Tariffs on Toys?!
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We should have published this article earlier, but the last few days have been very frenetic with a wide range of our clients seeking my inputs, insights and suggestions. I’ve advised $billion companies through to small one person companies and everything in between this week. This has been one of the most intense few days of my 25-year career. There is a lot to consider and discuss for sure on this topic!
There’s been a lot of bad news and massive disruption in the last few days as the full extent of tariffs imposed by the USA on imports from other countries has been announced. But to be frank, you have already read enough ‘woe is me’ reportage on this. So I’m going to give you one not so bad thing as a start point – it isn’t an issue just your business is facing. Just like the global financial crisis of the late noughties, just like the pandemic, and just like the resultant container price surge leading to massive inflation and a subsequent drop in consumer demand, everybody is facing this challenge.
It's not just that one key factory has upped prices on you, or that one retailer has decided to drop your products and give the business to a competitor. Actually, EVERYONE in the chain is badly affected by this situation and turn of events. Factories everywhere are negatively affected, retailers are going to be badly affected, your business will be affected and so will your competitors, oh, and so will consumers of our products sadly.
So the good news is this – sharp operators manage crises better than slack operators. If you run a good business, a tight ship, with better than average people on your team you can turn this seemingly disastrous situation into competitive advantage by managing it better than they do. The start of managing this situation better than your competitors is to be better informed and more aware of actual realities in terms of options and solutions.
That’s the annoying self-help part of this article done, now let’s review the facts and solutions here:
FACT 1 – TARIFFS HAVE BEEN IMPOSED ON ALL TOY MANUFACTURING HUBS OF SCALE
No leading Toy manufacturing countries have escaped taking a sizeable tariff hit. The table below shows the numbers, but here’s the most critical stats for the Toy & Game biz: China – 54 % tariff, Vietnam – 46%, European Union – 20%, India 26%, Indonesia 32%, Thailand 36%, Mexico’s situation was not worsened by the “Liberation” Day tariffs.
Now one point to be clear on is that the situation currently appears to be quite fluid. It seems to be the case that nothing is quite final. I suspect from what I know of each of the key countries listed here, Vietnam is very likely to offer compromises and is likely to get their rate reduced to some degree. India has seemingly done well, or at least less badly, versus the other key manufacturing countries and China is very likely to respond with comparable measures (more on China below).
The issue for Toy & Game companies here is that it’s not easy or quick to suddenly uproot Sourcing offices, tooling and find new vendors in other geographies, especially when things seem so changeable and never quite tide down.
The bottom line here is that as I have been writing about extensively (maybe even ad nauseum?!) for the last 10 years, Sourcing will require more brainpower, management time and resources going forward as we move from most production being in a relatively confined area in China to production spread out around Asia and elsewhere.
FACT 2 – SOME COUNTRIES HAVE BEEN HIT HARDER THAN OTHERS, AT LEAST FOR NOW
The first major problem we have here is that China has been made close to economically unviable by all the tariffs imposed. As of the end of 2024 at least, China still supplied c. 75-80% of all Toys globally. You can’t replace that amount of production in a decade, let alone in the few months we now have before Toy factories hit peak production for Q4 – it’s hard not to scream AAAAARRRGHHHH at this point.
The second problem is that so far the best alternative solution which has thus risen substantially in the last decade or so is Vietnam. And Vietnam has been really smashed with tariffs, 46% tariffs have been applied, purportedly on the basis of their substantial trade deficit vs the USA. The issue there is that there is no real prospect of Vietnam massively increasing consumption of more costly US goods based on it’s size and shape of economy.
The third problem is that the 3rd most popular country for Toy manufacturing in Asia has so far been Indonesia which was hit with 32% tariffs.
And finally, India has done comparatively well, but nevertheless still has 26% tariffs via this round. This seems like a surprisingly positive result for India, and Prime Minister Modi can definitely take some credit here for: 1. Being strong enough and charismatic enough to win President Trump’s respect. 2. Being quick to proactively offer concessions in the areas most valued by President Trump 3. To make the case that India’s economic strength is no real threat to the USA, but a stronger India could act as a strategic balance to China’s power, influence and impact in Asia from a geopolitical perspective.
I also think a general point to make is that President Trump does appear to be open to negotiation with strong leaders who show due deference and who are willing to offer concessions. That should be a template for any country frustrated by these tariffs.
FACT 3 – UNCERTAINTY IS OFTEN WORSE THAN BAD CERTAINTY, BUT THINGS COULD GET BETTER IN SOME CASES…
One of the most damaging impacts of the current tariff drama is the uncertainty it drives. Investing in new industrial capacity is not a quick decision to make normally, and it’s also not likely to be implemented very quickly. If you are a manufacturing company for Toys in Mexico right now, how likely are you to invest in new production capacity right now…? Probably not very likely at all.
If you are a Chinese Toy manufacturer, you probably haven’t looked at investing in new capacity for a while, but even your decisions to invest in Vietnam, Indonesia et al are now on hold.
For Toy & Game companies, today Vietnam looks like a much worse option than it was a week ago, but a successful lobbying/negotiation approach by the government of Vietnam could secure a 50% reduction in tariffs at which point Vietnam becomes one of the best available options. That’s a ludicrous situation to put industries and companies in, when these are the companies that employ the most people and that contribute the most to the US economy in general, but also pay a lot of taxes to government.
My analysis, conversations with people in the know in Vietnam, suggests that the Vietnamese government will definitely try to negotiate reductions in the tariff rate.
India may negotiate further reductions. One of India’s defining national characteristics is to always find workarounds to hurdles and to negotiate effectively, and I suspect there is more to come there too.
The problem for now though is where should we place manufacturing orders right now to get out inventory for the back end of the year, and of course that is a complex calculation right now.
The best solution we can guarantee right now should surely be based on diversification and spreading risk, at which point we’re back to needing to make better decisions and find better solutions versus our competitors as we all face up to the big challenge we have here.
FACT 4 – EVERY ACTION HAS AN EQUAL AND OPPOSITE REACTION AKA CHINA IS UNLIKELY TO CAPITULATE
I have written previously at length about how Mexico and Canada are very likely to compromise and seek least worst resolutions of the objections of President Trump to the trading status and balance between those parties. As above, India & Vietnam are also likely to negotiate and should therefore mitigate some of the impact.
I have studied China’s Toy sector extensively, but I have also studied at length China’s history, politics and governing body/institutions. Nevertheless I’m still an armchair expert at best on China’s politics and statecraft, but the one thing that seems very evident is that any country choosing to aggressively compete with China will be met with a strong, strategic and roughly proportionate reaction. China as a country is very deliberate on strategy, decisions and actions taken. So it is no surprise to see that China’s counter measures to “Liberation” Day tariffs was to hit back with an equal % of tariffs imposed, plus some other measures targeting areas likely to be most painful to the U.S. in general, but also specifically to Trump’s heartland supporters.
And here’s where things look darkest from where I’m sat – China’s factories are going to aggressively chase business outside China, I am already overwhelmed with factories from China seeking our help with this. But the dark part of this is that reduced orders will drive many Chinese factories out of the Toy & Game business. And the other upcoming hubs are nowhere near ready to pick up the slack. There is just not enough qualified production capacity available elsewhere.
The other issue with losing Chinese Toy & Game factories is the irretrievable loss of expertise, knowledge and capability. It has taken decades to build up all that expertise, and it could be lost in a heartbeat – that would be bad for our industry overall.
FACT 5 – INFLATION WILL RISE AND CONSUMER SPENDING/DEMAND FOR OUR PRODUCTS LOOKS LIKELY TO DROP
Based on all the Economic experts, analysts and mouthpieces I have studied, there seems to be no practical way that these massive tariffs won’t cause a significant upsurge of inflation in the USA, which will almost inevitably lead to at least a short term drop in demand, and then a resulting loss of revenues for Toy & Game companies. Just as demand seemed to show signs of strengthening again, it looks likely to diminish. Ordering commitments will become even more conservative, and we could be looking at a couple of years of really hard trading ☹.
FACT 6 – NEARLY EVERY TOY COMPANY SHIPS TOYS TO THE USA, OR ASPIRES TO…BUT THE TARIFFS DON’T APPLY TO IMPORTS INTO OTHER COUNTRIES, SO FINDING AND FOCUSING ON OTHER MAJOR OPPORTUNITIES WILL BE KEY TO REDUCE THE HIT ON SALES INTO THE USA
Even small international companies are normally working on selling into the world’s biggest market. In many cases, a tiny chunk of market share in the USA is hugely significant to global revenues. If demand diminishes in the USA, we have no option but to seek alternative sales growth opportunities where these tariffs are irrelevant. But that isn’t easy, and our competitors will be doing the same thing, so competition will be strong. Moreover though, any incremental international business is likely to be insignificant versus the size of opportunity in the USA.
FACT 7 – THE TARIFF SITUATION IS A SHORT-TERM SHOCK, BUT THERE ARE SOME LONG-TERM TRENDS
Here’s one of the key areas of potential advantage. We couldn’t have predicted the scale and impact of these latest tariffs being imposed, but we do know things like China chose to move away from low end manufacturing 10 years ago with their 2025 vision. The government clearly stated publicly, and in private to some major Toy companies, that their economy was on a trajectory to make real cars on the scale that they have historically made Toy cars. I have been writing about this for more than a decade, and the big Toy Cos are now significantly diversified, with some Top 5 global companies down to as little as 40% of their manufacturing in China now. They needed to be ahead of the curve, because we can move a coupla $million quickly, but to move a $billion manufacturing spend takes a decade, or more.
But above all take this current situation as a wakeup call – China has changed, regardless of what you want. The country we went to en masse for our manufacturing decades back in time went from hundreds of millions of starving agrarian peasants to a factory production line wage of as much as $1000 per month today, versus c. $200 USD in India for example.
So, wake up and smell the coffee, you need to diversify your manufacturing anyway, regardless of the tariffs. Whichever country has the worst US tariff rate today, should not become the major knee-jerk driver of your Sourcing choices, you need to apply STRATEGY here, not knee-jerk reactivity.
I have spoken to some Toy company CEOs who have revenues in excess of $100m USD. And they were adamant that they would stay in China as everywhere else wasn’t ready, was too much hard work and China was still delivering. That’s what I call the ‘Boiling Frog’ mindset, you don’t realise you are being boiled alive if the temperature only goes up a few degrees at a time. China has been a brilliant friend to the Toy business, and it still will, but it’s place as the only primary hub for Toy production are over, so you need to diversify anyway regardless of the tariffs.
FACT 8 – WHAT CAN WE ABSOLUTELY COUNT ON?
The last fact here is that there are some things we can absolutely count on here, and that certainty should drive more of our thinking and actions than the latest headline and change in tariff rate.
We know that kids love Toys & Games, and that parents like buying some types of our products. We know that there is a more diverse distribution matrix available to us now, and that it has never been easier to sell products to consumers than it is now, albeit it is very competitive. We also know that we need to diversify our Sourcing regardless of short-term shocks like the current scenario.
CONCLUSION: THE IMPACT OF LIBERATION DAY TARIFFS GOING FORWARD & HOW WE CAN BEST MANAGE
I have had the sheer joy & privilege of working in this industry since the start of this millennium. In my 25 years in this glorious business the 5 biggest events/impacts of macro level events (in rough timeline order) have been:
1. The introduction of the €uro currency making most of Europe’s economy easily accessible.
2. The growth of the internet and digital space.
3. The global financial crisis.
4. The COVID-19 pandemic, resultant container shipping cost crisis and resultant inflation/drop in consumer demand.
5. “Liberation” Day tariffs.
Maybe I missed something equally critical and impactful, and I’m happy to add to this list if something is missing, but there is no doubt that the recent slew of terrible tariffs is up there with the events of most impact and disruption in 25 years.
It is likely that much of the published tariffs will be rowed back, but much of it won’t be. In particular, China’s inevitably resilient response is unlikely to see huge drops in the tariff rates from China unfortunately. This will hurt a lot of people and businesses. I feel really bad for the factory teams I have built my career on working with, some might go out of business, although I and they will fight hard to prevent that, but this all seems like a lot of pain, with no obvious gain from where I sit as a non U.S. resident helping Toy & Game companies navigate this current crisis.
As for the likelihood of a huge growth in manufacturing in the USA, if it was still April 1st, I might spend more time on that ‘spoof’, but let’s keep it real here. I hope some U.S. citizens, companies and sectors do see growth after all these tariffs are applied, but alas the lost jobs elsewhere will be on a greater scale in my opinion – feel free to agree or not with that, but either way the only winners here will be those who manage a freakishly hard situation better than their competitors.
SOURCING CONSULTANCY – CAN WE HELP YOU TO BETTER HANDLE TOUGH TIMES?
We have helped hundreds of companies assess their Sourcing function, find and validate new factories and better manage their budgets, in some cases saving many millions of $ on manufacturing spend. Can we help your business better manage this current tariff driven Sourcing crisis? As you would expect, we are frenetically busy on this front right now, but our mission is to help and support Toy & Game companies to achieve better results, so we will try to make ourselves available to help you as long as you understand we offer a professional i.e. paid for service.
Our Sourcing services go from one off Consultancy calls costing £500 British pounds / $650 USD, through to ongoing retainer consultancy depending on your needs. More details here: www.KidsBrandInsight.com/services
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