Troubled Times for The Chinese Toy Industry

The history of modern Chinese toy industry dates back to the early 1900s. By the early 1980s,
the Chinese toy industry was developed enough to compete in the international market. By
2006, benefiting from economies of scale and cheap labor, the Chinese toy industry had come
to dominate the global market for toys, accounting for around 75% of the world's output.
However, in 2006-07, the Chinese toy industry faced a series of product recalls, adversely
affecting its global image.

The case discusses the development of Chinese toy industry over the years.

It discusses the problems facing the toy industry in China, with specific emphasis on the issue
of recalls in 2007 and the reason behind the recalls.

The case examines some of the other challenges that the Chinese toy industry faces such as
increasing labor costs, technological inferiority of Chinese toys and the growing demand for
high tech toys, and the Chinese toy manufacturers' lack of brand power. The case ends with a
discussion on the actions taken in response to the series of recalls and the possible impact of
these recalls on the Chinese toy industry.

Issues:

» Understand the reasons for the growth of the Chinese toy industry

» Analyze the problems facing the Chinese toy industry

» Evaluate the impact of recalls on the fortunes of the Chinese toy industry

» Analyze the future of the toy industry in China

If this flood of dangerous products continues and retailers are forced to pull toy after toy
from their shelves, China will become the Grinch that steals Christmas this year."1

- Richard J. Durbin, Democrat Senator from Illinois, commenting on the recalls of

Made in China toys, in August 2007.

"This is the last warning. If there is an unsatisfactory report in October [2007] we will
[impose] the next layer of measures. Among them is a ban on products."2

- Meglena Kuneva, the EU commissioner responsible for consumer protection, in

response to recalls of Chinese toys.

"It's quite urgent that we re-construct the Chinese toy industry. Otherwise, we will not only
lose the domestic market, but also the global market in the long term."3

- Shi Xiaoguang, president of the China Toy Association4, in 2002

Introduction
On October 4, 2007, the Consumer Product Safety Commission (CPSC)5 in the US recalled
more than half a million toys made in China as they contained dangerous levels of lead.

The CPSC announced that the recalled toys included 'Pirates of the Caribbean', 'Baby
Einstein', and 'Totally Me! Funky Room Decor Set' decorating kits, imported and sold by
Toys "R"Us Inc.6, and a variety of wooden toys imported and sold by KB Toys Inc.7 "A lot
of what is being recalled is because it violates the law, not that there is an imminent health
risk,"said CPSC spokeswoman Julie Vallese (Refer Exhibit I for more information on toy
recalls in October 2007).

The October 2007 recall was the latest in a series of Chinese toy recalls by toy companies and
retailers in developed countries. Among the reasons given for the recalls were excessive
levels of lead paint, loose magnets that could be swallowed by children, or other potentially
serious problems.

The recalls had a limited impact on toy sales in the US and the EU but they severely dented
the Chinese toy industry's image in international markets.

The possible long-term impact on its reputation, however, was only one of the many issues
confronting the toy industry in China.

With costs of raw materials and labor increasing, the toy companies were seeing an
erosion in margins. Also, the growing popularity of high-tech electronic toys was a
challenge to Chinese toy companies as they were not very strong in this field.
Furthermore, even in the traditional toy markets, Vietnam and Thailand were
beginning to pose a threat.

BACKGROUND NOTE

Toys have had a prime place in Chinese society since ancient times. Folk toys made of
wood, clay, and paper have always been very popular with Chinese children. Masks
and clay figurines in the shape of animals have been found in the ruins of ancient
Chinese habitations.

The history of modern Chinese toys, however, dates back to the early 1900s. Around
1910, the first factories that made toys from tin were set up. Toy making in China
started gaining momentum after the May Fourth movement8 in 1919...

The Growth Chinese toy companies, like other companies in the manufacturing sector,
benefited from the reforms initiated in China in 1979.

With the opening up of the Chinese economy, toy makers from Hong Kong, which by then
had become a major global center for good quality toys, started setting up production
facilities in mainland China in order to take advantage of the lower operational costs.
However, most of the value-added work such as product design, production planning, quality
control, management, and marketing continued to be done from Hong Kong...

THE PROBLEMS

Though the Chinese toy industry had several strengths, it was also up against several
problems that had the potential to significantly impact future growth. To start with,
Chinese toy companies were faced with the dual pressures of rising costs and
declining prices...

OUTLOOK

In an attempt to improve the quality of toys, the Chinese government sponsored a two-
day training session on October 11 and 12, 2007, on quality control for more than
1,000 people from the Chinese toy industry. At these sessions, Chinese government
officials and executives from multinational companies lectured on European and US
quality and safety standards, China's toy licensing system, toy certificate systems,
export test regulations, etc. Participants were also taught how to deal with high lead
levels or design flaws in their products...