Rising wages in China send shockwaves through toy industry (Feature)

By Elke Richter Feb 1, 2011, 2:06 GMT

Nuremberg, Germany - Rising wages in China are sending a jolt through the world toy industry, prompting a revival of factory capacity in the West, industry leaders are saying ahead of the Nuremberg Toy Fair.

The bulk of dolls on view at the annual toy expo, which opens Thursday in Germany, traditionally are western-designed and carry western brands but are churned out by low-pay, plastic-moulding factories in southern China.

Chinese factories saw timber into wooden blocks, they weld and bolt together ride-on tractors and scooters. They assemble diecast toy cars and electronic robots. In Germany, Europe's biggest toy market, nearly 80 per cent of today's toys are Chinese made.

But not for much longer.

For a start, western shoppers are suspicious after several toy-safety scares in recent years involving toxic paint and small, detachable parts that babies might swallow. Chinese factories were blamed.

Now inflation in China is also driving up both wages and factory- gate prices. Officially, Chinese inflation is running at 5 per cent for consumers, but the true figure seems higher. The renminbi exchange rate is up, and China's supply of cheap labour is running out.

Retail toy prices in Europe seem likely to jump as much as 30 per cent this year, and vendors say China is a major reason for that.

German companies say the prices Chinese factories are asking are getting steeper, and some believe that manufacturing in Europe is affordable by comparison. European inflation and pay are flat.

The trend is likely to be a hot topic at the toy expo, which is only open to the wholesale trade. German professional buyers returning from China say the days when southern China's factories could rely on an endless supply of cheap migrant labour are over.

'The workers are leaving to move over to higher-value manufacturing,' explains Martin Boeckling, chief of a German purchasing cooperation, Spiel und Spass. He says Beijing no longer recognizes toys as a priority manufacturing sector.

Although an estimated two-thirds of toys sold worldwide are Chinese made, the sector contributes only 1.5 per cent of China's gross domestic product.

Beijing has decided that its available labour resources need to be redirected into manufacturing types that add more value, including cars and electronics.

China is leaving the low-profit toy business behind and there is no obvious successor in the low-wage countries.

In centralized fashion, Beijing would also like to spread factories back to the places where Chinese people live, and reduce the vast migrations by China's job nomads at times of festivities.

Reducing the concentration of manufacturing in the south would help stop some of the snarl-ups on China's roads and railways. The rebuilding of those same roads and railways is also sucking away labour.

Otto Umbach, chief of another German purchasing cooperative, Idee und Spiel, adds another point: 'Chinese universities are graduating 6.5 million people per year. They don't want to work on factory assembly lines.'

China, he forecasts, faces a shortage of unskilled manual labour. Toy factories will have to hike pay 10 per cent this year.

European importers might be able to absorb that, but not combined with a jump in the price of raw materials and the cost of sea- freight.

'At the start of 2009 you could land a shipping container in Europe from China for about 600 dollars,' said Boecklin.

'Today it's costing 1,400 or 1,500 dollars.'

Several European companies are thinking of manufacturing closer to home.

Simba Dickie Group, a German company based near Nuremberg, has set up a new factory in France and has modernized its German plants.

Paul Heinz Bruder, head of a small German company, Bruder Spielwaren, is one of those who does not need to return. He never left. He said the logistics of supplying European shops from European plants always made better sense and ensured quick order fulfilment.

It also meant that on-the-spot checks to see that products were being made well and met safety rules were only a car drive away.

'Many companies you deal with in China are kind of fly by night,' he said. 'They don't have a proper mailing address. If something goes wrong, you have a real job on your hands finding who is responsible.'

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