China is the biggest exporter of toys in the world; around 80% of world's toys are originating there. Low labour costs and economic growth have allowed China to become the destination of choice for global toy businesses looking to offshore manufacturing while consumers have also benefitted from the resulting competition for production costs. So, Mattel's decision, which was announced on 19th February, to shift some of its production facilities from world’s manufacturing hub to Brazil and India came as surprise to many. Euromonitor was not one of them.
These were the very two countries investigated as potential and viable alternatives to China a year ago. Back in March 2012, Euromonitor International had explored the key parameters attached to China's global manufacturing output, analysed the main challenges and likely scenarios while studying the alternative hub destinations in emerging countries for toys production extensively in a series of three articles.
Average Salaries in Toys and Games Manufacturing per annum in US$: 2006-2011
Source: Euromonitor International
China – still attractive but no longer the only choice
Relatively low labour costs, a large workforce (some 452,000 employed in toys and games manufacturing in 2011) and strong economies of scale attract major international toy brands to Chinese manufacturers and Mattel is not an exception. Mattel Group manufactures 74% of its products in China and the remainder scattered across Indonesia, Malaysia, Mexico and Thailand.
Consumers worldwide have also benefited from the manufacturing shift to China, as savings made by international companies are reflected in the prices of goods. However, China is losing its competitive advantage as a low cost environment for labour. The country's one-child policy is resulting in shortages of labour, permitting workers the leverage to demand better wages. Rapid population ageing is narrowing the labour pool, while high inflation is increasing export and transportation costs. Average salary of an employee in toys and games manufacturing increased by 47% over 2007-2012. These factors are beginning to erode the country's manufacturing edge, with businesses increasingly looking into cheaper producers.
Brazil and India as alternative toy manufacturing hubs
Brazil is one of the fastest growing countries globally and Brazil overtook the UK as the world's 6th biggest economy in 2012. However, its manufacturing industry is a relative black spot for the country. The sector declined as a percentage of GDP from 14.6% to 11.2% between 2007 and 2012. 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. In April 2012, a further US$35 billion was pumped into the stimulus package.
With almost 194 million in 2012 and still growing, Brazil has the largest population in Latin America. 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 the dynamic regions in traditional toys and games sales recording over 5% CAGR compared to 3.5% of world average over 2011-2016 period. 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$13,612 – 8 times and 34 times more than China and India, respectively.
In India, average salary in toys and games manufacturing per annum is just US$397 dropping by 61% over the last five years; whereas it was doubled in China, to stand at US$3,657 in 2011. So, could India, the second most populous country in the world with very low labour costs, be another option?
As manufacturing shifts eastwards so does demand, as more Western producers rely on large Asia Pacific markets for sales, whether to consumers or retailers. In terms of traditional toys and games sales, India is forecast to be the third most dynamic country 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.
Number of Employees in Toys and Games Manufacturing
Source: Euromonitor International
No one expects Brazil or India to replace China’s number one status in global toys manufacturing any time soon. While rising inflation and tightening of liquidity provision by the country's central bank remain constraints on production, China still offers the most cost-effective manufacturing solution for toys. However, there are certainly more concerns and more questions are asked about the possible scenarios as well as their prospective impacts on the overall industry. Sources within the industry indicate that Mattel is not the only toy company exploring these.