By Alexander Chipman Koty
China’s toy industry recorded strong growth in 2016, bucking recent trends in China’s light industry sector. While China’s total exports fell by 7.7% and imports by 5.5% in 2016, toy exports increased by 9.5% and imports by 23%.
Although lower-cost manufacturing sites in India and Vietnam have attracted the attention of investors, China’s toy industry has fared well due to a shift in the country’s booming domestic market and advanced manufacturing processes. Given the maturity of the industry, however, foreign investors need to be strategic when entering the market to compete with established players.
China is the world’s largest toymaker, producing around 70% of the world’s supply. The total value of toy exports reached $33.7 billion in 2016. Of this, traditional toys, including dolls, puzzles, educational toys, etc., were valued at $18.4 billion. . Most toys exported by China are produced by OEMs that manufacture for foreign brands.
China has many toy industry clusters along its rich east coast. Guangdong Province alone produces more than half of the world’s toys, with the cities of Dongguan, Foshan, Shantou and Shenzhen leading. Other major toy production sites include Yiwu, Yunhe and Wenzhou cities in Zhejiang province; Yangzhou in Jiangsu Province; and Linyi and Qingdao in Shandong Province.
The city of Jiaxing in Zhejiang province has also become a major toy producer after Danish toy-making giant LEGO opened its first Asian factory there. The 160,000 square meter factory will employ some 1,200 workers and produce 80% of LEGO products for sale in Asia.
Overall, there are more than 10,000 toy manufacturers in China. Collectively, they employ approximately six million workers.
Both Chinese and foreign manufacturers have invested heavily in automation and R&D to increase efficiency and offset rising labor costs. Additionally, the growing popularity of more complex, high-tech toys is fueling the need for more advanced technologies and production methods, as well as more skilled employees.
Low-cost manufacturing initially drove China’s toy industry, but the emergence of a huge domestic consumer market has fueled its continued growth. The China Toy & Juvenile Products Association predicts that the Chinese toy market will grow 9.2% in 2017 to reach RMB 60.7 billion ($8.8 billion).
China’s rapidly rising income levels have made the country a giant consumer in a growing number of industries. However, it is not just soaring wealth that is driving up toy consumption.
The abolition of the one-child policy at the end of 2015 in favor of a two-child policy should lead to an influx of newborn babies, which should lead to an increase in the demand for toys in the short to medium term.
According to the Hong Kong Trade and Development Council, the two-child policy will lead to the birth of 2.4 million more babies in China each year, contributing 75 billion RMB ($11.5 billion) to the toy industry.
In total, the National Health and Family Planning Commission expects the number of newborns to fluctuate between 17.5 million and 21 million per year over the next five years. Currently, there are about 226 million children under the age of 14 in China.
According to Chinese e-commerce site Baobei360, which focuses on baby products, the average amount spent on toys per child under 16 in China is less than $30, compared to more than $200 in the United States. This suggests that there is still significant growth potential in toy spending per child, especially since Chinese parents have always shown a willingness to invest heavily in their children.
Despite the implementation of the two-child policy, many families in wealthier first-tier cities do not plan to have a second child, largely due to the high cost of living. For example, only 10% of eligible couples in Beijing said they would take advantage of the two-child policy. Rather, it is China’s less developed but increasingly wealthy cities where the birth rate is expected to be higher.
Given the growth potential of the industry, competition is intense, both in terms of cost and innovation. Traditionally, foreign brands dominate the upper end of the market, while domestic brands control the lower to middle end of the market.
Electronic toys, which are more interactive than traditional toys, have strong growth potential. This goes for both conventional toys, like action figures, and experimental products, like virtual reality and smart toys. Toys that are both interactive and educational are a particularly popular sub-sector, especially with parents.
Plush toys featuring cartoon characters are popular with children and adults of all ages and are often used for decorative purposes. Although local Chinese cartoon characters are slowly gaining prominence, this sector is still dominated by Japan and the United States, and South Korea to a lesser extent.
The popularity of foreign cartoon characters provides plenty of licensing opportunities. However, despite improvements in intellectual property protection, counterfeit products are still commonplace. Foreign investors should therefore make concerted efforts in IP protection when entering the market.
Although China’s toy industry has outperformed light industry as a whole, it faces challenges in the future. Intense competition among domestic toymakers — many of which compete on cost — is driving down margins. Land and labor costs continue to rise, meaning higher up-front investments in high-tech production methods are increasingly crucial. These factors will lead many people to consider lower cost alternatives.
However, as evidenced by LEGO’s massive investments in Jiaxing, the size and purchasing power of the Chinese market can offset many of these challenges. As with many of China’s traditional manufacturing sectors, investment in innovation and automation, as well as a recalibration towards the domestic consumer market are key to benefiting from China’s economic restructuring. .
About the Author: This article first appeared in Briefing China through Dezan Shira & Associates, a specialist foreign direct investment practice, providing business establishment, business advisory, tax and compliance advisory, accounting, payroll, due diligence and financial review services to multinational companies investing in China , Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For more information, please email [email protected] or visit www.dezshira.com.