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Chinese factories face steep tariffs for goods destined

for the

US

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For a US-owned toy factory in China, tariffs are an

existential

threat

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CEO could be forced to lay off employees in the US and

China

By Nicholas P. Brown

May 11 (Reuters) - The emails started pouring in on

April 9, the day President Donald Trump's 145% tariff on Chinese

imports took effect. Clients were canceling orders for toys from

Huntar Company Inc.'s factory in Guangdong Province, China.

But Huntar CEO Jason Cheung, 45, had already halted

production at the 600,000-square-foot facility in Shaoguan. He

saw the tariff for what it was: an existential threat to his

company, which manufactures educational toys bound for the

shelves of Walmart ( WMT ) and Target ( TGT ), like Learning

Resources Inc's Numberblocks, which help teach kids math.

"I needed to start saving money as soon as possible," Cheung

said. In the four weeks since, he has cut production by 60% to

70%, laid off a third of the factory's 400 Chinese workers, and

reduced hours and wages to those still employed.

Now, he's pursuing a frantic, long-shot effort to move his

operation to Vietnam before the company his dad founded 42 years

ago runs out of money.

He figures he has about a month.

Huntar's plight typifies a crisis facing countless factories in

China, where about 80% of toys sold in the U.S. are

manufactured, according to trade group The Toy Association. New

orders have fallen sharply amid a brutal trade war with the

United States that threatens to devastate the sector in both

countries.

Huntar is also unique in one key way: based in the U.S., it

straddles both sides of the trade war.

On paper, Cheung is Trump's bogeyman, the Chinese factory

owner taking American jobs. But he's also the U.S. small

business owner tariffs were meant to protect. He's the American

son of a Chinese immigrant, running a second-generation

family-owned business that employs 15 people in the U.S. -

people who would lose their jobs if Huntar falters.

Trump has said tariffs will incentivize companies to reshore

manufacturing, or, at least, drive it out of China.

Huntar illustrates why economists say that's unlikely: a

dearth of facilities and workers with toy making expertise in

other countries; heavy equipment that's hard to move and would

cost millions of dollars to replace; and, most acutely, no time

to solve those hurdles before coffers run dry.

More likely, factories like Cheung's will simply shut down, a

prospect that drove Beijing to the negotiating table with U.S.

officials in Geneva over the weekend, three sources familiar

with the Chinese government's thinking told Reuters.

Realistically, China cannot replace U.S. market demand for

product categories like toys, furniture, and textiles, which are

already feeling the impact of tariffs, one of the officials

said. As trade talks began, Trump signaled he was open to

cutting China tariffs to 80%.

That wouldn't help Huntar, Cheung says, noting that any tariff

rate over about 50% will make survival difficult. On a practical

level, there's no difference between 80% and the 145% tariffs

he's currently facing.

Crises have hit Huntar before, Cheung says, but not like

this. The 2008 recession brought a steady slowdown, one he could

plan around. And the COVID pandemic dealt a blow, but his volume

of production remained high enough to keep him afloat through a

temporary slump.

This time, he says, "our manufacturing business essentially

halted overnight." Cheung is starting to feel like his only hope

is just that - hope.

"I refresh my 'tariff' Google search five or six times a

day, hoping something's changed," he says.

A DREAM AND A LUCKY DESK

Huntar manufactures toys for U.S., Canadian and European

sellers, like Learning Resources Inc and Play-a-Maze, which

distribute them to retailers or sell directly to consumers.

It also makes its own educational toys under its Popular

Playthings brand, which it has had to stop shipping to the U.S.,

costing the company hundreds of thousands of dollars so far,

Cheung estimates.

American-owned factories in China are uncommon, as Chinese

law makes it difficult and costly for foreign entities to own

them, says attorney Dan Harris, a partner at Harris Sliwoski who

focuses on international manufacturing law.

But Huntar has roots in a business Cheung's father set up in

1983, a few years after escaping communist China and settling in

California's Bay Area.

Cheung grew up in San Francisco's Inner Richmond district,

he says, in a small house whose broken door you could simply

kick open. His father would sell clothes and furniture at a flea

market to augment his janitor's wages, with Cheung tagging

along, bored to tears.

As the operation matured, Cheung's father set up a factory

in China, to exert more control over quality. Cheung, who joined

the company in 2004, still uses the desk his father set up in

their living room decades ago.

"We think maybe it's lucky or something," he says.

The last few weeks have been anything but lucky. The factory

is sitting on $750,000 in canceled shipments - value Cheung

couldn't fully recover even if the trade war ended, because his

shipping costs would surely spike as factories raced to clear

backlogs. That's what happened after COVID, Cheung recalls, when

shipping costs ballooned from $2,000 per container to more than

$20,000.

"They don't deserve this," said Rick Woldenberg, CEO of toy

company Learning Resources, and a client of Cheung's since his

father was in charge more than 20 years ago.

Woldenberg has canceled future production in China, saying

his annual tariffs would jump from $2 million to $100 million.

"It's not who we want to be," Woldenberg said, "but they know we

have no choice."

According to an April survey by the Toy Association, more

than 45% of small and mid-sized toy companies in the U.S. say

China tariffs will put them out of business within weeks or

months.

Learning Resources, which employs 500 people in the U.S. and

manufactures 60% of its products in China, has sued the U.S.

government, asking a federal judge to stop tariffs from taking

effect.

"If nothing changes, we'll be crippled," Woldenberg said.

'CANNIBALIZE MYSELF'

Cheung has been scouring his contact list, calling factories

in Vietnam in hopes of finding a new home for Huntar.

Moving to the U.S. is out of the question. Wages here are so

high that manufacturing stateside would be even more expensive

than staying in China and absorbing the tariffs, Cheung says.

Even in Vietnam, financial and logistical hurdles are

proving too tall.

Few factories have enough space to handle his operation, and

competition is high among others looking to move. Even if he

found a good spot, Cheung would have to train a new staff and

run safety and quality control checks that could easily take

months.

There's also the question of infrastructure. Cheung's

factory is solar-powered, helping ensure profitability in a

thin-margin business. It has specific HVAC and wastewater

systems designed to negate the environmental risks of spray

paint and chemicals used to decorate toys. And it owns more than

30 injection machines, each weighing several tons, which craft

toys by pumping molten plastic to steel casings. These likely

can't be moved, and Cheung says he's not sure where he'd find

the money - well over $1 million - to buy new ones.

A more realistic move would be to outsource certain

operations and shutter others. Cheung could cut losses by

finding a Vietnamese factory to take Huntar's Popular Playthings

proprietary line, while ditching the business of manufacturing

toys for third party clients.

Going all-in - that is, keeping his factory intact in China

in hopes the trade war is resolved - is a higher-risk,

higher-reward gambit. If tariffs came down quickly, his company

would survive, but if they didn't, he'd lose everything. The

costs of keeping a large factory running, and paying employees,

while producing just a fraction of his normal output, would sink

him within several weeks, he says.

"I'm approaching this moment where I have to choose

basically to cannibalize myself," he says.

It's hard to pare down a business that once embodied the

American dream. Cheung's father came to the U.S. in 1978, after

escaping China by swimming across the Shenzhen River into Hong

Kong - all for a shot at freedom. He "wanted to see this

business continue through me and hopefully his grandkids,"

Cheung says.

His dad, he says, is feeling hopeless these days. Though

grateful for the life he built here, America's sheen as a land

of milk and honey has worn off. "His idea of the U.S. has

definitely changed," Cheung says.