They comprise a million-plus workforce. They run injection molding machines, paint doll faces, sew, stitch and assemble. They are China's toy makers to the world and they continue to gobble market share.
China's toy industry boosted shipments to the United States by 15 percent for the first nine months of the year, according to data published by the U.S. International Trade Commission. That means China is on track to export some $19 billion worth of toys and related festive articles to the United States this year.
China has been a major toy producer for years, especially in the southeast part of the country in the Pearl Delta area. But its importance is becoming more entrenched as global toy companies try to cut labor costs when faced with higher costs for plastics and energy.
Retailers also put pressure on toy makers, according to Frank Clarke, a spokesman for the New York-based Toy Industry Association. Like most other consumer goods, toys are increasingly sold through mass merchandisers that demand the lowest possible sticker price.
``Retailers force prices down. It's relentless,'' Clarke said in a recent telephone interview. ``It forces toy companies to manufacture as inexpensively as they can.''
Mattel, for example, sells nearly half its toys through only three mass merchandisers - Wal-Mart, Target and Toys ``R'' Us. The three retailers buy toys through one-time purchase orders. So, they can reduce the number of Mattel toys they buy or cut Mattel shelf space at any time, the El Segundo, Calif., toy giant explained in recent financial filings.
Low-cost labor in China reflects the relatively low value of Chinese currency. Recent events suggest the yuan will continue to be low vs. U.S. standards. China boosted the value of the yuan by 2.1 percent in July but it did not crimp toy exports to the United States, according to USITC data. The yuan currently is pegged at 8.2 to the U.S. dollar.
China is under pressure from the U.S. government to increase the yuan's value further, because Washington alleges it gives China an unfair trade advantage. How far and fast the yuan will rise is debatable.
China's State Information Center said in November it expects the yuan will trend upward, but the government think tank did not provide any specific numbers. The People's Bank of China, however, said at about the same time that pressures to increase the yuan's value were easing.
One trade consultant expects the yuan will rise but at a very slow rate, not enough to affect toy exports for several years at least. Exports are too important to China for the government not to be involved in protecting them by currency adjustments, said Pierre Farah-Lajoie, president of PFL International of Laval, Quebec.
Any appreciation of the yuan, as well as inflationary pressures within China, could impact the low-wage structure that toy companies have come to rely on.
The average salary in China is about US$200 a month, although in Guangzhou and Shanghai wages can be as much as double that, Farah-Lajoie said. Entrepreneurs, of course, can move their production to other areas in China where labor is cheaper.
``The government of China has established that as long as the labor cost remains under US$600 a month, China will remain competitive on the world market,'' said Farah-Lajoie. China's government already is reminding manufacturers about the importance of productivity based on modern equipment to compete against India.
``This will help China remain competitive for a good period of time,'' Farah-Lajoie concluded.
TIA's Clarke said labor costs in southern China already have begun to climb, partly because of competition for labor.
``It's too soon to say how much [toy manufacturing] will move out, but it is inevitable,'' he said in an interview.
An exodus of toy production from China would be a reverse of how the country became a toy powerhouse. Most early gains in China's industry came at the expense of Taiwan's industry in the 1990s.
Some Chinese manufacturers are investing in production plants in areas where labor costs are lower than in China, Farah-Lajoie added. He cited, as an example, textile operations going to Vietnam to avoid potential protectionist measures by the United States. So far, little toy production has migrated to other Asian countries. U.S. trade data shows toy exports to the United States from all of Asia outside China were only US$346 million to Sept. 30. That volume was only 7 percent of what China exported to the United States in the period.
Although most large toy companies source from China, building-block major Lego Group of Billund, Denmark, has not been swayed by China's cheap labor, so far.
``We have centralized production and have no history of setting up in new markets,'' explained Lego spokeswoman Charlotte Simonsen. The company so far has looked at Eastern Europe as its source of lower-cost labor and will switch all its Switzerland production there in the next few months. The long-term fate of its main molding and production operations in Denmark is still under review.
Lego's Czech Republic operation has been running for several years, providing Lego with some cost relief. Lego management has liked the arrangement because the Danish firm has a high sales volume in Europe.
European production allows Lego to react fast to consumer preferences, Simonsen said in a telephone interview. Impetus to relocate injection molding of Lego blocks to low-cost areas has been minimal because the process is highly automated, requiring little labor. Labor-intensive operations such as painting and assembly can be performed in the Czech Republic.
Production in China might make more sense if consumers in that country bought lots of Lego toys, Simonsen said. Sales there have been limited, but they could rise as mass-merchandising stores spread into China.
China's domestic toy market has barely been tapped, according to a study by Euromonitor plc. The 2004 study of China's toy market stated the country has 300 million children under the age of 14. Foreign imports are popular, but their sales are miniscule compared to the volume of toys China exports.
Simonsen played down the importance of Lego winning a copyright battle in China in 2003, one of several it has fought in recent years.
``Our counterfeiting win doesn't really affect our decision to manufacture there,'' Simonsen stressed. ``The keys are economics and ability to serve customers.''
Lego will take two or three years to decide if it will manufacture toys in China, said Simonsen.
Meanwhile, Lego's biggest direct competitor, Mega Bloks Inc., has been increasing its sourcing from China. The Montreal company, rather than expanding production in Montreal where its original factory is located, keeps up with growing orders by ramping up production in China.
Labor savings from made-in-China sourcing are no guarantee for high profits. Mattel's net profit slipped 12 percent in its third quarter compared to a year ago. Mattel blamed the drop on higher costs as well as declining Barbie doll sales.
Barbie's decline underlines the basic fact that toys are a fashion industry. Hits come and go, albeit Mattel has had a spectacularly long run with Barbie. To inject life into Barbie promotions Mattel plans a U.S.-wide touring stage show featuring Barbie and attendant magical figures. Mattel hopes the auditioning process and the Fairytopia shows in 80 U.S. cities next year will revive interest in the plastic doll. It will be a U.S. effort - no one has figured out how to buy that kind of hype from China.