When Microsoft, Nintendo, and Sony sign a joint statement, you know things are serious.
As the G20 Summit gets underway in Osaka, Japan, this weekend, the toy industry continues to await news on the oft-discussed next wave of tariffs, which threaten to tax more than $300 billion in U.S. imports from China — including toys. Conflicting reports say there still may be a truce, but there also might not. During the past week, testimonies have been heard at the U.S. Trade Representative’s (USTR) Special 301 Committee hearing, including on behalf of The Toy Association. The threat of major impact is real, and this week, statements have been presented by numerous toy and game makers, retailers, and others about the damage that tariffs could cause to American companies, workers, and families. Here are some highlights.
Microsoft Corporation, Nintendo of America Inc., and Sony Interactive Entertainment LLC submitted a joint written statement to highlight the “enormous impact and undue economic harm that proposed tariffs on video game consoles would have on the entire video game ecosystem.”
“While we appreciate the administration’s efforts to protect U.S. intellectual property and preserve U.S. high-tech leadership, the disproportionate harm caused by these tariffs to U.S. consumers and businesses will undermine — not advance — these goals,” they say. The extensive document details the complex nature of the U.S. gaming industry and how it both directly and indirectly employs more than 220,000 people. The biggest concern: extremely tight, near-cost margins that would result in job losses and higher prices being passed on to consumers.
“While we support the administration’s decision to hold China accountable for their unreasonable and restrictive trade policies and practices, tariffs on toys will only mean higher prices for families and less selection of toys this holiday season and for years to come,” says Skip Kodak, EVP of the Americas market group at LEGO Systems Inc.
In addition to the host of problems created by attempting to move manufacturing and sourcing, a major concern for LEGO is in product safety and IP theft. LEGO is one of the companies most subject to knockoff, bootleg toys.
“While the U.S. administration aims to reduce the harms U.S. companies face related to illegal use of intellectual property, a duty on toys will only further exacerbate the number of copycat and counterfeit toys that enter the U.S. market,” Kodak explains. “These products commonly enter the U.S. via small parcel shipments and under the $800 de minimis rate and would not be subject to the duty rate. This would only further hurt a contracting U.S. toy industry that is continuing to adjust to the shift towards online sales, as well as recovering from the bankruptcy of Toys “R” Us.”
Mattel agrees. “Tariffs will create a major competitive advantage for online toy sales by unaffiliated Chinese companies, which will avoid the Section 301 duty via the $800 customs de minimis personal exemption,” says Corrine Murat, director of government affairs. “This will put U.S. toy companies, which sell primarily through brick-and-mortar channels, at a clear disadvantage vis-à-vis those Chinese competitors (to compound the problem, some of those online toys have been found to be counterfeit and/or failing to meet U.S. safety standards).”
Hasbro, which has been working to diversify its supply chain since 2012, already moved 20% of its production to the U.S., noting that its Play-Doh, Monopoly Games, and Magic the Gathering cards are sourced from U.S. suppliers.
“This could not come at a worse time for our industry. We, and the U.S. toy industry overall, are facing serious headwinds from the recent bankruptcies of two major toy retailers, K-Mart and Toys “R” Us. … The proposed tariffs would exacerbate this problem, further damage our industry, and threaten additional U.S. jobs across many disciplines in our company and our U.S. supply chain, including high-paying jobs in R&D and product design,” says Kathrin Belliveau, SVP of global government, regulatory affairs & corporate social responsibility at Hasbro Inc.
“Because toys and games are fairly low-margin items, we anticipate that our retailers will pass along their additional costs to U.S. consumers in the short term. U.S. consumers are extremely price-sensitive, especially with respect to toys and games. If the price of a $19.99 game/product increases by 25%, consumers will buy fewer of them,” she adds.
Feld Entertainment, producer of live events such as Disney on Ice, Disney Live!, Marvel Universe LIVE!, Sesame Street Live!, Supercross, Jurassic World Live, and Monster Jam, sells toys, apparel, and other products at its live events across the country — and has licensing deals in place with the likes of Spin Master, which creates and market Monster Jam toys. The company fears a ripple effect across its businesses that will affect local economies in markets where its live events typically visit. Feld VP Thomas L. Albert notes that Monster Jam alone diffuses $107 million across local economies each year — with a large portion coming from local sales tax generation through merchandise sales and concessions, which often use novelty character cups, also sourced from China.
“The majority of our non-apparel products are imported from China,” he says. “In fact, China is the largest manufacturer and exporter of toy products, manufacturing more than 70% of the world’s total and 85% of toys sold in the U.S. Unfortunately, it is not easy to source from other locations. The infrastructure, long-term business relationships, manufacturing capacity, and affordable labor force cannot be easily or quickly replaced, duplicated or moved. Moreover, whatever capacity might be available in other countries would not be able to accommodate the level of demand from the large number of U.S. importers. Nor is there enough suitable domestic manufacturing capacity and labor available for production to move to the U.S. Even if adequate capacity was available outside of China, most of Feld’s items have significant upfront costs that are not readily portable if at all — for example, molds, quality control processes, safety testing, and inspections. In addition, licensor approvals of products and facilities are also not easily portable. Feld’s average annual import volume of items in the full list of categories imposed and contemplated is about $9.8 million annually. That may be small compared to other industries and even the larger toy companies, but it is a significant amount of Feld’s business.”
The company estimates that it’s already spent more than $265,000 on tariffs already, and the proposed tariffs will mean an additional cost of $2.5 million annually “That means … additional costs that must be either absorbed, which is difficult at our current margins, or passed on to customers, which would likely result in significantly decreased sales,” he adds.
Strider Sports International, makers of Strider balance bikes, is a small, privately held U.S. company based in Rapid City, South Dakota. The company employs 45 people locally, including sales, business development, purchasing, logistics, marketing, legal, and administrative professionals. In addition to the economic impact of tariffs, the company is more concerned with its greater mission: to teach kids to ride and grow into healthy adults.
“Affordable access to bicycles from a young age is critical to increasing the number of American children that learn to ride,” says Kevin Klapprodt, general counsel. “A tax on balance bikes will have a damaging impact on access to balance bikes and, ultimately, the number of American children that learn to ride a bike and continue to ride into adulthood. These negative impacts could continue well into the future, changing long-term health outcomes for American children and they grow to adulthood, and potentially increasing long-term health care costs in this country.”
Target, which has seen major growth in its toys and baby business in the past year, joins Strider in concern beyond profit, with focus on the impact on American families.
“The current proposal … will further hurt American consumers, especially budget-conscious parents who are concerned about their children’s safety, mental and physical development and comfort in everyday life,” says Mark Tritton, EVP and chief merchandising officer. “Target welcomes millions of parents into our stores every year, and as a result, we have unique insights into the needs and budgets of these families. From this perspective, we respectfully ask for exclusion of goods impacting families with young children in the appended list.”
“For example, federal and state law, consumer protection guidelines, and common sense require parents to use infant car seats and booster seats, cribs, high chairs, and playpens for their newborns and toddlers,” he adds. “Experts also recommend toys — compliant with federal standards — to foster cognitive, motor skills, social and emotional development. Finally, newborns, toddlers, and children require seasonal indoor and outdoor clothing and footwear that is comfortable, age-appropriate, and safe. Simply put, additional tariffs on these products will require new families to spend more or make tradeoffs about which products they’re able to purchase for their families. We work with a group of very sophisticated vendor partners who have been working for some time to diversify their services, and we also have design and sourcing teams that specialize in providing the best value for high-quality, non-discretionary items for families with young children, but a 25% import tax could still threaten those efforts.”
Likewise, John Van Fossen, senior director of government affairs at Meijer, the family-owned, Michigan-based pioneer of the “supercenter” concept, fears impact for families.
“The customers we serve are hard-working American families, the majority of which are low to middle income,” he says. “They shop our stores because of our low prices and their trust in the value of the products we provide to them. Duty costs are an element of the cost of goods sold and are thus included in the calculation of the final retail price. As a result, if other factors are held constant, the price of the final product will increase based on the imposition of an import duty. Our products typically gamer a low-margin, so the 25% tariff will be passed on to consumers.”
He adds that “the financial impact of such price increases on the American consumer would be substantial, if not devastating, in conflict with the stated aim of the tariffs to affect minimal impact on American interests.”
IAAPA, the Global Association for the Attractions Industry, has concern for the numerous amusement parks, theme parks, attractions, water parks, resorts, family entertainment centers, zoos, aquariums, science centers, and museums that it represents, noting the seasonality of its membership’s businesses.
“Between 10& and 20% of guest expenditures while visiting an IAAPA member facility is on merchandise,” explains Randy Davis, SVP of safety and advocacy at IAAPA. “Family entertainment centers, which are often small, family-owned businesses will be particularly hard hit as items they use for prize redemption in addition to items to purchase will be affected. … In many cases, orders are already in, contracts already exist. Sourcing decisions are complex, requiring identification of potential partners, confirmation that a product can be produced at the requisite levels of quality, volume, timeliness, and price while protecting any intellectual property involved. Additionally, it takes time to ensure various product standards and certifications are satisfied. Sourcing decisions cannot be turned on a dime and, in many cases, can take months or even years to change.”
Rita Wood, director of tax at Atlanta-based Kids II, notes that the family-owned maker of baby gear and products for small children, having already explored moving production to the U.S. and deeming it “infeasible,” could experience a “catastrophic” loss in sales if prices increase and products are discontinued by Walmart, Target, and Amazon.
“Ultimately, implementation of tariffs … will have a negative impact on Kids II and other small U.S. businesses,” she says. “Unlike large conglomerates with the capital resources and diversity of large business lines, which can absorb the increased costs of tariffs or higher-priced foreign suppliers, Kids II is a family-owned business with fewer than 500 employees. Moreover, the global bankruptcy of Toys “R” Us (TRU) has had a dramatic effect. … Kids II has taken and will continue to absorb a significant financial loss due to TRU’s actions.”
She also notes that based on current estimates, Kids II will incur an additional duty spend of more than $21 million if these tariffs are implemented, which will compel Kids II to either reduce its U.S. workforce in Georgia, or substantially raise prices, thus becoming uncompetitive against larger conglomerates, “several of which are foreign-owned.”
Finally, Richard Tinberg, 34-year president of the 100% employee-owned Bradford/Hammacher Group of companies, points out a “vicious cycle” discovered in the course of tariffs being enacted on collectible art products produced for The Bradford Exchange.
“One of our suppliers has told us that our price will be going up because a U.S. sourced chemical is used in the product, and China is retaliating by increasing tariffs on USA origin chemicals. Some of those chemicals are from major U.S. manufacturers (such as Dow Chemical). If we reduce our purchases of products from China, the U.S. chemical companies will have reduced sales. These retaliatory tariff actions are a vicious cycle,” he says.
In the end, one point from Tinberg echoes that of hundreds of additional U.S. companies due to the complex nature of manufacturing and the supply chain.
“We have heard that companies like ours could just divert our purchases to other countries, such as Vietnam or Thailand, or that we could simply have our products made in the United States,” Tinberg explains. “These are not viable options for us.”
I didn’t realize that these tariffs could increase the production of fake products like LEGOS. That definitely would affect the whole business ecosystem, whether you like it or not. Thanks for the writeup!