4 Feb 2013
Toy Industry in Hong Kong
Hong Kong produces a wide range of toys with particular strength in plastic toys, including dolls, doll houses and other accessories, action figures, construction sets, toy guns, make-believe toys and gimmicks such as beauty kits and doctor's kits. Other major categories are electronic toys and games, radio/remote controlled toys, battery-operated toys and metal toys. Taken together with re-exports, Hong Kong is the world's second largest toy exporter.
Hong Kong exporters are known for producing high-quality toys, with a large share of industry revenues generated from contract manufacturing with overseas manufacturers and license holders. To reduce operation costs and stay competitive, the majority of Hong Kong toy makers have set up production facilities offshore, mainly on the Chinese mainland. The role of their Hong Kong office has shifted towards quality control, management, marketing, product design and production planning.
Amid growing concern over product safety and environmental protection in overseas market, toy safety standards and regulations have become increasingly stringent. Hong Kong toy exporters are advised to keep themselves informed of the regulatory changes in different markets and comply with the new requirements.
Hong Kong toy makers produce a wide range of items, including dolls, doll houses and other accessories, action figures, construction sets, toy guns, make-believe toys (toy versions of adult "objects", e.g., kitchen implements, vacuum cleaners, etc.) and gimmicks such as beauty kits and doctor's kits. Other major categories are electronic toys and games, radio/remote controlled toys, battery-operated toys and metal toys.
To reduce operation costs and stay competitive, most Hong Kong toy makers have set up production facilities offshore, mainly on the Chinese mainland. As such, many toy companies in Hong Kong have been reclassified as import-export establishments, contributing to the apparent decline in the number of toy makers locating in Hong Kong.
Meanwhile, the role of their offices in Hong Kong shifts towards quality control, management, marketing, finance and accounts, product design, and production management. This skew towards higher value-added activities is sharpening the competitive edge of Hong Kong toy makers, while expanding production capacity through relocation.
Production on the Chinese mainland has been facilitated by an efficient network of supporting industries and services. This has greatly enhanced the competitiveness of Hong Kong toys in terms of its productivity, quality, reliability and delivery. Building on the base of plastic molded toys, Hong Kong toy manufacturers have added production skills from the clothing industry, the electronics industry and the metal goods industry.
The toy industry employs a wide range of manufacturing technologies. Computer aided design and manufacturing systems (CAD/CAM) are most commonly used. Many manufacturers have earned the International Organisation for Standardisation (ISO) 9000 certification and some have the CARE Seal of Compliance certificate.
Competition remains keen, especially from indigenous Chinese enterprises in open items. The rapid expansion of production capacity on the mainland set up by Hong Kong manufacturers also put much downward pressure on prices and profit margins. Orders received are smaller in lot size, and shorter delivery lead time is generally required.
Performance of Hong Kong Toy Exports^
Notes: ^ Since offshore trade has not been captured by ordinary trade figures, these numbers do not necessarily reflect the export business managed by Hong Kong companies.
Global demand for toys has remained sluggish as the world economy stumbles through uncertainty and the euro crisis in particular. In 2012, Hong Kong’s toy exports dropped 2% from 2011, with better performance observed in the category of traditional toys. In 2012, exports of traditional toys and games, which accounted for some 47% of the total, improved slightly by 2% from 2011. In contrast, exports of electronic and video games (53% of the total) fell by 6% in 2012. Sales of video games have reached a plateau in recent years due to fierce competition from devices such as smart phones which also have game functions. Yet there will be some stimulus to the sales after the new release of video game consoles in late 2012.
The top three markets of Hong Kong’s toy exports are the Chinese mainland, EU, and the US. Altogether they account for nearly three quarters of the total. In 2012, exports to the US saw a mild growth of 4% while sales to EU plummeted by 25%. Exports to China and Japan, however, experienced strong growth of 13% and 30% respectively.
Hong Kong exporters are known for producing high-quality toys. A large share of industry revenues are generated from contract manufacturing with overseas industry giants and licensed holders, such as Disney, Hasbro, Mattel and Warner Bros. in the US, Zapf in Germany, as well as Bandai and Takara Tomy in Japan. Production specifications and product designs are usually provided by these overseas buyers. This type of arrangement, in effect, minimises local manufacturers' risks relating to product designs, inventory taking and marketing.
However, there are an increasing number of Hong Kong manufacturers that offer expertise in design, engineering, modeling, tooling, quality control and other technical know-how to its customers. Thus, for OEM manufacturers who serve a narrow base of clients and have limited variety in their products, it is vital to maintain close contact with large buyers and keep abreast of market trends. Otherwise, their businesses will be very susceptible to the vicissitudes of their buyers. According to a HKTDC survey conducted in 2007, 91% of respondents in the toy industry were involved in OEM business, while 68% in ODM. Vtech's V.Smile is representative of Hong Kong toy industry's innovative power. It has earned the Innovations Award (Learning) in the Nuremberg International Toy Fair as well as the Toy of the Year Award in the American International Toy Fair.
Meanwhile, a growing portion of industry sales are created by proprietary product manufacturers. In the survey conducted by HKTDC in 2007, 40% of the respondents are manufacturers that engage in designing and marketing of their brand names. They include Manley, Playmates and Vtech. Some manufacturers also export generic products as open items. Trading companies source a wide range of open items from different small manufacturers.
In order to expand business networks, explore market opportunities, and promote product image as well as brand-names abroad, Hong Kong toy makers participate in well-organised and influential international trade fairs. Below is a list of some major trade fairs:
The HKTDC also organises study/match-making missions for Hong Kong manufacturers through arranging visits to specific markets for new business relations establishment.
Retail consolidation in overseas markets has changed the business landscape for toy exporters. In the US, for example, mass merchants including Wal-Mart and Target are taking away increasing shares of the toy market from specialty chains and traditional retailers. On one hand, a few toy retailers of smaller scales were either forced out of business or made to undergo restructuring process. On the other hand, mass merchants are able to purchase large quantities, allowing them to bargain with suppliers regarding to prices and terms of trade in a better position.
The mass market depends on aggressive advertising campaigns or promotional tie-ins for success. Gradually, more toy manufacturers are entering into partnerships with companies from other industries, especially fast-food chains, in their promotion campaigns. Toy makers are also engaged in licensing deals with movie studios, making products featuring film characters, such as Spider-man, Batman and Disney’s characters. Successful products can also come from phone apps/games, such as Angry Bird and Talking Tom.
Even before the tide of toy recalls in overseas markets in 2007, safety standards, regulations and code of practices have long been major concerns among overseas buyers. In this regard, the International Council of Toy Industries (ICTI), alongside active involvement of Hong Kong toy makers, has introduced the ICTI Code of Practice and an associated auditing process known as the CARE Process, to manufacturers, distributors and retailers of toys and related merchandise in its member countries.
Meanwhile, as the life cycle of toys is becoming shorter, this increases the risk of product development. The impact of this will not only be reduced profit margins for Hong Kong suppliers, but more importantly, it signals the need to invest in R&D, develop own design capabilities and create value-added edges so that products cannot be replicated by competitors easily.
Today's children, for their part, are growing up faster than a generation before. Kids aged 12 or above turn to non-traditional playthings such as video games, computers, music and cosmetics. This development is challenging toy manufacturers to create innovative toys that capture the interest of children. At the same time, greater efforts have to be made for pre-school toys due to an increasing demand for toys that can develop brain power, creativity, coordination and senses of players.
Under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA), the mainland has given all products of Hong Kong origin, including toys, tariff-free treatment starting from 1 January 2006. According to the stipulated procedures, products which have no existing CEPA rules of origin can enjoy tariff-free treatment upon applications by local manufacturers and upon the CEPA rule of origins being agreed and met.
The promulgated rules of origin for toys to benefit from CEPA's tariff preference are similar to the existing rules governing Hong Kong’s exports of these products. Generally speaking, for toys manufactured from textile fabrics, cutting and assembling, identified as the principal processes for the purpose of delineating their origin, must be done in Hong Kong. For toys manufactured from plastic sheets, the principal processes are cutting of plastic sheets, joining of plastic sheets by heat sealing and setting of a valve, which must be done in Hong Kong. Detailed information is available from the following hyperlink: http://www.tid.gov.hk/english/cepa/tradegoods/files/mainland_2013.pdf
General Trade Measures Affecting Toy Exports
Systematic obstacles to toy trade are minimal in the traditional markets. There are no quantitative restrictions for toy imports into these markets. This applies to both Hong Kong and the Chinese mainland products. In particular, the EU has completely abolished the import quotas on Chinese toys since January 1998. Import tariffs on toys imposed by the EU and Japan stayed largely in the 0-5% range, while tariff-free access is granted by the US. On the other hand, product requirements on safety and environmental protection have become more stringent in overseas markets.
In the US, the Consumer Product Safety Improvement Act (CPSIA) was signed into law in 2008. This legislation forms part of a comprehensive effort by the US government to enhance safety requirements of imported consumer goods. As a result, it becomes more difficult and costly to export to the US, since higher safety requirements means additional hurdles for the entry of these items. The requirements of CPSIA are wide-ranging. Take an example, for any products that are designed for children, they cannot contain more than a certain amount of lead and will be prohibited if otherwise. Manufacturers are also required to add a tracking label or other distinguishing permanent mark on children’s products such that manufacturers, retailers and consumers can ascertain the manufacturer or private label, location and date of production of the product, and cohort information (batch, run number or other identifying characteristic). The US Consumer Product Safety Commission (CPSC) approved the new third-party testing lab accreditation requirements to come into effect at the end of 2011. Starting from January 2012, toys that are manufactured or imported into the US has to be certified for ASTM F963, the mandatory toy standard, based on testings conducted by a CPSC-approved third-party lab.
In 2009, The US Toy Industry Association (TIA) launched a new safety assurance programme, the Toy Safety Certification Program (TSCP), which was an industry-driven voluntary initiative. The requirements therein did not constitute a federal consumer product safety rule. However, TIA has intended to implement various components of the TSCP in stages to facilitate all toy companies, importers and testing laboratories in compliance with CPSIA.
In the EU, Directive 2009/48/EC on the safety of toys (the "Toy Safety Directive") came into effect on 21 July 2011. The new Directive has updated measures, taking into account of technological developments and new safety concerns. It complements and adds to existing provisions regarding to warnings on toys and importers’ responsibility. In addition to the expanded general safety requirement, those relating to physical and mechanical properties, flammability, chemical properties, electrical properties, hygiene and radioactivity have been set out. More stringent rules apply to chemical hazards, such as certain chemical substances, fragrances and noise that are released from toys. In particular, the European Commission has recently approved Germany’s request for a stricter rule on chemical detection limits. These restrictions do not cover all chemicals that are listed in the Directive. Thus Hong Kong exporters have to be particularly aware of the level of lead, barium, nitrosamines and nitrosatable substances in the toys that are exporting to Germany. Since chemicals involve more complicated issues, the enforcement will come into effect on 20 July 2013.
In Japan, The Japan Toy Association (JTA) established a voluntary safety control system on toys. A "ST" Mark is issued on toys that comply with the voluntary safety standards. Besides, the International Organisation for Standardisation (ISO) has published three ISO standards on toy safety issues as ISO 8124. In May 2012, JTA announced regulations for rubber-made toys. Thermoplastic elastomer resins have to be tested unless there is clear indication that the material contains no or less than 50% rubber of total volume. These requirements apply to toys that are under Japan’s “ST” program.
On the Chinese mainland, more safety standards have been introduced. Starting from June 2007, the China Compulsory Certification (CCC) scheme on toys has become effective. Six types of toys, namely children's vehicles, battery-operated toys, plastic toys, metal toys, toys with shot projectiles and dolls, are subject to the CCC scheme. Toys need to apply for a CCC certification mark before they can be sold, marketed, imported or used for commercial purpose on the mainland. In addition, the General Administration of Quality Supervision, Inspection and Quarantine of China has adopted Measures for the Inspection, Supervision and Administration of Import and Export Toys in 2009. Exporting, importing or selling defective toys are prohibited and will be subjected to a fine equivalent to the triple of the goods' value. All illegal revenue and products will be confiscated.
Trend of shorter product life cycles and a wider variety of novelty designs: As fancy designs and gimmicks increasingly become key ways to attract buyers, the product life cycle of toys has shortened over the past decade. The boom-and-bust cycle is further driven by the renewed interest in licensed toys. This fast changing environment makes the toy market more competitive. Even for classic toys such as LEGO construction sets and Barbie dolls, products have to be renewed constantly with new features to stimulate sales. Besides the tendency of shorter on-shelf time, toys are characterised by a wider variety of novelty designs.
Continued popularity of smart toys: The worldwide mega-trend is to integrate electronics and new technology with toys to create additional and new playing possibilities. Classic wooden trains by BRIO, for example, are now equipped with modern infrared remote control and electronic sounds. Newly introduced dolls and toy robots are capable of communicating directly and interactively with others in the same product line, such as Robosapien made by a Hong Kong based company WooWee and Furreal Friends by Hasbro.
Sustained interest in licensing: The sparkling success of licensed products is expected to continue. While more toy manufacturers will ride on the licensing bandwagon in the hope of success, they should be aware that the trade is characterised by a rather short boom-and-bust cycle. A few leading toy companies have adjusted their marketing strategies to be less reliant on licensed products. Video games are now constantly inventing new characters, while sales of traditional characters remain satisfactory.
Strong and clear focus on educational, creative and developmental toys: With a better-educated and prosperous demographic audience growing in size, the market for educational toys is getting noticed by industry and consumers alike. Parents are now looking at the whole child perspective, demanding toys that develop skills such as listening, taking turn and creativity. For example, Hasbro has a product called T.J. Bearytales, an animated bear that encourages children to read together. Another company Toy Quest has video books, which encourage families to learn together through reading, sharing stories, and enjoying closeness through this type of play. Construction toys, such as LEGO, continue to be very popular too.
Wide interest in multi-media and web-compatible toys: With the rising popularity of the cyber world, assimilating real and virtual toys together is another continuing trend. It is already common for toy makers to have web sites for sales and product promotion. Now they are introducing toys capable of linking with the Internet so that toy-playing can be extended beyond the physical plaything. Bandai, for example, has rolled out toy robots that allow buyers to play games with animated versions of their robots over the Internet.
Youth electronics: Youth electronics is a growing category which allows children to have access to kid-size versions of adult products. Examples of youth electronics include kid-sized and affordably priced MP3 players and digital cameras. Parents are usually reluctant to buy real electronic products for their children; hence youth electronics becomes a good way to get started, as children can learn to take care of it before going for a higher price point.
Sports-like toys: Due to concerns about health and child obesity, experts and parents are searching for sports-like toys for children to exercise. Demand for aquatic toys and equipment, for example, has been strong. This development is a trend beyond the industry's traditional focus on mental development and game play.
Growing demand for collectables: Collectors' articles are increasingly sought after by adults and seniors. This successful exploration of new market began in Japan where declining birth rates urged producers to seek other market targets. High spending power characterises these consumers, who show great interest in soft toys, model railways and parlour games. In fact, a growing number of companies are introducing two lines for the same product, one for kids and the other for collectors. For example, Mattel has a strong collector business in Barbie dolls, Matchbox die-cast cars and the Hot Wheels racing system, in addition to the children's line of these toys.