Written by Richa Naidu
LONDON (Reuters) – Toy makers grappling with rising costs in China are seeing no easy option to move production to other cheaper centers.
Six years ago, monopoly manufacturer Hasbro approached Indian durable goods and aerospace supplier Aix for a subcontract.
Rohit Hegde, head of consumer vertical at Aequs, told Reuters: “They are looking at moving millions of dollars worth of products from China to India if they can get into toy manufacturing. I said,” he said. “We said as long as we can get at least about $100 million in business over the next few years, we can definitely invest in it.”
Fast forward to today, and Aequs manufactures dozens of toys for Hasbro and other manufacturers, including Spin Master, in two 350,000-square-foot facilities in Belgaum, India.
However, Hegde and other manufacturers believe that the inability of India and other countries to match China in terms of efficiency will limit companies’ efforts to transition to a lower-cost base, with the majority of production going to China. He acknowledges that if he stays put, there is an increased risk that toy prices will rise in the future.
“We don’t have port facilities (in India) like China. We don’t have road facilities like China. They’ve been doing this for the last 30 years and their efficiency levels are ours. Much better than that,” Hedge said.
Still, for toymakers like Hasbro and Barbie doll maker Mattel, the risks of relying on China for much of their production are compounded by the coronavirus pandemic, which has caused Chinese ports to struggle to export goods, causing periodic closures and holding up cargo. This came to light during the infectious disease pandemic.
Rising labor costs in China had already led manufacturers to diversify production geographically across different industries.
According to a report released by Rhodium Group in September last year, total announced US and European greenfield investments in India will jump by $65 billion (400%) between 2021 and 2022. , while investment in China fell from a peak of $120 billion to less than $20 billion in 2022. Mexico, Vietnam and Malaysia also collected some of this diverted capital.
But toy makers are struggling to transition production, even as other industries have been successful.
As of the first seven months of last year, 79% of toys sold in the U.S. and Europe still came from mainland China, according to U.S. and European Union import data provided to Reuters by S&P Global Market Intelligence Trade Data. In 2019, it was 82%. Service Panjiva.
In comparison, mainland China accounted for 35% of US and EU apparel imports in 2019. This fell to just 30% in the year to July 31, with India and Mexico the biggest beneficiaries.
“Will it be easy for them to come back out of mainland China? No, it’s not. It’s twice that for toys,” said Chris Rogers of S&P Global Market Intelligence. “The situation is further complicated by high seasonality, with partners holding inventory for most of the year. We have to be very strict.”
The minimum wage in China varies between 1,420 and 2,690 yuan ($198.52 to $376.08) per month, while in India unskilled and semi-skilled workers earn between 9,000 and 15,000 Indian rupees ($108.04 to 180.06) per month. It can be secured in USD). According to central bank estimates.
But sourcing from another country can take 18 months if a company buys products from a contract manufacturer and up to three years if a company builds a new factory from scratch, Rogers said. he said.
Toys released in the fall will be produced and stored or shipped starting in May.
“More reasonable cost”
Hasbro began highlighting over-reliance on China as a business risk in its 2018 annual report, while Mattel had to recall millions of toys contaminated with lead paint in 2007. Since then, it has been reported that they are withdrawing from China. Since the pandemic, efforts across the industry have stepped up.
Hasbro did not respond to a request for comment, while Mattel declined to comment for this story.
Rising wages in China are pushing up toy prices. For example, prices rose by around 8% in the UK in the first six months of 2022, according to Circana, formerly known as NPD. The risk for consumers is that prices will continue to rise rapidly if manufacturers are unable to reduce costs by moving to cheaper production centers.
U.S. tariffs on Chinese-made toys are currently modest, but that could change as some Republican politicians seek to strip China of its “permanent normal trade relations” status. The move could cause toy prices in the U.S. to rise by more than a fifth, according to the National Retail Federation.
“We’re all looking at avoiding China risk,” said Nick Aldridge, managing director of Bandai UK, the maker of the Tamagotchi virtual pet. “The cost of raw materials has increased significantly in China, so we are looking for places where we can offer them at more reasonable prices.”
Bandai still manufactures primarily in mainland China, but some products are made in Taiwan, Japan, and Vietnam. Aldridge said the company is considering India and Thailand as additional locations.
MGA Entertainment, the maker of LOL Surprise and Bratz dolls, is moving outside of China as it diversifies its sourcing to countries such as India and Vietnam, despite a year-over-year decline in exports from China during last holiday season. recognized that the country’s infrastructure was an obstacle.
According to Panjiva data, India accounted for just 1% of toy imports to the US and EU over the past five years.
“The problem in India is actually that even moving from one state to another is bogged down. There are so many crazy regulations,” said Isaac Larian, CEO of MGA Entertainment. told Reuters.
“(But) the infrastructure is getting better and better as these countries recognize the opportunity to take business from China and are making investments,” he said.
(Reporting by Richa Naidu; Additional reporting by Manoj Kumar and Casey Hall; Editing by Susan Fenton)