The China syndrome

Most of us have always known China as the world’s biggest manufacturer of toys, but recent developments have thrown doubt on that assumption long term. Or have they? Is it still business as usual in China? Jon Salisbury gathered together some interested industry insiders to find out what they think...
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The toy recalls of recent times did China few favours, adding more fuel to an already raging fire about the country. The credit crisis made it harder for Asian raw material suppliers as they struggled to pay for the materials they use. Mattel CEO Bob Eckert even said that Mattel’s suppliers in China were facing strains from high commodity and labour costs and additional safety testing requirements that had led to smaller vendors closing during the past year.

Stricter quality control for Chinese manufacturers and human rights are probably the West’s two greatest ongoing concerns about Chinese toy manufacturing. Human rights have long been a controversial issue in China and the toy industry has worked hard to address that via the ICTI CARE Process to promote ethical manufacturing with fair labour treatment and employee health and safety in the toy supply chain worldwide.

ICTI’s intent has been to provide a single, fair, thorough and consistent programme to monitor toy factories’ compliance with ICTI’s Code of Business Practices. So far, national toy associations in 22 countries countries are committed to the CARE Process, nearly 1,500 factories have registered in the Process and 747 factories now have the ICTI Seal of Compliance.

After all the furore over lead paint and rising raw material and overhead costs, the global credit crisis has shaken the world’s financial markets and some alarming reports have begun to circulate that could threaten China’s toy manufacturing prowess.

Wang Zhiguang, vice-chairman of the Dongguan Toy Industry Association, says: “Of the 3,800-odd toy firms in Dongguan, no more than 2,000 are likely to survive the next couple of years.”

Xiao Yong, the owner of a Dongguan firm, comments: “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 adds that it is time to develop other markets, including the domestic one.

We asked some manufacturers with more than a passing interest in the situation for their views. How they had been affected by the claim that 50 per cent of all Chinese toy factories are going to close?

Phil Ratcliffe, MD of MV Sports, thinks that this figure may have been exaggerated. “There is no doubt that Chinese manufacturers have been under immense pressure. Over the last year they have been faced with increased raw material costs, increased labour costs, reductions in Government rebates, currency appreciation against the dollar and increased pressure from suppliers in terms of testing and audit criteria.

 “There is a flip side, however, where some Far East manufacturers have profiteered from rising raw material costs and are slow to bring them down now that commodity prices are falling.”

Jon Diver, MD of Character Options, says that his firm has been affected both directly and indirectly but so far to a minimum: “We have a very close relationship with our factory base which allows us to understand what’s happening on the ground. We constantly have QA, QC and engineers in the factories to assess the situation. The indirect effect comes from fewer factories being willing to take on risks in terms of pricing and new customers.”

Hornby chairman Frank Martin is pleased to report that none of Hornby’s suppliers have been affected by closures. “However,” he adds, “all suppliers have reported substantial and unavoidable cost increases, which are being passed on to Hornby and other customers. In turn, Hornby increased its selling prices in September this year (2008) and will do so again in January.”

So, are toy manufacturers looking elsewhere at all? Might any other locations start to look attractive? In the short to medium term, Martin doubts it: “For high quality, detailed manufactured items there are currently no viable alternatives to China. For products requiring simpler manufacturing processes, countries such as India represent an opportunity. Over the longer term, these other countries may develop the skills to be viable alternatives to China, but in my view not in the next ten years.”

Phil Ratcliffe is a little more positive. “Other countries may be more attractive due to prohibitive EU duties on China in relation to categories such as children’s cycles. In this case Thailand, Malaysia, Philippines, Taiwan and so on become more attractive to importers. In general, however, there is nervousness amongst small to medium sized toy companies about pioneering in some of the alternative Far East sources.”

Jon Diver thinks that, as costs in China continue to rise, “more places will emerge. However, it’s not just about the price. The infrastructure to support the production of high-end and high-quality products may not be as robust in other countries as in Southern China, but we all have to constantly evaluate other possible places of manufacture."

Diver also believes that there are factors other than cost involved when considering manufacturing options. “Of course cost is important, but it is one of many criteria when we select a factory to produce items for us. Others include social and environmental issues as well as quality control and the systems the factory has in place to achieve our standard. This, of course, limits our manufacturing partners.”

Adds Phil Ratcliffe: “Of course social conscience has a part to play. It is a pity, however, that there are still so many different organisations auditing factories, each with differing criteria and it is understandable that some factory owners get frustrated. 

“It is important that factory owners are given the opportunity and the time to achieve compliance for their workers. If not, this can result in factories closing or workers being let go, which surely has to be detrimental to the process of trying to improve conditions.”

Simon Birchenough, MD at Worlds Apart, believes: “The issue of suppliers folding is huge and the knock-on effect of sub-contractors and secondary suppliers shutting down is even more significant."

Given all the upheaval in China, does the toy industry think that the country will still enjoy its status as the world’s hub of toy manufacturing in ten years’ time? “Definitely,” says Frank Martin. “With 1.2 billion people and the need to create up to 300 million manufacturing jobs over the next 20 years (to absorb the flow of labour from the land as a result of the industrialisation of agriculture), China will remain the primary source of toy manufacturing for the next 25 years at least. This manufacturing may well not take place in the Pearl River delta – it may move inland – but it will remain in China for the forseeable future.”


Big trouble in little China

Steve Reece takes a look at the industry’s recent over reliance on China as a manufacturing hub and what possible solutions are on hand to help toy firms.

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