China still reigns - but the situation is changing

China is still the primary source of toy manufacturing globally, and has a vast array of manufacturing capacity, supply chain, experience and knowledge combine with generally reliable delivery to acceptable standards.

Things are changing in terms of toy manufacturing though. China itself (as a state) is less interested in low end manufacturing versus the past, with the future looking more like technology driven manufacturing and easily automated toy production versus the original low labour cost driving toy production.

China has taken huge steps to reduce pollution following dreadful air quality issues in major settlements in China. China as a centrally planned/controlled state can do things other countries can’t. Huge forests have been planted to swallow up fumes and add clean oxygen back into the atmosphere – in fact in 2018 China is set to plant enough new forest area to cover the entire island of Ireland, with 60,000 soldiers assigned to the task. Toy companies sourcing from China have also seen cost increases in cardboard packaging over the past few years as China has cleaned up paper mills and sourcing.

According to the research on the topic of toy manufacturing, it looks like China currently manufactures in the region of $35billion of toys each year. Our estimates are that China will lose around half of that manufacturing over the next 10 years. Which has two clear implications – firstly, China is not disappearing from toy production, they will continue to be a strong element of toy manufacturing for the next decade or two at least. The other clear implication though is that half of current production will need to find another home.

The push towards manufacturing more toys outside of China has accelerated somewhat during 2018 due to ongoing cost inflation pressures, the need to drive cost savings following the implosion of Toys R Us and fears that Donald Trump would apply tariffs to Chinese manufactured toys.

Alternative toy manufacturing hubs

Among the options outside of China, there are some obvious long-term winners. Over the course of the last 12 months, India’s toy manufacturing has grown further as Hasbro and others have increased their number of vendors in India. Clearly like with any new thing, Indian toy manufacturing is in a learning curve and toy companies need to be able to deal with a different culture and a different style of communication.

Vietnam is another credible and growing toy manufacturing hub. Most capacity in Thailand comes via Thai subsidiaries of Chinese manufacturing groups, and clearly as the pressure grows on the business in China we can expect expansion further into Vietnam. Conversations with people in the know do though suggest that Vietnam will have somewhat limited scope due to infrastructure restrictions and other local issues.

‘Other Asia’ will also be a growing opportunity, with Malaysia, Thailand, Indonesia and the Philippines each having some very good factories.

The other major trend is ‘near shoring’. As the cost advantage of China disappears into the past, and as the political climate in major markets such as the USA turns inwards versus outwards, there is a definite trend for near shoring. Manufacturing is brought back to the home market or nearer manufacturing hubs. Eastern Europe is a growing hub for European toy companies. The labour rates are now often significantly below China, while being much closer to home reduces shipping times and demand responsiveness during critical peak periods.

In summary – the long-established status quo in toy manufacturing is changing rapidly. China remains the primary source of toy manufacturing, but that is ebbing away to alternative hubs to some degree. The ‘easy’ option remains China, but manufacturing and shipping cost savings combined with quicker re-supply times are rapidly changing things.

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