Indian Toy Manufacturing Update – Capacity For 2020 Dwindling
When our company first began connecting export ready and certified Indian toy factories with toy company customers around 5 years ago, it was frankly a hard sell. Although the major corporate companies like Hasbro had started to move into India in a big way, perceptions – or perhaps more accurately – preconceptions of India were a barrier to over come as was the long term habitual reliance on China’s fantastic reliability of supply and capacity to meet demand.
Today however, things have changed. India is a hot topic for toy companies right now. We have been arguing for 5 years that the only logical medium to long term alternative to China for toy manufacturing is India. In case you haven’t read previous articles, we have published on this topic, let’s follow our analysis through to this conclusion.
Firstly, let’s start with acknowledging how fantastic China’s toy production has been for the toy industry over the last 2 decades or more. The scale, efficiency and consistency of the toy manufacturing sector in China is not going to be easily or instantly replicated anywhere else. So why would we choose to move away from this proven hub of toy manufacturing? The reasons are more about China’s development than about anything we as the toy business can realistically influence. If you talk to people who have worked with Chinese toy factories for a couple of decades, they will tell you that originally the approach was to throw cheap labour at any issues. Over time, the ad hoc approach of throwing extra labour at any issues has been replaced by more efficiency. At the same time though, China’s working population has effectively started to move on from low end production line jobs for a low wage. The economy has been in the process of going beyond that for a decade. All those issues with lack of labour, manufacturing cost inflation and the working conditions caused by having to move a transient workforce in from far afield within China are a symptom of this that we all took for granted. Today, China is an increasingly modern economy, and that’s a great thing for their citizens, but it means that the country will not have the same advantages for low end labour intensive manual production line labour it had in the past. The Chinese government has a stated policy of seeking leadership in those disciplines which are higher end than toys. Because so many toys come and go every year, it is not viable to invest in automation on a product which could be gone a few months later. So, in conclusion on the direction of China’s toy manufacturing sector, we predict that China will keep the higher end toy manufacturing involving automation & technology, but the basic low-end toy manufacturing will go elsewhere.
Our analysis suggests that perhaps as much as half of all toy manufacturing currently in China could go elsewhere to find cheaper labour and to find the capacity at this low end which is going to start to dwindle in China.
Outside of China, the only viable alternative for at least the medium term is India. India has an educated, mostly English-speaking workforce. Labour costs are currently comparatively low. Existing industrial capacity is high, the automotive sector in India is developed and advanced, and injection moulded plastic components are a significant contributor to cars. Such injection moulding can be relatively easily adapted to produce toys. Above all though, India is the only nation in the world with a similar population size to China. There will be no shortage of workforce in India, and currently the urban population needs work and will take work like toy production line jobs.
No other country hits all these sweet spots like India. For sure there are challenges & shortcomings in India, as there would have been in China when toy production first started migrating there. The manufacturing transition process won’t go completely smoothly, but it is coming whether we like it or not and whether we are willing to act or not.
Those companies already sourcing from India may be achieving c. 10% manufacturing cost savings. Yes, those companies have a learning curve and some bumps along the way, this is not going to be as easy as sourcing from a country and sector which has been doing this already for 30 years! But bear in mind that manufacturing costs are usually the biggest cost for toy companies. We tend to spend c. 27-33% of sales value on manufacturing. So, forget corporate restructuring or cutting the advertising budget, the biggest area where a toy company can save money is manufacturing cost. A potential cost saving of 10% on the biggest cost area is likely to deliver both competitive advantage and also more profits.
This argument has been valid for the last 5 years at least, but the inertia caused by offices & infrastructure in or close to China has held toy companies back from migrating en masse elsewhere. Also, because annual cost increases are an annual drip, drip, drip of margin erosion there is no big shock to be the star to break the camel’s back. What has happened in the last year is that China’s economy is another year on from the time when it made economic sense to have low end manufacturing based there and of course we have the trade spat between the USA & China.
The tariff situation aside from all other consequences (intended or otherwise) has clearly accelerated the movement of toy manufacturing out of China. India has been a major beneficiary. The challenge for the toy industry (as we have been telling people for 5 years!) is that there are a limited number of export standard and certified toy factories in India. Those companies who were there first have established relationships and secured capacity, those who leave it to the last minute will mostly find that capacity is not there for them. India is on a major growth curve in terms of toy capacity, especially as the automotive sector both worldwide but especially in India have hit tough times, so the supply chain which contributes injection moulded parts for cars is increasingly looking elsewhere. The challenge though is that it takes time to build factories, to get certified and to build experience and toy specific supply chain, so demand is likely to outstrip supply for years to come. China has thousands of toy factories, and you just can’t replicate that in a hurry. New factories tend to launch with an ‘anchor’ customer to justify the investment required by the factory, so the reality is if you aren’t that anchor customer taking the capacity but also the pain of developing a completely new supplier then you are always picking up scraps left on the table by another toy company.
As we head into 2020, several factories in India of the highest quality are already full. Some of the up and coming factories definitely have capacity left but that is increasingly under pressure.
One of the other observations we would make about Indian toy manufacturing today is that it is not as fully developed in terms of product capabilities as China. This is to be expected based on one being completely mature and the other just developing. Hard plastics, basic electronics, packaging and Plush are all good in India. Soft ‘squishy’ type plastics & rubbers are less developed, complex electronics are harder to find at this point and some other categories are not yet available to the standards the toy industry needs, but this is developing constantly.
In conclusion, India is up and coming. The recent tariff situation has significantly increased pressure on existing factories. The sector is developing quickly but is not yet fully mature. India offers some different challenges to overcome and is not a perfect solution, but it is an amazing country and a vibrant and exciting country to visit, with great people. Sooner or later, if you are involved in sourcing and manufacturing of toys you are going to be heading to India, and so far it looks like the earlier you can do that the more of an advantage you can create versus your slower moving competitors.