China’s changing role in the toy business
For 3 decades or more, China has been the primary hub for toy manufacturing, and has developed into a highly reliable, effective and expert resource for the toy business. However, China’s economy has advanced at such a rapid rate that it is no longer viable to employ Chinese people in factories for toys with a large labour element in manufacturing. Because our industry is founded on an ongoing massive product churn with the vast majority of toys each year being new, this makes it hard to automate production, and therefore we continue to rely on cheap labour to make pricing as competitive as possible. The reason the toy business gravitated en masse to Chinese factories in the first place was because there was a vast labour force who worked for very low wages. Now though the Chinese economy has advanced beyond the point where that model works. In general, this should surely be seen as a good thing for Chinese people – living standards and disposable income have risen substantially. The challenge though is what happens next for toy companies who have relied so heavily on China’s vast manufacturing sector?
China's future role in toy production
Before we will look at the answer to this question, we should also be clear on China’s future role in the toy business. Firstly, China is the world’s second largest toy market, and as such it would make no sense for domestic supply to be produced elsewhere. Secondly, China is still going to be a key manufacturing partner for toy companies for at least the next 5-10 years, but the types of toys manufactured in China will rebalance more towards
a) toys with perennial sales where production can be automated
b) toys with complex production requirements like high end electronics.
Our analysis suggests that China will retain around half of toy manufacturing for the next 5 years or so at least, but it will no longer be the sole primary hub in the way that it once was.
The multi-hub reality
The bottom line for toy companies is that our industry is moving to a multi-hub sourcing situation. This has already been embraced my many toy companies and investigated by quite a few more. For some though reality is yet to hit since a significant amount of toy production has already been moved out of China. The challenge of course is that there is no single alternative to the expertise, reliability, labour force and capacity in China.
Outsourcing production to Vietnam
The major beneficiaries of moves away from China have been Vietnam and India so far. Over the last decade, Vietnam has seen many Chinese manufacturing companies set up new facilities with Chinese supply chain, ownership and ways of working with Vietnamese labour. Toy companies we have spoken to tell us supply from Vietnam is reliable and somewhat cheaper versus China, the major challenge we have heard repeatedly though is that Vietnam’s available workforce and latent industrial capacity is more limited. Therefore, we expect Vietnam to be an important supply source for the toy business, but only up to a limited amount of supply capacity – we will still need more capacity elsewhere.
India is rising
India is the primary opportunity to secure vast cheap production line labour along with latent industrial capacity. India is the only country in the world with similar population to China, and with labour costs significantly cheaper than China or Vietnam it’s obvious why India could develop the same amount of capacity as China eventually. The other advantage India has is a large scale latent industrial capacity, primarily due to the large automotive sector, with over 25m cars produced each year in India, with a massive plastic component supply chain. India does have several challenges in terms of method of communication, working practices, efficiency and reliability – but there are a number of very good factories in India now, and with huge moves into expanding the toy manufacturing sector India seems likely to become a major source for toy manufacturing going forward, but again is unlikely to become the toy manufacturing hub in the short term.
There are some additional high-level factories across other Asian factories including in Indonesia, Malaysia, Thailand and the Philippines, but the scale is not there yet, and may not come.
Opportunities for near shoring?
The issues with shipping costs this year have increased demand for local manufacturing in Europe. There are some excellent factories, particularly in Eastern Europe, but the challenge going forward is that pricing tends to be higher – as much as 25% higher FOB prices. So, in 2021 this might make a lot of sense, but when shipping costs return closer to normal levels the viability of near shoring will be harder to justify financially. There are some other benefits of near shoring aside from financials including speed of supply and diversification of supply chain risk. Product can move from Eastern Europe to West in just a couple of days, versus 4 to 5 weeks on the water shipping from Asia. With toy sales being so seasonal, one beneficial approach might be to have split supply with the bulk coming from Asia but with some resupply orders coming from closer to home.
The future of toy sourcing?
Overall then, the situation has begun to move from a single source model to a multi-hub approach. This is actually not a new situation though. This is what existed before China’s rise in the world of toy production. Going back to the early 1980s and beforehand, toys were generally sourced from multiple locations – Hong Kong, Taiwan, Japan and other locations. This situation may be new for us, but it is not new from a historical perspective.
The challenge is that we are heading into a situation where it is harder to manage, not easier. New factories in new locations don’t have 30 years of experience manufacturing toys, they may not have the same working practices – so uncertainty, risk and service failure are likely to increase overall. There will be good and bad things about this, for instance, in our work in India we found plenty of challenges, but the issues we have had in China with dorm working culture where workers live in the factory don’t really exist in the same way in India – local employment legislation is mostly more protective of the workers in India versus China.
In conclusion, prudent toy companies, even small companies, will be working on strategic diversification in sourcing, because due to economic factors, China is not going to be the primary source for toy manufacturing going forward as it has been in the past. With geopolitical risks coming to the fore, especially for US companies which tend to drive the major share of manufacturing volumes, there is an increasingly strong case for focusing on securing production capacity first and maximizing cost metrics second.