Hong Kong Manufacturing SMEs: Preparing for the Future

88Issues for Hong Kong Toy ManufacturersSimilar to other Hong Kong manufacturers in thePRD, Hong Kong toy companies also face challengesfrom changes in markets, powerful buyers andlicense holders, increasing competition, andincreased costs associated with rising wage ratesand input costs, the appreciation of the RMB, theimplementation of the Labour Contract Law, andshifts in policies on export processing. In addition,as a relatively labour-intensive and low value-addedindustry, the toy sector is feeling the effects of theindustrial upgrading movement that is being pushedby both the Central and Guangdong ProvincialGovernments. As an industry heavily reliant onboth plastics and packaging, it also attracts itsshare of attention from Mainland and overseasenvironmentalists concerned about production oflarge amounts of yet more potential waste, despiteindustry efforts to use recycled plastic materials.The toy sector was under pressure before theonset of the global economic downturn in 2008.Wage increases in the toy sector had been risingat double digit per centages each year. In addition,it is estimated that the implementation of LabourContract Law alone added 30 per cent to the labourcosts for toy manufacturers in the PRD. 164 The priceof raw materials used in toy manufacturing, such asplastic and metal fittings, had also increased. 165 Thetoy sector was also negatively impacted by changesmade by Mainland Government authorities in June2007 that lowered the export VAT rebate for toys164 www.fisme.hk165 Wei Jin, “Winter of Toy Industry in China”, Consumer Guide –Academic version, April 2010.166 Note that the Hong Kong Toys Council estimates that in 2007there were 8,500 toy factories and exporters in Guangdongand that this had decreased to about 3,000 toy factories andexporters by 2010.167 Wei Jin, “Winter of Toy Industry in China,” Consumer Guide –Academic version, April 2010.168 www.easttoys.com.169 www.glokids.cn.170 www.past5000.com.171 See Hong Kong Trade Development Council, “Hong Kong’sExport Outlook for 2010: Challenges amid a Slow GlobalRecovery,” 16 December 2009.from 13 per cent to 11 per cent. In 2007, 1,454of the 1,725 toy factories inspected in Guangdongwere found to have safety flaws. A total of 764 ofthese factories lost their export licences or had themsuspended. In August 2007, the Certification andAccreditation Administration of China issued newregulations for toy exporters that makes it moredifficult to obtain and retain an export licence.According to Guangdong Customs, from Januaryto July in 2008 there were 1,404 toy companiesin Guangdong doing export business, which was3,618 fewer than one year earlier 166 . This meansthat 72 per cent of the toy companies either exitedthe export market altogether or put their exportingactivities on hold. 167In the first quarter of 2009, the EU announced 143 toyrecalls, 134 of which concerned toys that originatedfrom the Chinese Mainland. During the same period,the US and Canada announced 13 toy recalls, all ofwhich were for Chinese products. This led to anotherround of new safety and environmental laws inthe US and EU. The combination of new Chineseand overseas regulations have increased input,compliance, quality management, and licence costs.Demand for toys from the US and the EU decreaseddramatically with the onset of the global economicdownturn. In 2009 and Hong Kong’s exports to thesetwo markets were down 19 per cent from 2008. Inresponse, the Chinese Government raised the exporttax rebate for toy exports from 11 per cent to 14 percent in November 2008, and further raised the exporttax rebate to 15 per cent in June 2009, in an attemptto stimulate toy exports. In the first ten months of2009, toy exports in China decreased 11.2 per cent,and toy exports in Guangdong Province decreased10.9 per cent. 168 Industrial players estimated that HongKong’s toy exports would grow between zero and 10per cent in 2010. 169 In the first four months of 2010,Guangdong’s toy exports increased 21.4 per cent yearon-year.However, Guangdong Customs indicatedthat most of the orders were short-term orders, andthe outlook of the industry was still uncertain. 170 Asurvey published by HKTDC in December 2009 171indicated that the demand for basic toys will continue