THE E-MAILS started pouring in on April 9, the day US President Donald J. Trump’s 145% tariff on Chinese imports took effect. Clients were canceling orders for toys from Huntar Company Inc.’s factory in Guangdong Province, China.
But Huntar Chief Executive Officer (CEO) Jason Cheung, 45, had already halted production at the 600,000-square-foot facility in Shaoguan. He saw the tariff for what it was: an existential threat to his company, which manufactures educational toys bound for the shelves of Walmart and Target, like Learning Resources, Inc.’s Numberblocks, which help teach kids math.
“I needed to start saving money as soon as possible,” Mr. Cheung said. In the four weeks since, he has cut production by 60% to 70%, laid off a third of the factory’s 400 Chinese workers, and reduced hours and wages to those still employed.
Now, he’s pursuing a frantic, long-shot effort to move his operation to Vietnam before the company his dad founded 42 years ago runs out of money.
He figures he has about a month.
Huntar’s plight typifies a crisis facing countless factories in China, where about 80% of toys sold in the US are manufactured, according to trade group The Toy Association. New orders have fallen sharply amid a brutal trade war with the United States that threatens to devastate the sector in both countries.
Huntar is also unique in one key way: based in the US, it straddles both sides of the trade war.
On paper, Mr. Cheung is Mr. Trump’s bogeyman, the Chinese factory owner taking American jobs. But he’s also the US small business owner tariffs were meant to protect. He’s the American son of a Chinese immigrant, running a second-generation family-owned business that employs 15 people in the US — people who would lose their jobs if Huntar falters.
Mr. Trump has said tariffs will incentivize companies to reshore manufacturing, or, at least, drive it out of China.
Huntar illustrates why economists say that’s unlikely: a dearth of facilities and workers with toy making expertise in other countries; heavy equipment that’s hard to move and would cost millions of dollars to replace; and, most acutely, no time to solve those hurdles before coffers run dry.
More likely, factories like Mr. Cheung’s will simply shut down, a prospect that drove Beijing to the negotiating table with US officials in Geneva over the weekend, three sources familiar with the Chinese government’s thinking told Reuters.
Realistically, China cannot replace US market demand for product categories like toys, furniture, and textiles, which are already feeling the impact of tariffs, one of the officials said. As trade talks began, Mr. Trump signaled he was open to cutting China tariffs to 80%.
That wouldn’t help Huntar, Mr. Cheung says, noting that any tariff rate over about 50% will make survival difficult. On a practical level, there’s no difference between 80% and the 145% tariffs he’s currently facing.
Crises have hit Huntar before, Mr. Cheung says, but not like this. The 2008 recession brought a steady slowdown, one he could plan around. And the COVID pandemic dealt a blow, but his volume of production remained high enough to keep him afloat through a temporary slump.
This time, he says, “our manufacturing business essentially halted overnight.” Mr. Cheung is starting to feel like his only hope is just that — hope.
“I refresh my ‘tariff’ Google search five or six times a day, hoping something’s changed,” he says.
A DREAM AND A LUCKY DESK
Huntar manufactures toys for US, Canadian and European sellers, like Learning Resources, Inc. and Play-a-Maze, which distribute them to retailers or sell directly to consumers.
It also makes its own educational toys under its Popular Playthings brand, which it has had to stop shipping to the US, costing the company hundreds of thousands of dollars so far, Mr. Cheung estimates.
American-owned factories in China are uncommon, as Chinese law makes it difficult and costly for foreign entities to own them, says attorney Dan Harris, a partner at Harris Sliwoski who focuses on international manufacturing law.
But Huntar has roots in a business Mr. Cheung’s father set up in 1983, a few years after escaping communist China and settling in California’s Bay Area.
Mr. Cheung grew up in San Francisco’s Inner Richmond district, he says, in a small house whose broken door you could simply kick open. His father would sell clothes and furniture at a flea market to augment his janitor’s wages, with Mr. Cheung tagging along, bored to tears.
As the operation matured, Mr. Cheung’s father set up a factory in China, to exert more control over quality. Mr. Cheung, who joined the company in 2004, still uses the desk his father set up in their living room decades ago.
“We think maybe it’s lucky or something,” he says.
The last few weeks have been anything but lucky. The factory is sitting on $750,000 in canceled shipments -— value Mr. Cheung couldn’t fully recover even if the trade war ended, because his shipping costs would surely spike as factories raced to clear backlogs. That’s what happened after COVID, Mr. Cheung recalls, when shipping costs ballooned from $2,000 per container to more than $20,000.
“They don’t deserve this,” said Rick Woldenberg, CEO of toy company Learning Resources, and a client of Mr. Cheung’s since his father was in charge more than 20 years ago.
Mr. Woldenberg has canceled future production in China, saying his annual tariffs would jump from $2 million to $100 million. “It’s not who we want to be,” Mr. Woldenberg said, “but they know we have no choice.”
According to an April survey by the Toy Association, more than 45% of small and mid-sized toy companies in the US say China tariffs will put them out of business within weeks or months.
Learning Resources, which employs 500 people in the US and manufactures 60% of its products in China, has sued the US government, asking a federal judge to stop tariffs from taking effect.
“If nothing changes, we’ll be crippled,” Mr. Woldenberg said.
‘CANNIBALIZE MYSELF’
Mr. Cheung has been scouring his contact list, calling factories in Vietnam in hopes of finding a new home for Huntar.
Moving to the US is out of the question. Wages here are so high that manufacturing stateside would be even more expensive than staying in China and absorbing the tariffs, Mr. Cheung says.
Even in Vietnam, financial and logistical hurdles are proving too tall.
Few factories have enough space to handle his operation, and competition is high among others looking to move. Even if he found a good spot, Mr. Cheung would have to train a new staff and run safety and quality control checks that could easily take months.
There’s also the question of infrastructure. Mr. Cheung’s factory is solar-powered, helping ensure profitability in a thin-margin business. It has specific HVAC and wastewater systems designed to negate the environmental risks of spray paint and chemicals used to decorate toys. And it owns more than 30 injection machines, each weighing several tons, which craft toys by pumping molten plastic to steel casings. These likely can’t be moved, and Mr. Cheung says he’s not sure where he’d find the money — well over $1 million — to buy new ones.
A more realistic move would be to outsource certain operations and shutter others. Mr. Cheung could cut losses by finding a Vietnamese factory to take Huntar’s Popular Playthings proprietary line, while ditching the business of manufacturing toys for third party clients.
Going all-in — that is, keeping his factory intact in China in hopes the trade war is resolved — is a higher-risk, higher-reward gambit. If tariffs came down quickly, his company would survive, but if they didn’t, he’d lose everything. The costs of keeping a large factory running, and paying employees, while producing just a fraction of his normal output, would sink him within several weeks, he says.
“I’m approaching this moment where I have to choose basically to cannibalize myself,” he says.
It’s hard to pare down a business that once embodied the American dream. Mr. Cheung’s father came to the US in 1978, after escaping China by swimming across the Shenzhen River into Hong Kong — all for a shot at freedom. He “wanted to see this business continue through me and hopefully his grandkids,” Cheung says.
His dad, he says, is feeling hopeless these days. Though grateful for the life he built here, America’s sheen as a land of milk and honey has worn off. “His idea of the US has definitely changed,” Cheung says. — Reuters
