National Bankruptcy Day

In the Wall Street Journal, Rick Woldenberg was quoted as describing February 10, 2009 as National Bankruptcy Day because that’s the day when many of us will go out of business due to the implementation of the CPSIA Regulations. I’m dismayed at how little it’s been discussed online and in the news. I’m shocked that so few manufacturers know about it. Of the ones that do know, most think it either doesn’t apply to them or it will magically disappear or it won’t be enforced so they can ignore it. Come February 10th, a lot of people will be hit hard by reality when their products are returned or their financing is declined.

To recap, this law was passed (424 votes to 1) to protect children from unsafe toys after last year’s widely publicized recalls (by the way, recalls have actually decreased by 46%). What few consumers realize is this legislation affects more than toys. What few clothing manufacturers realize is this also affects them. Of the ones who do know, most of them think it only applies to children’s clothes. Other than apparel the law includes diapers, blankets (housewares), books, videos, computer and electronic products, strollers, cribs, car seats, and anything humans come in contact with in their environment. Our objections are not higher standards for product safety or even the costs involved per se. The problem is Congress wrote the law and forced the CPSC to implement it before the regulations were written. These regulations are not written by people who are familiar with manufacturing and thus, impose unnecessary burdens.

A source I’m not at liberty to quote directly (but you can read it here) for legal advice -although she’s an attorney specializing in these matters AND an environmental engineer says

Another issue is lead paint limit. This limit applies only to painted or similar surface coatings – which would probably mostly be zippers, zipper pulls and perhaps buttons. This standard goes from 600 ppm (now) to 90 ppm. This applies for all painted materials for consumer use – not just kids stuff. I don’t know enough about your industry to know if this coating standard applies to painted on decorations on clothing. But, at the very least, any components of finished garments are going to have to meet this standard.

Three brief points:

  1. Regarding the phthalate regulations (a lengthy discourse omitted for brevity) testing for phthalates is roughly three times the cost of lead testing. For purposes of comparison, lead testing is expected to be about $30,000 for a ten piece line in three colorways.
  2. The lack of available labs needed to absorb the dramatic increase of testing required. Assuming everyone had the money and time to do it, it would still be impossible without the facilities and inspectors to do it.
  3. The requirement of “third party testing”. For our purposes this means you cannot avoid legal liability by relying on testing results supplied to you from your vendors. No no. You have to retest everything yourself. See why it’s problematic that these regulations were not written by those with a background in manufacturing?

Initially, we little guys were feeling a bit put out that these regulations would affect us a lot more than the big guys who have more money. As it turns out, they’ll be hurting in ways we won’t because they are factored. Selling to big box stores is done through loans, so called factoring. On the manufacturing side, loans are extended based on the receivables (invoices) that buyers owe the manufacturer. On the other side, factors lend money to stores to buy the inventory. Factors are a sort of financial middleman. Loans are more than just mere money changing hands; loans are legal contracts. To have a legal contract, the actions described within them must be legal. For example, a contract to hire a hit man is an illegal contract because the act of murder itself is illegal. Thus, loans for inventory and receivables cannot be legally extended unless the goods themselves are legal. Without the CPSIA compliance guaranty certificates, they won’t be.

Since most of the products intended for February delivery are either already made and on the way here or are in the process of being made and few to none of the inputs were tested beforeheand, all of these items will end up in bonded warehouses or landfills because it is illegal to sell them even as seconds. Products made domestically are not immune, they’re in the same boat. A factor is not going to break the law and make an illegal contract so a retailer can buy illegal goods. The end result is there will be a whole lot less product on store shelves. Since there won’t be much to pick from and costs are higher, consumers can expect to pay much higher prices. Prices will be rock bottom on February 9th, but overnight, prices will dramatically increase. The anticipated losses go into the hundreds of millions of dollars. This is not an exaggeration. According to 2002 U.S. Census Data (the last year for which data is available) just considering small U.S. clothing manufacturers, their contribution to the economy is over 900 million dollars annually. Small manufacturers with fewer than 20 employees comprise 68% of total apparel manufacturing in the U.S.. This of course does not include the untold numbers of stores that will go out of business too.

The point is now, what can we do? In the forum we’ve been devising a grassroots plan that we hope to launch tomorrow. One of our members who is familiar with regulatory processes, is drafting a letter you can mail to regulators. You can call your congressman. You can write a letter to the editor of any papers you read, on or offline. You can post about this on your own blog, post comments on blogs you read and talk it up in forums you belong to. You even need to lobby your suppliers too. Ask them what they’re doing about it. They’ll be hurting too if we’re not buying sewing machines or CAD systems. Resolve to post somewhere at least once a day.

The problem we have is that this is a very popular law with consumers and legislators. Because it is so complex, they don’t know what it really means or what its effects will be. In the upper echelons, most of the high level organizations like the AAFA, The Toy Association and the electronics industry are lobbying against it. Their problem is that they are not the grassroots. That’s you. The vast majority of Americans think this is a Great Law, striking back at unethically made low cost imports and thus, legislators are leery of what high level representatives say. That’s why it’s up to you to talk to other consumers like you. We need for consumers to know that this law will put many of us rather than importers out of business at a time when the economy can least absorb it. They need to know that come February, many of the products they expect to find in stores won’t be there. I think consumers will start to get the hint once they start getting tickets for transporting their infants without car seats because they can’t buy them in stores. Considering the consequences, there is little doubt the rules and regulations such as they are, will be rescinded. The only issue is, will they be rescinded before they bury too many of us? This law represents the last nail in the coffin of U.S. manufacturers. Even I’ll be out of a job. Why publish a blog if nearly no one can manufacture?

Related in the forum:
The War Room: CPSIA & Consumer Safety. This is a very active section with nearly 60 different threads and over 1,000 postings. Open to the public.

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