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Serious Business(HKTDC Enterprise, Vol 06,2007)

 

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Emerging markets are expected to absorb more output with domestic China and Middle Europe forecast to have the greatest growth

China's total toy sales climbed 16.9% year-on-year to US$17.76bn in 2006, with Guangdong Province again proving a play powerhouse, boosting exports 17.8% to US$14.06bn and providing 79% of the mainland's total toy exports.

Domestic mainland sales also grew 15% despite raw material price rises, salary increases and the introduction of the ICTI CARE process and technical requirements such as WEEE and RoHS that lifted production costs about 14%.

However, sale prices only increased 5%-10%, indicating that mainland manufacturers were prepared to accept a smaller profit margin while also toughening their operations.

Industry observers are therefore generally optimistic about the China toy industry's prospects this year, believing that global demand will remain basically the same as 2006 while domestic demand will grow correspondingly.

"Of course, the Guangdong toy industry has to face a lot of difficulties, but we anticipate healthy development this year," notes Guangdong Toy Association vice president Li Zhuo Ming.

Ultimately, he says, growth depends on a global economy that the World Bank estimates will slow down to 3.2% in 2007 from 3.9% in 2006, with the US market predicted to grow just 2.3%.

"Europe and Japan are also expected to have lower increases in economic growth of 2%, while developing countries are forecast to accelerate and expand 7.8% during this year," Li adds.

Overall, the consensus is that the declining global economy will reduce foreign trade growth from 9.4% to 7.8%, with attendant ramifications for most industries and services.

On the bright side, China's economy is still performing strongly and analysts expect it to increase 9% overall - although growth in exports is predicted to slip to 15%. "The rapid development of the mainland's economy and rising living standards helps boost domestic demand for toy products," says Li.

As a result, the US industry as a whole is currently under-stocked, leading many observers to predict that American buyers will extend the order-fulfilment time limit, increase order volumes and demand bigger inventories.

Meanwhile, emerging markets are expected to absorb more output with domestic China and Middle Europe forecast to have the greatest growth - the latter by up to 18%.

"Sales will also be boosted by the June 1 implementation of the China Compulsory Certification (3C) programme, a statutory safety and quality certificate that effectively improves toy safety, provides more confidence in toy quality and ultimately enhances the competitive edge of China's domestic toymakers in the global market," Li predicts.

That said, there are still several major problems to be solved by the mainland toy industry, including the failure of the World Trade Organization Doha round of talks that restricts entrance to world markets and maintains high import tariffs in protective markets such as Brazil and India.

Raw material prices are not expected to decline until the second half of this year and salaries are also expected to grow, further increasing costs incurred as a result of the adoption of health and safety directives such as WEEE, RoHS, EN71-9, the ICTI CARE Process and 3C.

Implementation of 3C involves 2,000-3,000 mainland toymakers and traders, only about 20% of whom had gained 3C certificates as of January this year according to local certification institutes.

Observers believe that the 3C implementation will result in the survival of the fittest. "At present, the 3C system has been implemented smoothly and, probably, is acting as a stimulant to upgrade production and management in the industry," Li notes. "Toymakers should get on board as quickly as possible."

The restrictions on PVC plasticizer, WEEE charges, RoHS directives, EN71-9 standards and REACH are also raising costs and increasing the difficulties of exporting to the EU, leading some toy companies to consider putting an end to all or part of their EU business and shifting to other regions.

If these industry shakeouts and market changes do eventuate, they will dovetail neatly with the central government's declared intention to advance the mainland's position in the global toy industry.

As a result, China's status will evolve from a labour-intensive production sector towards the upper end of the value chain by concentrating on improving quality rather than boosting quantity; further boosting sales and cementing the mainland's position as the world's leading toy manufacturing centre.


Guangdong Going Great


Guangdong Province continues to maintain its long-established role as the powerhouse of the mainland toy industry in terms of both quantity and product, according to China customs statistics which show that:

  • Guangdong Province's toy exports accounted for 80% of the national total in 2006
  • Guangdong's exports have grown 22% annually since 2002 while national exports registered annual growth of 18% on average
  • Guangdong-made toys were distributed to 186 countries and regions in 2006, with the US (US$5.28bn), Hong Kong (US$3.49bn) and Germany (US$1.28bn) registering year-on-year growth of 14%, 15% and 61% respectively
  • exports to six EU member states ranked among the top 15 markets, further underlining the popularity of Guangdong-made toys
  • video games are the most popular of some 23 toy categories
  • the top three toy export categories - video game consoles connected to a TV set, other video game consoles and other toys - saw year-on-year growth of 27%, 28% and 3% respectively
  • music boxes, 16-, 18- and 20-inch cross-country bicycles and electric trains, including slot, signal set and other accessories, suffered the most serious declines in popularity, falling by 23%, 9% and 5% respectively
  • construction toys enjoyed the highest unit price
  • highest growth in prices came from other construction kits and construction toys, video game consoles connected to TV sets and other toy animals


Slow Process

The China Compulsory Certification (3C) programme affects nearly 1,500 toy companies, who will be certified by institutes appointed by the Certification and Accreditation Administration of the People's Republic of China.

Bigger concerns are adopting a positive attitude, medium-sized businesses are following the trend and smaller firms are sitting on the fence, according to the China Certification and Inspection (Group) Co Ltd, the China Quality Certification Centre and the Certification Center of Light Industry Council selected to provide 3C certificates.

Industry analysts believe there are several key reasons for these trends:

  • a large number of toymakers currently operate as workshops and will not meet 3C standards so they have not applied
  • a number of domestic makers are OEM operators who have little relationship with the 3C process
  • most toy companies in Shenzhen and Dongguan are export-oriented and believe they do not need the 3C certification for exports, so they have not applied
  • lack of powerful promotion means many toymakers are still not acquainted with 3C, its requirements, benefits and advantages and have therefore adopted a passive attitude

Perhaps not surprisingly, big toy companies are strong supporters of a compulsory 3C policy, believing it would eliminate workshops and inferior factories that copy others' inventions using outdated equipment and non-standardized production, and thus raise the production level of the industry overall.

TEXT BY ZENG RUICHENG

Guangdong Province's toy exports accounted for 80% of the national total in 2006