The press reported earlier this week that more than half the toy exporters in China -– 3,621 in all -- had gone out of business this year. Last week, hundreds of angry workers protested for three days outside one closed factory in Dongguan in Guangdong Province, the heartland of China’s consumer products industries. Some of them blamed economic conditions in the U.S. for the loss of their jobs. A report by China’s General Administration of Customs issued October 13 also blamed the US credit crisis for what the Chinese see as a slump in their toy industry, still the world’s largest. Certainly, the global financial meltdown and the rapidly deteriorating American economy will bring grief to many Chinese workers in many industries, along with millions in this country. It would be a mistake, however, to leap too far in tying the closure of toy factories in China to sinking US economy.
In fact, the available evidence points to other causes. Most importantly:
• The timing is off. The credit crisis and stock market meltdown erupted in September, too late to affect orders, production and exports in the long toy trade pipeline for this Christmas retail season.
• After a series of product recalls last year, the Chinese government revoked the licenses of 600 exporters at the beginning of 2008. One-sixth of this year’s attrition thus was the result of Chinese government action nine months ago.
• The cost of plastics has risen strongly this year, largely driven by the dizzying spiral in petroleum costs over the first nine months of the year. China’s weak currency compounds the problem by forcing importers to pay extra renminbi for each extra dollar in the world price.
• China’s toy production has actually increased this year. Read the press items carefully: they report that the rate of increase in export sales has fallen (to “only” 1.3 percent over the first eight months of 2008), not the actual sales. Far fewer factories are in fact producing more toys. Overwhelmingly, the closures involve smaller, less efficient, less well run companies that lacked adequate capitalization and could not meet customer or environmental standards. Their disappearance is a sign of progress, not distress.
• The China Customs report speaks of “protectionism,” as a problem. Wait just a minute! Where in the world do Chinese toy exports face increased tariffs or quotas? To refer to product recalls as “protectionism” is unfounded, illogical and destructive of China’s image as a supplier to the world market.
• US imports of Chinese toys did in fact decrease by 5 percent over the first seven months, reflecting shifts in consumer demand (traditional toys like Barbie are declining in popularity) and perhaps some concerns about the quality and safety of Chinese-made toys but not the credit crisis. Moreover, China’s loss of sales to America has been more than offset by increased Chinese shipments to Europe.
• The biggest American toy “makers” – actually marketing companies, first and foremost – have enjoyed a terrific year thus far, despite the looming retail slump. Mattel and Hasbro, which together account for more than 13 percent of the world’s annual sales of toys – are enjoying stronger sales through the first nine months. About half those sales are international. A global recession may leave them with no good market for a while, of course, but thus far they have repositioned themselves quite effectively.
So, let’s not shed too many tears for the 3,500 surviving members of China’s toy industry. In a future post, I’ll address the larger issue of the slowdown of China’s growth. Please keep the instructive story of the toy industry in mind when you read that.