The Indo-China Game in the Global Toy Industry Relocation
In 1967, Mattel opened its first factory in Taiwan to manufacture Barbie Dolls, a decision often referred to be a trailblazer for the outsourcing phenomenon that made East Asia the workshop of the world. 20 years later, as the Taiwanese industrial ecosystem matured and wages increased, Mattel moved its production to China where wages were significantly less. Over the next 20 years, China emerged as the manufacturing powerhouse and at its peak produced 80% of the world's toys, with the US being its largest customer.
While China has for many years occupied an important position in the toy production market, pressures like those previously witnessed in Taiwan are visible. Cities in Southern China like Dongguan that housed the world’s biggest and the most efficient toy manufacturing facilities are now observing heavy exodus of these factories to several Asian countries.
Factors such as an exponential rise in wages, increased production costs and changes in the Renminbi exchange rate have depleted China’s competitive edge in this industry. In addition, the Chinese government is pushing for the transformation of its industrial economy to higher technology and service-led activities, with little consideration for labour-intensive and cost-sensitive industries like Toys. The US-China trade was has increased the pressure on toy manufacturers and accelerated the industry relocation strategy. As per industry estimates about 800-1000 toy factories in China have either been closed down or have shifted overseas.
Why India — “Make in India” for the World
As China’s cost advantage diminishes, a noticeable and deliberate movement towards automated and technologically advanced manufacturing can be noticed. However, as 2/3rd of all toys manufactured per year are new, it becomes necessary to change toy production lines on a frequent basis, making it difficult to automate the entire process. This structural limitation of the industry makes India a lucrative opportunity for manufacturers.
100% foreign ownership is permitted in a toy manufacturing facility registered in India. In the recent past, a few Chinese companies have reportedly entered strategic alliances or Joint Ventures with their Indian partners to establish toy manufacturing units in India.
Clusters for modern toy manufacturing exist around all major India cities such as Bengaluru, Hyderabad, Chennai, Pune, Mumbai, Delhi NCR, Ahmedabad, and Kolkata. All cities have large organized industrial parks available for organized manufacturing. In addition, foreign companies can also find ready built buildings for rented accommodations. These rental arrangements are cheaper than several competing South East Asian economies.
As per industry experts, toy factories in India offer cost savings of around 15-20% on average (based on ex-factory cost). Some of the advantages of considering India as a toy manufacturing cluster are:
1. Low labour costs
• The average minimum wage for contract workers in India is $ 148 per month (INR 10,000) and $ 234 in China.
• While countries like Vietnam and Thailand also have cheaper labour but India is the only country that helps set-up large factories with thousands of workers like China hosted for the last two decades.
2. Young Population
India vs. China Demographic Comparison
• More than 50% of the population is below the age of 25 and more than 65% below the age of 35. It is expected that, in 2020, the median age of an Indian will be 29 years, compared to 37 for China and 48 for Japan.
3. Preferential Policies for Exports
• Besides the growing domestic market, India has the potential to serve as a key export hub. India has several Special Economic Zones (SEZs) that are located closer to the container seaports, which makes export consignments more competitive.
• Toy manufacturing clusters located near cities like Chennai, Mumbai-Pune-Bengaluru belt have the appropriate skills and geographical advantage to support the growth of this industry.
4. Availability of Skilled Labour
• India has developed as a strong manufacturing ecosystem for the automobiles and engineering industry. There are nearly 25 million people working in the automotive sector and India is the 5th largest manufacturer of cars in the world.
• The automotive sector has a lot to offer the toy industry - because cars have a lot of highly engineered, plastic injection moulded parts. Therefore, when car part suppliers move into the toy industry, they tend to bring greater discipline and more advanced processes and capabilities with them.
5. Large and Fast-growing Domestic Consumer Market
• The Indian toys market was worth $ 1.3 bn in 2017, registering a CAGR of 15.8% during the year 2010-17. The market is further projected to cross $ 2.9 bn by 2023, at a CAGR of 13.9% during 2018-2023.
• India set to become third-largest consumer market by 2030. Consumer spending in India is expected to grow from $ 1.5 tn at present to nearly $ 6 tn by 2030.
Under the Make in India initiative, the government has highlighted 25 sectors where the country has either a competitive advantage or a strong aspiration to strengthen its manufacturing ecosystem. The Government of India should capitalise on the flux within the Toy Industry and establish a proactive strategy to attract companies looking to move out of China. The global toy industry is witnessing significant movement at the moment. Hasbro, a US multinational, which is among the top three toy company in the world, has announced plans to shift 40% of its order book from China by the end of 2020. Of this, India is likely to attract about $ 400 mn to $ 1000 mn over the next 4-5 years. Even smaller Chinese companies, such as Pals Plush, have realised the advantage of producing in India and begun to move operations here. Hangzhou, China-based soft toy manufacturer moved its operations to Sri City (Andhra Pradesh), investing over $ 3.5 mn and creating over 600 jobs.