Rough sailing at Hong Kong Toy Fair

Hong Kong — Amid positive news at the massive Hong Kong Toys & Games Fair — Hong Kong's exports of toys jumped 8.6 percent in the first eight months of 2018 to $4.1 billion — industry nabobs and show-floor exhibitors alike fretted over navigating the increasingly choppy oceans of the world economy.

The No. 1 uncertainty, considering that China makes an estimated 85 percent of the world's toys, is the China-U.S. trade war.

Attendees at the show, which draws close to 50,000 buyers and is one of the world's largest toy fairs, were not necessarily predicting that President Donald Trump would risk angering a nation of Walmart-shopping parents by slapping tariffs on finished toys from China.

A 25 percent tariff like that would be "a shock to the entire system," said Richard Gottlieb, head of New York-based consultancy Global Toy Experts. "We need zero tariffs on toys."

But tariffs the Trump administration has placed on chemicals and metals have hurt U.S. toymakers who buy materials from China, Gottlieb said.

An unpredictable President Trump and economic uncertainty were giving a bad case of the jitters to toy execs already fretting over cutthroat competition, rising labor costs in China and a patchwork of international safety standards.

At the fair's flagship conference, an economist with the fair organizer, the Hong Kong Trade Development Council, urged companies manufacturing in China to weigh "What if?" scenarios.

"Many more buyers from the U.S. ... will ask if you have an alternate production base outside China, just to play safe," Louis Chan said.

In a recent council survey, toy industry respondents were "more gloomy about the prospects for the first quarter of this year," Chan said.

Most respondents have found buyers cutting back on order sizes and aggressively asking for discounts, he said.

This view was echoed on the show floor. Buyers are more cautious, placing small orders and only following up if sales are strong, Gigi Che, director of Hong Kong-based toy trader Merx Ltd., said.

Even though when it comes to the world toy market, the United States is easily the 800-pound-gorilla, Chan advised the Hong Kong industry to look into small but growing markets in Spain, Chile, Eastern Europe and Taiwan. "It's never too late to develop new markets," he said.

Chan also counseled Chinese manufacturers — and virtually all Hong Kong toy companies making their toys on the mainland — to ponder workarounds like selling online to U.S. customers, where they can take advantage of an $800 daily exemption for personal orders, to the capital intensive, like opening a factory outside China.

Dominic Tam, chairman and CEO of Hong Kong-based injection molder and toy maker Combine Will Industrial Co. Ltd., told the conference his firm opened a plant in Indonesia last year.

The minimum wage, social insurance, water, fuel and electricity are all at least 10 percent cheaper in Indonesia than China, Tam said.

While Chinese manufacturers typically provide dorms and cafeteria food for workers from the hinterlands, many of Combine Will's 1,500 workers in Sragen, central Java, prefer to commute from home via motorbike.

And the quality of finished products is excellent: "Indonesian workers have very good attention to quality," Tam said.

Still, offshoring a factory is not for the faint of heart, he added. The hurdles include high outlays for land and construction, navigating government regulations and permits, factory certification, finding qualified local managers, training and working with cultural differences.

Plus, the minimum wage, currently about $120 per month in rural Sragen, is rising more rapidly than China's.

"I find it very challenging," Tam said.

While Chinese toy makers like Combine Will are exploring overseas manufacturing options, one analyst at the conference said there's increasing interest in China's own market as well.

By late 2021, China is on track to topple the United States as the world's No. 1 toy consumer, said Jonathan York, a project manager with market analysis firm Euromonitor International.

Electronics are gradually infiltrating traditional categories like construction and plush toys, York said in a presentation at the fair's conference, as children in connected households become digitally literate at ever-younger ages.

Per-family income is rising even as parents opt for fewer children, meaning greater expenditures for each child, York said.