China-to-Mexico Factory Shift Thrown in Disarray by Trump Threat
President Trump’s focus on China meant Mexico was a relatively cheap place to make products. Now the rug’s been pulled out.
(Bloomberg) -- In the past couple of years, Mattel Inc. has been consolidating more of its manufacturing in Mexico, shrinking its presence in China and other locales to cut costs on the Barbie dolls and Batman toys it sells around the world.
On Friday, its shares sank 7.2% on fears those playthings will soon get slapped with a tariff to enter the U.S.
Mattel isn’t alone. Around the globe, manufacturers have been betting that a renegotiated Nafta, rebranded as the USMCA, and President Trump’s focus on China meant Mexico was a relatively safe, cheap place to make products for export to the U.S. Now they’ve had the rug pulled out from under them and may have to reconsider as Trump threatens to put tariffs on imports from Mexico, which he’s betting will curb undocumented migration.
“It’s just crazy,” said Ross Baldwin, president of San Diego-based Tacna Services Inc., which manufactures goods in Mexico for other companies. He said he’d been getting a lot of inquiries from producers about moving output to Mexico from China to avoid tariffs. “It’s just out of the blue, especially when USMCA is in the middle of getting ratification.”
Mattel’s 2019 profit could be trimmed by $5 million to $15 million if tariffs are implemented on all Mexican goods, according to spokeswoman Dena Cook, with the impact depending on the level of levies that the U.S. implements. Trump has said the tariffs would start at 5% and could rise to as much as 25%. Mattel didn’t say whether it would absorb the cost or pass it on to retailers and consumers.
Big Gains
Mexico has seen big gains in shipments to the U.S. in categories where competing Chinese goods were hit with tariffs, from poster board to air conditioner parts. In all, U.S. imports of Mexican goods surged 10% to almost $350 billion last year. Meanwhile, the growth in shipments from China slowed by about a third.
Already a hub for production due to its proximity to the U.S. and low labor costs, Mexico seemed like a good bet, especially with an updated version of a North American trade agreement appearing to be near approval.
BMW AG, for example, now has to weigh higher prices for the sedans that are going to be produced at a $1 billion Mexican plant that’s set to open next week. U.S. solar-panel maker SunPower Corp., meanwhile, just finished overhauling its supply chain to survive the tariffs that the Trump administration slapped on solar imports last year.
“We’re looking now at the implications on the modules that we assemble in Mexico for export to the U.S.,” SunPower said in an email late Thursday.
Related: U.S. Farmers Roiled Again as Mexico Threat Slams Grains and Hogs
U.S. solar-parts maker Enphase Energy Inc. was also poised to open a brand new factory in Mexico to avoid tariffs on Chinese products. Jeffrey Osborne, an analyst at Cowen & Co., said the timing was “really kind of sad.”
“They had no exposure to Mexico but they have a lot going forward,” he said.
Higher Prices
For Dell Technologies Inc., Mexico was a safe harbor as well. The Round Rock, Texas-based company reallocated some desktop computer production to Mexico from China months ago in response to U.S. levies. Dell also makes servers in Mexico. Now, it’s trying to figure out how to deal with the new tariffs without sacrificing sales or profit.
“We are big believers in free trade,” Dell spokesman Steve Gilmore said in a statement. “One possibility, if this tariff goes through, is that we’ll have to raise prices.” He added that the company has a flexible supply chain that “allows us to pivot very quickly and minimize impact to customers.”
The impact ranges across the economy, from appliance maker Whirlpool Corp., avocado seller Calavo Growers Inc. to Constellation Brands Inc., which imports Corona beer for U.S. consumers. Chipotle Mexican Grill Inc. said the tariffs would “negatively impact our costs” and the company is working to minimize the impact.
‘Probably Illegal’
Baldwin at Tacna, which provides manufacturing services in Mexico for makers of everything from foam paint rollers to furniture and employs 8,000 there, summed up the effect on companies: “It’s devastating. It changes the complete economics of operations in Mexico.”
He said Trump’s move is “probably illegal” and predicted it will get challenged in court even if the tariffs do go into effect on June 10.
“My email is extremely active from clients right now: ‘What is going on? Will this affect us? This will kill our business,”’ Baldwin said. “Alarm is what it is, frankly.”
--With assistance from Nico Grant, Ian King, Brian Eckhouse, Oliver Sachgau and Christopher Martin.
To contact the reporters on this story: Joe Deaux in New York at jdeaux@bloomberg.net;Thomas Black in Dallas at tblack@bloomberg.net
To contact the editors responsible for this story: Anne Riley Moffat at ariley17@bloomberg.net, Jonathan Roeder, Lisa Wolfson
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