Innovation takes a backseat at small companies

NEW YORK — Toy robots that teach children to code. Sneakers made in America. Mold-resistant kitchen gadgets. The three items are among new products that have gotten stuck in the pipeline due to President Donald Trump's unpredictable trade policies, according to the brand founders behind the stalled items. They say that instead of fostering U.S. innovation, Trump's tariffs are stifling it with extra costs and unexpected work. At Learning Resources in Vernon Hills, Illinois, Made Plus in Annapolis, Maryland, and Dorai Home in Salt Lake City, research and development have taken a backseat to recalculating budgets, negotiating with vendors and tracking shipments in the shifting tariff environment. "If we don't have enough cash to cover just the restocks of the things that we know we need, do we want to take a risk on this new thing when we don't know how well it will sell yet?" Dorai Home founder Kelsey O'Callaghan said. O'Callaghan started the eco-friendly home goods company with a stone bath mat and now offers about 50 kitchen and bathroom accessories, which are made in China with a non-toxic material that dries quickly. New launches are critical to increasing sales and attracting customers, she said. As Trump increased the tariff on Chinese goods to 20% and as high as 145% before reducing the import tax rate to 30% for 90 days, Dorai Home postponed introducing new merchandise. O'Callaghan said she had to lay off the CEO as well as the head of product development, who helped the company jump on new trends. "I haven't really put the time or the emphasis on (innovation) because I'm covering too many other people's roles," she said. The company paused shipments from China in early April but resumed some on a staggered basis after the president's rate reduction. On Wednesday, Trump touted progress in U.S.-China trade talks. With details still sketchy and a deal not finalized, entrepreneurs interviewed by The Associated Press said they viewed the tariffs war as an ongoing threat. Tariffs and American innovation The potential stunting of innovation follows an economic slowdown during the coronavirus pandemic, when companies also had to put projects on hold. Some experts think the on-again-off again tariffs may have more enduring consequences because they rewire markets and upend business strategies. "When executive attention shifts from innovation to regulatory compliance, the innovation pipeline suffers. Companies end up optimizing for the political landscape rather than technological advancement," economists J. Bradford Jensen, a nonresident senior fellow at the Peterson Institute for International Economics, and Scott J. Wallsten, president of the Technology Policy Institute think tank, wrote in an April blog post. Trump has argued that curtailing foreign imports with tariffs would help revive the nation's diminished manufacturing base. Analysts and various trade groups have warned that fractured trade ties and supply chains may depress R&D activity of U.S. tech and health care companies that rely on international partnerships or foreign suppliers. Small companies, which often drive the innovations that create jobs and economic growth, already are under strain. With fewer people on staff and tighter budgets compared to large corporations, entrepreneurs say they are spending more time on cutting costs, suspending or arranging orders, and deciding how much of their tariff-related costs to charge customers. That means they're spending less time thinking of their next big ideas. Schylling Inc., a Massachusetts company that produces modern versions of Lava lamps, Sea-Monkeys, My Little Pony and other nostalgic toys, has its products made in China. As part of its strategy to account for tariffs, the company put a group of employees on temporary unpaid leave last month to reduce expenses. Beth Muehlenkamp, who was marketing director at the company, was one of them, but now she and several others who were furloughed, were permanently laid off early this month. She noted that she and other staff members typically would have been planning products for the final months of 2026. But Schylling isn't focusing on designing new products given the unstable trade outlook. "It's really hard to focus on innovation and creativity when you're consumed with this day-to-day of how we're just going to balance the books and deal with the changing rates," Muehlenkamp said. An uneven product pipeline Even some companies that do their manufacturing in the U.S. are scaling back investments in new products. Made Plus, a Maryland company that makes athletic shoes at a small factory in the state capital, put a planned golf line on hold because two key components — a foam insole and the tread for the bottom of the shoe — currently are made in China, founder Alan Guyan said. The company customizes its shoes on demand and charges $145 to $200 a pair. The footwear is made from recycled plastic bottles with advanced knitting, 3D printing and computerized stitching techniques. It's looking into getting components from Vietnam instead of China. Embracing new technology is essential to restoring manufacturing capability in the U.S. and competing with Asia, Guyan said. But given ongoing trade frictions, he said he does not want to invest time or money evaluating the latest embroidery and knitting machines, which come from Germany, Italy, China and the U.S. "We're just battening down the hatches a little bit and just hoping that there's enough influence in the community of footwear that it will somewhat change and get resolved and we can move forward," he said of the tariff roller coaster. In contrast, many big companies are forging on. Google parent Alphabet confirmed late last month that it still planned to spend $75 billion on capital expenditures this year, with most of the money going toward artificial intelligence technology. What's next for R&D? Sonia Lapinsky, a managing director at consulting firm AlixPartners, has advised her clients to limit tariff discussions to a small group of executives and to keep their product creation cycles in motion. Businesses have an even greater imperative to come up with attention-grabbing innovations when consumers may be reluctant to open their wallets, she said. Yet smaller companies may struggle to wall off tariff discussions from the rest of the business. Learning Resources CEO Rick Woldenberg said that roughly 25% to 30% of the 350 employees at the educational toy company's headquarters, including product developers, are working at least part-time on tariff-related tasks. The company usually develops 250 different products a year and expects to get half that many off the drawing board for 2026, Woldenberg said. While exploring factories in countries besides China, he said, Learning Resources is delaying the next generation of its interactive robots that help children develop computer programming skills through games and other activities. The family-run business and Woldenberg's other toy business, hand2Mind, are locked in a legal battle with the Trump administration. The jointly owned companies filed a lawsuit accusing the president of exceeding his authority by invoking an emergency powers law to impose tariffs. A federal judge ruled in favor of the two companies last month, and the administration has appealed the decision. Woldenberg said he's ready to take the case to the U.S. Supreme Court. "It's a win at the Supreme Court that we need," he said. "And so until then, there will be no certainty. Even then, if the government is bound and determined to keep us in an uncertain situation, they'll be able to do that."