Don't shed a tear for toymakers in their winter of discontent

PUBLISHED : Thursday, 13 January, 2011, 12:00am
UPDATED : Thursday, 13 January, 2011, 12:00am

'Surging wages and a strengthening yuan are pressuring Hong Kong toymakers to consider moving factories outside the mainland, including a possible return to the original toymaking capital of the world - Hong Kong.'

SCMP, January 11

Given the cold spell we're in at the moment, I can see how Hong Kong might be confused with Santa's capital at the North Pole. Brrrr. The return of the toy industry is a non-starter, however. The conditions for it are even colder here than across the border.

But I recall when they were much warmer in the early 1980s and a number of toymakers were seeking listings on the stock market. The big one was Playmates, much heralded as the maker of the latest doll sensation in the United States, Cabbage Patch Kids.

I was in the stockbroking industry back then and off we went to see them. Some things immediately became apparent. Playmates had no equity in Cabbage Patch Kids. The ownership rights were firmly held in the United States. Playmates was only a subcontract manufacturer and it wasn't even the primary one.

This was a company on a two- or three-year roll while demand was high and then its margins would be pinched tight again. It was the kind of stock that might be a Buy at six times earnings but would be a Sell at 10.

Playmates got a bit closer to ownership with its biggest hit, Teenage Mutant Ninja Turtles, but even there the idea came from an American brains trust. And that was the closest anyone in Hong Kong ever came to owning as well as making a big toy hit. Santa doesn't live in his workshop. Only his elves live there.

There is nothing necessarily wrong with this. It is how all new industries start out. You work as the slave of the foreigner with the technology and gradually you build up the know-how, you come to devise the latest technology yourself and now you're the one with the ideas. It's the natural progression.

But somehow this never happened in Hong Kong's toy industry. It only moved from making cheap plastic rubbish to making cheap plastic rubbish across the border. A few companies worked their way up the value chain, too, for instance Johnson Electric moving from friction toy motors to sophisticated electric micro-motors, but Johnson is a distinct exception.

Of course, it may be that a move upmarket is not possible in the toy industry. Toys are cheap plastic rubbish, as a walk through any toy megastore in America will show you, and nothing can change this, end of story.

I doubt that it has to be a dead end, however. Leaving aside Johnson's example, there are any number of industries for which toys could make an excellent stepping stone, most prominently consumer electronics, at which Taiwanese companies have excelled across the border.

But Hong Kong toymakers have generally not made that transition and now they moan that they are being forced out of business by rising costs, for which they mostly blame others. It's all because Beijing has adopted a high-wage policy in the Pearl River Delta, they say.

Perhaps, but while wages in Guangdong are higher than elsewhere in China, wage growth in Guangdong since 2000 has been less than elsewhere in China, as the chart shows.

I think what happened here is that, starting in the late 1970s these Hong Kong toymakers were offered a virtually unlimited pool of very cheap but good labour across the border plus all the land they needed, good port connections and full freedom to avail themselves of foreign capital. They took it all and got lazy. The living was good and easy. Nothing pushed them upmarket and so downmarket is where they stayed.

Perhaps they can still adapt themselves to a new reality, but I very much wonder whether starting afresh in India in 2011 will be easy as it was in Guangdong in 1978.

There is one thing I am sure of, however: no one in Hong Kong has any reason to share their tears. Leaving aside that these people moved their businesses out of this city, which makes it presumption on their part to ask us for help now, they had what was coming to them.

We're somewhere in the middle of the old story of the hare and the tortoise, around the part where the hare is fast asleep and the tortoise is crawling past him. I haven't identified the tortoise yet but I'm certainly not betting on the hare.