The Wall Street Journal-20080111-Not All Fun- Games at Hong Kong Toy Fair
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Not All Fun, Games at Hong Kong Toy Fair
HONG KONG -- It's called the Hong Kong Toys & Games Fair, but this year it was marked by woe and worry.
After a challenging year of recalls in 2007, China's toy makers are facing more problems in 2008. Vendors at the 34th annual fair, which wrapped up yesterday, reported a mounting list of concerns about their prospects, including rising prices for oil and other raw materials, labor shortages and increased regulatory scrutiny.
The combination of these pressures will raise costs and once again could transform China's toy industry, which in recent years has seen an explosion of small factories competing to deliver ever-lower prices to customers overseas. Cost pressures could kill off some of those smaller, more vulnerable players, leaving the manufacturers that remain with a bit more bargaining power and possibly raising the price of toys, at least at the wholesale level.
On the other hand, a field winnowed of smaller players, which are under more pressure to cut costs and corners, also could ultimately help make toys safer.
Most of the 2,000-plus sellers at the Hong Kong fair, Asia's largest toy exhibition, either directly make their toys in mainland China or source them from the mainland, where more than 80% of the world's toys are made.
"The smaller guys are getting all the pressure from the buyers," said Lawrence Chan, chairman of the Hong Kong Toys Council. "These small and less organized companies will face more problems to survive."
Over the past several years, a boom in the number of start-up factories producing toys for export has created a highly competitive environment. New factories were often able to meet buyer's price demands early on. Only later did issues of maintenance and quality control become apparent.
"Those kinds of squeezes have really challenged producers to make changes in production," said Richard O'Brien, director of international programs and intergovernmental affairs at the U.S. Consumer Product Safety Commission. "The opportunity for mistakes or unwise decisions is much greater than in factories with more stable and predictable track records."
Overall the export picture has been strong. China recently reported that toy exports rose 20% in the first 10 months of 2007 to $7.1 billion. In the U.S., in the recent holiday season, toy sales are estimated to have risen by just 3%. The discrepancy is partly due to China's robust toy exports to Europe, as well as to the re-import of many toys into China, a common tax strategy.
Some sellers at the fair also expressed concern about the impact of slowing economies in the West on toy consumption. Toy makers depend on volume, as profit margins for factories are notoriously narrow. With costs expected to mount, many more will find their operations unsustainable.
"This year is definitely more difficult than last year," said Stephen Lai, owner of Wing Tai Plastic & Metal Factory Ltd., a medium- size company of about 500 employees. "Costs are up 40% to 50% for some electrical components."
After last year's spate of world-wide toy recalls, which affected tens of millions of toys with design and manufacturing defects, Chinese toy makers must now navigate a complex and growing regulatory maze of product standards, safety codes and certification systems in order to sell their products. Additional product testing alone will add about 10% to Mr. Lai's sales prices.
China's consumer-products regulator, the central-level General Administration for Quality Supervision, Inspection and Quarantine, or Aqsiq, "fully expects that as they begin to implement more and more requirements, the small, unsophisticated companies will simply go out of business," said Mr. O'Brien of the CPSC. Aqsiq didn't respond to a request to comment.
Chinese manufacturers also face the possibility of sweeping changes in U.S. product-safety laws, now under consideration by Congress, which would further raise costs and add to the lead time required for production by imposing certification and third-party testing obligations.
Samson Chan, president of the Toy Manufacturers' Association of Hong Kong, predicts widely divergent price increases ranging from 10% to 30% in the year ahead, depending on the type of toy.
