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The Exit Of Toy Producers From China Is Not A Trivial Matter

The Exit Of Toy Producers From China Is Not A Trivial Matter
Toy manufacturers facing rising expenses in China are finding it difficult to move their production to less expensive locations.
Hasbro, the monopoly manufacturer, approached Aequs, an Indian provider of aerospace and durable goods, about a subcontract six years ago.
"They said if you can get into toy manufacturing, now we're looking to shift millions of dollars worth of product from China to India," Rohit Hegde, Aequs' head of consumer verticals, said. "We said: as long as we can get at least about $100 million of business in the next few years, we can definitely invest in it."
Presently, Aequs manufactures a plethora of toys for Hasbro and other companies, such as Spin Master, and has established a new tab in two 350,000-square-foot facilities located in Belgaum, India.
However, Hegde and other manufacturers agree that China is more efficient than other nations, which hinders their attempts to move to lower cost bases and increases the possibility of future price increases for toys if the majority of production stays in China.
"We don't have the port facilities (in India) that China does. We don't have the road facilities that China does. They have been doing this for the last 30 years, their efficiency levels are much better than ours," Hedge said.
However, during the COVID-19 pandemic, when Chinese ports found it difficult to export goods and were periodically shut down, leaving shipments stranded, the risks of relying on China for the majority of their production were highlighted for toy manufacturers, including Hasbro and Barbie doll maker Mattel, opens new tab.
Manufacturers in many industries have already been compelled to diversify their output regionally due to China's skyrocketing labour costs.
According to a report released by Rhodium Group in September of last year, the total announced greenfield investment from the United States and Europe increased by $65 billion, or 400%, in India between 2021 and 2022, whereas investment in China fell to less than $20 billion in 2022 from a peak of $120 billion in 2018. A portion of this capital was also drawn from Malaysia, Vietnam, and Mexico.
But while other businesses prosper, toymakers find it difficult to change their production methods.
Mainland China continued to produce 79% of toys sold in the US and Europe as of the first seven months of this year, down from 82% in 2019, according to U.S. and EU import statistics that S&P Global Market Intelligence's trade data firm Panjiva provided to the media.
In contrast, 35% of EU and US imports of clothing came from mainland China in 2019. In the year ending July 31, this dropped to just 30%, with Mexico and India reaping the greatest benefits.
"Is it easy to re-shore away from mainland China? No, it isn't. That goes double for toys," S&P Global Market Intelligence's Chris Rogers said. "It's more complicated because they're highly seasonal -- you're asking a partner to sit on inventory for most of the year. Toy makers also have to be doubly rigorous on safety, sourcing and making sure workers are treated well."
While the minimum salary in China ranges from 1,420 yuan to 2,690 yuan ($198.52–$376.08), central bank estimates for India show that unskilled and semi-skilled workers can expect to make between 9,000 and 15,000 Indian rupees per month ($108.04–$180.06).
However, if a business is purchasing goods from a contract manufacturer, setting up to source from overseas can take up to 18 months, and if a business is starting from scratch and creating a new plant, it can take up to three years, according to Rogers.
Production of toys intended for autumn sales begins in May, after which they are either sent or stored.
In its 2018 annual report, Hasbro addressed its excessive reliance on China as an operational risk, but Mattel has supposedly been moving away from China ever since it was forced to recall millions of toys contaminated with lead paint in 2007. Since the pandemic, industry-wide efforts have increased.
There were no comments from Hasbro and Mattel about the issue.
The rising cost of toys is partly due to China's spiralling wages. For example, in the UK, prices increased by almost 8% in the first half of 2022, as reported by Circana, the old name for NPD. If firms are unable to reduce costs by shifting to less expensive manufacturing areas, customers run the risk of seeing continuous steep price increases.
Revocation of China's "permanent normal trade relations" status has been called for by some Republican leaders, even though the United States now levies very little on Chinese toys. The National Retail Federation estimates that a move of this kind may result in a more than five percent increase in toy prices in the US.
"We are all looking at derisking China," said Nic Aldridge, managing director at Bandai UK, the maker of Tamagotchi virtual pets, opens new tab. "Raw materials costs have gone up a lot in China, we're looking for places where we could get a more reasonable cost."
While Taiwan, Japan, and Vietnam produce some of Bandai's products, mainland China remains the company's primary manufacturing location. According to Aldridge, it is considering Thailand and India as further locations.
Even though its sales of LOL Surprise and Bratz dolls decreased from the previous year, MGA Entertainment, the manufacturer of these dolls, has found that expanding its sourcing beyond China to nations like Vietnam and India is hampered by the lack of adequate infrastructure.
Based on data from Panjiva, India's share of toy imports into the US and EU for the last five years was under 1%.
"The issue in India is really the gridlock of moving even from one state to another. There are so many crazy regulations," MGA Entertainment CEO Isaac Larian told Reuters.
"(But) the infrastructure is getting better and better as these countries realize the opportunity they have to take business away from China and they are investing," he said.

Christopher J. Mitchell

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