Hong Kong Manufacturing SMEs: Preparing for the Future

89into the medium-term. A further survey released bythe HKTDC in January 2010 found that just 34 percent of Hong Kong manufacturing sector respondentswere optimistic as to the business outlook for thetoy industry in 2010, and another 48 per cent ofrespondents were neutral in their outlook. 172Despite the increased costs, toy manufacturers,particularly SMEs, have not been able to raise pricessufficiently to offset the cost increases because ofwidespread consumer resistance to paying more formost toys and because they lack negotiating powerwith trade buyers. Consolidation of toy retailingin major markets at the retail level has given morepower to fewer toy brands and retailers, leavingthe “big four” retailers including Wal-Mart andToys “R” Us, and brand holders like Hasbro andMattel in a position to exert their buying powerso as to compress manufacturer profit margins.The profit margin of toy companies in Shenzhenhas been reported to be three per cent to fiveper cent on average, and even lower for SMEs. 173Financial pressure has led to the closure of manytoy factories, especially as sub-sub-contractinghas become higher risk in terms of compliancemanagement.Competition is also becoming fiercer as thetoy market in Mainland China expands and toyproduction spreads across China. Two major factors– cheaper prices and copycatting in the Shantouarea – are hurting smaller Hong Kong-owned PRDfactories. Many toy factories in Mainland Chinaare targeting the domestic and developing worldmarkets where controls over intellectual propertyviolations and safety are less rigorous. This is hittingmid-size own-brand Hong Kong toy manufacturersthat target the same markets.Kong toy manufacturers to go beyond Guangdongas the further from the Greater PRD they go,the less of a competitive edge they have relativeto the Mainland toy manufacturers. It may notbe practicable, for example, to replicate outsideGuangdong the current model of employingmigrant workers recruited from cheaper labourmarkets elsewhere in the Mainland and housed inlarge factory compounds. Moreover, most toys arenot high value items and the scope to increase theirvalue is limited. Similarly, the scope to overhaul orupgrade long-established production technology islimited.Response Strategies of Hong Kong SMEsHong Kong toy manufacturers have engaged ina range of strategies to deal with recent issues.In general, Hong Kong toy manufacturers areattempting to maintain a presence in traditionalOEM manufacturing while at the same time tryingto find ways to add value to existing products andprocesses, carve out profitable niches in existingproduct categories, develop new products in nichemarkets, develop branded products, build businessin the Chinese Mainland, and partner with firms inthe entertainment industry to create toys that arepopularised via a presence in films, television, theinternet, and theme parks.172 Hong Kong Trade Development Council, “On the Roadto Recovery: Assessment of 2009 Christmas Sales in MajorMarkets,” 29 January 2010.173 www.glokids.cn.Toys were one of the first Hong Kong industries toenter the PRD, which makes the “empty the cage”policy of the Guangdong Government that seeksto push out companies in traditional industriesin favour of companies in “higher technology”industries particularly hard for them to accept.Presently, there are few viable options for Hong