INDUSTRY OVERVIEW TOY INDUSTRY IN CHINA

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1 TOY INDUSTRY IN CHINA In 2004, there were 6,296 toy export enterprises in China where majority of them were operated in a relatively small scale. There were 2,327 toy export enterprises with an annual export value of more than US$100,000, 844 toy export enterprises with an annual export value of more than US$1 million and only 90 toy export enterprises with an annual export value of more than US$10 million. The major PRC toy manufacturers are located in coastline provinces or cities such as Guangdong, Jiangsu, Zhejiang, Shanghai, Shandong and Fujian. Guangdong was an important toy manufacturing and export base of China in 2004 in terms of both the number of manufacturers and export value. With an export value of approximately US$8.98 billion, the major export categories of toy export manufacturers in Guangdong province were plush toy, electronic toy and plastic toy. The export value and the major export categories of the major toy manufacturing and export provinces were set out below: Export value in 2004 (US$ million) Major export categories Guangdong 8,980 Plush toy, electronic toy, plastic toy Jiangsu 781 Plush toy Zhejiang 701 Wooden toy, baby bicycle Shanghai 559 Baby bicycle, stroller Shandong 377 Plush toy Fujian 239 Electronic toy, plastic toy Source: China Toy Association 42

2 EXPORT MARKETS According to the statistics of The United Nations Commodity Trade Statistics Database, China is the world s largest exporter of toy and sport equipment (HS code 95) in 2004 with a total export value of approximately US$15.1 billion. In 2005, the total exports of toys and sport equipment grew by approximately 26.8% to approximately US$19.1 billion. The table below illustrates the value of total exports of the China s toys and sport equipment: (value in US$ million) Total exports 9,082 11,606 13,282 15,092 19,129 % increase (decrease) comparing with previous year (1.2%) 27.8% 14.4% 13.6% 26.8% Export in value (US$ million) 20,000 16,000 12,000 8, Source: World Trade Atlas 43

3 In terms of major markets, the US is the largest market which accounted for about 39% of total toys and sports equipment exports of China in Taken together with Hong Kong, Germany, Netherlands and Japan, these five major markets accounted for about 74% of total toys and sports equipment exports of China. The following is a breakdown of total exports to major markets by China s toy manufacturers from 2003 to 2005: Other Other Other 25.4% 25.6% 26.2% Japan US US Japan 5.5% 42.9% Japan 42.2% US 5.3% 6.4% 39.3% Netherlands Netherlands 7.6% Netherlands 5.7% 3.1% Germany Germany Germany 3.9% 5.0% 6.2% Hong Kong 14.7% Hong Kong 17.7% Hong Kong 17.3% Source: World Trade Atlas In terms of major categories, Articles for arcade, table or parlor games (including pinball machines, billiards etc), parts and accessories thereof and Toys nesoi, scale models etc, puzzles, parts and accessories thereof are the two largest categories which in aggregate accounted for approximately 66.5% of total toys and sports equipment exports of China in While the shares of Toys nesoi, scale models etc, puzzles, parts and accessories thereof and Festive, carnival or other entertainment articles, parts and accessories thereof are decreasing, Articles for arcade, table or parlor games (including pinball machines, billiards etc), parts and accessories thereof, which includes video games, showed a upward trend and accounted for approximately 35.79% of total toys and sports equipment exports of China in The following table shows the export value and share of each export category from 2003 to 2005: HS Code Description Value Share Value Share Value Share (US$ million) (%) (US$ million) (%) (US$ million) (%) 9504 Articles for arcade, table or parlor games (including pinball machines, billiards etc), parts and accessories thereof 9503 Toys nesoi, scale models etc, puzzles, parts and accessories thereof 3, % 3, % 6, % 5, % 5, % 5, % 44

4 HS Code Description Value Share Value Share Value Share (US$ million) (%) (US$ million) (%) (US$ million) (%) 9506 Articles and equipment for general physical exercise, gymnastics, athletics etc. nesoi, swimming pools, parts and accessories thereof 9505 Festive, carnival or other entertainment articles, parts and accessories thereof 9507 Fishing rods and tackle, nets, decoys etc, parts and accessories thereof 9502 Dolls representing only human beings, and parts and accessories thereof 9501 Wheeled toys designed to be ridden by children (tricycles, scooters), dolls strollers, parts and accessories thereof 9508 Merry-go-rounds, boat-swings and other fairground amusements, travelling circuses etc, parts and accessories thereof 2, % 3, % 3, % 1, % 1, % 1, % % % % % % % % % % % % % 95 Total 13, % 15, % 19, % Sources: World Trade Atlas INDUSTRY TREND The marketing channel of the PRC toy manufacturers is gradually diversified. In the past, majority of toy manufacturers would re-export their products through Hong Kong. Small and medium size toy manufacturers relied on the sales network of Hong Kong s trading companies to receive orders. At present, these manufacturers gradually reduce their reliance on Hong Kong s trading companies and develop their own sales network through international toy exhibitions, wholesaling and website. Instead of re-exporting through Hong Kong, their products are directly shipped through Shenzhen Yantian port, which is cheaper than re-export through Hong Kong. 45

5 Recent trend in the Hong Kong toy industry such as lowering profit margin, shortening product life cycle and increasing risk in product development becomes a challenge to toy manufacturers in Hong Kong. In order to remain competitive, toy manufacturers in Hong Kong need to create more value-added products, including but not limited to, a more sophisticated production planning, stronger research and development and the capabilities in designing new and innovative products which cannot be replicated easily by competitors. The consolidation of retail networks has changed the business landscape for toy exporters. In the US, for example, mass merchants including Wal-Mart and Target are taking up an increasing share of the toy market from specialty chains and traditional retailers. Smaller toy retailers were forced out of the business or underwent restructuring. As a result, mass merchants are in a better position to bargain with suppliers on prices and terms of trade. Regarding the product trend, the major growth areas are expected to be in interactive entertainment such as computer and video game, educational toys, toys integrated with electronics and new technology. Besides, in line with the growing popularity of the cyber world, toys capable of linking with the internet are expected to be the future trend. Safety standards, regulations and code of practices are major concerns among overseas buyers. ICTI has introduced the ICTI Code of Business Practices and an associated auditing process known as the CARE Process to manufacturers, distributors and retailers of toys and related merchandise in member countries. Leading importers and manufacturers have announced that they will fully implement the CARE Process by mid ICTI and the CARE Process ICTI was formed in 1975 as an association of toy trade associations from around the world. It promotes international toy safety standards and a responsible attitude to advertising and marketing to children. It is committed to the operation of toy factories in a lawful, safe, and healthy manner on behalf of its member companies. The role of ICTI is to inform, educate, and survey its member companies so that individual member companies can adhere to its Code of Business Practices. As an association, it also acts to encourage local and national governments to enforce wage and hour laws and factory health and safety laws. ICTI currently consists of toy trade associations from Australia, Austria, Brazil, Canada, China, Chinese Taipei, Denmark, France, Germany, Hong Kong, Hungary, Italy, Japan, Mexico, Netherlands, Russia, Spain, Sweden, the UK and the US. The CARE Process, a certification program administered by ICTI Asia Limited, completed with its code of business practice, guidance document and audit protocol, aims to provide a fair, thorough and consistent monitoring program for factories interested in and committed to upholding the principle of ethical manufacturing. 46

6 Supported by leading toy brands, such as Hasbro, Mattel, Leapfrog and Funrise, as well as the Toys R Us retail chain and many others currently active in different stages of adopting the process, the CARE Process is a consolidated effort to craft a single audit protocol that answer the diverse needs of the various buyers and brand names in their monitoring of factory ethical manufacturing practices. ICTI Code of Business Practices focus areas comprise of: Child labour Prison/Forced labour Working hours Wages and compensation Working conditions Industrial safety 47