International agreements, rather than kids, may impact toy production

While toy demand rides its own unique growth arc, questions loom about how international trade in the products will fare under a new U.S. government.

Analysts are predicting U.S. toy consumption this year will grow as much as 6.5 percent, continuing a growth trend evident for the past several years. The U.S. market is worth more than $21 billion a year, accounting for about a quarter of world demand, and is very dependent on international supply chains to meet children's desires.

The market growth underlines the vitality of the U.S. toy industry, stated Toy Industry Association President and CEO Steve Pasierb in a recent statement.

“Consumers are buying toys and games fueled by innovation in practically every category — from technology to collectibles to licensed products and [toys that encourage science, technology, arts and math] that are both fun and educational,” he elaborated.

Imports are crucial to U.S. markets. About 90 percent of U.S. demand is met by shipments from foreign sources, according to TIA data. Any disruption in the traffic is sure to impinge on the happiness of millions of American children.

It's too early to know how the incoming U.S. federal administration will view existing trade treaties and global trade, but statements made by President-elect Donald Trump during his election campaign certainly caught the attention of global traders in toys and a host of other goods.

“In the coming months, TIA plans to educate newly-elected members of Congress on industry priorities such as implementation of the recently passed chemical reform legislation, streamlining regulatory burdens, access to international markets and general policies that help small businesses,” Pasierb stated shortly after Trump's election.

Trump has threatened to tear up or renegotiate the North American Free Trade Agreement, and has complained about trade practices of China, the major source of toys entering the United States.

Mexico, a signatory to the NAFTA treaty along with the United States and Canada, has become an important toy source for U.S. markets. More than $700 million of toys and games were imported from Mexico into the United States in 2015, according to Statista GmbH, an internet-based statistics supplier.

Mexico has attracted major investments by toy OEMs who want to capitalize on the country's preferred status in NAFTA and relatively low labor costs. Lego A/S is perhaps the biggest current investor in Mexico toy production.

The Danish toy giant is spending more than 100 million euros ($107 million) to expand its eight-year-old toy factory in Monterrey, Mexico. The project includes adding 2 million square feet at the site, plus a huge number of injection molding machines and other equipment to package and warehouse its iconic plastic bricks and related toys. The facility, heavily oriented to exports to the United States, could double its production capacity in the expansion program.

The Monterrey project is due to come on stream in 2018 with completion slated for 2022. The expansion will boost toy output when the impact of the new U.S. administration should be easier to discern.

A Lego spokesman declined to speculate on how the company might adjust Monterrey's expansion pace in light of the new U.S. federal administration.

“The factory in Mexico delivers Lego products to the entire Americas, and we are continually scaling our capacity depending on the demand,” Lego spokesman Roar Rude Trangbaek stated in an email.

A new U.S. government is not the only challenge pending for the global toy trade. Brexit, the vote in June to take the United Kingdom out of the European Union in two years, could frustrate a host of trading relationships within and outside Europe.

The European Union market is arguably the single largest outlet for toys in the world. A study commissioned for the EU estimated the EU market for traditional toys was worth 15.8 billion euros ($16.9 billion) in 2011, about 12 percent bigger than the study pegged the U.S. market. EU toy exports were also sizeable — about 5.3 billion euros ($5.7 billion) for 2011 — albeit some 80 percent of that was between countries within the EU. Mattel Inc. was the biggest player in the EU with about 10 percent of the market, followed by Lego and Hasbro Inc., each with a bit more than an 8 percent market share.

Britain's withdrawal from the EU is bound to affect trade and investment flows, the regulatory frameworks of Britain and the EU, tariff rates and a host of other concerns to toy producers and companies in general.

In this time of uncertainty about future trade patterns around the globe there is opportunity for all companies to re-examine their supply chains, suggests an information management official.

“There is no better time to look at all supply chain issues holistically,” said Jason Dea, director of product marketing for Intelex, a Toronto-based information management software supplier.

Companies might fear what trade restrictions will do to their cost structures, but they should look beyond pricing to get the true values in the supply chain, Dea explained in a phone interview. Regulatory compliance, product quality, environmental issues and availability of labor and other resources at points along the supply chain all should be measured and managed, Dea said.

While there are more questions than answers for future trade patterns, it wouldn't hurt to leverage the information companies now have to chart a course.