Toy industry under global pressure

Hong Kong's toy industry faces a tough year, coming off a weak 2002 and hampered by a slow global economy and threatened by growing competition from mainland rivals.

The outlook is further clouded by news that the United States, which took up almost half of Hong Kong's toy exports, recorded its worst Christmas sales season in more than three decades. It reaffirmed the already weakened state of the North American economy.

A major indicator of sector sentiment, said analysts, would be the international toy fair in Hong Kong that would take place between January 7 and 10, one of the three largest toy fairs in the world. It will attract buyers from retail stores in the US, as well as overseas, who pick the toys they hope children will nag their parents for next Christmas.

In the meantime, among the key players, Kader Holdings and Playmates Interactive Entertainment posted disappointing financial reports in 2001 and the first half of last year, and could face worse given the weak end to last year.

'Gross profit margins in the industry will soften this year,' said David Yip Yun-kuen, executive vice-president of The Toys Manufacturers' Association of Hong Kong.

Orders received are expected to remain small in terms of lot size and delivery lead times are now shortened to 30 to 60 days, according to Mr Yip, against three to four months in better days in the early 1990s.

Despite the tougher business environment, Mr Yip said: 'Total toy exports are unlikely to see a plunge this year.'

What has changed, he said, was the distribution of orders among Hong Kong's wide range of toy manufacturers covering business from dolls, action figures, electronic toys and games and radio-controlled toys.

Hong Kong is the world's largest toy manufacturer, with a large share of industry revenues derived from contract manufacturing for overseas industry giants and licence holders such as Mattel, Hasbro, Disney and Tomy.

In 2001, total exports of toys from Hong Kong fell 18 per cent to HK$75.3 billion due to overall weak export performance. This compared with a 7 per cent increase in the preceding year, and the weakness likely continued last year given the slow global economy.

Toy exports dropped by 5 per cent in the first 10 months from the same period a year earlier, according to the recently released report by the Hong Kong Trade Development Council.

Exports to the US dropped 19 per cent in 2001 but the decline narrowed to 4 per cent in the first 10 months of last year.

Analysts said overseas retailers this year would place orders for selected items that had growth potential.

Whether toy makers could survive partly depended on their ability to cope with the market change, they said.

'As the life cycle of successful products gets shorter and children become more sophisticated in their demands, manufacturers will be easily caught out by the changing trends,' the trade council said.

'Toy makers need to invest more in research and development and to develop their own design capabilities or more value-added edges which cannot be substituted easily by competitors.'

Lucky Plastic Factory, an unlisted manufacturer of radio-controlled toys for boys, agreed.

'Lowering profit margin is not a solution,' director J.K. Jok said.

The small manufacturer with about 2,000 workers in its Shenzhen plant recently invested more than HK$1 million to develop a radio-controlled interactive mini-car aimed at creating its own brand product to sell in overseas markets.

Mr Jok said computer, electronic and video-game interactive entertainment was expected to continue to be a major growth area.

Manufacturing high-tech products was a method to fend off competition from copycats in the mainland, which offered low-priced products that hurt Hong Kong makers, he said.

There are hundreds of mainland toy manufacturers in Guangdong but most of them are small and lack financial strength to design their own products.

Besides upgrading product design, Mr Yip said cost control, improvement of supply-chain efficiency and automation were the effective measures used by traditional toy makers to enhance competitiveness.

FEELING THE HEAT

Gross profit margins in the industry are expected to soften this year

Orders received will probably remain small in terms of lot size

Delivery lead times are now shortened to 30 to 60 days, against three to four months in the early 1990s

Graphic: toys06gbz