Hong Kong's transitioning role in the global toy industry

Emily Cheung wears two hats.

As executive director of 33-year-old Hong Kong manufacturer Tsuen Lee Group (Holdings) Inc., she's in charge of corporate strategy, marketing, administration, finance and compliance at one of Hong Kong's biggest toy companies (current workforce: 12,000) with factories in Guangdong and Jiangxi provinces. She also serves as vice chair of trade group Hong Kong Toy Council.

She spoke with Plastics News at the Hong Kong Toys & Games show.

Q: What are the big challenges for the Hong Kong toy industry right now?

Cheung: We have two different sectors. Some are manufacturers, with factories in China. Some are trading companies. Those with factories in China are facing increasing labor costs. There are also policy changes. Guangdong [the province neighboring Hong Kong, where many Hong Kong firms operate factories] is trying to transform itself from labor-intensive manufacturing to high-tech. Some toy manufacturers are choosing to quit.

Q: What about moving to a less-expensive part of China?

Cheung: Moving is very difficult. You must invest in the land and build a factory. You must build up relationships with the local government. If [a company] can't get solid commitments from customers, how can they invest in a new place? This is a dilemma for many companies with Chinese operations.

Q: What about moving to lower-cost countries?

Cheung: [Toys] needs a lot of different components, like metal parts, plastic, screws, packaging, and printing. They're not like garments or shoes, which have relatively few components. So for toy companies, it's very difficult to move to an area or country without good supply chain support. They also need export support. A developed infrastructure for testing and shipping.

Q: What's the Hong Kong Toy Council doing to help?

Cheung: We are encouraging our members to ask their customers to provide them with designs that can be optimized for automated production. This is one way a toy company can survive in this challenging environment. What other challenges is the Hong Kong industry facing? Both trading and manufacturing companies face higher and higher costs for quality control.

We're trying hard to harmonize different standards among different countries. But before we achieve this, we need to accommodate ourselves to each country's regulations. If you want to ship one product to the U.S., Europe, the Middle East, Brazil and Russia, you need to submit samples for each different country. This drives the total product cost up.

These standards vary widely. If you want to sell your product into [a country], you need to pass their standards. To do that, you'd better use a testing lab that they recognize. Maybe some of the testing labs in the U.S. are not recognized by Brazil.

Political issues may make this more complicated, because toy safety is always a topic to talk about. In the past 10 years, for example, we've seen tightened controls on phthalates and heavy metals in paint. When standards are changed, you cannot use your old stock in the warehouse. But countries often publish regulations a year or two before making them law. They may post changes in advance, but still, you need time to adjust to them.

In the toy industry, we have a very obvious peak season and low season. We have to manage labor and production capacity. A lot of parameters keep changing. [A] customer may make changes in a design.

Also, unless it's a basic product, like a baby product, the shelf life of most products is only three to five years. And it's very difficult for the toy industry to automate.

Q: Can't safety and quality testing help your reputation and hence your brand?

Cheung: That's the idea. But still, some companies cheat. They fake the certificate. Here at the Toy Council, we have a [chemical testing] database which can trace all the testing results. So [if you're a buyer] you really know that this product is tested. We have been doing this for almost three years. So you have one place that keeps test results for your members. Yes. We built this database because of the very tight chemical regulations from Europe.

Q: Will more toy factories in China close?

Cheung: We've been seeing this since 2008. Quitting, or moving into another business. In 2008 China tightened its labor law, which means you have to pay more for labor. Also, the US economy collapsed, which affected the buying power there.

Q: What's next for the industry?

Cheung: The companies left behind will be stronger. The U.S. economy is picking up, and the Chinese toy market is growing, along with Brazil and some of the European countries. The mainland toy market is huge now — second only to America's. Middle class people are ready to spend more on toys, especially in China. Their income is increasing. The sense of wanting to buy quality products is much stronger than it was five or ten years ago. You can that see in this show — all the booths are full. Chinese parents are especially spending on educational products and licensed products.

If you pursue different strategies, have different products for different markets, then you can succeed.

If you just want to do OEM, that's very tough. So a lot of Hong Kong companies are trying to transform themselves. They want to make their own brand. Manufacturing to order vs. building your own brand — those are two very different business models.

It's not easy. It takes time. [At Tsuen Lee], we've spent three years launching our Ming the Minibus brand.

Q: What's your long-term goal at Tsuen Lee?

Cheung: Our company strategy is to be an OEM [contract manufacturer], an ODM and an OBM all at the same time. “ODM” [original design manufacturer] means I design the product and then I get a company with a popular license, Disney, say, to agree to put their brand on the product. So I don't own the brand, but I design the product.

“OBM” [original brand manufacturer] means I own the brand. I create it and I own it. Ming the Minibus is a cartoon character [based on Hong Kong public minibuses]. We took a lot of steps to design and promote it. We have a cartoon on Hong Kong TV, which we now broadcast overseas. We built an indoor playground at a mall here. That takes time and money.

Honestly, a lot of OEM [contractors] are not willing to transform themselves into something new. Or, if they do transform themselves, it's often into real estate property investment, or into making more high-technology products, like consumer electronics. That's because many consumer electronics items require the same injection-molding machines that are used by the toy industry.

Q: Is the falling price of oil good for the toy industry?

Cheung: There's only a small relationship between the price of resin and the price of the finished toy.

A bigger concern is children at age six and up are starting to play video games and mobile devices. The demand for traditional toys is dropping. But the Chinese toy market is booming. It's now second only to the United States. Hong Kong toys have more than a 60-year history. For the first 55 years, we could choose to export our products instead of selling to China. I played with lots of Hong Kong toys when I was a boy.

But why didn't we develop our own products? Because at the time, the US was our biggest market and we had enough orders to survive doing business. So not many people considered doing business in China. But for the last five years, it's been totally different. Now developed countries aren't doing so well, compared to previous years. So Hong Kong companies that want to transform themselves are already starting to look into the Chinese market.