The forecast, reported in China Daily, follows the closure of the Smart Union toy factory in Dongguan last week.
Speaking in an interview with the Guangzhou Daily, Wang Zhiguang, vice-chairman of the Dongguan Toy Industry Association, said: "Of the 3,800-odd toy firms in Dongguan, no more than 2,000 are likely to survive the next couple of years."
The bleak picture is based on a number of factors including the rising cost of raw materials, soaring overheads, the global market slowdown and depreciation of the US dollar, he said.
Zhiguang predicted that companies with good financials and their own brands are more likely to survive, while others, such as those dependent on OEM (original equipment manufacturing), will find it more difficult.
According to figures from the association, since 2006, the total cost of producing toys has risen by about 60 per cent, while contract prices have gone up by an average of just 10 per cent.
Also, according to figures from the local customs bureau, Dongguan firms exported $550 million worth of toys in the first half of 2008, which is down by 1.5 per cent on last year and signifies the first drop in three years.
The boss of one toy factory in Dongguan, told China Daily yesterday: "I daren't say too much (about the demise of Smart Union). But what I can tell you is that we're having a very hard time. Maybe someday in the future, my own factory will also go under.”
"There have already been some negative impacts for toy makers like us, such as the tighter capital chain. We're also a lot more cautious in the way we deal with raw material suppliers and other business partners."
Xiao Yong, the owner of a Dongguan firm selling Christmas trees and gifts, is also concerned about what the winter may have in store.
He said: "One of the main problems is that many toymakers in Dongguan rely too much on orders from the US and Europe. The financial crises there have led directly to a reduction in orders."
He added that the number of orders his firm has received for this Christmas is about half what it reported last year.
"Also, after the EU and the US changed the market thresholds for China-made toys, and because of the recall incidents of 2007, our testing fees have gone up by about 25 percent," Yong said.
In an interview with Nanfang Daily yesterday, Xiao Senlin, chairman of Hayidai Toys said: "Concentrating more on the domestic market and developing our own brands instead of doing OEM could be a way to shield us from the worst of the global financial crisis.”
Source: China Daily