Race to the Top for China's Toy Manufacturers
   2012-06-12 15:55:10    CRIENGLISH.com      Web Editor: dingxiaoxiao

By Stuart Wiggin

On June 12, a new toy safety standard came into effect in the United States of America. Although the standard was approved in December last year, it took 180 days for the standard to become federal law, thus replacing the previous standard which had been in effect since 2008. Changes to the U.S. safety standard come following a similar upgrading of EU toy safety standards in March. The significant change in safety policy has aroused concern among Chinese manufacturers and exporters in regards to toy testing requirements.

The new U.S. toy safety regulation, which will effect all toys imported into the United States, means that adapting to the new global business climate is more important than ever for Chinese toy manufacturers. The Chinese toy industry has been the target of much criticism in the past. In 2007, Mattel, the world's largest toy maker, recalled millions of units produced in China. Many within the U.S. saw this as a sign of inferior production and substandard safety requirements within the Chinese toy industry. Eventually, Mattel executives apologized to Chinese manufacturers after presenting the problem as a Chinese one. However, the damage had already been done to the 'made in China' tagline that appears on the majority of toys produced in the world today.

The Chinese toy industry's tainted image abroad has been compounded by the current economic climate, in reference to the Euro debt crisis and weak U.S. demand. As stricter safety requirements come into effect in the U.S., China's toy industry, which is already being squeezed by rising labor costs, is set to suffer more. The wages of Chinese factory workers have increased 20 percent annually over the past two years and 2012 is set to be no different. Meanwhile, toy exports fell 10 to 20 percent in 2011 according to the Toy Manufacturers' Association of Hong Kong. Elsewhere, rising material costs and currency appreciation have squeezed profit margins as retailers have kept prices steady, forcing manufacturers to absorb all the costs. 261 toy companies are believed to have suffered losses by April last year, according to data vendor Shanghai Wind Information.

The latest regulation from the U.S. is yet another sign therefore that Chinese manufacturers must reassess their business models in order to maximize profits. Though Europe and the U.S. have provided traditional markets for Chinese toy exporters, future emphasis of the industry as a whole will now surely fall upon the domestic market. Upgrading production in order to focus on domestic demand would help toy manufacturers escape the extra costs that increased levels of testing would create. This course of upgrading production has already taken effect in Guangdong. In Chenghai district, Shantou City, toy companies and manufacturers are taking an active role, alongside the government, in an effort to upgrade the toy industry within the region. Back in 2008, the Chenghai district government signed a cooperative agreement with CCTV Animation Studios. As a result, Chenghai became the designated production base for toys bearing CCTV animation images. This move means that the industry within Chenghai is in a better position to withstand the shocks created by changes to safety standards abroad as the region's manufacturers look increasingly towards the domestic market.

At present, most Chinese toy makers are original equipment manufacturers (OEMs). As a result, these manufacturers have little autonomy and are unable to withstand risks due to the low profit margins and a lack of innovative capability. Dongguan, in Guangdong province, is the hub of China's toy industry, producing a third of the country's toys. Over 80 percent of toy makers in Dongguan are OEMs and are therefore directly affected by changes within overseas safety laws. In order to capitalize upon the domestic market, toy manufacturers have been trying desperately to create recognized brands as they look to transition into above-scale toy manufacturers. And even though a brand goes a long way in China, as evidenced by the fact that the luxury goods industry is booming here, innovative design is also key for the success of domestic toy makers. Wealthy Chinese individuals have shown that they are willing to pay more for higher quality goods.

Furthermore, toy manufacturers would do well to increase the amount of automation within an industry that is at present incredibly labor intensive. Achieving a greater level of automation would be bad news for the industry's workforce, especially considering that last year roughly 10 percent of the workers within the toy industry are thought to have lost their jobs, according to a Reuters report earlier this year. However, a greater level of automation would allow companies to escape the dangers that a costly labor force poses.

China's toy industry produces 75 percent of the world's global toy exports. In 2010, toy sales in China created some 12.46 billion US dollars, with Dongguan, a region in Guangdong accounting for around 70 percent of this total. Ultimately, moving up the value chain will provide Chinese toy manufacturers with their best opportunity to cash in on China's growing economy and escape the pitfalls of exporting; pitfalls that have become even deeper following the latest introduction of America's newest toy safety standard.

These views do not reflect the views of CRI.

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