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One American Company’s Frontline View of The China Trade War

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Jay Foreman, Basic Fun, Trade War with China

With Jay Foreman, CEO of Basic Fun

This week, Steve spoke with Jay Foreman, CEO of Basic Fun, a company that develops and markets toys for collectors, both children and adults. The two discussed why outsourcing the production of goods is so critical for companies, especially small businesses. They also discussed how the trade war with China—and potentially elsewhere—may shape how profitable companies can be.

Outsourcing The Manufacturing Of Goods

Basic Fun, a toy company based in Boca Raton, Florida, designs, develops, manufactures, and markets traditional toys to both adult and child collectors. Their products such as Lite Brite, My Little Pony, Lincoln Logs, and Tinkertoys are all sold to traditional mass-market retailers like Walmart, Target, as well as to online retailers such as Amazon.

While all of the designing and developing of the toys is done in the U.S., the day-to-day manufacturing—or 90% of it—is outsourced to contract manufacturers in China. This is actually the standard model of manufacturing for many companies because it’s hard to find manufacturers in the States with the right skills and the lowest cost.

It’s not all about the lowest labor costs, however, but about finding the most efficient labor market and the most efficient workplaces to manufacture goods. China has been developing efficient, low-cost spaces with skilled manufacturers over the past 30 years. Largely because the Chinese government has gotten involved in helping to develop such industries, China has become the most efficient industrial manufacturing hub in the world.

The Trade War With China

Trade wars are nothing new. In terms of China, we’re actually on the third or fourth wave of new tariffs. Products like steel, aluminum, clothing, and electronics have all become subject to tariffs.

Toy companies, however, are part of the last tranche, that is, the last wave of tariffs, and so have been spared for the time being. For companies like Basic Fun, this is huge. Had the tariffs taken effect sooner, the additional costs would be ultimately transferred to the consumers, which means toys would go up in price by about 20% right before Christmas.

What actually ended up happening was a temporary deal whereby the U.S. won’t increase tariffs on the goods already being taxed and the Chinese have agreed to purchase more goods from the U.S., such as soybeans and pork bellies.

The Chinese have also agreed to open up financial service opportunities for Wall Street since this deal wouldn’t go through if Wall Street didn’t get something out of it.

Ultimately, this arrangement helped give the trade war with China a little slack and allowed us to kick the can down the road a bit. The rest of the deal and any future tariff issues won’t happen until 2020.

Having pending tariffs coming in the next year, however, leads to a lot of uncertainty, the last thing any business wants. You can equate it to a hurricane beginning to take form. Is it going to hit? How hard is it going to hit? Where will it strike? What will the company look like after? Understandably, pending tariff negotiations create an environment of uncertainty that makes it very hard to do business.

Bringing Manufacturing Jobs Back To The States

It seems that the presiding theme of the trade war was to encourage U.S. companies to bring manufacturing jobs back to the States where we pride ourselves on American workers’ abilities to efficiently and skillfully manufacture goods.

But the reality is that China’s got the manufacturing industry cornered. In terms of toys, they manufacture about 75% to 80%, dominating the toy manufacturing market.

In addition, there’s the issue of supply chain management. Regardless of what you’re making, you’re gathering components. So, in the U.S., Basic Fun sources components for toys from manufacturers in California, Texas, Florida, and Kansas. If each one of these components goes toward making the same toy, the company has to pay for the shipment of each one individually and wait for it to be manufactured and shipped. China, on the other hand, has developed a supply chain ecosystem, meaning a company can get every component for its goods and have the goods assembled within a period of days.

So, when it comes to the light to medium industrial manufacturing space, China really has the market secured. The U.S. doesn’t import tractors or airplanes from China. We import items like toys, shoes, and smartphones. They have their manufacturing, and we have ours. We benefit from importing the goods they can easily manufacture and assemble because it means lower costs for consumers.

Moving Manufacturing To Another Country

There have been recommendations to move manufacturing to other countries if the trade war with China continues, countries such as India or Vietnam. Each of these countries has issues of their own. A lot of time and risk goes into investing in developing a new manufacturing relationship, especially with countries that haven’t proven themselves.

India and Vietnam, for example, have tended to have non-existent safety standards, warehouses with no indoor plumbing, and unacceptable child labor practices. These aren’t manufacturers that most companies are willing to use, especially when products are going into the hands of children. Down the line, India might be an option if they work positively to develop their manufacturing industry, but today the country just isn’t ready.

The Big Picture

There’s some speculation that China’s having mastered the manufacturing industry is a tactic to dominate the world economy. To be objective, what China has done is to fill a space in the market that benefits them and benefits companies they work with. They have the infrastructure, they have the people, and they have the skill.

China is indeed our biggest competitor, however, as Jay says, it makes good business sense to use their particular expertise for certain items. A product that is assembled in China must first be designed and developed and then sold and marketed, all here in the U.S which remains the dominant force in global manufacturing.

To learn more about Jay and his company, head to the Basic Fun website!

Disclosure: The opinions expressed are those of the interviewee and not necessarily of the radio show. Interviewee is not a representative of the radio show. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by the radio show.

Read The Entire Transcript Here

Steve Pomeranz: I want to introduce Jay Foreman. He’s an American businessman who lives and works in Boca Raton, Florida. He’s president and CEO of Basic Fun which develops and markets toys for children and adult collectors, makers of such well-known toys as Lite Brite, Lincoln Logs, Tinkertoys, Play Hut, and K’Nex. Also, Jay has been doing business and traveling in China for 30 years, and this is why I’ve asked him to join me today. Jay Foreman, welcome to the show.

Jay Foreman: Great to be here with you.

Steve Pomeranz: It’s been a while. Now you’ve been very vocal of late writing editorials and conducting interviews on major business channels, expressing your thoughts about the current trade war with China because it’s directly affecting you. Generally, on this show, we discuss things in the broadest context, but I wanted to bring you in to discuss the effect kind of as a soldier on the field. You’re fighting the battle every day and I want to look more at the micro-picture rather than the macro-picture. To get us started, tell us about your business.

Jay Foreman: Sure. We design, develop, manufacture, and market traditional toys, kids toys—Lite Brite, My Little Pony, Lincoln Logs, Tinkertoys, some of the greatest toys ever made that are still sold in the market today. We sell them to traditional mass-market retailers.

Steve Pomeranz: The Walmarts of the world.

Jay Foreman: The Walmart, Target, through Amazon, online retailers, many specialty retailers all over the United States and globally. We manufacturer probably 90% of our products in China. We do actually 10% of our manufacturing here in the United States. It’s not easy to manufacture toys here in the US because it’s not easy to find labor that can do it. But we make kids’ toys.

Steve Pomeranz: Where’s the design done?

Jay Foreman: The design is all done here. One of the misnomers is everything’s made in China. But actually, we have a staff here in Boca Raton and in the United States with about 100 people throughout the US and in Boca Raton that design, develop, engineer, distribute, sell, really high-skill, high-value labor. Everybody here in my company, almost everybody in my company, makes the median income for the area or well, well above. And we outsource the other manufacturing. The day-to-day manufacturing of the product we hand to contract manufacturers in China.

Steve Pomeranz: Which has been a model for many, many years. If you think of an iPhone, it’s designed pretty much in the United States, but the manufacturing is done elsewhere. And if you look back in history, even going back as far as, let’s say, the American Revolution, once the Revolution was over, and we were friends again with Britain, they were exporting or sending their manufacturing to us because we were the lowest cost manufacturer or supplier of these goods. And that’s happened throughout the decades and decades and hundreds of years. And it continues. Now even China is not the lowest-cost manufacturer anymore. And now there are other countries.

Jay Foreman: There certainly are. Just to go back to the Revolution, remember, importing tea into the Colonies.

Steve Pomeranz: That’s what started it all.

Jay Foreman: Started the whole thing, as that’s the first trade war ever.

Steve Pomeranz: There you go.

Jay Foreman: So, yeah, and it’s not always what is the lowest labor cost. It’s what is the most efficient labor market and efficient workplace to manufacture. And that’s what has been developed in China over the last 30 years. It’s the most efficient light and medium industrial manufacturing hub in the world because they have a huge labor pool and the government has been very involved in helping develop these industries.

Steve Pomeranz: I want to get into that a little bit later because that gets into some of the details. Getting right to it, we’re in a period of time where there is a trade war. We are in a trade war with China and other countries as well, or at least where we’re blustering that we’re threatening a trade war with other countries. But the bottom line is that that’s having a direct effect on you because the tool is tariffs. How are tariffs affecting you right now?

Jay Foreman: Interestingly enough, over the last year-and-a-half or so, tariffs had been imposed in waves. We’re now well into the third and the early fourth wave of tariffs. Many products, steel, aluminum, clothing, certain levels of electronics, have all been placed under tariffs. The last tranche, the last piece of the tariffs, which is about 200 billion out of 800 billion in China trade is still pending and that’s due to go in effect on December 15th. That’s what’s being discussed right now. Fortunately for us, toys are part of that last tranche. We were spared this year. The administration didn’t want to be cast as the Grinch who stole Christmas.

Steve Pomeranz: What would have happened had the tariffs come in earlier?

Jay Foreman: If the tariffs would have come in, prices on toys would have probably gone up 20% leading into the Christmas season.

Steve Pomeranz: You guys were very vocal and you’ve kind of coined this, the Grinch who stole Christmas, and they heard that.

Jay Foreman: They did hear that. They did. We didn’t have the ability, I didn’t have the ability to get a lunch date with Donald Trump like Tim Cook from Apple did. He got to plead his case one on one. We had to do it through the press.

But he listened to both of us apparently. And we got pushed to the last tranche and now the current negotiations are really what they’re speaking about is something called the skinny deal” and they’re looking to make the skinny deal. And what’s the skinny deal? The skinny deal means we will not impose the last tranche of tariffs. Things like toys and smartphones, the prices will not increase on those. We won’t increase the tariffs on the current range of products that are still under tariff, although they will remain and the Chinese will agree to buy more soybeans and pork belly.

Steve Pomeranz: Oh, that’s what that deal was.

Jay Foreman: And they’ll open up financial services opportunities for Wall Street because, of course, Wall Street always gets their piece. And a few other things. It’s a partial way to a deal, so both sides can claim a level of victory, which it legitimately would be. And then they’ll move the rest of the deal into 2020.

Steve Pomeranz: As a businessman who very much depends on the seasonality of things, Christmas, of course, we’re talking about, this is going to push it out to the spring.

Jay Foreman: This would push it out to the spring. But interestingly enough, right now we just came through a sales cycle, a market-period cycle where we were showing next Christmas’s toys, Christmas 2022 to our customers are already previewing next Christmas toys. The idea is if tariffs were imposed, they would be imposed at the end of this year and they would start to take place in 2020, so prices would begin to go up in 2020. But what just happens along the way—and your listeners may know that follow business—that the last thing business wants is uncertainty.

And these pending tariffs are uncertainty. I equate it to almost those of us in South Florida who know when a hurricane is coming our way, you see it for 10, 12 days. It’s looming, it’s looming, it’s looming. Is it going to hit us? Is it going to go north? Is it going to go south? And that’s really what it feels like being involved with these tariff negotiations. Are they going to happen? Are they going to hit us? Are they not going to? And that just makes it very difficult to do business.

Steve Pomeranz: The idea of the tariffs, the idea of the trade war is the message that I’m getting as a layperson is to bring back this manufacturing to the US. Bring back the old days.

Jay Foreman: Make it here.

Steve Pomeranz: Yeah, make it here because we used to pride ourselves on the quality and the efficiency and so on and the ingenuity of manufacturing. That used to be our calling card. But that is no longer, so what the idea is, let’s bring back those old days. How much in terms of toy production, how much does China actually produce of the world toy production?

Jay Foreman: China’s producing probably about 75 or 80% of the global toy business. And they are the dominant player in the manufacturing of this category of merchandise.

Steve Pomeranz: Why is that per se? What is it about doing business in China that makes it so attractive for you?

Jay Foreman: Well, over the last 30 years, really the country has developed its labor pool and its manufacturing base around this really efficient model of producing product. Whether it’s the governments or the banks there, they’re very aggressive about helping to sponsor and support businesses getting set up with equipment and supporting their labor force. The Chinese people, like the American people are incredibly industrious, hardworking people. They are very bottom-line oriented. It’s just become a really great place for medium and light industrial.

Steve Pomeranz: But it’s more than that because there’s a supply chain. It’s not just looking at their big factories, but where are they getting the parts? How soon can they get the parts? Can they do them just in time? Are they ordering them from some other part of the world? Explain that to us a little bit.

Jay Foreman: Sure. And the idea is when you’re creating, whether it’s a toy telephone or an iPhone, you’re gathering dozens and dozens of parts. In many countries like this country, you might find components, some components in California, some in Chicago, some in New England and in Kansas.

And I might be manufacturing in Florida or in Texas. And I’ve got to bring all those parts in. China’s developed the whole supply chain in very concentrated areas so within days, even same day, you can get component parts for your entire product very efficiently and very cheaply to put together and assemble into one. It is an ecosystem that’s been developed and it works really well again, for light industrial product. Just remember, we don’t import any cars from China. We don’t import tractors from China. We don’t import jet airplanes from China. We import shoes and toys and tchotchkes. And they do that well and we do our stuff well.

Steve Pomeranz: My guest is Jay Foreman, he’s an American businessman and he’s in the toy business. We’re trying to get a micro-view from the person or the soldier on the field. The person who’s actually out there doing it day-to-day. We’ll be right back.

I’m back with Jay Foreman, a successful toy manufacturer and creator and distributor and a person who has been doing business with China for 30 years. We’re trying to find out kind of  what the man in the street’s view of this is, who’s actually fighting the fight every single day. Welcome back, Jay.

Jay Foreman: Thank you. Great to be here.

Steve Pomeranz: We were talking before the break, we were talking about the supply chain idea, and how quickly you can get material from one place to another, so you can have it all assembled and China has figured out a very efficient way of doing that and making it more attractive. Actually, the toy industry had a crisis in 2005 which kind of led to this. Tell us quickly about that.

Jay Foreman: So in 2005, some paint with lead in it got to a toy factory and was put on Hot Wheels cars and literally you would have to … your child would have to lick a Hot Wheels car for an hour a day, for 150 days, and then swallow the car to get sick.

Steve Pomeranz: It didn’t matter.

Jay Foreman: But it didn’t matter because the paint had a higher level of lead. So that forced us all to create this super intense level of quality control and oversight, which in the last 15 years or so we put into place which makes toys from China one of the safest products you can give to a child or give to anybody. In fact, there’s probably a lot of other types of products that are way—I don’t want to say more dangerous—but not as safe as a toy from China because we have really, really detailed protocols.

Steve Pomeranz: That was a real Achilles heel for the toy industry and that’s one thing you didn’t want to mess with, so you got that fixed.

Jay Foreman: We had to get that fixed because it just taints … One bad apple taints the whole barrel.

Steve Pomeranz: Okay, so we got the supply chain idea and we got the reason that it’s so good. Why can’t we just bring back this manufacturing back to the United States? As a matter of fact, you were directed by the president to do that. Right? Bring back your manufacturing to the U.S. Why not? Why can’t you do that?

Jay Foreman: In a capitalist society? That’s pretty amazing where the government is ordering you to move your business somewhere. But I’ll take it as it comes and I would say it’s very simple. It’s supply of labor. And I’ll give you a very quick story. When I started my career in the toy business in 1986, I started working in a toy factory in Brooklyn, New York.

We made the toys in Brooklyn, New York. We made stuffed animals, we cut them, we sold them, we stuffed them, we bagged them. And we trucked them out of Brooklyn, New York to a big factory in Williamsburg. And back then in 1986, I didn’t own the factory, I just worked there. 60% of our workforce was undocumented aliens because we couldn’t find enough workers in New York.

Steve Pomeranz: Even back then.

Jay Foreman: Even back then [crosstalk 00:02:59] 33 years ago.

Steve Pomeranz: They didn’t want to sew.

Jay Foreman: It was a skill that was tough to come by. It was tough to be competitive at the salaries that you had to pay. People would rather do other things than rather go into it. So now fast forward 33 years later, it’s no more attractive of an occupation to either sew stuffed animals or paint eyeballs on Barbie dolls.

Steve Pomeranz: Yeah.

Jay Foreman: But we don’t even have a labor force even to speak of, to draw from. So to bring back production to a country that is struggling for labor in a system where we’re kind of closing the border off to low-skilled labor just really makes no sense. It’s impossible. You can’t do both.

Steve Pomeranz: So you on a day-to-day level, you look at this and I say, “Well, let me go get a factory and X, Y, Z. There are these opportunity zones now. You can get tax breaks.” But the question is can you coordinate the supply chain? Can you start all of this again? Why don’t you just consider going to India or to Vietnam?

Jay Foreman: Sure. Well, each of those markets have their own issues, in general, of course, because I have a supply chain and a production base that works and it costs a lot of capital to try to move. It takes a lot of time and you’re also taking a lot of risks. India, for example, it’s a wonderful country, but it hasn’t developed yet as a manufacturing base.

The workplace standards there, the use of child labor, other types of labor, sanitary conditions … You’re talking about a country where 50% of the people don’t even use an indoor restroom. They don’t even have a restroom and you’re going to make things that you’re going to put in children’s hands and mouths in a country that’s not ready for that yet. They haven’t spent the time and effort to develop it. So India, while they have a huge population and potentially down the line will be an opportunity for us, today it’s not.

Vietnam, on the other hand, is a really great growing industrious manufacturing base, but it’s growing so fast. If you just moved 5% of the production out of China into Vietnam, which has got a population of less than 10% of China, you’ll max out their capacity in a couple years. It’s almost becoming impossible to manufacture in Vietnam and the costs are going up exponentially.

Steve Pomeranz: It’s also giving a small company a huge government order.

Jay Foreman: Absolutely.

Steve Pomeranz: It’s great to have the numbers on the books, but can you actually really efficiently-

Jay Foreman: They’re maxed out.

Steve Pomeranz: Now in one of your articles, you mention this idea getting back to India, that you may visit a car plant in India and it may look like a very modern car plant, but there’s more to it than that.

Jay Foreman: Right. So you have to go behind the scenes and go to the subcontract factories that supplied a lot of the parts, the seats, the steering wheel, some of the components and you have to look and see where those things are manufactured and, of course, cars are a pretty important thing. You don’t want it to be done in a shoddy environment. So your wheels fall off of your car. But again, we don’t import cars from India, so we don’t have to worry about that.

Steve Pomeranz: Yeah.

Jay Foreman: But you don’t want to put toys, one of the most precious commodities that you would give to one of the most-

Steve Pomeranz: Your child.

Jay Foreman: … vulnerable parts of our community, children, someplace you can’t really trust and we can trust the manufacturing that’s done in China right now, and it doesn’t make sense to upset it and try to move it around. It just would be a foolish thing to do.

Steve Pomeranz: Now you’ve … Looking at the bigger picture here. So there is a prevailing argument that our policy towards China has been based on a fantasy or wishful thinking. It’s the belief that China’s a peaceful, developing country, working hard to participate in global markets to ultimately become freer and more open.

I think of late, we’ve seen that that’s not really the truth. When in fact really it seems like their goal is, and I don’t know if this is hyperbole, but their goal is to dominate the world economy. So they’ve created these supply chains that kind of locked manufacturers in because they’re so good, and they’ve also subsidized their own state-owned companies and industries to create an unfair playing field and lots of reports of them pilfering intellectual property, which is another big fear. And these seem to be real world, real travails that are going to have an effect on all of us in the short term. I realize that you’re operating a business here, you’re not a think tank, but can you see your way to a larger picture here? I mean, if in fact what I’ve just said is correct and our competitor’s looking for total domination.

Jay Foreman: Right.

Steve Pomeranz: Is this just a small price to pay? You’re thinking about next quarter, next year. Do you have any thoughts on the bigger picture?

Jay Foreman: Sure. I mean, I could take my—I’m a small businessman—hat off and put I’m an American hat on. I’m not here to defend China and their government or their system. I’m just here to really talk a little bit more common sense and practicality. So to think that China’s interest is to dominate the world.

I mean, I don’t know that that’s any different than our interests. We’re dominating the world right now. We’ve been dominating the world for over a hundred years. I mean, they called the last century, the American century. What we’ve got to be doing is making sure we dominate the next century, but we can’t expect that other countries aren’t going to try to take that space away from us. I know we’re in baseball season right now, so we play in the WEL of the “world economic league,” and we’re-

Steve Pomeranz: It’s the big leagues though.

Jay Foreman: We’re the big leagues and they’re our biggest competitor. So maybe they’re going to bite our ear or kick us in the shins and whatever. But come on, we’re big boys. We can fight that. So that they can do, I think there’s a more rational way to approach trade, in just in my opinion, as a layperson. But somebody who’s been manufacturing for many years and one is try to be smart about what do we want to make here, what does it make sense to make here? This is a radio show, but I brought a prop with me, which is something called a chatter phone.

Steve Pomeranz: A chatter phone and so it’s Fisher-Price and I’m going to try to make a sound here. Does anybody remember that sound?

Jay Foreman: Yeah. That is the sound of an old rotary phone-

Steve Pomeranz: That’s right. Okay.

Jay Foreman: … that many generations of children have had over the years. And we make that phone in China and that phone costs $4 to make and it sells for $12. I hope I’m not giving away any trade secrets-

Steve Pomeranz: I hope not either.

Jay Foreman: … but there’s a lot of people involved that got to eat, have to eat between the four and the 12, okay. But at the same time, I’m holding in my hand a $600 iPhone, which is now almost obsolete because it’s probably an iPhone 6.

Steve Pomeranz: Yeah. That’s an iPhone 6?

Jay Foreman: I think, maybe.

Steve Pomeranz: Shame on you.

Jay Foreman: Right. The new iPhone-

Steve Pomeranz: Is the 11.

Jay Foreman: … is the 11 and it’s about $1,100.

Steve Pomeranz: It’s not quite that much, but it’s about-

Jay Foreman: $1,000.

Steve Pomeranz: 800 to 1,000, yeah.

Jay Foreman: And the $800 phone costs about $350 to make, so we’re talking about a phone that costs $4 to make versus a phone that costs 350 or $400 to make. My suggestion is let’s focus on maybe how to make iPhones in America and not worry so much about how to make chatter phones in America. The idea is let’s try to develop high-value manufacturing, high value to our economy and to our workforce.

Steve Pomeranz: Use some discernment here, not just kind of one wide brush painting everything, all products, no matter what price point they’re at and so on. Think a little bit more deeply about strategic initiatives for the next 25 years. What you want, what industries you want to protect. What, I mean, we love the toys, we love the toy industry, but is that really a national security industry, you know?

Jay Foreman: Right.

Steve Pomeranz: I think you guys …

Jay Foreman: Absolutely, and you just have to kind of pick your spots and pick where you want to really go after. I think that’s really the key and we’re not doing that right now. We’re approaching a very sophisticated, intricate process of dealing with one of our biggest trading partners with a hatchet and machete instead of with a scalpel. We need to approach it a little bit more intelligently.

Steve Pomeranz: Okay. So you’re not against this idea of competing at a high level with sharp elbows-

Jay Foreman: Not at all.

Steve Pomeranz: … but you’re saying let’s be smart about it.

Jay Foreman: Let’s be smart about it.

Steve Pomeranz: My guest, Jay Foreman, a businessman who owns Basic Fun!, which is a company that develops and markets toys and they make such well-known toys as Lite Bright, Lincoln Logs, Tinkertoys. And I chose these because I’m old and these I remember and also this familiar sound here, the chatter phone, right?

Jay Foreman: Indeed.

Steve Pomeranz: Thank you. Thank you, Jay. Thanks for joining me.

Jay Foreman: You’re welcome. Great to be here. Good. That was fun.

Steve Pomeranz: Hang on, hang on. As you know my mission is always to educate my listeners and remind you week after week, segment after segment, that we love to get your questions because we do. These are complicated times, which makes for complicated topics and I’m always here to answer them. So, if you have any questions about your portfolio, your kids, your kids’ kids, your retirement, your 401k, how to take better care of your family, anything financial that’s on your mind, I’m here with over 35 years of experience and I’d love to help you in any way I can. So go to stevepomeranz.com and go to the contact section and let me know how we can help. That’s stevepomeranz.com. Stevepomeranz.com.