China's large manufacturing base has been key in attracting foreign toy businesses and boosting the domestic labour market for a long time, while Chinese consumers have benefited from lower prices on locally produced goods. However, high rates of inflation, growing wages and a shift in government policy are beginning to erode the country's manufacturing edge, with businesses increasingly looking into cheaper producers.
In the second article of the global toys manufacturing series, Euromonitor International investigates the alternative hub destinations in emerging countries for toys production.
Could China Keep its Place?
China's rise has been reflective of a general manufacturing shift away from advanced economies to emerging markets. In order to reduce costs, some international businesses are employing “China+1” strategy, operating one factory in another country enabling them to diversify operational and environmental risks. Economies of scale, cheap labour and a greater focus on services have pushed more manufacturing capacity to emerging economies, with more Western businesses outsourcing production to developing nations. In 2005, developed countries controlled over two-thirds of global manufacturing production; by 2010 this had been cut to just over half. Click to tweet!
China's 12th Five-Year Plan (2011-2015), announced in March 2011, focuses on developing sustainable, high-tech manufacturing industries while downgrading its low-quality goods production, with potentially long-reaching consequences for global exports. This may provide opportunities for other emerging nations to take over China's mantle as a major toys producer in the long run.
Brazil is one of the fastest growing countries globally and has recently overtaken the UK as the world's 6th biggest economy. However, its manufacturing industry is a relative black spot for the country. The sector declined as a percentage of GDP from 14.9% to 12.8% between 2006 and 2011. Click to tweet! High interest rates, a low skilled work force, a strong currency and significant competition from Asia has stymied the sector's development. As a response, Brazil's government launched the “Bigger Brazil” plan in August 2011, which is set to enhance the business environment for manufacturing businesses through subsidies and tax cuts.
With over 192 million in 2011 and still growing, Brazil has the largest population in Latin America. Click to tweet! In fact, leading multinational traditional toys and games companies are already looking into Brazil as a secondary hub for their global manufacturing operations. As well as being a very dynamic market itself, Brazil could also serve as a great gateway to Latin America which is projected to be one of most dynamic regions in traditional toys and games sales recording 6% CAGR – almost the double of world average – over 2010-2015 period. Click to tweet! In addition, its proximity to North America makes it an ideal spot reducing the shipping costs considerably. However, one big setback could offset all of its advantages: labour costs. In 2011, average salary per annum in toys and games manufacturing stood at US$14,142 – 5.5 times and 36 times more than China and India, respectively. Click to tweet!
Thailand's manufacturing as a percentage of GDP stood at 35.2% in 2011 highest in the world proving that there is already a manufacturing infrastructure in place easing the entry barrier. Click to tweet! World's largest traditional toys and games companies, Mattel and Hasbro, already have production facilities in the country.
Thailand's position as an Asian transhipment hub and high ranking it World Bank's Ease of Doing Business Index as well as its low-cost workforce offer businesses favourable conditions for production, while domestic consumers benefit from homemade goods. However, record floods in Thailand over July-November 2011 paralysed Thai manufacturing capacity. In late October 2011, the government estimated that around 10,000 factories had shut down. Global supply chains were disrupted, with several US and Japanese plants forced to slow production.
In India, average salary in toys and games manufacturing per annum is just US$393 dropping by around 40% over the last five years; whereas in China, it increased by a whopping 87% to stand at US$2,587 in 2011. So, India, the second most populous country in the world with very low labour costs, could be another option. Or could it be?
As manufacturing shifts eastwards so does demand, as more Western producers rely on large Asia Pacific markets for sales, whether to consumers or retailers. Preliminary findings from Euromonitor International's 2012 research, which will go live in May 2012, highlights that India is forecast to be one of the most dynamic traditional toys and games markets in the world with around 9% CAGR over 2011-2016. However, very low per cap toys spend somewhat undermines this growth. The major concerns are poor infrastructure and lack of fully operational logistics which could cause serious problems to manufacturing.
Average Salaries in Toys and Games Manufacturing per annum in US$: 2006-2011