"We're Taking No Chances" - How The Trade War Inspired One Company To Rebuild Its Entire Supply Chain

Larry Sloven has been building supply chains in Asia for the better part of his 30-year career. But in that entire time, he never encountered anything quite so challenging as the US-China trade war, and the adaptations that it forced his company - Capstone International, an HK-based subsidiary of Capstone Companies.

Sloven, the president of Capstone, said he primarily focuses on building supply chains in Southeast Asia. Sloven, who is 70, has spent half of his life connecting factories, sourcing raw materials, and dealing with logistics, mostly in Southern China. But now, with his Big Box store clients demanding supply chain reshuffles at the drop of a hat, Sloven explained how "[i]t is the hardest thing I’ve ever had to do in all my 30 years in the business."

It was still early days when Sloven started looking at Thailand and other countries in the region to shift some assembly and sourcing of raw materials in early 2018. But a year passed swiftly, and by the spring of 2019, with trade talks seemingly stalled, Sloven, who grew up on Long Island, felt confident that he was prepared for anything.

Initially, the tariffs didn't have much of an impact on the cost basis for Sloven's supply chains. But as the summer of 2019 dragged on, and it became clear that the trade war wouldn't be ending any time soon, Sloven started taking additional precautions, setting up back-up plans "just in case."

After settling on a few factories in Thailand to handle assembly for new products, including a smart mirror that was still in development, Sloven started preparing 'test runs' to make sure the factories could ramp up production within a six-month timeframe.

He scheduled a series of pilot runs to test how well the Thai factory handled assembly. He also needed to prepare for audits of labor rights and environmental standards that U.S. retailers require.

He estimated that would take at least another six months.

"I’m going to start moving on a small scale because they’re not going to be able to just do it immediately," Sloven said. "As much as they say, ‘Oh, I can do this right now’ - I’m not taking that chance."

More investment in tooling and moulds was required, too, but the Thai companies agreed to bear the cost.

Regardless of what happened with the trade war, Sloven felt covered.

"You prepare for war,” he said. "You’re ready if you’re attacked.”

For its story, Reuters closely monitored Sloven and his business over the course of a year - a year that saw the trade war escalate in ways the financial press hadn't anticipated.

As Sloven started breaking down the process of setting up new supply chains into smaller tasks, he quickly discovered that convincing some of the manufacturers in southern China with whom Sloven worked remained convinced that a trade deal would be struck, or at least that's what they said.

For whatever reason, they refused to negotiate deals that would involving shipping more production and raw materials abroad.

With the help of his go-to trade attorney, Sloven eventually succeeded, but it took a lot of work.

Sloven also had work to do in China.

His suppliers in Shenzhen, Dongguan and Guangzhou were certain the trade conflict would blow over and were reluctant to negotiate deals that would send components and raw materials abroad for assembly.

But Sloven kept pressing ahead with the Thailand plan, concerned about the toll the trade war was taking in China.

In early April, Sloven invited Reuters to meet his trade lawyer, Sally Peng of Sandler, Travis & Rosenberg.

Peng described how Chinese factory floors were emptying out as workers were laid off. Few owners had the expertise or resources to automate or find new export markets, so most were riding it out, hoping for a trade deal. They were “losing money every day,” she said.

"They believe that eventually it will all come back," Sloven said.

"I think within five years, it will all be gone," Peng replied.

But by the time Capstone reported its 2018 results, the seriousness of the company's situation had become readily apparent. Capstone's CFO described the trade war as one of the greatest challenges the company had ever faced.

Then Trump hiked tariffs again in May, and everybody went nuts. One survey showed that the number of firms planning to move at least some production outside of China had climbed above 40%. Meanwhile, the Asian press kept up a steady patter of reports about company's plans (most notably, companies that build components for Apple's many products). Regular readers of ZH should be familiar with these.

It soon became apparent which regional rivals would benefit the most from Trump's aggressive protectionism, and which might falter.

The same day Sloven met his lawyer, his bosses in Florida announced 2018 results that reflected the effects of the trade war. Net revenues came in at $12.8 million, down from $36.8 million in 2017. Net losses were $1 million, a swing from a $3.1 million profit.

"Capstone faced challenges in 2018 unlike any in its history,” chief financial officer Gerry McClinton said.

Meanwhile, development of the smart mirror was in full swing. The prototype was deemed a success at a Las Vegas electronics show in January, and a PR agency and a marketing company were hired to advertise the new product.

Then Trump hiked tariffs to 25% on May 10.

For Sloven - and many others - the urgency level bounced back up. That month, a survey by AmCham China and AmCham Shanghai showed the number of firms that had moved production or were considering doing so leaped above 40%.

Toward the end of Reuters' reporting period, Sloven was feeling good about Capstone's positioning. Raw materials were being sourced, assembly lines had been built.

The only thing left to do was make it through the labor audits typically favored by multinationals in the developed world, who wanted to minimize human rights abuses and any other undesirable features of their supply chain. Thailand doesn't exactly have the best history with this.

Sloven ticked off a list of concerns, from shipping time, to ensuring products met the threshold to be considered 'Made in Thailand'.

With his supply of components and raw materials secured, the next big step was the audits.

Thirty-five percent of the product had to be made in Thailand for the product to be considered Thai, and thus exempt from American tariffs.

A certificate from an independent auditor would prove that, but the auditing usually takes four to five weeks.

"I know what I have to do, but getting the information is mind-boggling. These are supply chain issues that everyone in the world is going to have to face,” Sloven said.

Logistics was another concern for Sloven. Shipping to the United States from Thailand takes 8-10 days longer than it does from China.

It took him a while to gather all the information he needed, but as of the end of August, Sloven said he felt prepared should the trade war drag on for years, as some have speculated might happen.

"There's always going to be hiccups," Sloven conceded. But he was prepared as he possibly could be, he said. And that at least gave him some peace of mind. And with the tailwind from a strong dollar making foreign goods cheaper, not every surprise has been a bad one.