Analysis: Christmas gloom for China toymakers as orders shrivel

HONG KONG Thu Jun 23, 2011 3:36am EDT

1 of 2. Toys, which are made in China, are displayed inside a showroom in Hong Kong June 23, 2011.

Credit: Reuters/Tyrone Siu

HONG KONG (Reuters) - China may be the world's toy-making capital, but for Cheung Tak Ching the Christmas season is shaping up to be lean and joyless.

Sitting in a showroom amid an array of bright smiling toys he makes for Walt Disney Co (DIS.N) and Mattel Inc (MAT.O), the 40-year industry veteran bemoans a 5-10 percent fall in pre-orders.

"Our customers, mainly in the United States, still have good levels of inventory after restocking last year," said Cheung, managing director of Wah Lung Toys, which operates several factories in southern China employing nearly 8,000 workers.

After wrenching change that saw hundreds of toy factories in China shut down in the 2008 financial crisis, hopes were high for a rebound. But Europe's debt crisis and a sluggish U.S. economic recovery are curbing Western demand, while cost and Labor pressures within China are mounting.

The attrition has seen net profit margins of Hong Kong toymakers -- which run a sizeable share of toy factories in southern China's Guangdong province and around the Pearl River Delta -- shrink to 3-5 percent from more than 10 percent in the 1990s, said Cheung, who also heads Hong Kong's toy manufacturers association.

The gradual appreciation of China's currency, which has risen almost 30 percent against the U.S. dollar since it was revalued in 2005, has also hit hard.

Cheung estimates toymaker profit margins will be shaved by 1 percentage point for every 2 percent rise in the yuan against the U.S. dollar.

Higher wage bills and a 20 percent rise in materials and input costs for toymakers have already translated into average product prices rising about 10-15 percent this year.

"I've been in this industry for 14 years and this is likely to be the toughest year," said James Lee, a sales manager for Jingjiang Haolilai Toys, whose orders for seasonal products like Santa Clauses, snowmen and fiber-optic Christmas trees are down 30 percent this year.

TOUGHER MARKET

More than 80 percent of the toys sold around the world come from China, which exported $10.8 billion worth of toys last year, industry and official data shows.

As with many other exporters, the second quarter is a critical, make-or-break period, when Western orders are finalized for the Christmas season so toys and other devices can be shipped out in the months leading up to December.

A Reuters straw poll of 18 small China exporters last week found 67 percent expected orders to fall or remain the same in 2011, while 33 percent expected growth of 10-20 percent, partly because of demand from emerging markets such as Brazil, India and Southeast Asia.

"Our customers are very price sensitive and also we can't take too many orders because there are not enough workers," Jingjiang Haolilai's Lee said, referring to increasing competition for Labor in the country of 1.3 billion people.

Reflecting pressures that feed back into China's manufacturers, California-based toy giant Mattel and smaller rival Hasbro Inc (HAS.O) reported lower first-quarter profits as they pay more for fuel and freight, and higher Labor costs in China, where most of their products are made.

Chinese factory output growth fell to the lowest pace in at least nine months in May, showing the impact of government credit curbs, power shortages and slack global demand.

And a preliminary purchasing managers' index from HSBC suggested the factory sector barely grew in June as a new order index dropped to its lowest level since July 2010.

The slowdown in China's industrial growth is also reflected in the freight cargo market. Throughput in Hong Kong's container terminals grew only 1.2 percent in the first five months, the Hong Kong Port Development Council said in preliminary data.

Cathay Pacific Airways Ltd (0293.HK), the world's largest international cargo carrier, said freight fell 12.9 percent in May from a year earlier.

"The American economy still is dismal. Consumer confidence is starting to drop as most people believe that there is going to be a double-dip recession," said Shaun Rein, managing director of China Market Research Group in Shanghai.

The Federal Reserve on Wednesday cut its forecasts for U.S. economic growth, but offered no hint of further monetary support, saying the recovery should gradually pick up heading into 2012.

Compounding the pressure for many Chinese toymakers is the emergence of chronic Labor shortages. Rampant inflation in coastal cities and more plentiful, better paid jobs back home are deterring an increasing number of China's 150 million migrant workers from moving to coastal manufacturing hubs such as Guangdong and the southeastern province of Fujian.

Despite a rise in minimum wages in various factory towns in Guangdong by about 20 percent to 1,320 yuan ($204) per month in May, supply has remained tight, meaning even toymakers with healthy Western orders may not have the manpower to cope.

"We've always had the problem of Labor shortages," said James Yu, of gifts-and-toys maker Poly Magic, who expects orders to grow 50 percent this year. "We've always been trying to hire more workers, but it's not easy ... the Labor market has been a mess."

(Additional reporting Justina Lee and Donny Kwok; Editing by Charlie Zhu and Neil Fullick)

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