Profiles of Hong Kong Major Manufacturing Industries

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Last updated: 21 January, 2009

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Toy


  • 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, while a large share of industry revenues are derived from contract manufacturing for 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.
  • Computer and video game interactive entertainment is expected to remain a major growth area, followed by smart toys (traditional toys with electronics features) and educational toys. With the popularity of the cyber world, assimilating real and virtual toys together is another product development trend. Toys capable of linking with the Internet are introduced so that toy-playing can be extended beyond the physical plaything.

Industry Features

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, the majority of Hong Kong toy makers have set up production facilities offshore, mainly on the Chinese mainland. In the wake of this relocation trend, many toy companies in Hong Kong have been reclassified as import-export establishments, thus contributing to the apparent decline in the number of toy makers locating in Hong Kong.

Meanwhile, the role of their Hong Kong office is shifting towards quality control, management, marketing, finance and accounts, product design, and production management. This skew towards higher value-added activities is helping Hong Kong toy makers to sharpen their competitive edge, 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 productivity, quality, reliability and delivery. Building on their base in plastic moulded 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 commonly used. Many manufacturers have earned the International Organisation for Standardisation (ISO) 9000 certification and some have the CARE Seal of Compliance certificate.

Competition has remained keen, especially from indigenous Chinese enterprises in open items. The rapid expansion of production capacity on the mainland by Hong Kong manufacturers also put much downward pressure on prices and profit margins. Orders received are smaller in lot size, while shorter delivery lead time is generally required.

Performance of Hong Kong Toy Exports^

-

2006

2007

Jan-Nov 2008

(HKmn)

Growth %

(HK$mn)

Growth %

(HK$mn)

Growth %

Domestic Exports

239

+21

206

-14

186

-3

Re-Exports

77,327

-2

95,525

+24

98,189

+11

Of Chinese Mainland Origin

71,608

-6

83,129

+16

84,026

+9

Total Exports

77,566

-2

95,731

+23

98,374

+11

By Market

2006

2007

Jan-Nov 2008

Share %

Growth %

Share %

Growth %

Share %

Growth %

EU

28.9

*

28.7

+23

32.6

+25

Germany

9.7

+20

13.0

+66

17.7

+50

UK

6.1

*

5.0

+1

4.6

+2

Italy

3.0

-13

2.5

+1

2.5

+14

US

33.9

-13

28.8

+5

27.2

+5

China

11.6

+104

21.6

+130

21.0

+8

Japan

10.6

-20

7.5

-13

5.9

-12

ASEAN

2.4

-2

2.9

+48

1.8

-26

Singapore

1.5

-4

2.2

+72

1.1

-42

By Category

2006

2007

Jan-Nov 2008

Share %

Growth %

Share %

Growth %

Share %

Growth %

Traditional Toys

68.1

-8

50.5

-9

43.4

-5

Toys and Dolls

59.5

-6

44.4

-8

38.6

-4

Carnival Articles & Decorations

6.7

-21

4.9

-11

3.9

-14

Non-video Games

1.8

-19

1.2

-17

0.9

-24

Non-traditional Toys

31.9

+16

49.5

+92

56.6

+27

Portable Video Games

16.7

-4

25.5

+89

29.4

+28

Video Games

15.3

+50

24.0

+94

27.2

+27

Note: ^ 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. * Insignificant.

Hong Kong's toy exports experienced strong growth of 23% and 11% in 2007 and in the first eleven months of 2008, respectively. The top three markets of Hong Kong's toy exports are the EU, the US and the Chinese mainland, accounting for some 80% of the total. Thanks to the strong euro during the period, exports to the EU maintained robust growth at 23% in 2007 and 25% in the first eleven months of 2008. Growth in exports to the US remained steady at 5% in both periods. Growth in sales to the Chinese mainland, however, slowed significantly from 130% in 2007 to 8% in the first eleven months of 2008.

In terms of product, non-traditional toys such as video games and portable video games have showed brilliant performance in recent years, making the share of non-traditional toy exports increasing from 32% in 2006 to 57% in the first eleven months of 2008. On the contrary, exports of traditional toys declined by 9% and 5% during the periods.

Amid the global economic downturn, sales of discretionary items like toys are expected to be sluggish. The outlook for traditional toys will likely be unassuming due to keen competition and a shift in consumer preference towards more sophisticated products. In contrast, sales of non-traditional toys are expected to be stronger, due in part to the sustained popularity of video games, and in part to the anticipated rising trend of in-home entertainment triggered by falling disposable incomes. Emerging markets like China, Russia and Eastern Europe will likely exhibit stronger growth for Hong Kong's toy exports.

Sales Channels

Hong Kong exporters are known for producing high-quality toys. A large share of industry revenues are derived from contract manufacturing for overseas industry giants and licensed holders such as Disney, Hasbro, Mattel and Warner Bros. in the US, Zapf in Germany, and Bandai, Takara and 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 related to product designs, inventory taking and marketing.

Increasingly, however, Hong Kong manufacturers are offering expertise in design, engineering, modelling, tooling, quality control and other technical know-how to its customers, although some OEM manufacturers still serve a narrow base of clients and produce only a few products, making their businesses quite susceptible to the vicissitudes of their buyers. To maintain close contact with large buyers and to keep abreast of market trends are essential parts of OEM manufacturers' sales efforts. According to a HKTDC survey conducted in 2007, 91% of respondents in the toy industry were involved in OEM business, while 68% were in ODM. Vtech's V.Smile is representative of Hong Kong toy industry's innovation power. It has earned the Innovations Award (Learning) in the Nuremberg International Toy Fair and the Toy of the Year Award in the American International Toy Fair.

In the meantime, a growing portion of industry sales are provided by proprietary product manufacturers. These manufacturers, accounting for 40% of respondents in the 2007 HKTDC survey, design and market products under their own 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 manufacturers, usually the smaller ones.

In order to expand business networks, explore market opportunities, and promote product image and brand-names abroad, Hong Kong toy makers may participate in some well-organised and influential international trade fairs. Below is a list of some major trade fairs:

Country/Region

Events

Hong Kong

  • Hong Kong Toys and Game Fair in January

Chinese Mainland

  • Shanghai Toy Expo held in Shanghai in October

US

  • American International Toy Fair held in New York City in February
  • Mass Market Toy Expo in New York City in October

Europe

  • Nuremberg International Toy Fair held in Germany in February

Middle East

  • The Middle East Toy Fair held in Dubai in May

The HKTDC also from time to time organises study/match-making missions for Hong Kong manufacturers to visit specific markets for establishing new business relations.

Industry Trends

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 up an increasing share of the toy market from specialty chains and traditional retailers. A few toy retailers of smaller scale were forced out of business or underwent restructuring as a result. Mass merchants, on the other hand, purchase on large quantities, and thus are in a better position to bargain with suppliers on prices and terms of trade.

The mass market depends on aggressive advertising campaigns or promotional tie-ins for success. Increasingly, toy manufacturers are entering partnerships with companies from other disciplines, especially fast-food chain stores, in their promotion campaigns. Toy makers are also increasingly entering into licensing deals with movie studios to make products featuring film characters.

Even before the recent tide of toy recalls in overseas markets, safety standards, regulations and code of practices have long been major concerns among overseas buyers. The International Council of Toy Industries (ICTI), with 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 member countries.

Meanwhile, the life cycle of toys is becoming shorter, and shorter life cycle increases the risk of product development. The impact on Hong Kong suppliers is thus not just the lowering of profit margins, but also the need to invest more in R&D and to develop their own design capabilities and more value-added edges which cannot be replicated easily by competitors.

Today's children, for their part, are growing up faster than a generation before. Kids aged 12 or above easily turn to non-traditional playthings such as video games, computers, music, cosmetics, etc. This development has continued to challenge toy manufacturers to create new, innovative toys that capture the interest of children. Meanwhile, greater efforts are being made to introduce toys for pre-schools that require a higher level of creative input and help develop brain power, coordination and senses of players.

CEPA Provisions

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. Non-Hong Kong made toys are subject to tariff rates up to 16% when entering the mainland.

The promulgated rules of origin for toys to benefit from CEPA's tariff preference are basically 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_2009.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, whether made in Hong Kong or the Chinese mainland. 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 are becoming more stringent in overseas markets, mainly in areas of product safety and environmental protection.

In the US, the Consumer Product Safety Improvement Act (CPSIA) was signed into law in August 2008. This legislation forms part of a comprehensive effort by the U.S. government to enhance the safety of imported consumer goods, which could create additional hurdles for the entry of such items and ultimately make it more difficult and costly for exporters to ship their products to the US. From November 2008, every manufacturer of a product subject to any Consumer Product Safety Commission (CPSC) standard must issue a certification stating the CPSC regulations that apply to the product and that the product (based on appropriate tests) complies with all such regulations. From December 2008, sales of any product designed or intended primarily for children that contains more than a certain amount of lead will be prohibited. More new requirements of CPSIA will take effect in 2009. The US Toy Industry Association (TIA) also advocates members' compliance to the safety standards set by the ICTI, as well as the standards published by the American Society for Testing and Materials (ASTM).

The EU Toys Directive, which is under review amid the recalls in 2007, stipulates that all toys must meet the essential safety requirements and bear the "CE" mark denoting conformity. Earlier, significant changes to EN 71 Part 1, which governs the safety of toys - mechanical and physical properties, were made in November 1998, including: a new soaking test for toys that contain plastic decals or use an adhesive; new labelling requirements for balloons, bicycles, and toys intended to bear the mass of a child under 36 months and toys comprising monofilament fibres; new torque and compression test requirements for products intended for children under three years old; modifications of the requirements for mouth-actuated toys; and toys which a child can enter. To concur with the rising demand for electric toys, the EU has also imposed new regulations regarding the safety standard of electric toys - EN 62115:2005.

In the EU, environmental and health concerns continue to be major issues. After several European countries banned the use of phthalates in toys that are made of synthetic materials, the EU has adopted a permanent resolution to ban the use of six phthalates in toys and childcare articles since 16 January 2007. The EU has also adopted a new regulation concerning the use of chemicals - REACH, which stands for Registration, Evaluation, Authorisation and Restriction of Chemicals. REACH has entered into force since 1 June 2007, requiring certain amount of chemical substances manufactured and imported to be registered to the European Chemical agency.

Two directives being implemented by the EU call for significant changes in the patterns of development, production, consumption and behaviour, and advocate the reduction of wasteful consumption of natural resources and introduction of measures for reducing waste management problems linked to heavy metals and flame retardants concerned. They are the Directive on Waste Electrical and Electronic Equipment (WEEE), and the Directive on the Restriction of the Use of Certain Hazardous Substances (RoHS). Exporters of electronics toys to the EU are required to compile with WEEE effective from 13 August 2005 and RoHS from 1 July 2006.

Furthermore, a framework directive regarding the energy-using products (EuP) has been implemented since August 2007, stipulating that manufacturers have to include eco-friendly measures throughout the lifecycle of the products. However, the implementation would not immediately impact on producers and importers of EuP, until the entry into force of the future implementing measures.

In Japan, a voluntary safety control system on toys was established by the Japan Toy Association (JTA). An "ST" Mark is issued to toys in compliance with this voluntary safety standards. Besides, the International Organisation for Standardisation (ISO) has published three ISO standards on toy safety issues as ISO 8124.

In the Chinese mainland, as safety has become a major issue, more relevant 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 a CCC certification mark before they are sold, marketed, imported or used for commercial purpose on the mainland. In additional, the Provisional Measures Governing the Registration of Toy Exports Quality Permit was issued in August 2007. Enterprises exporting the specified categories of toys must have a quality permit before they can export the concerned product. Under the new measures, the coverage of toys has been expanded, while the validity period of the quality permit is shortened.

Product Trends

Trend of shorter product life cycles and a wider variety of novelty designs: As fancy designs and gimmicks increasingly become key ways to attract buying, 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. Indeed, even for classic toys such as LEGO construction sets and Barbie dolls, new playing features are regularly being added or enhanced to stimulate new sales. Besides the tendency of shorter on-shelf time, toys are also 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. Game consoles like Wii aside, even very successful and thoroughly popular "oldies" are refined with electronic features. 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 more at the whole-child perspective, with focus on skills such as listening, taking turn and inspiring 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.

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: Children always like imitating their parents. Youth electronics is a growing category which allows children 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 may be a little reluctant to buy their younger children the real electronic products, but buying them youth electronics is a good way to get their children started, make sure they know how to take care of it, and see if this is a product they are really going to enjoy before they go 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 collectibles: Collectors' articles are increasingly sought after by adults and seniors, particularly in the US, Germany and Japan. High spending power characterises these consumers, who show great interest in soft toys and dolls, 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.

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