Tariffs may put Minnesota housewares firm on the brink

Washington — If the latest round of President Donald Trump's proposed tariffs on China is enacted, it may be the end of the line for plastic home goods company Madesmart Housewares.

Devee McNally, founder and CEO of the 29-year-old Minnesota company, says 25 percent tariffs will be a huge financial blow, adding $5 million to the $20 million the firm spends annually manufacturing and importing its kitchen products, boxes and other products from China.

"The overall impact would wipe out our entire profits, virtually putting Madesmart out of business," she said.

The company designs and markets products under its own brand, but since 2004 has contracted out all of its production to molding factories in China.

In some ways, that's the outsourcing business model the Trump administration wants to change with tariffs. It argues that by raising costs for Chinese goods, it can boost manufacturing and jobs in the United States.

But Madesmart executives say it's not that simple. Tariffs will hurt firms like theirs.

"It sounds good in theory, but there are so many U.S. companies that are relying on the less expensive manufacturing that can be done overseas that it is going to put a lot of these smaller organizations out of business," said Jason Seifert, chief financial and operations officer.

Given the on and off nature of the trade talks, it's not clear if this latest round of tariffs on $300 billion in Chinese imports will be enacted, or if Beijing and Washington will reach a settlement.

But the St. Paul-based company was not taking any chances. It pleaded its case for exemptions in a June 14 letter to the Office of the U.S. Trade Representative, as part of USTR's formal review.

It told government investigators it had previously tried and failed to build a profitable business manufacturing its plastic home products in the United States.

It owned an injection molding factory in Wisconsin until 2004 but closed it because it couldn't make money manufacturing against large competitors and those already buying from China. The company was near bankruptcy at that time, Seifert said.

Moving production to China turned out to be a "life-sustaining decision," McNally said, because it allowed the firm to transition into a profitable, 30-person design and development company whose products are sold in major retailers like the Container Store and Bed, Bath & Beyond.

McNally wrote that she wanted government officials to see the harm to her firm directly: "I hope to give a tangible example of the devastation it would bring to my small business and my 30 employees."

After escaping the first three rounds of tariffs, all of Madesmart's products are included in this latest $300 billion round.

Of course, all plastic housewares importers would face the same 25 percent tariff as Madesmart, potentially leveling the field.

But Seifert contends that small companies like Madesmart are disadvantaged against larger, better capitalized competitors with the resources to have production in more than one place.

"Our problem is we've never had the capital to do both," Seifert said. "It's easy to say, 'Why don't we just find another country or have another backup plan.' But in order to do that, we're spending millions of dollars in molds on something that may or may not happen."

Over the last year, the company has stepped up its efforts to look at sourcing in other countries, and it thinks Mexico may be the best option, he said.

But it's not necessarily a great option for an industry like plastic storage containers and home products, where every penny matters and making it as cheap as possible is crucial.

"It is still more expensive to produce down there and they also don't have as good of options as far as expertise as we do with China," Seifert said. "China is sort of known as the place to go to get your quality plastics."

Seifert said the company believes one of its competitive advantages is its ability to manage its supply chains in a way that brings in low-cost but attractive, well-designed products, on time to U.S. retailers. Building a new supply chain to meet both those sometimes competing goals would be challenging, he said.

For example, it continues to look at U.S. production. Seifert said U.S.-based custom molding and manufacturing companies regularly pitch for their business.

"We literally every year talk to a half-dozen companies that come into our company, they think they can do it and then we start telling them what our process is in China and what we're paying," he said. "And they get to the point where they don't even quote it.

"We would not be able to make a profit, we would not be able to survive, by producing in the U.S.," he said.

The tariff talk is particularly disheartening, he said, because apart from the planning for a potential existential crisis, business has been good.

"Our business has been booming; we're actually having our best year ever in 2019," he said. "Our sales are up 25 percent over what they were in 2018."

If the tariffs go ahead, Seifert said the firm's not quite sure what will happen.

Last week it put three months of inventory on container ships across the Pacific Ocean in an expensive, rushed order to beat potential tariffs and buy time.

Tariffs may lead Madesmart to layoffs and cutting the company back to a smaller version of itself, he said, pushing the firm into a "break-even-at-best scenario, if we're able to continue the business as it is."

The company argued that with average salaries of $75,000, it's created good jobs that could be lost.

In her letter to the USTR, McNally did what few have done in the thousands of written comments and among the hundreds testifying in person at the USTR's hearings, which stretched from June 17-25. She made it explicitly political.

"I voted for President Trump thinking it would be good to have a businessman in the White House," she said. "Little did I know this administration would be the biggest embolizing threat my company has ever faced."