HOW THE PANDEMIC WILL AFFECT TOY & GAME SUPPLY CHAINS
2020 has been a tumultuous year for mankind. For the toy and games business it has been interesting so far to say the least! Toy fair season mostly proceeded according to plan, albeit with fewer Chinese companies in attendance, but pretty much as soon as the trade show season wrapped up the world declared a pandemic and lockdown ensued.
We’ve written elsewhere about the purchasing habits of consumers during this time, but this article will look at the impact on and implications for the global supply chain for toys and games.
Firstly we should state that prior to the pandemic we were already at a crossroads in terms of toy and game manufacturing, with China’s rapidly developing economy moving beyond the point where it can easily sustain the type of high labour toy manufacturing which built the massive manufacturing hubs for toys in China. The following video presentation offers more insight on this trend, what it means, and why it means China is going to play a bigger part in the toy business in the future, but in a changed role and why that means some high labour toy production has already moved out of China and will continue to do so for the next decade:
Aside from this the world has changed a lot so far in 2020 due to the Covid-19 pandemic, the question though will be the extent to which that is short-term versus permanent.
The first major impact on the toy and game supply chain was China’s lockdown and delay in re-starting production after Chinese New Year. Thankfully at the time of writing this has now largely cleared and Chinese toy factories are mostly back producing again, albeit producing for a much altered economic situation and a toy market with differing demand levels across categories.
Vietnam, the primary alternative toy manufacturing hub to China has seemingly managed the pandemic in an admirable way with far less disruption versus other countries. While India has been in a strict lockdown, albeit with this easing at the time of writing and most factories beginning to produce toys again.
So that’s what has clearly happened in the short term. The implications of what has happened are less clear though.
While China was locked down we saw a flood of urgent enquiries for toy production in India and Vietnam as companies knee-jerked towards alternatives to China. Then all of a sudden as soon as China’s toy factories got back into swing the enquiries tailed away and the status quo resumed. Frankly this knee jerk way of managing sourcing is worrying – as the cliché goes you don’t want to put all your eggs in one basket!
Strategically speaking the market leaders in the toy business have been seeking to diversify their supply chain since at least 2013-2014, and at the time of writing Vietnam has been the primary beneficiary but with other Asian countries like India & Indonesia benefiting also.
So the trend has been to move some production away from China for some time. Both Hasbro and Spin Master have stated to the stock market that expect to have as much as 50% of their manufacturing coming from outside China in the next year or two. This is a huge shift versus where they were even 5 years ago.
So to understand whether there will be any long term impact of the Covid-19 pandemic on toy sourcing we need to assess for two ends of the spectrum – at one end we have strategic stock market listed companies who have to manage and mitigate risks as a part of their corporate culture to avoid having to ever (as far as possible) deliver bad news to the market for any single quarter. At the other end of the spectrum are the majority of toy companies – often owner or family managed, generally managed in a competent but not corporate, ultra-disciplined or strategic way.
The major stock market toy companies have long since been diversifying to avoid relying entirely on China for manufacturing both in terms of managing risk of being reliant on on one country as a source but also to mitigate and to address cost inflation in China. For these companies, it is likely that they will stay on their planned track even coming out of the Covid-19 crisis, because they were already taking significant steps to plan for China’s rapidly advancing economic cycle and the hard reality that means this laudible increase in wealth and wages will make low end labour heavy toy production less and less viable over time.
For independent toy companies we would surely have to expect that some would recognise the risk of being so reliant on China’s toy manufacturing and seek at least a little diversification. To start from the beginning finding new factories, auditing them, checking them out and running a first year production pilot takes time. So to have to set all that up and do all the required work in a panic is not preparing for success. Nevertheless, we expect based on our understanding of human behaviour and the inertia and intransigence of toy companies who have a deeply ingrained sourcing from China ‘habit’ that most toy companies will not choose to change anything much coming out of the pandemic.
In fact, as change = risk and uncertainty we have seen short term signs of even the major corporate toy companies locking in their current arrangements. There is so uncertainty around the world, health, working practises and the overall toy and games business in the midst of the pandemic lockdown that even where it makes strategic sense, even the most corporate of companies will go into risk aversion mode.
Therefore, while we expect the long term trend of toy companies seeking alternatives to toy manufacturing in China to continue and if anything gather pace, the short term impact of the coronavirus outbreak is more likely to be a delaying influence on toy manufacturing transition.
We run a venture helping toy companies set up toy manufacturing in India: www.ToyTeamIndia.com
We also help toy factories in China go from being OEM contract manufacturing suppliers to building their own brands and distribution. This change in business model allows factories to go up the value chain and move from c. 5% manufacturing margins to 30% brand owner margins. For more information on this: https://www.kidsbrandinsight.com/blog/toy-co-growth-booster-program/