Tariffs Threaten the Game Industry

When one wants to escape the incessant stories of tensions and politics that dominate the news these days, it’s good to know that you can break out a board or card game and unwind. Even a little online browsing for the latest Eurogame, or scrolling through Kickstarter to find that awesome set of miniatures that you never knew you’ve been waiting a lifetime for can be therapeutic. But now, even that brief form of sanctuary has had its walls breached by economic turmoil.

Your fun is being spoiled by tariffs.

Until recently, you’d be forgiven for thinking you were mishearing “sheriff” and wondering what Nottingham has to do with things, but unless you’ve set parental controls to “4-year-old” on all your media, you’ve heard about the ongoing trade war. Tariffs are a fee – an added tax – paid by importers of specific products. For most of this year, they’ve added 10% to the cost of a wide range of items shipped into the US from China. The tariffs have been estimated to add $767 in extra costs this year for a family of four. Many larger companies have been able to absorb this added tax burden rather than pass it along to consumers. Other companies were able to negotiate with their Chinese suppliers to get them to reduce their wholesale prices to offset, but, many others simply had to increase their prices as a result.

When the American President announced early in May that he would be more than doubling that 10% tax to 25% – and increasing the range of products affected to include games – it sent shockwaves throughout the US business community. Import and customs duties are a Byzantine labyrinth in the best of times. Electronic games are taxed differently than educational toys, which are charged under a different rate than books and so on. Importers will naturally look for which category is the most favorable and apply to have their product come into the country under that classification. In highly competitive markets, profit margins are usually thin. And, with small companies and start-ups, the difference of a few percentage points can mean the difference between success and bankruptcy.

Can’t make it here

Buckle up kids, it’s time for a quick economics lesson. Don’t roll your eyes at me. If you wonder why your last Game Night cost more than before – and it wasn’t the beer – you’ll need to know this. Besides, you’ll have achieved your “I learned one new thing today” in only two paragraphs.

The stated reason behind the tariffs is “to protect American jobs.” However, millions of jobs on the North American continent are dependent upon a steady stream of product that is made in China. Even though the price gap has been closing, it is still 5-10% cheaper to manufacture products in China and ship them to US. The difference is greater in some industries, such as electronics. In Europe, the cost differential is even more pronounced at 10-20% on average – even when adding in the cost of shipping the item halfway around the world. As labor costs rise in eastern China, manufacturers have been moving their factories out of the cities of Shenzhen and Guangzhou to western provinces deeper within China to be closer to potential workers. Vietnam, Myanmar (Burma), and other Southeast Asian countries have seen manufacturing hubs set up by Chinese owners, but China still remains the primary source for a wide variety of consumer and durable goods.

Part of the reason is labor. A skilled assembly line worker at Foxconn – one of the largest electronics manufacturers – makes $400 a month or about $100 a week. An assembler at a Foxconn plant in the US starts out at $8.42 an hour or $336.80 each week before taxes. But beyond that is the special nature of the Chinese Industrial Regions. In Shenzhen, a city located right across the border from Hong Kong, the makers of various components that go into an item are all next to each other, making it easy to bring the parts together quickly. If the iPhone – one of items Foxconn assembles – were made in the USA, it would double in price to $2,000.

Deep Impact

Resourcing from overseas is not a new phenomenon. Look at a toy made in the 1960s and you’ll likely see “Made in Japan” embossed on the underside. In the 80s and 90s, production moved first to South Korea and then to Taiwan before settling on the mainland. Today’s modern communication technology makes it nearly as easy to communicate with a factory across the Pacific as with one across town. And even if you’re not making electronics, it still often makes sense to be “Made in China”.

Printing costs have been rising for decades. That’s a big reason besides the rise of the Internet for the decline of newspapers and magazines. It’s also why the current issue of the Star Wars comic is over $5 and not the 30¢ of the first issue from 1977. With print production runs in the tens of thousands, the giant game companies like as Habro can afford to print books, such as the Dungeons & Dragons hardbound rules in the US. Likewise with best sellers such as Monopoly. Smaller game companies, simply can’t offer an affordable product without resorting to Chinese printers. In the highly competitive market for consumers’ discretionary entertainment dollar, cost is critical. Most people don’t think too much of dropping $20 on a game. But, when the price goes up to $40, there’s a lot more hesitation. The average game book is priced between $20 and $50 with most of the smaller companies’ products being at the $20 range. The net profit to the company on each book is $6-8 according to insiders. The tariff would shrink that margin by 25%. Even if the book or board is printed domestically, chance are that the included plastic game pieces such as miniatures, tokens or dice were made elsewhere.

John Stacy, the executive director of the non-profitGame Manufacturers Association (GAMA) says that the tariffs “could dramatically reduce the number of new games in production within the United States.” Worse, he says, is that it could even cost American jobs and the closure of many companies. The hobby game industry produces about $5 billion annually for the U.S. economy. It’s a quarter of a percent of the broader $20 trillion but is not insignificant. GAMA represents over 1,000 companies in the industry that includes board games, role-playing, card games, dice and miniature games among others. There has been a substantial growth in the industry in the past decade fueled, in part, by crowdsourcing entities like Kickstarter. Stacy continues, “With Kickstarter there’s a low barrier to entry to get into this industry. There are more games on the market today than there were in any previous year. Every year the number gets larger and larger. So it gets harder and harder to reach the market and get your product out there to sell your product.”

For GAMA members and the industry as a whole, the tariffs present a major threat to their existence, according to Stacy.

“The [hobby games] manufacturing infrastructure in the United States has basically collapsed in the last 20 years. The expertise and the specialization is simply not there. Obviously, we still have some big manufacturers in this country, but they can’t do smaller products in the volumes that we’re buying them in — 2,000 copies or whatever — because it’s cost prohibitive to buy that small of a quantity from a U.S. company. So our members have to go overseas to buy them. That’s what allows them to actually keep their doors open, because the margins are so thin in our industry.”

He notes that even if it were economical to produce domestically, most of the existing manufacturers aren’t able to match the quality of the Chinese-made products and there are very few alternate sources game makers can turn to.

To add to the pain, the tariffs will essentially occur overnight. That upsets the careful calculations made to determine whether a product is viable. As anyone who’s ever supported a Kickstarter project can attest, there’s a period of several months between when a product is funded and the backer receives their item. An item that was planned out last year, funded early this year, with deliveries this summer now costs the maker 25% more. Given the 4-6 week transit time of a container ship, the game designer could literally lose money between the time his product left China and arrived at his warehouse.

While the damage will be felt across the entire industry – and ultimately by the game player – it will hit the smallest and most innovative companies the hardest. Stacy said, “The competition is very tough, so you have to be very price conscious to keep your part of the market share that you currently have. So there’s this cycle that makes it hard to raise prices because the market is so competitive. If you keep the prices low it’s easier to get into the marketplace. This cycle just continues and continues. So it’s very hard to make money in this industry.”

Digital Salvation?

The industry has been moving towards PDF/digital downloads for some time. This has been in part due to the rising costs of printing, but it also makes it easier for smaller companies to get their product out without having to get a distributor to pick them up. But that really isn’t an option for board or card games where physical printed parts are a critical aspect. Sure, one could download and print all the 550 cards in the basic Cards Against Humanity set, but most players will give up somewhere around the 50th card and opt for a rousing game of Canasta, instead. Three very popular party card games, Joking Hazard, Cards Against Humanity and Exploding Kittens could never have been published through conventional means. They were funded through Kickstarter and have been printed in China. The CAH team even famously gave the employees at their Chinese a paid 1-week vacation in 2015.

It has also been suggested that 3D printing might release companies from being overly reliant on Chinese manufacturing. Of course, many of the consumer-level machines are made in China – and therefore subject to the tariffs, But they are not really an option in the near term until they are as cheap and easy to use as a microwave.

Until the trade war is resolved, the increased costs are going to hamper the hobby game industry along with the rest of the economy. Small press companies will struggle to grow, let alone not fail. The entry price point for new gamers will keep many out of the hobby and as distributors pull back due to the uncertainty, you may even find it harder to locate the next expansion set for your favorite game.

You have options

It should be noted that our neighbors to the north will not be unaffected by the antics south of their border. Because the two economies are so intertwined, some of the rising costs will be passed along to Canadian consumers. Additionally, a decline in innovation does not stop at a political barrier.

The United States Trade Representative is the US governmental agency implementing the tariffs and discussions will begin on June 17th. Twitter users can let their feelings be known at https://twitter.com/USTradeRep

And, of course, American citizens can contact their Representatives and Senators. And, you can vote next year.

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