Hong Kong Industry Profiles

• Hong Kong produces a wide range of toys with particular strength in plastic toys, including dolls, doll houses and other accessories, action figures, construction sets, toy guns, make-believe toys and gimmicks such as beauty kits and doctor's kits. Other major categories are electronic toys and games, radio/remote controlled toys, battery-operated toys and metal toys. Taken together with re-exports, Hong Kong is the world's second largest toy exporter.
• Hong Kong exporters are known for producing high-quality toys, while a large share of industry revenues are derived from contract manufacturing for overseas manufacturers and license holders. To reduce operation costs and stay competitive, the majority of Hong Kong toy makers have set up production facilities offshore, mainly on the Chinese mainland. The role of their Hong Kong office has shifted towards quality control, management, marketing, product design and production planning.
• Amid growing concern over product safety and awareness of environmental protection in overseas market, toy safety standards and regulations have become more stringent too. Hong Kong toy exporters are advised to keep themselves informed of the regulatory changes in different markets and comply with the new requirements.

Industry Features

Hong Kong toy makers produce a wide range of items, including dolls, doll houses and other accessories, action figures, construction sets, toy guns, make-believe toys (toy versions of adult "objects", e.g., kitchen implements, vacuum cleaners, etc.) and gimmicks such as beauty kits and doctor's kits. Other major categories are electronic toys and games, radio/remote controlled toys, battery-operated toys and metal toys.

To reduce operation costs and stay competitive, the majority of Hong Kong toy makers have set up production facilities offshore, mainly on the Chinese mainland. In the wake of this relocation trend, many toy companies in Hong Kong have been reclassified as import-export establishments, thus contributing to the apparent decline in the number of toy makers locating in Hong Kong.

Meanwhile, the role of their Hong Kong office is shifting towards quality control, management, marketing, finance and accounts, product design, and production management. This skew towards higher value-added activities is helping Hong Kong toy makers to sharpen their competitive edge, while expanding production capacity through relocation.

Production on the Chinese mainland has been facilitated by an efficient network of supporting industries and services. This has greatly enhanced the competitiveness of Hong Kong toys in terms of productivity, quality, reliability and delivery. Building on their base in plastic moulded toys, Hong Kong toy manufacturers have added production skills from the clothing industry, the electronics industry and the metal goods industry.

The toy industry employs a wide range of manufacturing technologies; computer aided design and manufacturing systems (CAD/CAM) are commonly used. Many manufacturers have earned the International Organisation for Standardisation (ISO) 9000 certification and some have the CARE Seal of Compliance certificate.

Competition has remained keen, especially from indigenous Chinese enterprises in open items. The rapid expansion of production capacity on the mainland by Hong Kong manufacturers also put much downward pressure on prices and profit margins. Orders received are smaller in lot size, while shorter delivery lead time is generally required.

Performance of Hong Kong Toy Exports^

Notes: * Insignificant. ^ Since offshore trade has not been captured by ordinary trade figures, these numbers do not necessarily reflect the export business managed by Hong Kong companies.

Global demand for toys has been weak since the financial tsunami in late 2008. In the first nine months of 2011, Hong Kong’s toy exports reported no growth compared with the same period in 2010, after falling by 19% in 2010. In January-September 2011, exports of traditional toys and games, which accounted for about half of the total exports of toys, dropped by 6% year-on-year. On the other hand, electronic toys and games (38% of the total) performed much better, increasing by 33% year-on-year. Sales of video games, however, seemed to have reached a plateau in recent years, especially when other devices such as smart phones have also developed game playing functions. Exports of video games, accounting for 15% of the total, slumped by 19%, 26% and 31% year-on-year respectively in 2009, 2010 and the first nine months of 2011.

The top three markets of Hong Kong’s toy exports are the EU, the US and the Chinese mainland, together accounting for over three quarters of the total. In 2010, sales to all major markets registered double-digit declines. In the first nine months of 2011, the EU market was the most inspiring, registering a year-on-year increase of 17% after the 26% decline in 2010. Exports to China grew slightly by 2% year-on-year in January-September 2011, after dropping by 17% in 2010. The US market was gloomy – toy exports to the US dropped by 25%, 19% and 25% year-on-year respectively in 2009, 2010 and January-September 2011, bringing its market share down from 23% to 17%.

Sales Channels

Hong Kong exporters are known for producing high-quality toys. A large share of industry revenues are derived from contract manufacturing for overseas industry giants and licensed holders such as Disney, Hasbro, Mattel and Warner Bros. in the US, Zapf in Germany, and Bandai, Takara and Tomy in Japan. Production specifications and product designs are usually provided by these overseas buyers. This type of arrangement in effect minimises local manufacturers' risks related to product designs, inventory taking and marketing.

Increasingly, however, Hong Kong manufacturers are offering expertise in design, engineering, modelling, tooling, quality control and other technical know-how to its customers, although some OEM manufacturers still serve a narrow base of clients and produce only a few products, making their businesses quite susceptible to the vicissitudes of their buyers. To maintain close contact with large buyers and to keep abreast of market trends are essential parts of OEM manufacturers' sales efforts. According to a HKTDC survey conducted in 2007, 91% of respondents in the toy industry were involved in OEM business, while 68% were in ODM. Vtech's V.Smile is representative of Hong Kong toy industry's innovation power. It has earned the Innovations Award (Learning) in the Nuremberg International Toy Fair and the Toy of the Year Award in the American International Toy Fair.

In the meantime, a growing portion of industry sales are provided by proprietary product manufacturers. These manufacturers, accounting for 40% of respondents in the 2007 HKTDC survey, design and market products under their own brand names. They include Manley, Playmates and Vtech. Some manufacturers also export generic products as open items. Trading companies source a wide range of open items from different manufacturers, usually the smaller ones.

In order to expand business networks, explore market opportunities, and promote product image and brand-names abroad, Hong Kong toy makers may participate in some well-organised and influential international trade fairs. Below is a list of some major trade fairs:

The HKTDC also from time to time organises study/match-making missions for Hong Kong manufacturers to visit specific markets for establishing new business relations.

Industry Trends

Retail consolidation in overseas markets has changed the business landscape for toy exporters. In the US, for example, mass merchants including Wal-Mart and Target are taking up an increasing share of the toy market from specialty chains and traditional retailers. A few toy retailers of smaller scale were forced out of business or underwent restructuring as a result. Mass merchants, on the other hand, purchase on large quantities, and thus are in a better position to bargain with suppliers on prices and terms of trade.

The mass market depends on aggressive advertising campaigns or promotional tie-ins for success. Increasingly, toy manufacturers are entering partnerships with companies from other disciplines, especially fast-food chain stores, in their promotion campaigns. Toy makers are also increasingly entering into licensing deals with movie studios to make products featuring film characters.

Even before the tide of toy recalls in overseas markets in 2007, safety standards, regulations and code of practices have long been major concerns among overseas buyers. The International Council of Toy Industries (ICTI), with active involvement of Hong Kong toy makers, has introduced the ICTI Code of Practice and an associated auditing process known as the CARE Process to manufacturers, distributors and retailers of toys and related merchandise in member countries.

Meanwhile, the life cycle of toys is becoming shorter, and shorter life cycle increases the risk of product development. The impact on Hong Kong suppliers is thus not just the lowering of profit margins, but also the need to invest more in R&D and to develop their own design capabilities and more value-added edges which cannot be replicated easily by competitors.

Today's children, for their part, are growing up faster than a generation before. Kids aged 12 or above easily turn to non-traditional playthings such as video games, computers, music and cosmetics. This development has continued to challenge toy manufacturers to create new, innovative toys that capture the interest of children. Meanwhile, greater efforts are being made to introduce toys for pre-schools that require a higher level of creative input and help develop brain power, coordination and senses of players.

CEPA Provisions

Under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA), the mainland has given all products of Hong Kong origin, including toys, tariff-free treatment starting from 1 January 2006. According to the stipulated procedures, products which have no existing CEPA rules of origin can enjoy tariff-free treatment upon applications by local manufacturers and upon the CEPA rule of origins being agreed and met. Non-Hong Kong made toys are subject to tariff rates up to 16% when entering the mainland.

The promulgated rules of origin for toys to benefit from CEPA's tariff preference are basically similar to the existing rules governing Hong Kong's exports of these products. Generally speaking, for toys manufactured from textile fabrics, cutting and assembling, identified as the principal processes for the purpose of delineating their origin, must be done in Hong Kong. For toys manufactured from plastic sheets, the principal processes are cutting of plastic sheets, joining of plastic sheets by heat sealing and setting of a valve, which must be done in Hong Kong. Detailed information is available from the following hyperlink: http://www.tid.gov.hk/english/cepa/tradegoods/files/mainland_2011.pdf

General Trade Measures Affecting Toy Exports

Systematic obstacles to toy trade are minimal in the traditional markets. There are no quantitative restrictions for toy imports into these markets, whether made in Hong Kong or the Chinese mainland. In particular, the EU has completely abolished the import quotas on Chinese toys since January 1998. Import tariffs on toys imposed by the EU and Japan stayed largely in the 0-5% range, while tariff-free access is granted by the US. On the other hand, product requirements are becoming more stringent in overseas markets, mainly in areas of product safety and environmental protection.

In the US, the Consumer Product Safety Improvement Act (CPSIA) was signed into law in 2008. This legislation forms part of a comprehensive effort by the US government to enhance the safety of imported consumer goods, which could create additional hurdles for the entry of such items and ultimately make it more difficult and costly for exporters to ship their products to the US. The requirements of CPSIA are wide-ranging. For example, sales of any product designed or intended primarily for children that contains more than a certain amount of lead are prohibited. Also, manufacturers are required to have a tracking label or other distinguishing permanent mark on children products such that manufacturers, retailers and consumers can ascertain the manufacturer or private labeller, location and date of production of the product, and cohort information (batch, run number or other identifying characteristic). The US Consumer Product Safety Commission (CPSC) has recently approved new third-party testing lab accreditation requirements, which will go into effect at the end of 2011. Starting January 2012, toys manufactured or imported into the US will need to be certified for ASTM F963, the mandatory toy standard, based on testing conducted at the CPSC-approved third-party lab.

The US Toy Industry Association (TIA) has further launched a new safety assurance programme, the Toy Safety Certification Program (TSCP) in 2009, which is an industry-driven voluntary initiative and the requirements included therein do not constitute a federal consumer product safety rule. However, TIA has intended to implement various components of the TSCP in stages to help all toy companies, importers and testing laboratories facilitate compliance with CPSIA.

In the EU, Directive 2009/48/EC on the safety of toys (the "Toy Safety Directive") has been officially adopted since 2009 and came into effect on 21 July 2011. The new Directive has updated previous measures to take account of technological developments and new safety concerns. It complements and adds to existing provisions regarding warnings on toys and importers’ responsibility. In addition to the expanded general safety requirement, those relating to physical and mechanical properties, flammability, chemical properties, electrical properties, hygiene and radioactivity have been set out. More stringent rules also apply to chemical hazards caused by certain chemical substances and fragrances used in toys, as well as noise from toys. However, recognising that this is a more complicated area, the parts of the Directive relating to chemical content will come into force on 20 July 2013.

In Japan, a voluntary safety control system on toys was established by the Japan Toy Association (JTA). An "ST" Mark is issued to toys in compliance with this voluntary safety standards. Besides, the International Organisation for Standardisation (ISO) has published three ISO standards on toy safety issues as ISO 8124.

In the Chinese mainland, as safety has become a major issue, more relevant standards have been introduced. Starting from June 2007, the China Compulsory Certification (CCC) scheme on toys has become effective. Six types of toys, namely children's vehicles, battery-operated toys, plastic toys, metal toys, toys with shot projectiles and dolls, are subject to the CCC scheme. Toys need to apply a CCC certification mark before they are sold, marketed, imported or used for commercial purpose on the mainland. In additional, the General Administration of Quality Supervision, Inspection and Quarantine of China has adopted the Measures for the Inspection, Supervision and Administration of Import and Export Toys in 2009. Any person who sells imported toys or exports toys which have been inspected to be defective will be prohibited, and subject to fine from equivalent amount up to triple of the goods' value by the inspection and quarantine authority. The illegal revenue and the products will be confiscated.

Product Trends

Trend of shorter product life cycles and a wider variety of novelty designs: As fancy designs and gimmicks increasingly become key ways to attract buyers, the product life cycle of toys has shortened over the past decade. The boom-and-bust cycle is further driven by the renewed interest in licensed toys. Indeed, even for classic toys such as LEGO construction sets and Barbie dolls, new playing features are regularly being added or enhanced to stimulate new sales. Besides the tendency of shorter on-shelf time, toys are also characterised by a wider variety of novelty designs.

Continued popularity of smart toys: The worldwide mega-trend is to integrate electronics and new technology with toys to create additional and new playing possibilities. Classic wooden trains by BRIO, for example, are now equipped with modern infrared remote control and electronic sounds. Newly introduced dolls and toy robots are capable of communicating directly and interactively with others in the same product line, such as Robosapien made by a Hong Kong based company WooWee and Furreal Friends by Hasbro.

Sustained interest in licensing: The sparkling success of licensed products is expected to continue. While more toy manufacturers will ride on the licensing bandwagon in the hope of success, they should be aware that the trade is characterised by a rather short boom-and-bust cycle. A few leading toy companies have adjusted their marketing strategies to be less reliant on licensed products. Video games are now constantly inventing new characters, while sales of traditional characters remain satisfactory.

Strong and clear focus on educational, creative and developmental toys: With a better-educated and prosperous demographic audience growing in size, the market for educational toys is getting noticed by industry and consumers alike. Parents are now looking more at the whole-child perspective, with focus on skills such as listening, taking turn and inspiring creativity. For example, Hasbro has a product called T.J. Bearytales, an animated bear that encourages children to read together. Another company Toy Quest has video books, which encourage families to learn together through reading, sharing stories, and enjoying closeness through this type of play.

Wide interest in multi-media and web-compatible toys: With the rising popularity of the cyber world, assimilating real and virtual toys together is another continuing trend. It is already common for toy makers to have web sites for sales and product promotion. Now they are introducing toys capable of linking with the Internet so that toy-playing can be extended beyond the physical plaything. Bandai, for example, has rolled out toy robots that allow buyers to play games with animated versions of their robots over the Internet.

Youth electronics: Children always like imitating their parents. Youth electronics is a growing category which allows children have access to kid-size versions of adult products. Examples of youth electronics include kid-sized and affordably priced MP3 players and digital cameras. Parents may be a little reluctant to buy their younger children the real electronic products, but youth electronics is a good way to get their children started, make sure they know how to take care of it, and see if this is a product they are really going to enjoy before they go for a higher price point.

Sports-like toys: Due to concerns about health and child obesity, experts and parents are searching for sports-like toys for children to exercise. Demand for aquatic toys and equipment, for example, has been strong. This development is a trend beyond the industry's traditional focus on mental development and game play.

Growing demand for collectibles: Collectors' articles are increasingly sought after by adults and seniors. High spending power characterises these consumers, who show great interest in soft toys and dolls, model railways and parlour games. In fact, a growing number of companies are introducing two lines for the same product, one for kids and the other for collectors. For example, Mattel has a strong collector business in Barbie dolls, Matchbox die-cast cars and the Hot Wheels racing system, in addition to the children's line of these toys.