Hong Kong Manufacturing SMEs: Preparing for the Future

90We note the following:• Hong Kong toy makers are looking to enter theChinese market in order to tap into demandassociated with the estimated 252 millionchildren aged fourteen and under. Many HongKong firms have entered in a small way to learnmore about consumer requirements in Chinaand how they differ from those in traditionalmarkets. However, selling into China is not easy.According to interviewees, obstacles to HongKong toy manufacturers entering the Chinamarket include an immature market structure,poorly established or inaccessible distributionchannels, unclear regulations, under-the-tablepractices, and difficulty collecting on invoices. 174• Most toy manufacturing is relatively labourintensive and apart from moulding and injectionwork, many of the manufacturing activitiesare hard to automate. This means that labourcosts need to be kept low in order to remaincompetitive. It also means that firms need tohave access to a steady stream of workers. Toachieve this, some firms have already moved outof traditional manufacturing areas in the PRDto locations such as Shaoguan, and to othermountainous areas of Guangdong from whichsemi-rural labour can be more easily sourcedat cheaper rates. However, the new locationsare further from Hong Kong and ports, makinglogistics less convenient and more costly. Logisticscosts and proximity considerations need to becarefully weighed against cost of labour andaccess to workers.174 ESA interviews with industrial players.• Contract manufacturing of toys is considered acommodity business and companies that only doOEM are likely to have limited life, limited profits,or limited growth unless they have additionalor superior services to offer to their customers.Such companies face fierce price competitionunless they find ways to add value by superiorperformance or through bundled services.• Developing branded toys is a strategy to addvalue that is being followed by an increasingnumber of Hong Kong firms. Some are selfbrandingin the Hong Kong and Mainlandmarkets while co-branding with leading firmsin other markets such as the US. Co-brandingallows the Hong Kong firm to gain quickaccess to large markets alongside known andrespected brands, knowledge that may help thefirm build its own brands in other markets, andthe opportunity to perform other activities andservices (such as OEM manufacturing) for its cobrandingpartners.• Improving product design and applying upgradedtechnology are other ways for Hong Kong firmsto add value. In the PRD, the technology inthe toy industry is already quite advanced, butHong Kong firms have dealt more extensivelyand over a longer period of time than mostcompetitors with international firms that requiremanufacturing to be done to global standardsand in compliance with stringent requirements.Some Hong Kong firms have engaged intechnology reengineering projects to maintaintheir competitive edge, others have focused oncombining engineering excellence and designcapabilities to build new features into toys.• Some firms are extending their scope by usingengineering skills developed in the toy sectorto enter crossover markets such as electroniclearning products or the smart phone sector.