It took Jacob Rothman two decades to build a Chinese manufacturing business with his friends and family. Now the 49-year-old American executive says customers want him to make some of his grilling tools and kitchen products elsewhere. He knows it isn’t going to be easy.
“There’s not a customer that we have that isn’t pressuring us, suggesting, hoping that we will build factories outside of China,” says the co-chief executive of Velong Enterprises Co., which has six factories in mainland China and serves big retailers and consumer brands such as
and grill maker
Yet “there’s nothing like China,” he added. “We’ve built this supply chain for 30 years to work like a Swiss clock. There’s just nothing like it.”
Decoupling from China will be slow, difficult and expensive for companies beginning to rethink their dependency on the world’s second-largest economy. Some are doing so because of rising tensions between Beijing and Washington, D.C., on everything from trade, technology and security to Taiwan, a self-ruled island that China claims as its own.
The differences threaten to unravel decades of economic integration. Many lawmakers in Washington now want certain products to be manufactured in the U.S., and the Biden administration has imposed new restrictions on semiconductor exports to China. Chinese leaders also want to rely more heavily on homegrown suppliers. The supply-chain snarls unleashed by the pandemic and disruptions caused by China’s Covid-19 lockdowns further strained relations between the countries.
Investment by American companies in China was already slowing before the pandemic. U.S. firms invested $13 billion there in 2019, down from a 2012 high point of $15.4 billion, according to data compiled by research group Rhodium Group. Investment then sank to just $8.4 billion last year.
It isn’t going to be easy for the U.S. to wean itself from China. That country’s share of U.S. imports has shrunk in recent years, mostly as a result of tariffs, but it remains significant. The value of goods taken in from China was 17% of all U.S. imports over the first eight months of this year, according to U.S. Census Bureau data. That was a larger percentage than any other country even though it fell from 22% in 2017, the year before the Trump administration imposed duties on a range of Chinese goods.
Yuki Zhong (2), Benny Su
The turmoil of recent years was enough for some American executives to diversify their supply chain networks. Companies that make
beer coolers, Roomba vacuums and
cameras were among the U.S. manufacturers that shifted production to countries outside of China as trade tensions mounted during the Trump administration. New York fragrance seller
Inter Parfums Inc.
decided to move its operations back to the U.S. during the pandemic following disruptions at its factory in Shanghai. Among more than 300 U.S. companies recently surveyed by the American Chamber of Commerce in Shanghai, 18% now rank China as No. 1 in their global investment plans, down from 27% in 2021.
Shifting away from China presents numerous challenges, as Mr. Rothman says he is discovering. His company has expanded into Cambodia and entered joint ventures in Vietnam and India in recent years. Mr. Rothman says he has also been scoping out factories in Mexico and Turkey and looking at the potential of the Philippines. His company employs roughly 1,200 among its six mainland China factories and 600 outside China.
Each option has drawbacks. Cambodia and Vietnam are promising but far smaller in terms of capacity and population, he says. Factories in Vietnam are already jam-packed and have limited available space. Turkey has gleaming, high-tech factories but is beset by rampant inflation, complicating the management of costs and pricing. India has huge potential but needs newer infrastructure, such as better roads, Mr. Rothman says.
No country can compete with the scale and sophistication of China’s infrastructure, he says. Getting the right factories, people, equipment and raw material supplies to come together is like “landing a jet on an aircraft carrier.”
Mr. Rothman has invested decades of his life getting to know how things work in China. After growing up in California and studying religion at Bowdoin College in Maine, he says he thought he was going to be a rabbi. Instead he went to China so he could help source and develop products for his family’s business, a California broom-and-mop maker called National Broom Co. As he arrived in China, National Broom started producing electronic gadgets and gifts that might land on retail shelves during the holidays.
He learned to speak fluent Mandarin with help from a tutor in San Francisco, a grammar book and a dictionary. He tried to immerse himself in China in a way that many Westerners didn’t. He stayed at local Chinese hotels instead of the Sheraton or the Westin and took the bus instead of relying on drivers, striking up conversations with strangers to improve his language skills. He eventually married a Chinese woman.
Mr. Rothman’s commitment to the country deepened when he became partners with Chen Jingqiu, a Chinese man who had served as a vendor to his family’s business. Mr. Chen was the initial founder of Velong Enterprises in 2003 with Cao Yushu, the businesswoman who would become Mr. Rothman’s wife. Mr. Chen was located in the southern coastal city of Yangjiang.
The two men invested in new machinery and over the years amassed an impressive list of Western clients that included Walmart and Weber, retailers
Dollar General Corp.
Loblaw Companies Ltd.
, as well as brands such as Mr. Bar-B-Q and Char-Broil. By 2012, Mr. Rothman left his family’s business so he could focus on Velong full time. In 2013, the firm’s annual revenue was $32 million, up from roughly $3.8 million a decade earlier.
A spokeswoman for Walmart says the company’s sourcing approach “includes a variety of complementary strategies and relationships with both established and new suppliers.” The other companies didn’t respond to requests for comment.
Mr. Rothman’s partnership with Mr. Chen came to embody a tight interdependence between the countries as well as their families. His wife, Ms. Cao, and Mr. Chen’s wife, Chen Jing, ran the company’s finances. “It’s about China and the U.S. working together,” Mr. Rothman says.
They had disagreements, too. Mr. Rothman says he once got into an argument with Mr. Chen over how to handle a customer and was so upset he stormed out of the factory and sped away on a motorcycle taxi. Mr. Chen pursued him in his car for miles, he says, pleading with him at stop lights to return to the factory to work it out. “Eventually I calmed down. Paid the motorcycle driver and…went back to work,” he says.
They first started hearing from customers who wanted factories outside China early in
presidency, Mr. Rothman says, and the questions intensified after tariffs were imposed on a range of Chinese-made goods in 2018. After an initial foray outside the country with a joint venture in Vietnam, Velong spent $5 million building a factory in Cambodia to make grill and furniture covers, with production starting in early 2020. The company picked Cambodia because exports to the U.S. from there are duty free, labor costs are low and it was cheaper and easier to find space than in Vietnam.
Then the pandemic hit. China’s strict border controls meant some technical managers couldn’t visit the factory to supervise production. Hiring workers and managing the factory through its opening was done remotely. Business still soared as locked-down consumers in the West splurged on new grills and kitchenware; the company’s revenue hit a high of nearly $160 million in 2021.
That surge reversed when high inflation and rising interest rates helped depress consumer demand, slowing orders for new goods from Velong’s factories, including its fledgling operation in Cambodia. Velong hasn’t yet recouped its $5 million investment there, Mr. Rothman says. The plan is to add production lines making kitchen timers, thermometers and other electronic devices and build a school to help employees develop skills in English, accounting and business management, Mr. Rothman says.
Velong’s joint venture in Vietnam churns out chopping boards and charging cables. Another in India makes brassware and wrought-iron home decorations.
But none of these places can compete with China, according to Mr. Rothman, who says he has toured factories in Vietnam, India and Mexico where assembly lines are poorly organized and easily-automated tasks such as cutting and polishing sheets of metal are done by hand, limiting the speed of production.
In Mexico, he says, he can’t get the type of plastic needed to make grill or outdoor furniture covers; it has to come from China. In Vietnam and Cambodia, he says he needs to ship in steel and electronic components such as temperature sensors for thermometers. They also come from China, he says.
Making these overseas forays pay over the long term is another challenge. Mr. Rothman says he has nightmares about picking the wrong location and being saddled with a factory nobody wants to use. Customers, he says, are eager to make the move but aren’t always forthcoming with the business to make it work.
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Decoupling from China “is going to happen in dribs and drabs. And it’s going to increase over time. But it isn’t going to be easy.”
The pressures to look elsewhere aren’t abating this year, as inflation surges and a war rages in Ukraine. The company’s revenue is expected to drop 30% from 2021. “Some of our customers are losing that confidence in China now. But that’s beyond our control,” says Ms. Cao. Mr. Chen says 2022 feels like a turning point: “The world may no longer rely on China as the world’s factory floor going forward.”
After decades of shuttling between China and the U.S., Mr. Rothman and his wife bought a house in Shanghai, intending to make a permanent home. They were due to move in over the summer after finishing renovations, but lockdowns caused delays. They are hoping to finally move during November.
Mr. Rothman says he frets about his 12-year-old son’s education, after droves of foreign teachers at Shanghai’s international schools fled the city to escape life under the threat of lockdown. This year, during a lockdown, Mr. Rothman spent two weeks teaching English to his Chinese neighbors’ children.
“I don’t want to leave here. I’ve invested 20 years of my life here. But I will, if I have to,” he says.
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