Business Day

Toy makers leave China for cheaper India

- Richa Naidu

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 subcontrac­t.

“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,” said Rohit Hegde, Aequs’ head of consumer verticals. “We said: as long as we can get at least about $100m 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 US and European greenfield investment in India shot up by $65bn or 400% between 2021 and 2022, while investment in China dropped to less than $20bn in 2022, from a peak of $120bn in 2018. Mexico, Vietnam and Malaysia also drew some of this redirected capital.

Yet toy makers 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 US and Europe, versus 82% in 2019, according to US and EU 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 US and EU apparel imports. This was reduced to just 30% in the year to July 31, with India and Mexico the biggest beneficiar­ies.

“Is it easy to reshore 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 between 1,420 yuan per month to 2,690 yuan per month ($198.52-$376.08), in

India unskilled and semiskille­d workers can be secured for between 9,000 Indian rupees and 15,000 Indian rupees a month ($108.04 to $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.

TAINTED

Hasbro began addressing its outsize 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 to push up toy prices. In the UK, for instance, prices rose 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.

 ?? /123RF/olegdudko ?? Toy story: Mainland China made 79% of toys sold in the US and Europe in the first seven months of last year, versus 82% in 2019.
/123RF/olegdudko Toy story: Mainland China made 79% of toys sold in the US and Europe in the first seven months of last year, versus 82% in 2019.

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