OVER THE PAST few decades, the Hong Kong toy industry has acquired a global reputation for reliability and cost effectiveness. Originating in the 1950s, the industry has moved with the times and evolved from manufacturing low-cost items such as plastic dolls and model trucks to producing traditional favourites and a sophisticated range of technology-related toys and games. The export of Hong Kong-produced toys accounts for a respectable 4 per cent of the territory's entire export pie. Taken together with re-exports, Hong Kong is the world's second largest toy exporter. There are more than 4,000 companies involved in toy producing/exporting in the territory, but only 133 are strictly manufacturing. Statistics from the Hong Kong Trade and Development Council (TDC) put 2003's gross output for the latter companies at $288 million. With the support of factories and facilities on the mainland, the sector has established a leading position in both design and manufacturing processes, but several competitive challenges are looming. The rising cost of raw materials and global economic uncertainty were two challenges confronting the industry. TDC economist Raymond Yuen said another was falling birth rates, especially in Japan and some European countries. 'Because of this, toy designers are looking into developing products for older people,' Mr Yuen said. Joan Szeto, general manager of Toys Club, a showroom and retail outlet, said designers were now developing the same toy for two different target markets - children and those wanting collectables. Ms Szeto said children today mature at a faster rate than they did in any previous generation. They are less interested in playing with traditional toys and more attracted by hi-tech, computer-based games. This could pose a problem for parents who do not want their children to spend unlimited hours in front of a computer or TV screen. The outcome is the rapid development of new types of educational toys. These often incorporate IT components to create instant appeal, but cleverly enhance childhood learning in a way that parents commend. Clinton Li, project manager of local toy design and manufacturing company Ontex Industries International, said there were six areas in which educational toys helped even very young children to learn new skills: sports-oriented toys to develop motor skills; scientific and exploration-related items to encourage mental development, and games and traditional puzzles to strengthen problem-solving skills. Then there are toys that can enhance a child's musical ability, pre-literacy products that give a head start in understanding the alphabet, and toys that encourage role play and help in social development. Well-designed toys help children develop mentally and physically, Mr Li said. Members of this youngest age group do not decide what to buy, so it is up to retailers like Ms Szeto to educate the parents. 'Often, parents come in and ask for the best-selling toy, regardless of whether it is appropriate or not for their child. We suggest looking at each child as an individual, and keeping in mind his or her personality and development when purchasing toys,' she said. There is a tendency for parents to choose only brand names, believing those companies ensure reliability and safety in their products. This presents a challenge to companies striving to establish a name in what is potentially a highly lucrative market. James Lim is a director of COG, a family-controlled toy design and manufacturing company that has been operative for more than 30 years. He recalled the difficulties in trying to get established. 'It takes time to build up a reputation, so good quality and educational content must be there from the beginning,' he said. He said an educational toy should have a good concept, a good design and good content. In the early years, these high standards would sometimes cause him frustration, but he said he now understood that customers sought the best of error-free products. Customers comprise end users or children and overseas buyers looking to toy designers and manufacturers to bring their ideas to fruition. This is known as original equipment manufacturing (OEM), and it has been the bread and butter of the Hong Kong toy industry for the past 40 years or so. In OEM, a big company, such as Hasbro or Mattel, comes up with a concept but turns to the expertise of others to develop a prototype and, ultimately, accept orders to manufacture and deliver to specifications. OEM business represents approximately 88 per cent of the output of the Hong Kong toy industry. Some companies, such as Ontex, also carry out original design manufacturing (ODM), in which the subcontractor comes up with the initial ideas and designs as the first stage in the ordering and manufacturing process. A third option, practised by COG and on the rise in Hong Kong, is original brand manufacturing (OBM). This involves manufacturers also selling products under their own brand names. Mr Yuen of the TDC described the OEM system as two companies developing a partnership. 'This has helped foreign buyers to have confidence in both the production capabilities and the high level of intellectual property rights protection of Hong Kong manufacturers,' he said. He predicted that the educational toys sector would continue to grow, and that even with the challenges ahead, the toy industry would maintain its position of importance in the Hong Kong economy.