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The Ever-Growing Importance Of China To The Global Toy Industry

The Ever-Growing Importance Of China To The Global Toy Industry

Spoiler alert: this article is not primarily about OEM manufacturing!

For those who have been in the toy business for a long time, China is synonymous with toy manufacturing, and has been for the working lifetimes of most people in the toy trade. China has been an incredible manufacturing resource for toy companies. Much has been written about the pressures on China’s toy factories (including by ourselves), with rapid economic development which makes labour intensive toy production less and less viable in China. Labour cost inflation is the primary reason why toy companies are increasingly looking to Vietnam, India and other Asian markets to pick up some slack in terms of lower labour costs.

This manufacturing picture though is not the only picture. There are two major areas where China is going to offer huge opportunity, competition and activity for the toy business around the world for the forseeable future:

Domestic China Market

There was a point in time when China’s domestic toy market was primarily generic locally manufactured toys. Over time though, as China’s economy has developed and living standards have increased substantially, China is fast becoming the major growth opportunity in the world today for established toy companies. The fact that Lego has plans to open 80+ stores in China should give a strong indication of just how big the domestic toy market opportunity is in China. If current levels of economic development and brand adoption continue, China could become the world’s biggest toy market in a decade potentially.

China therefore has growing importance to the toy industry because there are only so many countries in the world which offer such a large market alongside significant upward growth. The challenge for many toy companies though is that China (like all markets) has its own quirks in terms of culture, distribution setup, media and consumer wants. To use the Lego example again, Lego has launched products tailored to the Chinese market – this is in itself quite a statement, because Lego’s range is one of the most global in the toy business. The major U.S. stock market listed companies have been investing heavily in China’s domestic toy market for at least a decade because above all they need growth to satisfy their investors.

For smaller toy and game companies it can be daunting to know where to start with selling in China, and just like elsewhere, finding a good committed distributor can be challenging, but nevertheless the opportunities are significant and growing.

Chinese manufacturing companies launching their own brands

China has been the world’s toy manufacturing powerhouse for so long, and many manufacturing groups have generated significant wealth over decades by manufacturing toy products on an OEM basis for other companies. Even from way back though, some toy factories went direct to building their own brands in Western markets supplied from their own factories in China. This method of doing business is growing. Logically speaking it makes sense after all, maybe once a toy factory supplying OEM manufacturing might make 15% profit or more, but today with increased labour costs and constant downward pressure on pricing from customers while costs rise might be lucky to generate 5% profit. It makes sense then that of those thousands of Chinese toy factories some should invest to seek to transition from manufacturing toys for other people to designing, manufacturing, selling and marketing their own products and brands.

This could be one of the most disruptive implications of China’s economic development for toy markets around the world, as long- established toy factories with significant expertise move up the value chain to compete with their one-time customers. In the last 12 months, our company has Consulted for more Chinese factories looking to move up the value chain and establish their own brand than we did in the 5 years before that.

China’s role in the world, and especially for us in the toy business is changing. This vast heavily populated country at one point supplied our industry with a large industrial capacity, huge workforce and cheap labour. Looking forward though, while Chinese factories will continue to play a very significant role in supplying toy companies with OEM manufacturing, that role is likely to recede over time. Whereas China’s domestic market is likely to grow significantly, and the number of Chinese toy factories switching from OEM to creating and building their own brands is going to increase significantly which will add competition and new product development streams to the market.

We run a Consultancy business advising toy companies on how to grow their business by a combination of strategic analysis and export sales facilitation. We have helped more than 100 companies grow. Our clients range from $multi-billion FMCG giants through to start ups, from long established toy companies to toy factories and everything in between. We work with companies around the world – recent projects have been delivered for clients in the USA, UK, China, Hong Kong, India, Eastern Europe and beyond. For more information on our process and methodology for growing toy sales: https://www.kidsbrandinsight.com/blog/toy-co-growth-booster-program/

The Future For China & Toys

THE FUTURE FOR CHINA & TOYS

China has been the heart of the toy industry in many ways for the last few decades. With a dominant position/share of toy manufacturing China has been the key source for toy companies. These though are interesting times – China’s traditional cost benefit on labour heavy toy production seems to have waned considerably in the last few years in particular. Numerous Chinese toy manufacturing groups have opened factories in Vietnam to balance out China’s rising/risen labour costs. Yet the question remains not just will China continue to be a viable source for labour heavy non automated production of toys, but also does it want to? With the pollution problems in several major population centres, the difficulty finding workers who can live in the key manufacturing centres on factory production line jobs and the fact that China’s accelerated & awe inspiring economic development is now pointing towards higher end automated/technology driven manufacturing.

Aside from the manufacturing consideration, China has become an extremely important toy market for distribution also. This importance stems from two factors: 1. The size of the market, with China having moved ahead of Japan’s powerful toy juggernaut in terms of market size in the last few years to take the mantle of world’s 2nd biggest toy market.  2. The certainty of significant market growth over the next few years – as the more mature Western markets grow in low single digits, China’s increasing wealth is filtering through to consumer spending on toys. Moreover, the relaxing of the 1 child policy will clearly lead to higher birth rates, and as every child born will have toys, growth is therefore assured.

So that’s where we’re at today – a Chinese toy manufacturing sector facing challenges & in the process of moving up the value chain and an internal Chinese toy market which is a major growth opportunity both locally but also for those established toy companies with the ambition and wherewithal to take on the China opportunity.

Looking forward, here are some observations about what’s to come for China & the toy industry:

CHINA & TOYS – FUTURE MANUFACTURING

The one truth which is clear is that the traditional heartland of toy manufacturing in the South of China is likely to encounter change going forward. The local economy, real estate prices etc dictate that local workers will struggle to work in low end manufacturing jobs, even if the factories pay them more, that will in itself cause change as the factories will be less competitive on price leading to less business which is the biggest change driver of them all in business! In addition the traditional model of bringing in workers from further afield in China’s interior seems to be less viable as the overall economic growth/maturing of the economy makes these jobs less and less worth leaving your family for.

The good news for Chinese toy manufacturing though is that the toy industry totally has the China habit – trying to get a toy company to move away from China to other Asian manufacturing countries like Vietnam or India has been compared to trying to get blood from a stone – the deeply embedded nature of the Hong Kong toy hub and long term factory relationships have created a huge inertia which means toy companies sometimes appear to literally need to be dragged kicking and screaming away from China!

On a more positive note, it is very clear that the Chinese toy manufacturing sector is in the process of moving higher up the manufacturing value chain – so we can expect significant growth in high end products where production can be automated/robotised and also in more advanced technology driven products. As such, while I expect China to (eventually) lose much of the low end labour heavy production, I believe it will keep a significant amount of toy manufacturing long term due to the higher tech production resulting from the knowledge driven more sophisticated economy that has arisen & will continue to develop.

In short, longer term I expect China to be a less dominant player in toy manufacturing, but still a major source, certainly for the next decade or so. Hong Kong is therefore likely to remain the hub of the Far East toy manufacturing scene for the forseeable future. Despite the increasing levels of growth/transfer of production to India, Vietnam and others we are seeing/will see over the next decade, the level of expertise/experience in Hong Kong and the fact it is as close to all Asian toy producing countries as anywhere else means Hong Kong is here to stay as our Asian hub for toy companies.

CHINA & TOYS – FUTURE OF CHINA’S DOMESTIC TOY MARKET

This section is mostly good news. The reality is this – China is today a distant 2nd to the USA in terms of domestic toy market size, but China’s toy market is growing rapidly. This is great news for the global toy industry – while mature markets like the USA, Canada, Western Europe etc., will continue to grow single digits due to growing population, China appears likely to see more significant growth – due to increasing standard of living and disposable income for more of it’s people. When you combine this with the relaxing of the one child policy, the resultant increase in birth rate which is set to be significant, and with the sheer size of China’s population, the reality is that China is likely to be the most consistent growth opportunity for toy companies for a decade or more. That’s not to say there aren’t challenges inherent within trying to grow in China, but there is a reason why Mattel & others are so focused on planting seeds of growth in China – in the medium-longterm China’s toy market size will eclipse that of the USA, while the USA still continues to grow at a lower rate.

In short, aside from short term issues, further global financial slowdowns/crashes, the bad movie year that was 2017 for the global toy industry and the constant fight for retail share/listings, the future looks glowing for the global toy industry, and China is a major factor in that rosy outlook!

 

by Steve Reece, CEO of Kids Brand Insight www.KidsBrandInsight.com,  a leading toy expert consultancy to toy companies around the world, which helps people & companies to get ahead in the toy industry, find the right toy & game factories and to consumer research test their products with kids and parents. Steve also advises investment companies via leading expert networks like Gerson Lehrman (Steve is an acnowledged GLG toy expert).