China's vicelike grip on global toy manufacturing is showing signs of loosening, with rising wages and falling exports prompting some Chinese plastic toy makers to shift production to other countries.
Large Hong Kong toy maker and injection molder Lung Cheong International Holdings Ltd., for example, sold its mainland China factory campus and established new facilities in Indonesia. The company claims Indonesia “enjoys favorable advantages over [China] and most Asian countries due to plentiful supply of labor.”
Speaking in early January interviews at the Hong Kong Toys and Games Fair, the world's second-largest toy show, executives said that while China retains supply chain advantages, interest is growing in alternative manufacturing spots.
“For the U.S., Mexico is booming. I lost one or two projects to Mexico for sure,” said Bernie Ting, chairman of the Hong Kong Toys Council and general manager of plastic toy molder Qualidux Industrial Co. Ltd. “Toy making is spreading out. ... The trend is kind of moving [from China].”
A key reason is that wages in the toy-making hub of Guangdong province have doubled in the last five years, he said.
Neil Friedman, the former president of retailer Toys R Us and toy maker Mattel Brands, said global toy companies are looking at manufacturing locations outside China.
“They definitely are, there's no question about it,” said Friedman, a 40-year veteran of the toy industry, in an interview after an appearance on a panel at the Hong Kong show. “You've seen people moving manufacturing to Vietnam. I think people are exploring because the labor costs are getting higher and higher [in China].”
Clearly, 2012 was a tough year for Hong Kong's toy makers, which do most of their manufacturing in China. Hong Kong is the world's second-largest exporter of toys, after mainland Chinese factories.
Toy exports from Hong Kong dropped 10.8 percent through the first 10 months of 2012, compared with the same period in 2011, to US$7.5 billion, according to figures from the Hong Kong Trade Development Council released at the fair. That figure includes toys made in Hong Kong-owned factories in mainland China and re-exported through the ports of Hong Kong.
And while executives at the fair said the Christmas season was better than expected, it was not enough to turn the situation around. “By October we knew it would be a slow year,” Ting said.
Toy sales in the U.S. dropped about 2 percent for the year, and economic problems in Europe became, for some companies, the Grinch who stole their Christmas.
“The global economy is still affected by the uncertainties related to the European sovereign debt crisis [and] together with rising operating costs, these factors pose potential challenges to the entire toy industry,” said Kader Holdings Co. In its most recent Hong Kong Stock Exchange earnings filing, the firm reported that its toy sales dropped more than 25 percent in the first half of 2012.
“Amid the difficult operating environment, a growing number of small-scale toy manufacturers were forced to leave the market,” according to Kader. On its website, Kader said it has more than 500 injection molding machines and 10,000 employees in several Chinese factories.
Hong Kong trade statistics show that exports to Germany and the United Kingdom dropped sizably, down more than 40 percent to each country. While country-specific export figures can sometimes vary from year to year, drops of that size could indicate companies shifting some sourcing away from Hong Kong firms, Ting said.
Lung Cheong said that although there's also wage pressure at its Indonesia plant, the more positive environment there “seems sustainable.”
“The group looks forward to optimistic growth in our Indonesian plant,” the company said. “Management remains confident of the group's ability to seize this unique opportunity to consolidate its market position amid the exit of weaker players.”
Still, for some Chinese toy factories 2012 was a good year.
Business was up for Shanghai KingBaby Children Products Co. Ltd., an injection molder of riding toys for children. According to sales director Mike Hu, that's because the company has focused in recent years on improving its product design and not competing on price.
The Shanghai-based company, with 80 molding machines in factories there and in Anhui province, has added several-hundred employees in recent years, bringing its total workforce to 1,000, he said.
Hong Kong-based Kin Yat Holdings Ltd. said toy sales were up and it expects more business from another toy customer to come to fruition. It also said it has been able to make productivity gains to keep up with rising wages in China.
The company is investing in a new factory in Shenzhen, China, because of the increased business in toys and a line of robotic vacuum cleaners it manufactures.
One analyst predicted that while the toy industry is very labor intensive and follows lower wages, it's not likely to abandon China in great numbers.
“Having spoken with quite a number of factories, you will probably see a slight increase of factories considering to go outside China,” said Christian Ewert, president and CEO of ICTI Care Foundation. The socially responsible sourcing initiative is part of the New York-based International Council of Toy Industries.
“But the trend more observed,” Ewert noted, “is you see factories moving from the south to the north [within China], in order to capitalize on being closer to human resources in those places.”
The Hong Kong Toy Fair was held from Jan. 7-10, with about 1,900 exhibiting companies and more than 30,000 expected attendees.