal components for the automotive and healthcare industries. However, it has been hit hard by rising steel prices and shipping bottlenecks.

Andy Dieringer is the director of supply chain at Yorktown, Indiana's company. "We used to have the ability to put something on a ship and get it within five to seven weeks," he said. It takes between nine and 11 weeks for shipment from China to arrive.

According to Susan Murray Carlock (co-owner and vice president of business development), the company is now looking for suppliers in Mexico. She said, "I could see us getting there by next year" -- possibly by the second quarter 2022.

It's not easy to leave China. There are still low costs. The clustering of specialized suppliers in Chinese manufacturing centers makes it easier for factories to obtain parts when they are needed.

Poses, at All Things Equal, laments that "I haven't yet had luck in finding North American factories to produce my games for a competitive price." But, I'm still trying!"

Coates, the consultant who is also executive director of The Reshoring Institute (a non-profit that assists companies in manufacturing in the United States), said that there are "zillions" of parts that aren't made in America.

This can be dangerous. It is possible for companies to abandon equipment, increasing the chance that their Chinese-trained workers can use the machine tools and molds to make competing products.

Coates stated that it was difficult to get out of China and often very costly.

However, U.S. companies are now looking for alternatives to relying on supplies crossing a vast ocean, especially in a time when tensions between the U.S. and China are high. According to McKinsey, major supply chain disruptions have become more frequent.

"CoVID seems like a black Swan -- and it is," Katy George, McKinsey partner, said.

McKinsey discovered that supply chain breakdowns lasting more than a month are becoming increasingly common. It used to be rare but now they occur every 3.7 years.

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