Toy manufacturers' shift from China is no child's play

Toy makers grappling with surging costs in China are finding no easy options when it comes to shifting production to cheaper centres elsewhere.

Six years ago, monopoly maker Hasbro approached Indian durable goods and aerospace supplier Aequs to sub-contract.

"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, told Reuters. "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."

Fast forward to today and Aequs makes dozens of types of toys for Hasbro and others including Spin Master in two 350,000-square-foot facilities in Belgaum, India.

But Hegde and other manufacturers acknowledge that India and other countries cannot match China for efficiency, limiting companies' efforts to shift to lower cost bases and raising the risk of higher toy prices in future if the bulk of production remains 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. Still, for toy manufacturers including Hasbro and Barbie doll maker Mattel, the risks of relying on China for most of their production were highlighted during the COVID-19 pandemic, when Chinese ports struggled to export goods and were periodically shut down, leaving shipments stranded.

Soaring labour costs in China had already been driving manufacturers across industries to diversify production geographically.

A report by Rhodium Group last September showed that total announced U.S. and European greenfield investment into India shot up by $65 billion or 400% between 2021 and 2022, while investment into China dropped to less than $20 billion in 2022, from a peak of $120 billion in 2018. Mexico, Vietnam and Malaysia also drew some of this redirected capital.

Yet toymakers are struggling to shift production even as other industries succeed.

As of the first seven months of last year, mainland China still made 79% of toys sold in the United States and Europe, versus 82% in 2019, according to U.S. and European Union import data provided to Reuters by S&P Global Market Intelligence's trade data service Panjiva.

In comparison, mainland China in 2019 accounted for 35% of U.S. and EU apparel imports. This reduced to just 30% in the year to July 31, with India and Mexico the biggest beneficiaries.

"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 China's minimum wage varies from between 1,420 yuan per month to 2,690 yuan per month ($198.52-$376.08), in India unskilled and semi-skilled workers can be secured for between 9,000 Indian rupees and 15,000 Indian rupees a month ($108.04- $180.06), according to central bank estimates.

But setting up to source from other countries can take 18 months if a company is buying product from a contract manufacturer, and up to three years if a firm is building a new factory from scratch, Rogers said.

Toys to be sold in the autumn go into production starting in May and are then stored or shipped.

'MORE REASONABLE COST'

Hasbro began addressing its outsized dependence on China as an operational risk in its annual report in 2018, while Mattel has reportedly been shifting away from China since 2007, when it had to recall millions of toys tainted with lead paint. Efforts across the industry have ramped up since the pandemic.

Hasbro did not respond to a request for comment, while Mattel declined to comment for this story.

Spiralling Chinese wages are helping push up toy prices. In the UK, for instance, prices rose by about 8% in the first six months of 2022, according to Circana, formerly known as NPD. The risk for consumers is that prices will keep on rising sharply if manufacturers can't cut costs by moving to cheaper production centres.

Though U.S. duties on Chinese toys are currently negligible, that could also change as some Republican politicians have called for revoking China's "permanent normal trade relations" status. Such a move could raise the price of toys in the United States by more than a fifth, according to the National Retail Federation.

"We are all looking at derisking China," said Nic Aldridge, managing director at Bandai UK, the maker of Tamagotchi virtual pets. "Raw materials costs have gone up a lot in China, we're looking for places where we could get a more reasonable cost."

Bandai still mostly manufactures in mainland China but some of its products are made in Taiwan, Japan, Vietnam. It is looking at India and Thailand as additional locations, Aldridge said.

MGA Entertainment, maker of LOL Surprise and Bratz dolls, has found infrastructure outside China to be a road-block to diversifying sourcing to countries like India and Vietnam, even as its exports from China last holiday season dropped versus the year before.

India accounted for only 1% of U.S. and EU toy imports over the past five years, according to Panjiva's data.

"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.