China Forced to Keep Unprofitable Firms Alive to Save Jobs and Avoid Unrest

On the factory floor of a 69-year-old liquor plant in northwestern China, a dozen workers toil away sticking labels by hand on bottles of a fiery liquor known as baijiu, the nation's most popular spirit.
The inefficiency on display at Shaanxi Qinyang Changsheng Brewing Co. — a firm that hasn't turned a profit since 2020 — might seem like an anomaly in a country where robots are replacing manual labor. But it's a scene replicated across the nation, as company owners and local officials go to great lengths to protect jobs and keep struggling firms alive.

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US Manufacturing Expands While Inflation Measures Accelerate

US manufacturing grew at a steady pace so far in June, partly reflecting stronger employment growth, while two measures of inflation accelerated to the highest levels since July 2022. The S&P Global flash June factory purchasing managers index held at 52, the highest since February, according to data released Monday. Figures above 50 indicate growth.

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Will Tech Tariffs Slow U.S. Growth?

The tariff roller coaster rumbles on, and for American manufacturers, there's no getting off the ride anytime soon. Even with a drastic reduction in duties on China-made goods and a respite from global 'reciprocal' tariffs, the looming threat of taxes on foreign wares will continue to sow confusion. For some footwear, apparel and textile manufacturers based in the United States, tariff turmoil has been a boon to business, and for others, it's resulted in orbiting by brands and retailers that are voicing interest but aren't quite ready to pull the trigger on onshoring. The uncertainty of President Donald Trump's tariff strategy hasn't just paralyzed retail decision-makers, but the supply chain. Without clarity about the future of trade policy, manufacturers are left wondering about when to scale up—and how. More from Sourcing Journal Amazon and FedEx Continue to Up Their Game on AI-Enabled Logistics Robots AGI Denim's Apparel Park: A LEED Platinum Pioneer in Sustainable Denim Manufacturing Tariffs Stall Long Beach Imports, Marking Slowest May Since Pre-Covid Era Much of the U.S. manufacturing landscape, across sectors and applications, relies on advanced, automated technologies that take the place of cobbler's benches and traditional sewing machines. Some next-generation processes, like 3D printing, are on the verge of breaking through as production drivers in the U.S. But all of these activities, new and traditional, rely on machinery, much of which is sourced overseas and, under the current tariff regime, subject to potentially onerous duties. 'There's a combination of issues happening right now. I think uncertainty in the marketplace has stymied some orders from coming to fruition, because people are wondering how the 90-day pause will conclude,' said Kim Glas, president and CEO of the National Council of Textile Organizations (NCTO), regarding the opportunities coming to American producers. According to Glas, the rapid evolution of trade policy may be driving up interest in American manufacturing, but it's not providing any clarity for producers that are trying to understand their place in the puzzle. In the absence of a clear path forward, the textile sector is waiting until July 9—the date that the deferral of reciprocal duties concludes—to see 'what kind of market signals' will materialize. NCTO has long been supportive of holding 'trade predators' like China and Vietnam accountable for non-market activities. 'But we have also advocated, including in the first Trump administration, for a few exceptions that we think are critical,' Glas said. Access to state-of-the-art textile manufacturing equipment is necessary to help improve processes at the nation's plants, both in order to drive efficiency and cost-competitiveness. But those upsides come with a hefty price tag. 'It's very expensive,' Glas said. 'When you apply a 10-percent tariff, or another tariff differential, it can make a real difference about whether or not you can afford to reinvest in your operation,' she explained. 'When you do a big capital expenditure like that, you have to amortize those costs over a period of time.' But duty costs are paid upfront. And on a machine that costs tens, if not hundreds of thousands of dollars, even a 10-percent duty could be make-or-break for a small operation. There are significant limitations to such equipment production in the U.S., Glas explained, and the advanced machinery is essential to most modern operations. Devices used for extruding, drawing, texturing or cutting man-made textile materials aren't made stateside. Many of these technologies hail from Europe, and of course, China. Glas stressed the tightness of margins in a price-competitive industry like textiles, where companies are likely to spring for the lowest-cost option. The risk in not having access to advantageous technologies is that foreign operators will gain those capabilities, underscoring their own attractiveness. 'We have to think about this in a holistic way. If the design is to unleash more U.S. investment, we're all for that. We want to see our U.S. textile industry grow and we need the administration's help,' Glas said. 'But there is a recognition across the industry that a lot of the textile machinery is no longer made here, and will not be made here overnight. So we need to have a special dispensation for that.' The NCTO lead said exemptions for production machinery could be written into potential forthcoming trade agreements or tariff regimes, or an exclusion process could be established after tariffs are reinstated (as was the case with Trump 1.0's Section 301 duties on China). Either way, she hopes decisions surrounding solution for American manufacturers are 'expeditious.' 'The tariffs are definitely making the machinery more expensive,' Mitch Cahn, owner of Newark, N.J.-based apparel and gear manufacturer Unionwear, told Sourcing Journal. The producer, which specializes in items like baseball caps and tote bags, imported machinery earlier this year from Canada, before Trump's tariff announcements. 'We didn't make the investment because we expected tariffs, we actually made the investment to ramp up for the U.S.A.'s 250th birthday' in 2026, he said. Cahn anticipates a surge of business surrounding the occasion, along with events like the World Cup and the Olympics. According to the business owner, doubling down on automated machinery (this time, on an apparatus that sews canvas totes) was a matter of necessity. 'We were having a lot of difficulty hiring more sewers; the pool was dry,' he said. 'We had to invest in machinery to make up the gap between what we were doing and what we want to be able to do next year.' The tote bag machinery, when it's operating at full speed, will do the work of 44 people with a single operator. 'We're still ramping up; the goal is to have it probably operating 18 to 20 hours a day by the end of the year,' he said. 'We didn't do it to speed up or save money. We just did it because there was really no way for us to grow linearly—not even exponentially,' he explained. 'There's no way for us to keep adding sewers to our operation, so we need it.' These planned investments in technology aren't a bid to replace human headcount with machines—in fact, Unionwear is holding on tight to the sewers that it employs. One prevailing issue inhibiting the growth of American manufacturing is the lack of a pipeline for skilled, affordable labor. The group has plans to automate other production processes, and is in talks with American manufacturers for those projects. Since the reciprocal duties on more than 60 countries were announced, Unionwear has seen a 'considerable' increase in interest and sales, Cahn said. 'If the tariffs are here to stay, the return is actually going to be much greater than it would have been without the tariffs,' he said of the investment in new technology. 'And the reason for that—and it's something we didn't expect—is the possibility that with automation, we actually can be competitive with import prices that have tariffs on them.' Cahn said that even if the Canadian-made machinery was tariffed at the 25-percent rate that Trump originally threatened, the company still would have made the buy. 'It really opens up a much bigger market for us,' he added. Kuba Graczyk, founder of Los Angeles-based 3D-printed footwear startup Koobz, agreed that investments in automation are key to expansion as a U.S. producer. The group, which prints mono-material, single-piece shoes, currently operates 60 3D printers and is building out a factory in Ventura, Calif. that Graczyk said will house 4,000 printers at the end of the next two years. This will give the startup the ability to churn out 'a couple million pairs of shoes a year,' he estimates. Since April 2—Trump's so-called 'Liberation Day'—business has picked up, he added. 'Customers who were actively working with us decided to substantially accelerate, customers who were just, like, looking at this as something interesting decided to launch projects with us to see where it could go instead of being hesitant,' Graczyk said. 'And those folks who ghosted me suddenly decided, 'Hey, let's get on that again.'' 'Of course, it tapered down' over the course of the ensuing weeks, which saw reductions in duties on China-made goods, deferrals on all reciprocal duties and a trade deal with the United Kingdom, among other trade developments. 'But out of all of this interest, we were able to create an amazing pipeline which is wired long-term, because one of our gauging questions was, 'If the tariffs get back to [what they were previously] would you still work with us?'' Koobz has decided only to take on business with partners that have a long-term plan for onshoring and budget allocated to the effort. But scaling up from 60 to 4,000 3D printers—which Graczyk said ring in at about $600 apiece—will require significant capital expenditure. While the price tag on the devices is modest, a tariff will add to it, and the group is looking to scale aggressively in a short period of time. Koobz looked into 3D printer options made outside of China, and found that the models made stateside as well as in Europe cost more and came equipped with fewer, less-advanced features. 'There are other sources than China. In Europe, there's still a handful companies that can manufacture equipment of that sophistication, at that scale—maybe not as good, maybe a little bit different architecture,' Graczyk said. But beyond price and performance, the factory owner is also looking to develop a smart and resilient supply chain, starting with machinery. One way to foster this could be to diversify sourcing for machines, but there would be differences between the units and the way they operate, as well as possible differences in quality and output. 'We are fortunate enough that we haven't pulled the trigger on any anybody yet, but we are at risk of slowing down because we would rather take more time to de-risk this as much as possible; to slow our progress instead of building while still thinking about where to source,' he said. 'We know we have to build a system which is very flexible.' Koobz is having discussions with 3D printer manufacturers about the potential of nearshoring printer production to free-trade-agreement countries like Mexico, and some are already considering doing so. 'Short-term, I'm not super worried about securing our next year's growth, because the printers that we're using for the current stage of products are already in the U.S., in distributor warehouses,' he said. 'We've already purchased some of them, so there's some frontloading of this equipment. But thinking forward, we need to add multiple colors, multiple materials—those machines are a little bit more sophisticated, and inventory of those doesn't exist.' The already-bought machines and those available onshore will float the company through to the last quarter of 2026, he believes. After that, Koobz will 'have to start solving the puzzle' of where to source the technology that powers its operations. 'Who are we going with for the next stage of building? Are we keeping the same equipment, the same manufacturer, buying higher-tier machines from them—or are we switching to something else because of the tariffs?' To Graczyk, there are bigger concerns than the added financial burden caused by the import taxes. It's the breakdown in the U.S.-China trade relationship—and the inkling that it could get worse, not better—that gives him pause about eating the cost of potential duties and sticking with Chinese suppliers. 'We already figured out how to work it out with the previous tariffs, the 145 percent, because [the printers] generate so much margin and profits that we can absorb [the tariff cost],' he said. But he worries about a 'complete decoupling' of the world's two biggest economies. 'We believe our business model supports the investment in this equipment, even with those outrageous tariffs, but the biggest threat is to business continuity; whether our business needs can be met long-term with companies based in China,' he added. But machines manufactured outside of China, too, will be subject to trade barriers—even those made in nations the U.S. considers allies. Desma, which crafts direct-injection molding machines used by the footwear industry in Germany, has also felt the impacts of tariff talk. While goods from the country face only a 10-percent duty rate (for now), the intense swings in the administration's tariff strategy are not doing anything to propel what was already a sustained and healthy trend toward onshoring, according to regional sales manager Marco Schafer. 'Many people consider options and discuss scenarios, but we have not experienced a rush into investing into manufacturing capabilities, and going at it full-steam,' he said. 'And I think people are right to be cautious, because you just saw what happened with China—you went from next to nothing to over 100 percent. Now they're back to 30 percent, and it's questionable if that has any effect whatsoever, or if the market will eventually just absorb those costs and not much will change.' Schafer said footwear firms have been eager to bring some portion of their manufacturing closer to home for at least three or four years, and those that understand the business case for doing so didn't need tariffs to push them over the finish line. 'It's not so much the Made in USA label; there are some hard economic figures' that underscore the appetite for reshoring. 'You are in the market you're selling in, so your logistics are shortened. The other thing is capital—if you order container loads of goods from Asia, your capital is tied up for quite a long time, whereas if you manufacture here and you have shorter lead times, your cash flow is actually improved.' But it's a decision every company has to make for itself, and much of it has to do with modeling costs versus output. 'A simplified view: you realistically have to make at least 500 pairs of the same or similar product in a day, in a one-shift operation, to even be able to consider an investment into automation,' he believes. Desma's 'bread and butter'—direct injection molding machines—allow footwear manufacturers to produce foam midsoles for performance shoes and sneakers. The largest, most advanced model can churn out 1,500 to 2,000 pairs per day. All told, it's a big investment, with machines costing hundreds of thousands of dollars. Ergo, the footwear manufacturers who are intent on scaling operations using these machines aren't doing so on a whim. 'All the major projects we're working on—whether those are already projects we have on order, or projects we hope to have on order soon—they all originated in 2024,' Schafer said. 'Those projects don't happen overnight; the machines and calculations are complex, so you have to really be sure that you believe in your product and in your forecast.' In short, tariffs are generating interest, but they're not turning the tides for makers of advanced machinery. Even if an American footwear firm decided today that the unstable trade environment necessitated a sea change in sourcing strategy, they couldn't fast-track that shift. 'We're dealing with six-to-seven-month lead times after we after we get an order, but to get the right configuration of the equipment, whether it's a machine or automation line, you're easily involved with engineering six to 12 months before a company is ready to place a [purchase order]. These are often two-year projects,' he said. 'People know that if they get into this field, it's a big commitment.' There are myriad other factors in the equation, from availability of raw materials (many of which are still sourced from Asia or Europe), to staffing (workers must be trained on robotics and electronics), and facilities, which must be equipped to support the machinery and its output. 'All that needs to be put into consideration,' Schafer added. 'And therefore, the whole tariff thing—yes, it triggered some discussions, but no active projects as of yet.' That could change with more clarity about the future of America's trade relationships. Of the volatility of the past two months, Schafer said, 'We hope that the worst is behind us, and that after the loud time comes the time of more quiet negotiations behind closed doors.' This article ran in SJ's Tech Report. To download the full report, click here. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data

Bloomberg

29 minutes ago

• Bloomberg

Huawei's New Laptop Adds to Evidence of Stalled Chip Advance

Huawei Technologies Co. 's latest computer product is powered by a chip manufactured using years-old technology, suggesting US sanctions are still preventing China from developing cutting-edge semiconductor technologies. The processor in the MateBook Fold is built with domestic partner Semiconductor Manufacturing International Corp. 's 7-nanometer technology, according to Canada-based consultancy TechInsights, employing the same process technology adopted in the Mate 60 Pro that stunned US officials two years ago. Industry leader Taiwan Semiconductor Manufacturing Co. is expected to start mass producing 2nm chips, which is three generations ahead of 7nm, later this year.