China's toy industry had a challenging 2007, from headline grabbing recalls, rising costs and new tax laws that hurt its bottom line. And things may not get much better for 2008, according to industry officials interviewed at the Hong Kong Toys & Games Fair.
There were some bright spots: Christmas retail sales in one of the key export markets, the United States, actually grew modestly at about 3 percent, better than expected.
And the recalls of Chinese-made toys that dominated the news in the United States for months did not appear to slow its global exports, even if it did raise costs, industry officials said.
``Overall as an industry, no [the recalls did not appear to hurt],'' said Bernie Ting, vice chairman of the Hong Kong Toys Council and general manager of injection molder Qualidux, a Hong Kong-based toy maker with about 400 presses and 8,000 workers. ``It is a surprise to us.''
According to industry data from Hong Kong, toy exports from Hong Kong grew 25 percent in the first 11 months of 2007, to US$11.4 billion, although growth to Europe was much stronger than export growth to the United States.
Toy exports from mainland China also were up, rising 20 percent in the first 10 months of the year, to US$7.07 billion, according to the Hong Kong Trade Development Council. Almost all Hong Kong toy makers have their production in mainland China.
``Toy recalls last year had a limited impact on our export performance,'' said Jeffrey Lam, chairman of Hong Kong TDC's Toys Advisory Committee and managing director of toy maker and plastic firm Forward Winsome Industries Ltd., also in Hong Kong.
But executives said they face plenty of other challenges that are squeezing China's toy makers.
In interviews at the Hong Kong toy fair, held from Jan. 7-10, they listed global problems like rising plastic costs, along with more local challenges, such as Chinese currency gains against the U.S. dollar and changes in China's tax laws in 2007 that effectively raised taxes on low-value exports like toys.
``This year is very difficult for most of the factories,'' said Lawrence Yeung, director of the Hong Kong-based injection molder Plastmetic (Hong Kong) Manufactory Ltd. ``We are suffering. The renminbi is going up and oil is going up and the price of plastic is going up.''
Two Hong Kong injection press suppliers said the toy industry's problems meant severe cutbacks in spending on new equipment.
Chen Hsong Group said the recalls led to an ``almost complete dearth of machine purchases'' in the second half of the year, and LK Technology Holdings Ltd. said the recalls and other problems slowed capital equipment purchases.
``After the news of the recalls, everything dropped'' as overseas toy purchasers became much more cautious, said Calvin Wu, general manager of Shing Hing Plastic Manufacturing Ltd., a Hong Kong-based firm that molds PVC toy animals and other products.
A new labor law that took effect this month in mainland China also will raise costs significantly, possibly as much as 50 percent, depending on how it is implemented, said James Wong, managing director of Hong Kong-based plastic toy maker Neu Kreation Ltd.
He said his firm is weathering the problems better than some competitors because it focuses on efficiency and developing new designs for its higher-end building blocks and toys, to stay ahead of competitors that simply copy its products.
``The edge is we have to provide high-quality products and better-designed products - we need to keep on innovating,'' he said.
Like other toy makers interviewed, Wong said his firm would try to increase prices this year to recover some of those costs, in his case possibly by 15 percent.
Industrywide, toy makers are looking at price increases of ``high single digits to low double digits,'' said Lawrence Chan, chairman of the Hong Kong Toys Council.
``In the last couple of years, definitely manufacturers have tried to absorb some of those cost increases,'' said Chan. ``But how long can we absorb, how long can we survive? I think we are reaching the stage right now where we need the help of our buyers to help us through this difficult period.''
While it's not clear how much of the price increases would stick, the toy industry may not have a viable alternative to `made in China,' at the moment.
China supplies more than 80 percent of America's toys, for example; and about 75 percent of China's toys come from Guangdong Province, across from Hong Kong.
The economic environment and the higher costs from meeting new quality challenges will lead to some industry consolidation, Chan said, as smaller Chinese toy makers struggle to survive: ``At this stage, I'm not seeing the end of it.''
Toy industry officials were reluctant to offer firm predictions for 2008.
Hong Kong's Trade Development Council last month predicted that exports in all sectors for the territory would grow 7 percent in 2008, which would be the lowest growth in five years, because of expected economic weakness in the United States.