Hong Kong toy companies eye opportunities in Chinese market as Beijing’s trade war with US intensifies

The Chinese domestic market has become more important in recent years, even before potential US tariffs became a concern for Hong Kong toymakers

PUBLISHED : Saturday, 06 October, 2018, 11:31am
UPDATED : Saturday, 06 October, 2018, 11:31am

Emily Cheung’s family has been designing and making toy cars, dinosaurs and other children’s products in Hong Kong for 36 years – toys that are on many occasions destined for the United States.

The US remains an important market for the family business, Tsuen Lee Group (Holdings). But like many Hong Kong toymakers, Cheung has been exploring opportunities to lessen the company’s reliance on America and other western markets.

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One solution is turning to the domestic market in China, where rising incomes have made it more attractive for toymakers.

Tsuen Lee, which has manufactured products based on Marvel and DC Comics superheroes and Peppa Pig, has built a successful line of toys in China based upon characters from Ming the Minibus, a series of books and educational television shows about a Hong Kong minibus that travels the world, said Cheung, who is the second generation to run the business.

The US accounts for about half of Tsuen Lee’s business, which employs 12,000 people in Hong Kong and on the mainland.

“The Hong Kong toy industry is [looking for] different ways to try and minimise the impact of the worldwide economy,” said Cheung, who is also the chairwoman of the Hong Kong Toy Council. “Because of the growth of the Chinese economy, parents in China are looking for some good quality products, premium products. That’s why there’s room for Hong Kong toymakers.”

The shift to the domestic market is a reversal for China, which has been the world’s toymaker for the past 60 years. About 85 per cent of the toys sold each year in the US come from China, according to the Toy Association, a US trade group.

Growth in the Chinese market, which has not embraced toys based on properties such as the Avengers or Batman as readily as its western counterparts, is particularly important as Washington threatens to put hefty tariffs on all goods made in China as part of an escalating trade war with Beijing.

Parents in China are looking for some good quality products, premium products. That’s why there’s room for Hong Kong toymakers
Emily Cheung, Tsuen Lee Group (Holdings)

Finished toys, one of the top exports from China to the US, have avoided any levies so far, but are likely to be among goods taxed as part of new tariffs.

“This is a move by the industry to diversify,” Cheung said, adding that some toymakers have also looked at Russia as a new market for their goods.

As many as one million people work in the toy industry in Hong Kong and China, Cheung said. Hong Kong is typically home to design, development and testing functions for the industry, working hand in hand with factories in mainland China.

Worries about the US-China trade war and the collapse of Toys “R” Us in the US have already pressured stock prices of several Hong Kong-based toymakers this year.

Shares of Playmates Toys, a subsidiary of Hong Kong-based Playmate Holdings, have fallen by 41 per cent this year, while shares of Herald Holdings, another Hong Kong-based investment holding company principally engaged in the manufacture of toys, have declined by about 22 per cent since the beginning of the year.

Playmates and Herald took provisions for doubtful debt related to the collapse of Toys “R” Us, the toy retailer that closed its stores in the US and the United Kingdom after it filed for bankruptcy protection last year.

Playmates and Herald did not respond to requests for comment.

The Toys Manufacturers’ Association of Hong Kong said some members had moved manufacturing of some products, such as plush animals, to Vietnam, Indonesia and India, but these were mostly “labour intensive and less sophisticated products”.

China remains – and is likely to remain – the centre for toy production worldwide despite the threat of US tariffs, the industry group said.

Francis Choi Chee-ming, the Hong Kong billionaire known as the “Toy King”, said China continues to possess the “most resourceful and skilful labour force in the toy industry”, and other Asian countries, where manufacturing might shift, are three to five years behind the mainland in their ability to manufacture more complex toys.

“The trade war has encouraged some manufacturers to start looking at other countries for setting up their operations, but this process will not happen overnight as it requires extensive planning for manufacturers to relocate,” said Choi. “Keep in mind that labour wages will also continue to increase in these new countries as more manufacturers settle in and the rapid demand for quality workers exceeds supply.”

As the trade war escalates, Cheung said Hong Kong toymakers have seen delays in some orders from the US, as toy sellers contemplate the potential impact of tariffs on Chinese-made products. Some manufacturers, especially those who make arts and crafts products, have already been hit by the tariffs.

Some toy buyers have been asking whether the cost can be shared with manufacturers if tariffs are put in place, particularly as many of the prices for 2019 have already been set, said Cheung. This may mean a change in designs to fit new prices.

“The tariff, manufacturers, honestly, cannot afford it,” said Cheung, who is also a committee member of the Hong Kong Young Industrialists Council. “Manufacturers only have a low, single-digit margin. How can they afford 10 per cent or 25 per cent tariffs?”