Cutting the umbilical cord

The U.S. toy industry depends on more than kids' whimsy for its life. As if that weren't risky enough!

It depends, too, on continuous movement of that line of vessels stacked with colorful containers, stretching from China to the United States. The slightest disruption in that line could create havoc for the U.S. toy industry.

In the event of a disruption—whether it be an act of nature, backups at Customs resulting from intense Homeland Security, or picketing longshoremen—it's essential for a company to have a “Plan B.”

Anyone active in toy importing has experienced serious backups at California's Port of Long Beach, for example. In fact, importers held their collective breath last fall and winter, sweating out late shipments that might, or might not, arrive on time to meet customer deadlines. And that was without an act of nature or even a longshoreman's strike.

Recent experience, however, may be nothing compared with the coming crunch at U.S. ports.

It's no secret that the tremendous growth in Chinese export production fueled by the continuing hunger of U.S. consumers for cheap imports continues unabated.

Dr. Robert Hormats, currently vice chairman, Goldman Sachs (International) and managing director, Goldman Sachs & Co., envisions a Chinese manufacturing dynamo continuing to grow its production and an equally voracious American consumer continuing to seek low-priced foreign goods.

Add to this phenomenon: no plans for improved U.S. port development, railroad infrastructure or other logistics improvements.

According to Hormats, not only is the status quo a problem, but the ramifications from a terrorist attack would be significant. He noted that a bomb, even a small one, at the Port of Long Beach could cause major backups that would pale in comparison to the havoc wreaked by the 10-day longshoremen's strike two years ago.

Less than 100 years ago, the U.S. toy market was, like today, largely dominated by imports. At that time, however, the imports came from Germany rather than China. With the advent of World War I, U.S. ports were cut off from German imports and U.S. domestic toy manufacturing tripled in six years. It never looked back—well, at least for several decades it didn't. We may, in a few years—if not sooner—be facing a similar watershed. We may speculate on why there are no plans for import infrastructure development. Perhaps it is a quiet way for the U.S. government to limit imports without the use of tariffs. Perhaps it comes from a lack of vision.

Whatever the reason, U.S. toy importers are advised not to wait for the roof to fall in and then figure out what to do. There are things that can be done to mitigate the ever-increasing risk of shipment delays.

No one is suggesting a large shift in imports from Asia to North America. That will not likely happen, nor, perhaps, should it. Too many U.S. businesses have established infrastructures in Asia.

What we can do, however, is to think about and prepare for the “unthinkable”—whatever that happens to be—and to make sure that contingency plans and relationships are in place so that remedial action can be prompt.

Companies may want to sit down with experts who are well versed in logistics emergencies and get them to ask you the “tough” questions. (Please see “Asking the tough questions” on this page.) If you don't have answers, or don't like the answers you do have, then it might be time to consider taking the action steps needed to mitigate exposure.

Calculate the percentage of return on investment you are receiving on imported goods.

Determine your degree of risk. If you are entirely dependent upon imports and you are not in a position to carry over unsold inventory, then your risk premium could be extremely high.

Calculate the cost of producing those same products in Mexico, Canada or the United States, determine your percentage return from those sources, and then subtract out the risk premium and determine what kind of return that leaves.

Consider using alternative ports in Mexico, Canada or even underutilized ports on the Gulf Coast or Southeast.

Who knows? Moving back to North America may not sound so bad. It's happened before!