A number of small enterprises fortunate to strike deals on the reality show Shark Tank are now faced with a precarious situation. The imposition of tariffs poses a threat to these businesses, leaving them in a mad scramble for sustenance. Our story includes the tale of Donny McCall who entered Shark Tank’s floor in 2012, armed with dreams and a pickup truck. He was looking to secure an investment of $100,000 for a 10% stake in his venture called Invis-A-Rack—an innovative foldable cargo rack targeting the trade industry.
The Sharks, astute as they were, admired the concept, however, they were disconcerted regarding the elevated production costs, a direct consequence of McCall deciding to produce his product in his hometown, Sparta, North Carolina. McCall reported an annual revenue of around $50,000, with the total expense for each unit reaching $250. His dedication to job creation in the U.S. and his belief that customers would be willing to shell out more for quality American products were laudable.
Regardless, the Sharks couldn’t see eye to eye with him. No offers came forward from their end. For years, the stance of the Sharks, akin to many private equity entities, was one of encouraging business owners to outsource their manufacturing overseas. This advice was given considering the significant savings it provided. The strategy of reducing costs through overseas manufacturing enhanced profits, while enabling consumers to purchase goods at lower prices.
A research piece published by the Federal Reserve Bank of New York in 2017 provides some insight into this phenomenon. The study emphasizes that prices of commodities such as clothing slumped by almost 10% in the decade that succeeded China’s integration into the World Trade Organization in 2001. As long as the supply chain mechanism stayed resilient, this strategy proved reciprocally beneficial for business growth and profitability.
However, the onslaught of the COVID-19 pandemic revealed the pitfalls of depending excessively on remote factories, when the world and global trade came to a standstill for some time. Current events have once again brought those risks into sharp focus. Still, these risks are a result not of natural occurrences but rather consequences of the unorganized and impulsive tariff plans imposed by President Trump.
A common sentiment among several manufacturers was that commencing operations in China was not so much a choice, but the last resort. Numerous apparel businesses dispute the feasibility of domestic production, citing either logistical issues or expressing concerns that exorbitantly priced products stemming from local production wouldn’t be sellable.
Few had the foresight or a solid plan to deal with the tariffs, which for some imports from China had spiked to a staggering 145%. Most are clinging on, awaiting a swift resolution to the issue and striving for survival. Some companies have considered discontinuing certain products in response to these changes. Others are contemplating what to many seems unavoidable if the status quo remains intact—they are weighing the possibility of shuttering their businesses and abandoning the ventures they so painstakingly established.