Features

More Manufacturing Slowdowns as Chinese Factories Face Power Plant Shutdowns, Electricity Rationing

Chinese factories have been working hard to keep up with global demand as they recover from complete COVID-related shutdowns in China’s manufacturing sector, both earlier in the pandemic and more recently.

sixtwentysixMore Manufacturing Slowdowns as Chinese Factories Face Power Plant Shutdowns, Electricity Rationing
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Latest COVID Surge Hampering Factory Activity in Asia

The development spells more supply chain trouble for the North American promo products industry.  Manufacturing output is slowing in key production centers in Southeast Asia due to the rampant spread of COVID-19’s delta variant, making it more difficult and more expensive for western brands to get goods produced and shipped to North America.

The slowdown in activity has the potential to get worse in the weeks ahead in the wake of developments like stay-at-home orders issued by the government in Vietnam, a key country for the production of everything from apparel and shoes to upholstery.

The grim news comes as the global supply chain for virtually every industry is already in disarray due to COVID-caused complications.

The promotional products market is no exception.   Rising raw-material prices, congestion at ports, insufficient labor and domestic transport capacity, skyrocketing costs for shipping containers/ocean freight, unfavorable monetary exchange rates and more have resulted in promo experiencing inventory shortfalls, higher product prices, lower customer service levels, longer production times, shortages of important decorating materials like screen-printing ink, and delays in order delivery.

One thing driving up costs and making it harder and pricier to get promo goods manufactured is constraint on factories related to attempts to control outbreaks of the delta variant in Asia, where the vast majority of domestically sold promotional products are produced.

COVID clearly weighed on Southeast Asia factories in August, where manufacturing managers in Vietnam, Thailand, and the Philippines all reported deeper contractions in activity.

The IHS Markit purchasing managers’ index (PMI) for Vietnam dropped from 45.1 in July to 40.2 in August. It was the third straight month of declining activity and the lowest reading since April 2020. Readings above 50 denote expansion; below 50 signifies contraction. Vietnam produces more than 30% of the United States’ shoe imports and is second only to China when it comes to supplying the shoes and apparel that are imported to America.

 

 

Meanwhile, Thailand’s PMI retreated month-over-month from 48.7 to 48.3 – the seventh time in the last eight months that activity eroded. The Philippines recorded its lowest PMI in some 15 months, falling from moderate expansion territory in July (50.4) to contraction in August (46.4).

Indonesia’s PMI rose more than three percentage points month over month to 43.7 in August, and Malasyia’s inched up to 43.4, but that still means contraction was occurring in both countries, just not at as rapid a rate. Elsewhere, India bucked the trend, with IHS Markit data showing that manufacturing remained in expansion with a PMI of 52.3 in August. Still, India’s rate of expansion declined, having slipped from 55.3 in July.

Analysts say the fact that the overwhelming majority of people in these countries are unvaccinated is fueling the COVID outbreaks and thus impacting factories’ ability to function.

“Southeast Asia’s under-vaccinated economies have been fighting record levels of infections and deaths, including in Thailand, Malaysia and Vietnam,” Bloomberg reported. “Of 53 countries in Bloomberg’s latest Covid Resilience Ranking, the bottom five are all in Southeast Asia.”

In August, more than 80 apparel and footwear brands, including Nike, penned a letter to President Joe Biden pleading with his administration to donate vaccines to Vietnam. “The health of our industry is directly dependent on the health of Vietnam’s industry,” the letter said. 

The White House is reportedly providing an additional 1 million doses of the Pfizer vaccine to Vietnam, a rollout expected to start on Sept. 1/Sept. 2.

 

 

The official PMI for China, which has temporarily shuttered certain ports and implemented localized lockdowns in recent months in attempts to combat delta flare-ups, declined slightly from July (50.4) to August (50.1).

The reading indicated manufacturing expansion was still occurring in August, but there were headwinds. The new export orders sub-index declined to 46.7 in August from 47.7 in July. Furthermore, the Caixin Media and IHS Markit PMI for China showed that manufacturing there had fallen into contraction, with a tally of 49.2, the lowest level since February 2020 when societal shutdowns grounded production activity in China.

Manufacturing activity continued to expand in Japan, Taiwan and South Korea, but those countries experienced month over month PMI declines that indicated the expansion was slowing.

By Christopher Ruvo, PROMOGRAM 

sixtwentysixLatest COVID Surge Hampering Factory Activity in Asia
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U.S. Job Growth Strong, But Industry Hiring Difficulties Remain in Promo

The U.S. added 943,000 jobs in July, according to the Bureau of Labor Statistics. This is ahead of analysts’ expectations and helped push the country’s unemployment rate down to 5.4 percent. Tracking this growth, The Conference Board’s Employment Trends Index increased again in July for the fifth consecutive month, reaching 109.8, up from 108.96 in June.

“The Employment Trends Index remained on its historically strong upward trajectory, suggesting rapid job growth is likely to continue over the next several months,” says Gad Levanon, head of The Conference Board Labor Markets Institute. “This high mark comes off the back of nearly one million new jobs added in both June and July and a steep decline in the unemployment rate.  However, recruiting and retention difficulties—and rapid wage growth—are expected through the summer, particularly in industries key to the reopening of the economy, such as food service and leisure and hospitality.  The rapid wage growth is likely to lead to higher inflation in the coming year.”

Levanon adds, “Despite the still-high unemployment rate, many employers are having difficulty finding qualified workers. According to the National Federation of Independent Business, 49 percent of firms reported being unable to fill open positions in July—an all-time high. For many of those currently unemployed, job-search intensity remains low due to an array of factors: enhanced unemployment benefits, fears of getting infected, a lack of childcare, and interest in pursuing and preparing for a different type of career. Going forward, we do expect economic activity in in-person services to be negatively impacted by the current resurgence of infections fueled by the ‘Delta’ variant. While this Delta wave may produce slight slowdowns in hiring, we expect job growth to remain very strong overall.”

Businesses in the promotional products industry are approaching hiring from new angles to manage the tight labor market. Dawn Conway, CEO of distributor Boost Engagement in Dayton, Ohio, says, “We have been affected; it has been challenging finding candidates to fill entry-level positions, specifically warehouse associates. The most successful step in recruiting talent is referrals from our employees. We have a points-based referral program that is heavily promoted through our proprietary engagement platform, which is one of Boost Engagement’s core offerings.”

Kevin Walsh, CAS, president of supplier Showdown Displays in Brooklyn Center, Minnesota, says, “We’ve had to become more creative, flexible and aggressive. Pre-pandemic, Showdown had built a healthy pipeline of prospective employees as a desirable employer and fun place to work. Those prospects and that pipeline has evaporated post-pandemic. As a result we’ve taken multiple steps to increase interest for applicants and attract the type of team member that wants to be part of Showdown Displays. This includes; No.1, increasing our existing referral bonus program for associates, No. 2, offering signing bonuses to new employees, No.3, increasing entry-level rates—as well as the subsequent rates for existing employees—and No. 4, re-instating our profit-sharing program. It’s a competitive market out there so offering a suite of incentives is required.”

Labor shortages are not confined to the U.S.  Yesterday, The Wall Street Journal reported that as global demand for goods surges, Chinese factories are having difficulty filling jobs because many young people are rejecting factory jobs in favor of service-industry jobs that pay better and migrant workers are staying home amid COVID-19 fears. The story goes on to say that the trends may be indicative of longer-term demographic changes, including a shrinking labor pool.

sixtwentysixU.S. Job Growth Strong, But Industry Hiring Difficulties Remain in Promo
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The Story Behind The Supply Chain Trouble…

Global sourcing experts weigh in and provide strategies for navigating the disruption.

Below are highlights from the story by Christopher Ruvo

 

The supply chain disruption that’s affecting the promotional products industry and virtually the entire global sourcing network probably isn’t going to relent anytime soon.

Still, there are strategies and practices that suppliers, like other importers and product sellers, are implementing that will help mitigate issues to the extent possible.  That’s the message from global sourcing experts outside promo who work on supply chain issues.

“The supply chain crisis is one which is going to take a while to sort out, but there are many ways of doing so, and combining a number of techniques may help us to sort it out sooner rather than later,” says Teri Shern, co-founder of ConexBoxes, a provider of steel storage container solutions.

Relief in 2021 Is Unlikely

By now, most promo pros are familiar with the impact of supply chain upheaval on the industry. Fueled by issues tied to COVID-19 like societal shutdowns, labor shortages and a gigantic global bounce-back in demand for all manner of products following the economic lows experienced in the coronavirus’ early waves in 2020, the supply chain troubles have led to stock shortages, higher product prices, increased delivery/transport costs, longer production times and delays in delivery of orders, among other headaches.

 

New fiascos for promo are emerging too, with apparel decorators now reporting shortages of key materials like screen-printing ink.

 

The big question in promo – and in all industries affected by the upheaval – is when will things get better?

Supply chain professionals believe troubles will persist into 2022 and potentially beyond.  “There’s a lot of fundamental restructuring going on as a result of the pandemic-induced demand shifts and geopolitics that we are probably 12 to 18 months away from being in a new steady state,” says Aaron Alpeter, founder of Izba Consulting, a supply chain consulting, outsourcing and technology firm.

Similarly, Patrick Penfield believes it will be at least the end of 2022 before global supply chains can settle into something like a new normalized stability.

“You have the delta variant causing issues for supply chains now and you could have intermittent disruptions like that throughout next year,” says Penfield, a professor of practice in supply chain management and director of executive education at the Syracuse University Whitman School. “Those interruptions make it difficult for supply chains that are already overwhelmed to catch up.”

The problems could intensify in the fourth quarter, according to sourcing pros.

As just one example of how that might look, retailers could be scrambling to get products that were produced overseas out of shipping containers that have been delayed in delivery/unloading and into their distribution centers and then onto shelves. That could lump considerable extra weight on already overstressed domestic transport providers – a pressure that ripples throughout markets, including the promotional products industry, contributing to backlogs and delivery delays.

“Getting timely deliveries will be a challenge,” Penfield predicts. Transport services are likely to be more expensive too, given planned surcharges from carriers like FedEx and the Postal Service.

 

Speaking broadly about the global supply chain, some sourcing pros think there’ll be bellwethers to look for that signal the return of stability and relative normality.

“Right now, the secondary market for parts is very hot, which only happens when there’s a supply imbalance and poor planning on a macro level,” shares Alpeter. “You’ll know that we’re in a new steady state when the arbitrage opportunity for parts and components begins to evaporate.”

Even when that happens, though, prices for things like air and ocean freight may remain well above their pre-pandemic costs – a potential reality that could mean higher product prices in promo and other industries are here to stay as such expenses factor into what promo suppliers are obligated to charge per product to remain viable.

“I think you’ll see prices for air and ocean stabilize, but they could stay elevated long term,” Alpeter says. “Going back to 2018 – I don’t see that happening.”

Best Practices

There’s no magic spell to cast to cure the supply chain ills. Even so, there are things companies that import and ship product can do to cut paths through the jungle of complications. Penfield recommends working closely with freight forwarders to maximize supply chain efficiency. “They can help you minimize your costs,” Penfield says. “They can also provide advice on things like which ports to use given conditions. You have to engage with them to leverage their expertise.”

Another smart tactic for suppliers would be to beef up inventory levels, ordering in advance and carrying more stock than would normally be the case. Leading proactive promo suppliers like Polyconcept North America, Gemline and others have already been executing this strategy for months. “You want to have enough inventory to protect against disruption,” Penfield says.

 

As companies build inventory, they should do so strategically, stocking up on best-selling SKUs rather than wasting time, expense and precious cargo space on items that generate relatively marginal sales. “It’s a good time to look at what’s selling and what’s not selling and make decisions accordingly,” Penfield says.

The strategizing should also include proactive planning and making potentially difficult purchasing decisions based on marketplace realities, supply chain constraints and costs.

Alpeter gives an example. He’s working with a brand whose factory has said that it will only be able to support a portion of the requested amount with the current component commitments it has from vendors. The factory feels it can produce a higher portion of the requested amount but would need to increase the bill of materials dramatically to secure components on the secondary market.

“By evaluating this in advance in the summer, the brand can evaluate the trade-off between reduced sales and lower margin, as well as come up with a broader business plan, as opposed to having things hit all at the same time and potentially making emotional and unsound business decisions,” Alpeter says.

Meanwhile, Penfield and others say that reducing the amount of packaging used to ship product from overseas is a smart way to get greater quantities of products to domestic shores faster. “Shipping full container loads can help immensely,” he says.

Longer term, promo suppliers should be working to automate processes to reduce reliance on labor. More automation makes companies less susceptible to labor shortages that can slow down production and fulfillment when there’s simply not enough staff. Suppliers in promo are making steps in this regard.

They’re also executing another long-term improvement strategy recommended by global sourcing experts, and that’s diversifying the countries and regions from which they source products, which makes supply chains more resilient and less vulnerable to disruptions that can come from natural disasters, COVID shutdowns, labor strikes, and societal unrest that may occur in any one area and cripple operations at key factories.

Penfield notes that geographic sourcing diversification will include companies increasingly looking to source closer to home, such as within their own hemisphere. More could – and should – look for domestic sourcing options where possible too, advice that promo distributors could also take. “Look locally and find domestic providers at least as an alternative,” Penfield says.

“While the current supply chain challenges are severe, they’re also about exposing inefficiencies in different areas,” says Mario Veraldo, a 25-year veteran of the global shipping and logistics business who is CEO of MTM Logix, a supply chain and logistics company. “So, while there is no silver bullet answer to the disruption, you can start improving things now by focusing on specific areas that feed into the supply chain.”

Source: PROMOGRAM on

 

sixtwentysixThe Story Behind The Supply Chain Trouble…
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U.S & China G-20 Agreement Postpones

The pace of escalating trade tensions between the U.S. and China have slowed following a bilateral meeting last week at the G-20 Summit in Buenos Aires, Argentina, between President Trump and President Xi Jinping. The U.S. will push back plans by 90 days to raise tariffs from 10 percent to 25 percent on approximately $250 billion in Chinese imports, while the Chinese government agreed to buy a substantial amount of U.S. agricultural, energy and industrial products. The 25 percent tariff was expected to go into effect on January 1 on a large number of products. See the detailed list, organized by HTS (Harmonized Tariff Schedule) code, here.

The agreement gives the U.S. and China a window to come to an agreement over disputes regarding the trade imbalance between the two countries and the U.S. Trade Representative’s Section 301 into Beijing’s intellectual property practices and theft of trade of secrets. If no agreement is reached during the 90-day pause, the U.S.’ proposed 25-percent tariff on Chinese goods will go into effect.

Charles Boustany, former congressman and spokesman for Tariffs Hurt The Heartland—a nationwide campaign against tariffs supported by the coalitions Farmers For Free Trade and Americans For Free Trade, of which PPAI is a member—says, “Agreeing not to raise tariffs on American businesses, farmers and consumers is an encouraging first step. These tariffs are taxes that Americans pay, and avoiding a massive tax increase on January 1 is welcome news that must be followed up by rolling back the tariffs currently in place. Tonight’s announcement makes clear that the Administration has heard the stories of economic hardship from Americans who have been hurt by tariffs. Our campaign will continue to tell their stories as the Administration enters into this important negotiation period.”

Industry companies, still reeling over the impact the tariffs will cause on their businesses, are now rethinking how to best manage the delay. Read more from them in Thursday’s PPB Newslink.

sixtwentysixU.S & China G-20 Agreement Postpones
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Pantone Names Living Coral ‘Color Of The Year’

Pantone announced today that PANTONE 16-1546 Living Coral is the Pantone Color of the Year for 2019. The company describes Living Coral as an animating and life-affirming shade of orange with a golden undertone.

“Color enhances and influences the way we experience life,” says Laurie Pressman, vice president of the Pantone Color Institute. “As a shade that affirms life through a dual role of energizing and nourishing, PANTONE 16-1546 Living Coral reinforces how colors can embody our collective experience and reflect what is taking place in our global culture at a moment in time.”

Leatrice Eiseman, executive director of the Pantone Color Institute, adds, “Color is an equalizing lens through which we experience our natural and digital realities, and this particularly true for Living Coral. With consumers craving human interaction and social connection, the humanizing and heartening qualities displayed by the convivial PANTONE Living Coral hit a responsive crowd.”

Pantone has announced a Color Of The Year for the past 20 years. The selection goes on to influence product development and purchasing decisions in multiple industries, including fashion, home furnishings, industrial design and promotional products, as well as product, packaging and graphic design.

To arrive at the Color of the Year selection each year, Pantone’s color experts at the Pantone Color Institute comb the world looking for new color influences. This can include the entertainment industry and films in production, traveling art collections and new artists, fashion, all areas of design, popular travel destinations, as well as new lifestyles, playstyles and socio-economic conditions. Influences may also stem from new technologies, materials, textures and effects that impact color, relevant social media platforms and even upcoming sporting events that capture worldwide attention.

sixtwentysixPantone Names Living Coral ‘Color Of The Year’
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Tariffs: Impact & Advice for the Promo Industry

President Donald Trump’s tariffs on billions of dollars of imported Chinese products and components are shaping up to be the defining issue for the promotional products industry in 2019. That’s not a political statement: It’s a business reality forecast by a wide range of distributor and supplier executives. They say the tariffs will trigger everything from far-reaching product price increases and supply chain disruption, to destabilized annual pricing and catalog confusion, to thinner margins, possible diminished sales, and a potential shift in some end-client spend toward so-called “budget items” and products manufactured outside China.

“This is something that goes far beyond the control of our industry,” says Jonathan Isaacson, president of Top 40 supplier Gemline (asi/56070). “It’s going to affect everyone.”

In this report, Counselor details the anticipated impact from tariffs and offers advice on how to prosper amid the tumult.

Tariffs 101
As of early November, the Trump administration had imposed tariffs on about $250 billion worth of imported Chinese goods. Levies affect approximately 6,000 items. Troublingly, promo executives said, the current 10% tariff imposed this fall on $200 billion worth of goods is set to increase to 25% by 2019. As worrying, Trump has said he could impose penalties on an additional $267 billion of Chinese products, effectively taxing everything the U.S. buys from China.

Economists and financial analysts take the president’s threat seriously. “We now assume U.S.-China trade war enters Phase III in 2019, resulting in tariffs on all +$500 billion of imports from China,” J.P. Morgan analysts wrote in a recent report. “There is no clear sign of mitigating confrontation between China and the U.S. in the near term.”

Trump aims for the tariffs to reduce the U.S. trade deficit with China – a deficit that was $375.2 billion in 2017. The president’s administration is also utilizing the levies to compel Chinese authorities to open markets in the nation of nearly 1.4 billion people more fully. Trump wants China to start “playing fair” – to strengthen copyright protections and to stop strong-arming American companies into divulging technological secrets in exchange for doing business in the country. So far, Beijing isn’t budging. Authorities there have met Trump’s penalties with retaliatory tariffs on tens of billions of dollars of U.S. exports. The economic upshot for both countries, at least in the short term, is potentially negative, many economists believe. Tariffs will drive up prices on goods in the U.S. and hurt certain industries here, while dragging on China’s economy.

“Total impact on China’s GDP growth is 1%, if China does not take countermeasures,” J.P. Morgan analysts say.

Promo Prices Are Going Up
As the trade war intensifies, the promotional products sector is caught in the maelstrom. That shouldn’t come as a surprise – the promo industry’s main supply chain model has long been rooted in Chinese factories producing a majority of the products suppliers and distributors imprint and sell in the U.S. The model has been successful, enabling the American promo market to benefit from reliable production while keeping product costs down.

But now, the Trump tariffs are disrupting the status quo – and in no more profound a way than being the primary catalyst for sweeping price increases soon to take effect on promotional products imported from China that are subject to import penalties. “Suppliers simply have no choice but to increase prices on impacted products,” says Eddie Blau, CEO of Top 40 supplier Innovation Line (asi/62660).

“This is one of the biggest challenges our industry has faced from an outside pressure. It’s hard, but it’s not insurmountable.”Jonathan Isaacson, Gemline

The majority of suppliers told Counselor they’re holding pricing for 2018. But come 2019, prices on some products are going up – potentially a lot. A definitive industry-wide increase for each affected product category was difficult to pin down. Why? Various unknowns remain, and suppliers could increase prices differently based on what their businesses can bear. Still, with that caveat in mind, industry firms communicated a collective range that put increases as low as 1%, depending on the particular product and supplier, to as much as 25%, should Trump’s import levies accelerate as currently scheduled.

At the ASI Power Summit in October, a majority of surveyed industry leaders forecast the anticipated price jumps to be along the scale of 11% to 20%. “In general, we’ll see more price increases for next year than what we have experienced in the last 10 years,” says Paul Lage, president of Top 40 supplier IMAGEN Brands.

Products in the Crosshairs
Suppliers say they don’t want to increase pricing, but lamented that their hands are tied. Not only are suppliers and their overseas manufacturing partners contending with tariffs, they’re dealing with the macroeconomic uncertainties of the trade war, facing rising costs for labor, raw materials and more, and shouldering growing expenses for ensuring compliance with product safety regulations and socially responsible production.

“We’re working with our factories and looking at all aspects of our operation to help offset some amount of the tariff impact,” says David Nicholson, president of Top 40 supplier Polyconcept North America, in a comment representative of the efforts of many leading suppliers. “We’re committed to minimizing the extent of the increases, but unfortunately, some level of increases will be inevitable.”

So far, headwear, bags, keychains, technology products and accessories, certain drinkware (including stainless-steel items), stationery, coolers, cases and some outerwear are among the items suppliers and distributors anticipate will be affected by tariff-driven price increases. But, as executives noted, the rises will probably not be limited to those categories.

Gregg Emmer, VP/CMO at Top 40 distributor Kaeser & Blair (asi/238600), performed a detailed analysis that shows 32 categories of goods on the tariff list that are tied to items the distributorship sells. Emmer’s unofficial list includes wool, cotton and denim apparel; leather items; rubber items; plastic rainwear; awards – quartz, marble, granite; paper products; dog accessories like leashes; bamboo and wood items; cork products; parts for flashlights; magnifiers; bicycle and motor vehicle accessories; sound amplification products/speakers; golf bags; and more, including some previously mentioned products.

“This is going to be very substantial and very impactful,” says Memo Kahan, president of Top 40 distributor PromoShop (asi/300446).

Without calling out specific companies, promo executives worry some suppliers might try to hold 2018 pricing on tariffed products to capture market share. That, however, is unlikely to be a sustainable strategy, critics note. “You could have companies working on paper-thin margins, but then they go belly up because they just can’t operate that way for long. That creates instability for the industry,” says John Bruellman, president/CEO of Showdown Displays (asi/87188).

Annual Pricing Stability Is Under Threat
With the tariffs and related geopolitical uncertainties, promo pricing could change throughout 2019. Such fluctuation is uncharacteristic of the industry, executives say. Traditionally, promo suppliers have established annual prices and held them. But with tariffs in play, some suppliers aren’t confident they can commit to set prices for the whole of 2019. Prices could go up if more or steeper tariffs are levied, or could go down should the tariffs be rescinded or modified.

The tariffs “could start to reshape how we approach annual prices and program business,” says Melissa Ralston, chief marketing officer of Top 40 supplier BIC Graphic (asi/40480).

Inside the Deficit: One reason why the U.S., under President Trump’s direction, has imposed tariffs on China is because of the massive $375.2 billion trade deficit between the two countries in 2017. Here’s a look at categories where China holds a major surplus.

The potential for price wobbles is causing repercussions on catalog production. Some suppliers, for example, are publishing catalogs without pricing, or warning that 2019 catalog pricing might not be accurate through the year, and encouraging distributors to check supplier websites or to directly consult with the supplier before quoting. Others are nixing printed catalogs for 2019 and focusing on digital, leveraging the more nimble communication medium that can accommodate price alterations over a year.

“Given the current uncertainty, we’ve made the decision to forgo printing a full-line 2019 catalog,” PCNA wrote in a communication to distributors. “This will enable us to have as much flexibility as possible in reacting to year-end tariff changes.”

Price unknowns and potential fluctuations are causing headaches for distributors trying to produce 2019 catalogs, too. Kaeser & Blair has been burning the midnight oil to devise a plan that would prevent catalogs with inaccurate pricing making it into circulation. “Having 100,000 printed catalogs with inflated pricing would certainly be an impact for us,” says Emmer. “I can see that duplicated many times over in the industry.”

While there isn’t universal consensus, some promo executives think the disruption is hastening in a “new normal” related to printed catalogs and price fluctuation throughout a year. “Even if the tariffs are rescinded, we see a potential shift away from published printed prices and to more digital platforms that can handle constant change,” says Ralston.

Adds Lage: “This event will probably disrupt the industry in the sense of being dependent on catalogs and annual pricing deals. The commerce world is changing much faster than our industry standards. We’ve seen several suppliers not produce a catalog this year. We think you will see several more in the next couple of years not printing catalogs. Eventually, there will be a new standard for our industry.”

Impact on Distributors & End-Clients
Of course, absorbing the whole of tariff-related product price increases isn’t smart or feasible for distributors. That’s why many are planning to move some of the increase to end-clients. “Most of the tariffs are too large for us to absorb, so we’ll have to pass on the cost increases to our customers,” says Bob Herzog, CEO of Top 40 distributor Corporate Imaging Concepts (asi/168962). Even so, distributors say they aren’t just unloading the burden on customers. Many also expect to eat margin in order to stay relevant and competitive. “I see profits going down next year,” said Kelly Moore, owner of distributor Moore Promotions (asi/601617).

Diminished profits aren’t the only potential consequence for distributors. Kathy Finnerty Thomas, president at Stowebridge Promotion Group (asi/337500), anticipates program business her Arizona-based distributorship conducts will have to be renegotiated in light of new cost realities. “We’ll see a huge impact in 2019,” she says.

Meanwhile, some fear clients could draw back on promotional products spending and devote available cash to other marketing media. “We’re competing for hard-fought advertising dollars in a marketplace that has an abundance of alternative options,” says Joshua White, general counsel and SVP of strategic partnerships at Top 40 distributor BAMKO (asi/131431). “As tariffs drive up the cost of brand impressions, promo becomes less cost competitive.”

Others, like Emmer, worry smaller clients will lack the budgets to buy promo products if price increases are too large. “During the last recession, we saw the economic hit on the small customers cause them to simply stop using specialty advertising,” Emmer says. “If we have to increase costs by 25%, it’ll likely have a similar effect.”

“We’re committed to minimizing the extent of the increases, but unfortunately, some level of increases will be inevitable.”David Nicholson, PCNA

Along related lines, certain industry leaders are anxious that the most significant harm from tariffs will be the negative reverberations they could send rippling through the U.S. economy. One concern is that clients, trying to mitigate increased costs of their own, might pull back on ad spending, including promo.

“Our challenge will be to convince them to keep their spend at a high level by being nimble with our product offerings,” Herzog says.

Another concern is that U.S.-based exporters impacted by China’s retaliatory tariffs could also eliminate or reduce their investment in branded merchandise as their businesses/industries suffer. Despite GDP growth in 2018, the Trump administration approved paying up to $12 billion in government assistance to U.S. farmers to make up for shortfalls caused by the trade war. “While tariffs certainly damage our industry, the greater destruction of the economy is our greatest threat,” says Finnerty Thomas.

Given the potential for those dark clouds to gather, some industry leaders say it wouldn’t be hard to imagine 2019 registering the first year-over-year sales decline in the $23.6 billion promotional products industry since the Great Recession. “There’s a possibility that overall industry volume slows or declines as the value and ROI for promotional products becomes less compelling,” says Nicholson.

Nonetheless, Nicholson and others caution that it’s too soon to etch a pessimistic outlook in stone. Both distributors and suppliers Counselor spoke with believe savvy consultative distributors will be able to keep revenue streams up, in part by properly preparing/educating clients for the price increases and guiding customers to products that fit their spending plans. Those can include comparatively lower-priced items and products unaffected by tariffs, including goods produced in nations other than China.

“We anticipate some movement from tariff-bearing products to non-tariff bearing products, and changes of countries of origin,” says Jay Deutsch, CEO of Top 40 distributor BDA (asi/137616).

Lage expresses a similar view. “I don’t think end-users are going to change their budgets for promotional products,” he says. “I do think they’ll change the products that they buy within the industry to meet their needs with the money they have to spend.”

Migrating Production Away From China
In light of the tariffs, China’s manufacturing sector stands to potentially suffer, as American importers across industries seek out alternative countries in which to build at least certain items. While an effort to diversify supply chains into countries beyond China has been underway to varying degrees among some promo suppliers, the tariffs are starting to compel a broader, concerted effort to move more production into different countries.

At this year’s ASI Power Summit, industry leaders were asked to describe the impact of tariffs in one or two words. This wordcloud shows their answers. The larger the word, the more people gave that answer.

“We’ve already looked at ways to source outside China and increase our USA demand,” says Brandon Mackay, CEO/president of Top 40 supplier SnugZ/USA (asi/88060). “We’re seeing some success there and we’re just getting started, but our sourcing team feels up to the task.”

Showdown Displays, which produces items that include signs, banners and tabletop displays, is also exploring sourcing options in countries beyond China. Nations range from Turkey, India and Taiwan to Korea and Mexico. “We’re trawling the globe,” says Bruellman.

“Most of the tariffs are too large for us to absorb, so we’ll have to pass on the cost increases to our customers.”Bob Herzog, Corporate Imaging Concepts

Showdown Displays isn’t the only company casting a worldwide net. “The greater shift will see production moving out of China into other regions, including Malaysia, Mexico and Africa,” says Kahan, adding that the U.S. is unlikely to see much production return.

Still, supply chains don’t simply move overnight, and China will remain the industry’s manufacturing hub for at least the short term, even as some production migrates. “These supply chains are complicated and built over years,” says Isaacson. “If you’re talking about reforming them somewhere else, that takes considerable time and money. You have to establish the infrastructure, and make sure everything is right to meet regulations and properly address social responsibility.”

Certain suppliers are reluctant to begin shifting production, but are coming to view such a move as inevitable. “We certainly don’t want to move away from China for our supply chain,” says Blau. “The country’s infrastructure was built to support a robust export industry and it works very well. Our suppliers have become more sophisticated over time, learning to improve their manufacturing quality, communications and overall understanding of the promotional products industry in the U.S. Having said that, we’re certainly considering moving some product categories elsewhere, and we’ll be spending more energy on that effort in the coming year.”

Notably, American importers in promo and other industries steering production away from China could potentially ricochet disruption back to the North American promo market. Partner factories suppliers rely on in China could close, shift into different types of production or face backlogs as a result of being overwhelmed with work gained from factories that have closed up shop. “If suppliers don’t have enough time to move their supply chains, it could result in a shortage of factory capacity to produce some of the products we sell here,” says Isaacson.

Despite the challenges tariffs present, promo execs believe the industry will ultimately adapt, grow and thrive, as it always has. “This is one of the biggest challenges our industry has faced from an outside pressure,” says Isaacson. “It’s hard, but it’s not insurmountable.”

Adds Finnerty Thomas: “As entrepreneurs, it’s our job to navigate the ever-changing landscape, try to foresee the problems on the horizon and put solutions in place. It’s not our job to sit and worry about what’s beyond our control, but to do the best with what we have.”

Tariff Timeline

April 2017
The U.S. Trade Representative investigates whether steel/aluminum imports pose a threat to national security.

August 2017
The U.S. begins a formal investigation into certain policies and practices of the Chinese government tied to technology transfer and intellectual property.

January 2018
President Trump issues a 30% tariff on solar imports after U.S. manufacturers petition for relief.

March 2018
U.S. imposes tariffs on imported steel and aluminum from all nations, including China. In response to U.S. action on steel and aluminum, China places tariffs on $3 billion of U.S. goods.

May 2018
Joint talks in Washington lead to the U.S. agreeing to hold off on tariffs, as China says it will significantly increase purchases on goods made in the U.S.

June 2018
After disagreements about previous deals, the U.S. announces tariffs on $50 billion in imports from China. Trump threatens more tariffs if China retaliates. China does. Trump announces the U.S. will put tariffs on another $200 billion of Chinese exports.

August 2018
Trump threatens to increase the proposed tariff on $200 billion of Chinese imports to 25%, up from 10%. China unveils a list of $60 billion worth of U.S. imports it plans to apply tariffs on if U.S. follows through on threats.

September 2018
Effective September 24, U.S. announced a 10% tariff on $200 billion of Chinese exports until the end of 2018. Tariffs will rise to 25% afterward.

sixtwentysixTariffs: Impact & Advice for the Promo Industry
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