Lily Twelve Tree (17:12)
Interesting, right? US Based businesses are still going to have to raise their prices because we live in a global supply chain now. This is really interesting because if we use the Observatory of Economic Complexity, a fantastic online resource I recommend you checking out, we can look at where the US actually imported beauty products from in 2023. From largest to smallest, 17.7% was from France, 17.2% was from South Korea, 16.1% from Canada, 10.4% from China, and 9.7% from Italy. There were a few things that stuck out to me here. Firstly is how prominent these European countries are because the EU was the second on Trump's fact sheet. Then we also have South Korea, which was really high up on Trump's little fact sheet. And then there's Canada. As I mentioned, I'm going to be doing a deep dive into Canadian beauty in another episode because I truly had no idea how much Canada was supplying the US but my biggest shock from these import percentages was actually how low China was at only 9.7%. I thought, this can't be right. And then I kept digging and I learned about import codes. These imports are of the class 3304, which is beauty or makeup preparations and preparations for the care of the skin, which essentially just means these imports are of finished goods. These are products that are ready to hit the shelves when they are imported into the US what this 9.77% does not include is any packaging or any raw materials. So I had a poke around at some packaging import codes to see all of the packaging compartments of a product that American manufacturer would likely be buying. So, paper goods, 29.4% from Canada, 25.5% from China. Pumps and sprayers, 63.7% from China. Glass bottles, 30% from Mexico, 19.3% from China. Plastic packaging, 23.6% from Canada and 22% from China. And this doesn't even touch on raw materials because I can guarantee that the US either can't farm and produce all of the ingredients to go into a beauty product or that simply they don't because the US is drastically behind countries like Australia when it comes to advancements in agricultural production. Having a more forgiving climate has meant that there has been less pressure to adapt to better farming methods. But that is a topic that my ag research boyfriend can explain to you another time. But then my other follow up question to all of this is why is everything made in China? I feel like if we could answer that, then we could answer why Trump is going so hard on China specifically. In 1978, China had a GDP of only 200 billion. That accounted for only about 4% of the world's GDP. But nowadays that GDP has risen to 17.8 trillion USD and accounts for over 18% of all economic activity in the world. And this is largely thanks to one industry, manufacturing. I learned all of this from a fantastic YouTube video by Wendover Productions that I'll link on Substack. But essentially, in the early 20th century, goods were often just produced right where they were sold. America made American goods, Europe made European goods, and it wasn't until cheap worldwide shipping became available that the production side of a company could relocate to the other side of the world. But why did China win? So in 1978, Dou Xiaoping took power in the People's Republic of China. He visited Bangkok, Singapore and other flourishing Asian cities and was convinced that in order to succeed, China had to open itself up to the outside world. Most notably, he allowed foreign investment in the country for the first time in decades. He opened up four Special Economic Zones with both tax incentives and exemptions from the oversight that the rest of the country saw on its investments and trade activity. These four zones were essentially the free market portions of China, but none of them was more successful than Shenzhen in the Guangdong province. But before this designation as a Special economic zone in 1980, Shenzhen was a tiny town with about 30,000 inhabitants. But today it has grown to nearly 18 million people, which means that its size rivals that of New York and London and it's believed to be the single fastest growing city in human history. And what made Shenzhen so special was that it lays just north of the border of Hong Kong, which at the time was a British territory. A double mention. But again, back to the MCO beauty episode when I found that manufacturer that I mentioned it was in Shenzhen, and finding that manufacturer sent me down such a rabbit hole with beauty manufacturing in Shenzhen. If any beauty brands are listening and want to do the most iconic podcast episode ever and will invite me on a trip to go visit their manufacturers. Please get in touch because I am dying to visit Shenzhen. It is fascinating and it's at this point of the episode that for me everything just starts clicking into place. I consume a lot of founder content for one and pm the founder of the jewelry brand Heaven Mayhem was visiting manufacturers in this week and documenting it all on TikTok. And right after she had visited these manufacturers she hopped in a car to go stay with her, I believe boyfriend's family in Hong Kong. And my ears pricked up because it was only a two hour car ride which means she was in Shenzhen or in Erin Deering, the founder of Triangle Bikinis. Any Aussie girls listening will know what that is. But I read her book last year and it was honestly brilliantly entertaining. For majority of the book Erin is talking about her life living in Hong Kong and going back and forth over the Chinese border to their manufacturer Ding ding ding, Shenzhen mention, Shenzhen mention. And so while I knew everything was made in China, I didn't realize that it was all made in one city. And a funny thing, and this funny thing that happened with this with Shenzhen is because you end up having a lot of advantages by manufacturing locally like they did back in the day when we're Talking about the 20th century and American goods being made in America. But now because everything was being concentrated in China, you had similar benefits whereby you can produce your packaging across the road from your contract manufacturer and you only have to send it a few more blocks to be assembled, which further reduces the costs. Not to mention that because all of this money was poured into developing this city, which has been a continuous investment by the way. It wasn't a once off back in the 80s. There's so many of these manufacturing facilities which of course fosters competition which drives the product down. Which is why Chinese produced goods, particularly beauty products, are so much more affordable than so many other countries. Which means the US are having to buy and import a lot from China, which means that the power of the relationship is leaning in China's favour. But we know that it's bigger than this are hitting China the hardest. But they're not only hitting China. So among the countries with the highest tariffs are also countries with a really small gdp. So why go after them? For example, Cambodia of all places is listed on the fact sheet as charging the US 97% in tariffs. Well of course they don't. That magical formula that we walked through in part one we know is calculated on the basis of trade deficits. So how much do you think the US imports from Cambodia quite a lot, actually. The US imported 36% of all of Cambodia's exports in 2023. And this was primarily textile and clothing products. And why is the US So fond of Cambodian clothing? It's cheap. The minimum wage is roughly 65 cents an hour compared to the US where it's $7. 25. Allowing for the cost of goods produced by these manufacturers to be made at roughly 11% of the wage costs than what it would have been if these products were made in America, which is why Americans love Cambodian clothes. If we set aside the considerable ethical implications of this, the reasons that countries such as Cambodia, Vietnam, Sri Lanka, and Bangladesh hold this competitive edge globally is because their manufacturing costs are exceptionally low. Now, if you flip that and consider how much Cambodia would import from the U.S. it's minimal, right? This is what makes this trade deficit so huge, which in turn forces Trump's tariffs to go up. Cambodia is being hit with a 49% tariff. Vietnam, 46%. Sri Lanka, 44%. Bangladesh, 37%. And I've seen some videos on people explaining why this would be great for killing giants like Shein and Temu and other mass clothing manufacturers that are known for having super sketchy work conditions. And while I hear that logic, I can't help but consider that whether it's ethical or not, this is still millions of people's livelihoods. If these businesses go down, so, so do they. It's not like Shein starts charging people more for their clothes and therefore paying their workers more. Or if. Or if a mega brand like Shein is forced to close down, it's not like these workers can turn around and go work for somewhere else because they are collectively being hit with the same tariff. If anything, this will breed even more corruption. I think what's just crazy about all of this and what I really took away from learning about this, was that how Trump is worsening the divide between the rich and poor in a lot less obvious ways than, like, tax cuts. It's by enforcing these regulations that only big, big businesses with huge budgets could ever spend. And how the brands with the extremely high margins, the 90% beauty margins, and taking consumers on a ride are actually the ones that are best positioned for this. Because while these types of tariffs can never be justified, they will send the small business into bankruptcy, and the big business, they can just absorb some margin, at least for a bit. Right, because that's the other thing, is that final invoices from manufacturers are received by businesses after they clear customs. So these tariffs being enforced so quickly means that there would be countless shipments in transit currently that businesses would have placed before the enforcement of these tariffs. Or if they weren't in transit, they could have been in pre production and somehow already on the way. These costs are so huge and would have been so unexpected that realistically it could bankrupt so many of the small players. All of which helps beauty in the US the world's largest beauty market, to become more and more of a monopoly. Part 3 what does this all mean for the future of Beauty? Before all of this began, as far back as a decade ago, actually, many of the big, big manufacturing companies in China started opening up shop in different countries, with some even expanding to the US because of technological advancements. And a lot of manufacturing lines can now be automated, which means that the reliance on those cheap labor costs has lessened. Whether a robot is working in China or in the us, it is costing a business the same. So being able to manufacture products in the US helps save on shipping. Or as the founders of Experiment, Beauty pointed out, is also much more sustainable. Reducing travel time is a significant reducer in carbon emissions. I think it's also worth pointing out the PR element to this Made in America sounds good. The list of episodes I want to do is growing by the day, but one I've mentioned before is how I've always wanted to look at how Made in America is thought to be good and Made in China is thought to be bad. Race and racism plays a significant part of this, but is certainly not the whole answer. But the cost of setting up shop in the US is really expensive. So when I was looking at those different import codes for the different parts of beauty manufacturing, I saw an overwhelming percentage of a bunch of different product classes, mostly in packaging, was coming from Mexico. And on one hand, as a neighbor to the U.S. this made sense, but I was also kind of confused because I didn't know Mexico to be a popular manufacturing destination. And well, Mexico is now said to be having a manufacturing renaissance because what's happened is that these big Chinese businesses are setting up shop in Mexico to short circuit the tariffs. This started back in Trump's first presidency when he first placed tariffs on China in 2018amounting to over $34 billion. These tariff figures have climbed way higher this year, but many of these Chinese businesses took 2018 as a bit of a heads up. In 2023, the value of goods imported by the US from China was 427 billion. That was down 110 billion from 2022. Imports from Mexico were actually higher than China. Goods imported by the US from Mexico were actually higher than China at 475 billion, and they were up 20 billion from 2022. And in short, this is what they're calling a triangular trade that's developing where Mexico was becoming like the middleman. Chinese companies will either send raw materials and packaging to Mexico for it to be assembled and turned into the final good. The final good will then be exported to the US Minimizing the tariffs, rather than just sending it directly from China. Or to even just make parts of the supply chain cheaper, Chinese companies are exporting them to Mexico and then selling them to manufacturers in the US who will do the assembling and create the goods at, yes, an increased rate because it's been shipped twice and that adds up, but far less than shipping it directly from China and just paying the tariff. This second option comes with the added benefit of being able to call itself American made. You know how on the back of Apple products they say designed in California, made in China. I think we can expect to see a lot more of that assembled in Mexico or formulated in the US or other forms of creative positioning. I would hope it will start to be a necessity because as we all start to get better educated on what made in country actually means. But realistically, I think the definition of what counts as made in a country is going to get a whole lot blurrier. And transparency around supply chains will firstly become a selling point until hopefully it becomes regulated by countries that are getting shafted in the process. We've started to see a lot more of this in fashion in recent years, where worker conditions have been front of mind, but beauty has mostly taken a back seat. Another thing that's likely to happen is that products that still require labor and are labor intensive will likely move to Central and or South America, whereby they get the benefit of being geographically closer. But more significantly is they're being hit with softer tariffs. Colombia, Costa Rica, Guatemala, Ecuador and Argentina are all being hit with 10%, which is considerably less than China's 145% or South Korea's 25%. L'Oreal, for one, already manufactures some of their products in Colombia. Not a lot, but some. And there are pros to moving production closer to the states with reduced carbon emissions for one. And near shoring could also open up faster prototyping and shorter lead times, which could aid smaller businesses. But is such a small pro comparably. And then the one other area of the situation, although less direct, I wanted to talk about, with the pressure that all of this puts retailers under When a beauty product is sold via a retailer, the retailer takes a cut which splices the brand's margins, right? But if a beauty brand's margins are already being spliced by the tariffs, can they afford to continue those retail partnerships? To avoid how much the price of a product has to be raised by a beauty brand, they might opt to double down on non traditional beauty retail channels. We're living in a time where D2C feels pretty hard to pull off the incentive to buy directly from a brand without being able to shop from others. And having to pay for shipping to only shop from one brand just feels a little bit dated 2010s early D2C. But brands also now have access to online retailers like Amazon and TikTok shop that by their digital nature they take a significantly smaller cut of the likes of Sephora, Ulta or cvs. Of course this means the brand is responsible for all the logistics and they don't get the benefits of being placed in store. But it leaves a big open ended question of what beauty retail will look like in the US Moving forwards, Could we possibly see brands leave mega retailers? Does Sephora need and rely on young and exciting brands more than it lets on? Would it implement a program to help them survive? I guess we'll just have to wait and see. And that brings us to the end of today's episode. This is the most topical topic I have done, I think, and I turn this episode around in about the half of the time I usually do. And be honest with me, can you tell? And secondly, do you care? Shoot me a DM on Instagram or send me an email. All my contacts are linked in the show notes and I have to say I have such a soft spot for topics that leans so heavily into the business of beauty because I have such a chip on my shoulder about beauty being taken seriously. Being able to weave current affairs and politics and into the industry in a way that is hopefully equal parts entertaining and educational. Definitely my favorite episodes to make. So if you enjoyed the episode, please follow the show wherever you're listening and rate it. Give it a like really helps discoverability. If you're feeling extra generous, share it with with a friend. I can't tell if at the moment the world is on fire or if it's just my world is on fire. I think it's a bit of both. I'm currently in mid semester break and rather than studying for my mid semester exams, I'm building Barefaced's first product, a software product. And while it's pretty simple and I'm really taking minimum viable product to to a new extreme. And very literally, I I'm learning a lot. I've I've done quite a few small scale coding projects at this point, but I've never done anything with web, let alone anything that requires web architecture and there are so many moving parts like building servers and databases and it's honestly really fun and it's easily the biggest project I've ever done in my life. But be sure to sign up to the sub stack not only for the full breakdown of today's episode, but to be the first in the know when that launches. I will definitely do an episode on it when it goes live because I think it'll be pretty interesting to this audience. But I'll let you be the judge of that. I have no idea when it's gonna go live because the further I get into it, I think I've actually overcomplicated how large it is. But in saying that I've never done any of the parts so I actually can't plan my time. But anyway, I will see you soon. Who knows, maybe even next week. It's only been 10 days since you last heard from me, but no promises. Take care. I'll catch you in the next this episode was recorded on Ghana country. I acknowledge the traditional custodians of this land and pay my respects to elders past and present.
