Members of Guangdong toy industry may be asking Santa to bring the one thing they want for Christmas: profits.

Instead of festivity, it's uncertainty that abounds in the toy factories in South China's Guangdong Province, where many of the factories run by Hong Kong investors wonder if this year's mild rise in Christmas orders will be enough to bring in earnings.

Shenzhen, the city right on the border with Hong Kong, is Guangdong's manufacturing centre and has by far the densest cluster of toy factories with 1,200 of them hiring some 600,000 men and women.

Apart from toys, Shenzhen also provides the US market with around 70 percent of its man-made Christmas trees and ornaments every year.

But between 2003 and 2004, the Guangdong toy makers already saw their orders fall, as a result of the public health crisis of SARS (severely acute respiratory syndrome).

Next came rising energy prices, Hurricane Katrina in August and Hurricane Rita in September that heavily damaged the US economy and consumer enthusiasm.

What happened in Guangdong over the past few years may be indicating a trend.

According to a piece of business intelligence from Jiangsu, also a major trading province, Christmas toy exports actually saw a 20 percent decline in year-on-year terms.

Some experts say toy manufacturers may have to learn how to upgrade their low-tech factories into ones capable of producing more highly value-added intelligent toys.

Toy trouble

Across the Chinese mainland, there are around 8,000 toy-manufacturing companies, with a total staff of 3.5 million, figures from the National Bureau of Statistics show.

These companies produce almost 75 percent of the toy supplies in global trade although most of the products are of the low value-added types.

More than half of the Chinese toy exports (some say as much as 65 percent or even more) come from Guangdong Province.

But there is some good news, said C. K. Yeung, vice-chairman of Hong Kong Toys Council.

"Some of the Hong Kong toy makers (with factories in Guangdong) did see larger sales for the 2005 Christmas than 2004 with an average growth rate, as I estimate, of 10 percent or above," he said.

Yeung is also vice-chairman of Blue Box Toys, which sells its branded and OEM products in the world and owns four manufacturing facilities in the Chinese mainland, including Shenzhen. Blue Box Toys also saw its orders increase in 2005, and is already working to fulfill its 2006 orders.

However, rising orders did not necessarily mean greater profits, Yeung warned. In fact, he said, profits had remained flat for most part of 2005 and may not be able to offset the growing costs in labour and material supplies.

"It's an open secret that the industry's profit margin is only razor-thin, and our business environment continues to get tougher," he said.

"Our wage expenditure alone went up around 20 percent in two years," Yeung said, "a big growth."

Meanwhile, there was the price hike in the major raw material such as plastics, due to the more expensive crude oil. Toy makers had to spend an extra of 20 to 30 percent on their material supplies in 2005, he said.

Comparing with those expenses, he said, the rise in Christmas orders was only a mild one, if not too mild.

It is still difficult to tell whether the increase in sales towards the end of the year can balance off that in the overall costs.

Competing for profits

New competition is also making profit harder to come by.

Toy companies keep springing up, making the competition even more ferocious. According to the Guangdong Customs, in the first seven months of 2005, as many as 301 new toy exporting companies were established in the province, bringing the total number of local toy exporters to more than 1,600.

Throughout 2005, reports about the Guangdong toy industry were murky. Some claimed downright losses in sales.

It was not until mid-December, in an exclusive report for China Daily, the Shenzhen Customs said that from January to November, Guangdong's toy shipments overseas showed only an annualized growth of 2.5 percent, totalling US$4.25 billion.

And that was only following sluggish performance of Guangdong's toy industry for the previous three years. From 2002 to 2004, its annualized export growth went down from 7.2 percent to 6.8 percent, then to 6.2 percent.

The Shenzhen Customs report blamed high fuel prices and hurricanes in the US for damaging the economy and causing consumers to spend less. Katrina hit the US southern states on August 29 and Rita on September 25.

Whether Shenzhen can revitalize its toy industry depends on how the local industrialists with their financial partners across the border from Hong Kong to revamp their factories in such a way as to be innovative and more efficient, Yeung of the Hong Kong Toys Council said.

"Making toys is a business that is easy to come in but hard to stay," he said, "In order to stay, companies will have to reposition themselves by aiming the high-end market, and by coming up with products with unique designs and superior quality."

Possible overhaul

Both Hong Kong Trade Development Council, an institution to promote trade, and Shenzhen Customs have openly urged toy manufacturers to shift to the production of the more expensive intelligent toys instead of the traditional low value-added items.

Intelligent toys are referred to the items with learning aid functions and the gadgets that can be operated, rather than only played with by hand.

At the same time, the pressure is also building up for companies to improve their social accountability and management standards according to the ICTI ethical manufacturing programme.

The ICTI is formed by toy trade associations from many countries and regions in the world, including of those of US and the Chinese mainland, Hong Kong and Taiwan.

Although it is a voluntary organization, the compliance with its code of practice could have a long-term influence on a toy factory's profit prospects, Chinese trade experts say.

Right now, the initial ICTI focus, as it claims on its website, is on the Chinese mainland, Hong Kong and Macao, "where the world's majority of toys are manufactured," while expansion is contemplated to all countries where toys are made.

Chen Weiren, an ICTI expert, explained that in order to get certified in compliance with the ICTI code, a factory must follow seven steps and get audited before receiving a seal of compliance from ICTI Asia Ltd. And the seal of compliance must be renewed, based on the auditor's verification every.

Some large toy manufacturers have already signed up with ICTI, and are preparing for its auditing. But many small manufacturers still have to learn more about its significance.

Even though export is sluggish, said Wang Shaoqing, secretary-general of Shenzhen Chamber of Commerce for Crafts and Gifts, most local manufacturers will still try to look for new markets.

At the moment, shipments to the US still account for more than half of Guangdong's toy exports. Together with EU and Hong Kong, the three destinations would take up to 85 percent of Guangdong's total toy shipments overseas.

Wang said he was glad that Chinese toy manufacturers could have made inroads into the market of some of the new EU members, such as Poland and Hungary, when their spending in the Christmas season was on the rise.

Although North America and Western Europe would remain the main market for Chinese toys, "diversifying sales can always help mitigate the risk."

But Wang suggested it is also time when toy merchants should start looking for opportunities in the domestic holiday market.

"Precisely because it is still an under-developed market, there are potentials still to be tapped," he said. Besides Christmas and Halloween, Chinese festivals can also be good occasions for selling decorations and gifts, he said.

(China Daily December 23, 2005)