Hong Kong's plastic toy factories face tough conditions, squeezed between weak markets overseas and rapidly rising wages and costs in their mainland China factories.
In interviews at the recent Hong Kong Toy Fair, the world's second-largest toy exhibition after the Nuremburg International Toy Fair in Germany, local plastics executives and industry leaders struck tones somewhere between caution and pessimism.
Looking at the numbers it's easy to see why: The global toy market grew only 1 percent in 2011, according to market research firm NPD Group, and the head of the Hong Kong Toys Council estimates local factories will see only 1 percent growth this year.
Add in wages in Chinese factories going up 15-20 percent a year, labor shortages, and other rising costs, and toy factory executives said they have no breathing room.
“2011 was a disaster for the toy industry overall,” said Lawrence Chan, chairman and CEO of Hong Kong-based plastic toy maker Wynnewood Corp. “The first half of last year was unbelievably bad. It hurt most of us.”
Hong Kong is the world's second-largest toy exporter, and along with mainland Chinese firms, make up by some estimates 70 percent of world toy production. Hong Kong firms have substantial toy production in the Pearl River Delta region around Guangzhou.
Yeung Chi Kong, executive committee member of the toys council and vice chairman of plastic toy maker Blue Box Group, predicted that Chinese factory wages would rise 15 percent this year, after going up 20 percent each of the last two years.
China's strengthening renminbi also rose 5 percent against the U.S. dollar in 2011, which added another 3 percent to factory production costs, he said. Raw material costs for plastics, metals and cotton also have risen.
“I am seeing a lot of badly run factories going out of business, leaving the cream of the crop,” Yeung said.
He and other Hong Kong toy factory executives at the Jan. 9-12 fair called on toy brand owners to accept higher prices to ensure quality. But Yeung also urged toy factories to treat workers better, upgrade management systems and invest more in automation.
“In the mainland in the last 30 years, we have gotten used to hiring more workers” to solve a problem, Yeung said.
From interviews with toy brand owners, however, it seems unlikely they'll accept much in the way of higher prices.
Canadian plastic action figure maker Round 5, for example, said it was very aware of problems facing the Chinese injection molding factory it contracts with for production, and is working to address them, but toy retailers are not accepting higher prices.
“We definitely feel the labor shortage,” said Barron Lau, CEO of Markham, Ontario-based Round 5, which has licenses to produce Bruce Lee action figures, among others. But, he said, “Retailers keep our price steady. We have to eat the costs.”
The shortage of workers in Pearl River Delta toy plants means orders that used to require four-month lead times now require six months, complicating his company's planning, he said.
China's higher costs had some toy factories elsewhere in Asia seeing opportunities.
In Taiwan — where factory wages are still much higher than mainland China but have been flat over the last decade — the rising costs in China could bring business back, said Meiko Wang, sales manager with Cyber Giant Enterprises Co. Ltd., a manufacturer of plastic ride-on toys in Tainan.
But executives of several factories from Taiwan, Korea and elsewhere in Asia said they had not seen much movement of toy orders from China.
One longtime toy industry analyst, Jane Zimmy with NPD Group Inc. in Port Washington, N.Y., said she was skeptical that much production would leave China, even with higher costs.
Zimmy, who has followed the industry for 30 years, said toys increasingly have substantial electronic components that require skilled manufacturing and strong supply chains, which is hard for lower-wage countries to match.
“Moving the production processes is pretty complicated,” she said, noting, for example, that the production lines for popular toy tablet computers like the LeapFrog have many of the same requirements as manufacturing iPads.
It's a point echoed by others at the fair, including Round 5's Lau. He said that while Vietnam and India are sometimes mentioned as alternate locations for making toys like his PVC action figures, they lack the infrastructure, supply networks and experience of China.
“It would take a lot to get us out of China,” Lau said.