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Nov 30, 2015

Microeconomics of Competitiveness

Dr. Mark Esposito

Lorenzo CONTI

Guillaume HOUDREMONT

Bixi GONG

Sindhoori SREENIVAS

Wasim AI MOHAMED

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Executive Summary

China has become the leader in toy manufacturing with more than 70% of worldwide

production. The country has many advantages that are attracting Foreign Direct Investments.

Our focus is on the region of Guangdong where most of the production of toys exists and the

analysis of this dynamic cluster. The toy manufacturing business is one of the most profitable

sector of Guangdong, since it is a very dynamic market and a well-connected province because

of its regional positioning. Transportation and infrastructure is also an important factor which

helps the business.

The report aims to portray the situation of the Guangdong toy industry and its current &

potential challenges. It also includes strategic issues relating to export and technical

regulations followed in China. We talk about the well-known Chenghai case to describe our

cluster better.

We also provide possible solutions that address the needs of this cluster.

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Table of Contents 1. Overall Economic Performance ........................................................................................................... 4

1.1. Introduction .................................................................................................................................. 4

1.2. Macro Performance...................................................................................................................... 4

1.3. Micro Performance....................................................................................................................... 6

2. Assessment of Overall Business Environment and Policy ................................................................... 8

2.1. Legacy ............................................................................................................................................... 8

2.2. Regional Position and Interaction (Geography) ......................................................................... 10

2.3. Policy Choices ............................................................................................................................. 11

2.4. General Diamond (Business Environment) ................................................................................ 14

Context for Firm Strategy and Rivalry: .................................................................................. 14

Demand Conditions: .............................................................................................................. 15

Factor Conditions: ................................................................................................................. 15

Related and Supporting Industries: ....................................................................................... 15

3. Analysis of Cluster ............................................................................................................................. 16

3.1. History of Chinese Toy Manufacturing ....................................................................................... 16

3.2. Guangdong Toy Manufacturing Cluster and the Chenghai case ................................................ 17

3.3. Cluster diamond analysis ............................................................................................................ 20

4. Identification of Strategic Issues ....................................................................................................... 24

4.1. Export and Technical Regulations .............................................................................................. 24

4. Cluster Recommendations ................................................................................................................ 30

6. Reference .......................................................................................................................................... 33

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1. Overall Economic Performance

1.1. Introduction

China, officially the People’s Republic of China

(PRC) lies on the Eastern terminus of the sizably

voluminous Asia continent and relishes a

remarkably long coastline. It is the world’s most

populous country with a population of 1.37

billion as of 2015 (Data.worldbank.org). It is a

sovereign and single party state, governed by the Communist party of China and one of the

fastest growing economy in the world. As of 2014, China is the largest economy in terms of

purchasing power parity (PPP).

1.2. Macro Performance

Since the first economic reform in 1978, China

has moved to become a market predicted

economy with visually perceived rapid economic

and convivial development. With the

incrementing percentage of GDP every year and

rising per capita income, currently US$ 10.36

trillion, 500 million people are elevated from

penuriousness (Data.worldbank.org). China recently became the second most immensely

colossal economy and is increasingly playing a consequential and influential role in the

Figure 1 chinabackdoorjob.wordpress.com

Figure 2 http://data.worldbank.org/country/china

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ecumenical economy. Until 2015, China was the world's most expeditious-growing major

economy, with magnification rates averaging 10% over 30 years (Imf.org).

China's rapid economic

growth has increased its

energy consumption

drastically making the nation

build thousands of extra

power stations to provide

electricity for all the incipient factories in the cities. The demand for the durable consumer

goods for cultural and recreational use and services has been increasing from the last couple

of years. The inflation rate has reduced to around 2% over the years making the Chinese

market more stable and attracting FDI. China’s currency, Renminbi ¥ is “no longer

undervalued” declared International Monetary Fund helping it gain 25% against the US dollar

(Imf.org).

Despite the appreciation of

Renminbi, China is still the main

exporter of consumer goods.

There is a decrease in the labor

force as the Chinese population is

aging and the wages are rising due

to the middle aged population. Adding to this, people are also looking for sustainable jobs to

Figure 3 http://data.stats.gov.cn/english/easyquery.htm?cn=C01

Figure 4 http://data.stats.gov.cn/english/

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lead a better life. There are a lot of migrant workers since the cost of living has increased over

the years. The Chinese economy has had a steady momentum and stable growth though the

GDP growth has reduced by a couple to 7.4% (Data.worldbank.org). The fiscal and monetary

policy has a continuing prosperity. GDP is considered the main source of income for the

economic growth of the country. As a country it’s high and as an individual it’s low. This also

differs in every region.

1.3. Micro Performance

China is a broad hub for manufacturing, and is the largest capital and labor economy in the

world. It is also known as the largest importer and exporter of service products and goods

respectively worldwide. It is furthermore the world's fastest consumer super convenience

store and second largest importer of goods in the world. Considered to be the largest trading

nation in the world, China plays a cardinal role in international trade. Its business terrain has

additionally undergone a huge transformation, therefore many foreign investors have set up

large manufacturing operations in all major cities of China. Its growth has come largely from

an elevating labor supply and rapid redistribution of wealth.

China has been prosperous in

mobilizing inward Foreign Direct

Investment (FDI). Also the credit

for the country’s economic

development and export progress

goes to the inbound FDI. Foreign

investment is like a catalyst for the economic reform of the nation. More than half of China’s

Figure 5 http://english.mofcom.gov.cn/article/statistic/

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exports and imports are due to the foreign invested enterprises. They account for 30% of

Chinese industrial output, while generating 22% of industrial earnings and bringing on board

only 10% of labor due to their high productiveness (English.mofcom.gov.cn). Higher education

has bought about a huge change in the economic and social development of the people of

China. The country has produced a good amount of experts in all fields of study. The country

also has many collaborations with foreign universities. In the long run, China’s policy of free

and compulsory education, has brought the country to a literacy rate of 99.7% of the

population (UNICEF). This has helped the economy to grow at a fast rate and make China a

developed country. China’s Social Progress Index (SPI) is 59.07, scoring the highest in

“Nutrition and Basic Medical Care” and “Access to Basic Knowledge” with more improvement

scope in “Personal Safety” and “Personal Rights” (Imperative). China has replaced its One-

Child Policy with a new Two-Child Policy. This change is due to the aging population and its

labor shortage and would assure the country of a strong economic stability. In 1986, China

implemented the “Compulsory Education Law of People’s Republic of China” which states that

school-aged children and adolescents will receive nine-year compulsory education (primary

and junior secondary school) with no tuition or miscellaneous fees. This has helped in the

eradication of illiteracy among the young and middle-aged group to a great extent and in social

and economic growth of the country. “Patent Law of the People’s Republic of China” was

introduced in 1984 and last amended in 2008 (Wipo.int). State Intellectual Property Office

(SIPO) grants the patents in China. It is also a member of Agreement on Trade Related Aspects

of Intellectual Property Rights (TRIPS). China ranks 26th in the Global Competitiveness Report,

a yearly report released by the World Economic Forum (Global Competitiveness Report 2015-

2016). It determines the country’s ability to provide good welfare to its people, and this

depends on how effectively a country uses its resources. It ranks 1st for market size (10th pillar)

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and 8th in macroeconomic environment (3rd pillar) (Global Competitiveness Report 2015-

2016).

2. Assessment of Overall Business Environment and Policy

2.1. Legacy

Guangdong province is located in central zone

of south east of China, in the center of the Asian

Economic circle. It has a total area of 179,757

square kilometers and is surrounded by Guangxi

on the west, Fujian on the east, Jiangxi and

Hunan on the north, Hainan off the southwest.

Guangdong is divided into 21 prefectures, 121

counties and 1642 townships.

Since January 2015 Guangdong became and remains the most populous province in China

(preceded by Henan and Sichuan province) registering a total of 106,440,000 registered

inhabitants without considering the floating population. Due to the regions’ fast-growing

economy and high labor demands, mainly within the manufacturing sector, there is an average

influx of circa 30,000,000 additional migrants. In terms of ethnic representation all 56 ethnic

groups of China can be found in Guangdong. The Han ethnic composition counts for more than

105,000,000 people, making up 99% of Guangdong’s population (91% in whole China),

followed by the Zhuang (0.7%) and Yao (0.2%) minority. The largest subgroup of Han Chinese

Figure 6 http://www.china-map-guide.com/province/guangdong/

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in Guangdong are the Cantonese people. Guangzhou has an even higher unbalanced gender

ratio (130 boys for 100 girls) than the rest of the country (112-120 boys per 100 girls).

Guangdong got a long history of religion hosting the world's top five religions: Catholicism,

Christianity, Islamism, Buddhism and Taoism. Only around 7% of the population of Guangdong

belongs to organized religions. The largest groups being Buddhists with 6.2% (first religion in

Guangdong), followed by Protestants with 0.82% and Catholics with 0.2%.

In linguistic aspects Guangdong is populated predominantly by Cantonese speakers. There are

many other dialects and considering the influx of millions of Mandarin-speaking immigrants

in the last three decades, Cantonese linguistic dominance has decreased. In a result of the

migration Mandarin is the first language in education and government and in areas with large

migrant population.

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2.2. Regional Position and Interaction (Geography)

The province of Guangdong faces the South China Sea to its south with the longest coastline

of any province (4,300 km). It is surrounded by Guangxi, Fujian, Jiangxi, Hunan, Hainan

(offshore) and strategically borders with the two special administrative regions of Hong Kong

(former British colony until 1997) and Macau (former Portuguese colony until 1999). There

are a few inactive volcanoes in the southwestern end of the province. The river delta, also

known as the Golden Delta of Guangdong, is the convergent point of three upstream rivers:

the East River, North River, and West River. The term Pearl River Delta also refers to the dense

network of cities,

covering 9 prefectures

of the province of

Guangdong,

Guangzhou, Shenzhen,

Zhuhai, Dongguan,

Zhongshan, Foshan,

Huizhou, Jiangmen and

Zhaoqing, and the SARs

of Hong Kong and Macau. Since 1979 when the Chinese government liberalized its economy

the delta became the leading economic regions and a major manufacturing center of China

and the world. The proximity of Shenzhen, highly influenced by the capitalistic and financial

services of Hong Kong, was able to create an economic gateway for foreign capital. From

geographic positioning Guangdong province benefits to privileged access to international

markets. Thanks to its efficient port system along the Pearl River Delta it has also easy access

to the Chinese market. Besides of its advanced water networks it also benefits of a highly

Figure 7 http://supplychains.com/shenzhen-overtakes-hong-kong-as-third-busiest-container-port/

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developed road and air transportation network. Guangdong benefits from of the most

complete infrastructure and the most convenient transportation in China. The speed train

intercity railway systems easily connect all mayor cities around the Pearl River Delta. It is also

the most dense distributed airport area of the country.

2.3. Policy Choices

For long time the Chinese

economy has been closed to

foreign activities and private

business were forbidden. It

only dates back to 1979 that

the central government

decided to progressively

open and liberalize its

economy to allow the private

sector to flourish and

foreign investment to enter mainland china. In a result of such open door policies almost all

the clusters were formed. Guangdong province has enjoyed special treatment due to its

geographical location with the support of some particular localities acting like a sort of

laboratory for the central government to gradually test new sorts of initiatives limited in other

regions. Implemented by Deng Xiaping in 1980, the central government established 4 special

economic zones (Xiamen, Zhuhai, Shenzhen and Shantou) while the rest of mainland china

maintained its central planning. These coastal zones were localized in proximity of strategic

Figure 8 Specialized town in Guangdong Prefectures, 2008

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sources of foreign capital. Shenzhen is only 35 kilometers away from Hong Kong, Zuhai next

to the former Portuguese colony Macau and Shantou facing right next to Taiwan. It is with the

support of the local authorities that these zones received special policies and an institutional

environment conductive to free markets in support of cluster initiatives and entrepreneur’s

awareness of potential benefits of this form of cooperation. Considering the collectivist

aspects of Chinese culture such form of cooperation is inherent to the Chinese people. The

special economic zones were set to attract foreign investments with foreign technology

meanwhile promoting its exports in new market oriented reforms. In order to facilitate such

aims these zones have been turned in small specialized and autonomous societies grouping

diverse activities ranging from industrial production to the promotion of research and

development, education and social wellbeing. In 1999 the central government implemented

an innovation promotion policy on science and technology institutions to encourage

technological progress. Looking for ways to enter in high tech sectors and produce added

value, the most important part was the setup of innovation centers.

These innovation centers coordinated business linkages with the foreign world and organized

various activities to attract

foreign customers. In 2000

Guangdong authorities from

the Department of Science and

Technology promoted specific

policy measures with the

program of slogan “one city

one product”.

Figure 9 http://www.lifeofguangzhou.com/node_10/node_35/node_155/node_525/node_528/2009/04/03/123874022356753.shtml

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These such called specialized towns supported by their growth and development program

have been the main driver of success during the coming years. These spatial agglomerations

of enterprises, officially recognized by government authorities, focus on the manufacturing of

single specific items or close products. Consequently the promotion of various clusters in

Guangdong province became an industrial policy model encouraging the development and

growth of the manufacturing sector of its economy. The official recognition is based on specific

criteria and linked to specific firms and town level with financial policies granted in return

expected to guarantee competitiveness, innovation and market visibility rewards. To be

considered specialized town the town has to be a township from administrative view with at

least 30% of its industrial employment concentrated in one industry. Second term of condition

states that its value of industrial output had to exceed 2 billion yuan. By the end of 2011 the

officially recognized specialized towns were 326. The funding by provisions to each innovation

center of the specialized towns from the Department of Science and Technology helps firm to

develop new technologies and initiates cooperation among business units. In a result of such

support the number of high-tech firms has dramatically increased.

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2.4. General Diamond (Business Environment)

Context for Firm Strategy and Rivalry:

The open door policy from 1979 has provided a macro-environment stimulating all private

sectors to enter which was previously banned. First introduced in Guangdong, the province

had the first mover advantage. Following the open door policy the local governments were

stimulated to act in strong connection with local firms in order to push the development of

the local economic system. By the end of 2011 the officially recognized specialized towns were

326 with a multitude of private, national and multinational firms. Geography is in favor of

national and export oriented companies in coastal areas and close to main roads, railways,

airports and ports. Closeness to Hong Kong, Macau and Taiwan allows foreign direct

investments by overseas Chinese and foreign companies.

• Pilot Free Trade Zone

• Supplier quantity

• Quality of suppliers

• Availability of raw materials

• Collectivist aspect of culture

• Support institutions

• Technology transfer

• Infrastructure quality

• High bureaucracy

• Market pull condition

• Innovation promotion policy

• Promotion of specialized towns

• Sector-specific trade fairs

• Inequality of consumer spending power

• First mover of open door policy

• Involvment of local governements

• Fierce competition

• Well connected province

• Closeness to FDI sources

• Effectiveness of antitrust policy

• IP protection Context for firm strategy and rivality

Demand Conditions

Related and Supporting Industries

Factor Conditions

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Demand Conditions:

At the time the current economic situation was in a dramatic state with shortage in almost all

areas. Theses urgent needs caused a market pull condition providing a powerful reason for

the existence of clusters. The innovation promotion policy from 1999 by the central

government encouraged technological progress though the setup of innovation centers. The

promotion of specialized towns in the year of 2000 concentrating the manufacturing process

of single or close related products became an industrial policy model set by the Guangdong

authorities from the Department of Science and Technology. Increase in international visibility

of the towns with sector-specific trade fairs on national and international level to attract

investors. Promotion of R&D and innovation centers according to defined national and

provincial guidelines for industrial technology upgrading.

Factor Conditions:

The natural environment is in favor for natural based clusters. The collectivist aspects from

Chinese history and culture has played an important role in cluster formation. Long tradition

is highly valued and knowledge and skills in production passed down from generation to

generation through family and relationships. The creation of institutions offering support

services to all firms of each specialized town. Sector specific professional training programs to

improve skills of the workforce and consequently to enhance competitiveness. Transfer of

technology and academic knowledge by supporting relations between firms and universities.

Related and Supporting Industries:

Since beginning of 2015 state council of Guangdong approved the establishment a pilot free

trade zone covering 3 areas (Nansha Area of Guangzhou, Qianhai-Shekou area of Shenzhen,

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Hengqin area of Zuhai). The development goals compromise the implementation of pilot

reforms over 3 to 5 years in order to improve regulation of international market orientation

and business environment.

3. Analysis of Cluster

3.1. History of Chinese Toy Manufacturing

The Chinese Toy Manufacturing history is very controversial.

It has not a long life, but it skyrocketed very soon and aggressively, and all the events related

to this radical change has to be ascribed to the political and economic situation of the time.

Before the ‘80 the internal demand of toys was very low due to the economic crisis that was

weakening the whole country, in fact, families were more interested on buying essential

goods, like food and clothes, so households were not paying attention on buying children

entertainment stuff. During the ’90s the trend begun to change, and the Chinese toy

manufacturing was seeing the beginning of its glorious path on that field.

This is due mainly because two reasons, one political and one economical:

- The government adopted the so-called “one child policy”, so households had only one

child to take care of, meaning a higher focus towards a child’s needs, for example, toys.

- The ’90 were the years of the economic boom almost everywhere in the world, but

this rising affected China significantly, therefore the number of wealthier households

rose.

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Nevertheless, the “Golden Years” are definitely the 2000’s, when the “one child policy”

generation became

parents themselves.

These new young

couples started to

focusing more and

more on their children.

This situation meant

that fathers and

mothers begun to

allocate a huge amount of resources on children education and entertainment (aJournal -

Inform - Inspire -Introduce,2015)

3.2. Guangdong Toy Manufacturing Cluster and the Chenghai case

Guangdong, for many years, has been the biggest production hub for toys in China, and its

export occupies a decisive role upon this market.

This business is mainly oriented toward the export, and North America (US especially) is the

biggest market.

Figure 10 blogs.ft.com

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This province accounts for more

than 70% of the industry’s output

and, in 2009, the Guangdong

province has been nominated

“Animation Toy Creative Industry

Cluster” by the Chinese Culture

Department.

As mentioned above, the Chinese Toy Industry Life is quite young, and the most interesting

period is the last decade.

Before the Financial Crisis, Guangdong toys annual export increased every year reaching the

peak in 2007, when the rate of the annual export grew for more than 20% than 2006.

This market faced a huge depression among 2008 and 2009, when the crisis reached China

brutally.

Around 2010 the market started to

recover, but still needed several

years to restore completely.

According to the latest statistical

data (released by Guangdong Toy

Association), this industry inverted

the trend, booming its sales.

24.65

1.86

40.52

2.2

28.74

2.02

0 10 20 30 40 50

Europe

Oceania

North America

South America

Asia

Africa

Guangdong toy export area divided by continents

0

0.5

1

1.5

2

2.5

3

2007 2008 2009

Guangdong toy export during the crisis

USA European Union

Figure 11 Study of Guangdong toy export trade in post-crisis era

Figure 12 Study of Guangdong toy export trade in post-crisis era

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The total amount of export reached 17.34 billion US$ (the total amount of China’s toy export

was 26.37 billion US$), making Guangdong province the biggest toy manufacturing place in

the world (ZHENG, 2010).

Chenghai, which is the most dynamic city of the province, experienced an exponential growth

in the toys industry throughout the last 15 years.

Chenghai has been named the “China Toys & Gifts City” by the China Light Industry Union, and

won the award released by the Ministry of Technology and Science of China “Chenghai

Industrial Base of Creative Design and Manufacture of Intelligent Toys in the National Torch

Program”.

This city has now more than 4,000 toy manufacturing industries.

In order to have an idea of the sales volume

of this industry in this city, just have a look

on the 2013 performance: The Chenghai

toys output value grew for more than 14%

than in 2012, and gained almost 35 billion

Yuan (70% of which were export earnings).

Figure 13 “Toy factory in Chenghai” img.diytrade.com

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3.3. Cluster diamond analysis

Context for Firm Strategy and Rivalry

The context for the raising of this cluster is favorable under almost every point of view.

First, and most important thing, China is the World’s largest exporter of toys.

•Economic engine

•Rise of new hi-tech companies

•Good retailing distribution

•Low products quality

•Availability of raw materials

•Cheap and skilled labor force

•University training

•Unpleasant work conditions

•No unions

•No job stability

•Products more competitive

•Big R&D expenditure

•CCITF

•Big income inequality

•Thousands of toy manufacturing plants

•Big competition

•Province well connected

•Insufficient anti-trust regulation

•Mattel scandal

Context for firm strategy

Demand Conditions

Related and Supporting Industries

Factor Conditions

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Chinese government offered a high export tariff discount of

15% to exporting units, in order to encourage exports of

toys from China. In Guangdong province, there are

thousands of toys industries; Chinese multinationals, like

Good Baby Group and Guangdong Alpha Animation &

Culture CO. LTD., but also foreign multinationals, like Mattel

and LEGO, have invested heavily on the Chinese market.

This flourishing of new factories creates the basis for a big

rivalry competition.

With seven of the biggest Chinese airports, and with one of the most important Chinese

harbor, Guangdong province is very well connected with the rest of China and, most

important, with the rest of the world. One problem for this industry is the inefficiency of anti-

trust regulations, which makes the competitiveness often unfair. Furthermore, the context for

the rise of the toy manufacturing in Guangdong has seen one of the darkest moment in its

history in 2007, when Mattel had to withdraw more than 18 million toys produced in

Guangdong from the market, mainly because the using of toxic materials and varnishes.

In fact is not rare that in those factories quality controls lack of rigorousness, and often those

toys do not reach the standard quality released by, for example, European Union or United

States (Nytimes.com, 2015).

Demand Conditions

In Guangdong almost every industry has its own toys design and set-up team, which makes

the products more competitive and desired by the market.

Figure 14 wsj.com

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Moreover, every enterprise spend an

average of 8% of its annual sales revenue

in R&D in order to anticipate the

upcoming trend and create new child’s

needs.

In addition to the traditional stores,

Guangdong toys industry specialized

itself on the “Online Retailing”, meeting all the demands of a more and more exigent and

modernized costumers (now China is the world leader in marketing of goods through E-

commerce).

Furthermore, from 1999, the city of Chenghai hosts every year the “China Chenghai

International Toys & Gifts Fair (CCITF)”, which attracts thousands new potential customers

from all around the world (Ccitf.com, 2015).

The CCITF is the third biggest toy fair of China.

Big income inequality, within the province, still limits the spread of local demand.

Related and Supporting Industries

Guangdong province represents, with few other Chinese provinces, the industrial engine of

China, and its steady development is a key factor for industries stability.

It is an area of more than 100 million people (around 7% of the total Chinese population),

characterized by a strong inclination to manufacturing production.

Figure 15 “The CCITF in 2014”.: ccitf.com

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Guangdong has several industries

that boost the growth of toy

manufacturing industry, but

probably the sector that helps

most, is the hi-tech one.

One third of the total industrial

output of big hi-tech companies is

located in Guangdong.

This industry supports the development of new technologic toys, which are more required by

new generation children.

The fact that the quality of products from domestic suppliers is low, should not be overlooked.

The retail distribution market in Guangdong is one of the most developed in the whole

country. Several foreign multinational retail enterprises (Wal-Mart and Carrefour for example)

have their presence in this province.

It allows the increasing of local supply and demand for toys.

Factor Conditions

As already mentioned above, China is the World’s leader in manufacturing and exporting of

toys, and Guangdong is one of the province that made this leadership possible.

This province is full of raw materials industries, which makes the availability of plastic, bolts

and synthetic materials, essential for toys manufacturing, low cost and easy delivering.

Nevertheless, the most relevant factor is the availability of cheap and skilled human labor

force.

Figure 16 china-trade-research.hktdc.com

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In a very competitive scenario like the Guangdong one, where all the enterprises fight to

overcome each other in the war of price, the cost of labor force results to be the only one

dependent variable.

The average salary for a factory worker is 180 €, which can become 400 € working for 12

hours six days per week, often with a temporary-job contract and most of the times in a very

unpleasant conditions.

Moreover, there is almost no chance for the workforce to rebel and change this status-quo,

as the only union allowed is the governmental one, thus all the companies can exploit this

situation and make huge profits with small salary expenditures.

The majority of these workers are also very competent in this field, as several Universities

offer intensive courses (6-8 months duration) related to the toy industry, like how to design

a toy or how to use and maintain various production machines (Sycom Projects Consultants

Pvt Ltd, 2015).

4. Identification of Strategic Issues

Export and Technical Regulations

Most Guangdong toy manufacturing rely on exporting to survive. During exporting, technical

regulations come up as obstacles. It varies from country to country. The difference depends

on each country’s industrial situation. Countries set their own standards in order to avoid the

increasing import of goods, it implies more difficulties on exporting. The total proportion of

technical regulations in EU, US and Japan is up to 95% of the whole world statistics. EU has

42%, meanwhile the US owns 28% and Japan 26% (Wto.org, 2015).

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The technical regulations bring dilemmas to Guangdong toy manufacturing in many aspects.

How to define and classify a toy, the standard of content of trace elements, the testing

procedures, the packages, the labels, the materials and so on. All the developed countries

have regulations, especially EU. Some products have requirement to certain environment of

the factory, the toy workers’ health and the address of factory. EU has technical regulations

on the toy size and even the components used in the manufacturing process. The more

complex the process is, the more limitations it has (Li, X. 2012). Using EU regulation as an

example, if the producers would to export to EU, they have to make sure their product pass

the tests done by certified institution. Some of these tests are valid only for a year. If the

producer wants to continue exporting the year after, he has to do the test again. However,

this rule does not apply to the producers and companies within the EU area.

As a result, exporting cost tends to increase. In order to meet the regulation and successfully

export to those regions, toy companies in Guangdong have to improve the investment on

R&D, selecting new materials, upgrading equipment, adjusting production line. Due to the

limited development capability, some companies miss the opportunity to enter foreign

markets and have fewer opportunities to export. Meanwhile, the risk of exporting raises. If

the products are not able to meet the standards after the delivery, they would be detained or

destroyed.

Quality of toy material is an aspect that cannot be ignored because it is directly related to

children’s health. Certain toxic materials used in the manufacture of such toys are limited or

prohibited. In 2013, EU updated the safety regulation for chemical requirements. There were

eight elements with restricted migration levels, after the update there are 19 in total.

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What we can learn

from the chart is

that the new

version of the

regulation has

divided the toy

materials into

three types: 1. Dry,

brittle powder-like

or pliable toy

material; 2. Liquid

or sticky toy

material; 3. Scraped-off toy material.

In addition, the new version of the regulation (EN71-3:2013) modified the safety directive of

elements. The limits of elements are mostly reduced, which means that the safety standard is

higher than before. For example, we can see that for Antimony, the limit has been reduced

from 60 to 45 in dry, brittle powder-like or pliable toy material (Safety Update Revised Toy

Safety Directive 2009/48/EC, 2015).

Guangdong toy manufacturing has the advantage of low cost, but sometimes it means the

materials used might be of low quality. Improving the standard of safety means that the

manufacturer has to take more care of the quality test and the selection of materials. When

toys exported do not meet the standards, EU will discard them making a big loss to the

Guangdong manufacturers. In order to better the export criteria and save the reputation of

Figure 17 Safety Update Revised Toy Safety Directive 2009/48/EC

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the toy manufacturers, Chinese government has set stricter standards. Standardization

Administration of P.R. China (SAC) modified the GB 6675-2003 National Toy Safety

specifications to GB 6675-2014. All the manufacturers should follow this standard if they want

to get into the Chinese market. The changes of standards include the standard of sound (the

LpAeq lower than 65dB) (Bureauveritas.cn, 2015), the burning performance (the stricter

burning speed of toy mask or things that could be worn on the head), and the new safety

requirement of paints and plasticizer.

This leads to higher technology and chemical requirements. SilverLit, a toy manufacturing

company has its own brand, lab and production. Every year they export toys worth around

120-150 million RMB to the EU, which is 40% - 50% of the total sales (Finance.people.com.cn,

2015). As mentioned by He Ming, Quality Control Manager of SilverLit, “To export toys, we

need to test 30,000 samples. Every sample needs to take the test for 8 elements which costs

300-400 RMB. Since the EN71-3:2013 is carried out, we have to test for 19 elements which

costs 1000 RMB for each sample. If we send them to other labs, it would cost more. In this

process, the cost of test increases by 10% - 15%” (Finance.people.com.cn, 2015). And the new

regulation says toys have an expiry after 10 years and wants the manufacturers to give a 45

day notice about the hazardous substances, which increases the file storage and managing

cost. Since the regulations are stricter, it is difficult for the manufacturers to choose the

suppliers which give better quality raw materials for the production of toys.

Migrant workers are the main labor forces in the toy manufacturing industry. However, they

are moving towards new emerging areas outside Guangdong province in order to find high-

salaried jobs and the whole labor market mobility is raising. The lack of these migrant workers

adds pressure to the toy manufacturing companies. Especially at the time of Chinese lunar

New Year, the workers go back to their hometown, which causes huge problems in the

28

manufacturing. The migrant workers are not well educated and earn low wages. They do not

consider themselves as parts of the company but a tool in a factory to produce goods. This

attitude also leads to the mobility of laborers. It leads to limitations in the production

capability.

The increase in aging population of China results in a shortage of labor across the country.

Since China adopted the One-Child Policy in order to control the huge population and its quick

increase has slowed down the growth of population and the elderly population is growing

more and more. Due to this, China is losing energetic labor force, so the government has

introduced the Two-Child Policy.

The wages of migrant workers are too low compared to

the average labor salary. Guangdong province has

raised the minimum wages twice in the last few years to

combat a shortage of workers. Using Guangzhou, the

capital city of Guangdong Province, as an example, we

can see the minimum wage has an increasing trend. In

2011, the minimum wage in Guangzhou was 1300 RMB per month. After 2 years, the

government raised it to 1550 RMB per month and in 2015, the minimum wage has come up

to 1895 RMB per month (Usa.chinadaily.com.cn, 2015).

Figure 18 www.prb.org

29

As a result, there

is a raise in cost

of production

and quality

testing cost. And

according to the

cluster analysis,

the high-tech

investments

are increasing and companies are working more towards improvement of quality and product

function as well as Research and Development. Also the workers are mistreated by superiors

and under-aged individuals are employed in Guangdong.

Nowadays, tablets, laptop and smartphones have become a part of our daily lives. Children

spend more time on gismos than playing with traditional toys or outdoors. In the App Store of

Apple, there are not only variety of games but also educational applications for children to

learn something. Gadgets are beats out traditional toys (Andronico, M. 2014). Due to this,

traditional toy manufacturers are facing problems with change in consumer preference.

1300 1300

1550 1550

1895

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2011 2012 2013 2014 2015

MINIMUM WAGE IN GUANGZHOU

Minimum wage in Guangzhou

Figure 19 Exhibit 1 Minimum wage in Guangzhou

30

5. Cluster Recommendations

As discussed previously, the Chinese toy market is facing tremendous pressures nationally and

internationally. To address these issues Chinese toy manufacturers should adjust their

strategy and start taking serious initiatives to be able to overcome those challenges.

Intellectual property

Despite the efforts made by the Chinese government to improve the Intellectual property

protection in the manufacturing sector, China is still far away compared to its European and

American rivals. The rise of counterfeits in toy manufacturing created more than 34 billion

(Global Black Market information, 2010) dollars of loss for foreign companies and it represents

major concerns for future potential investors. To address this issue it is important to

acknowledge the role of the government and to enforce its legal framework and IPR laws to

combat those violations. Despite being a member of the WTO and TRIPS agreement, the

Chinese government is still reluctant in providing companies with the necessary protection for

intellectual property due to the economic benefit it receives from counterfeit goods. It is

estimated that the Chinese counterfeit industry accounts for 8% of Chinas GDP (The

Economics of counterfeit trade, p125). The government should start by changing the mindset

of companies by implementing effective IP policies that prohibit any actions taken for the

purpose of violating those rights and develop programs of awareness across all industrial

sectors. On the company's level, setting up wholly owned foreign subsidiaries rather than

joint ventures could be a major advantage for companies who wish to protect their technology

in toy making since information and technological know­how in joint ventures can be misused

and easily leaked to third parties. On the production side, dividing the manufacturing process

31

into several isolated discrete operational units can also prevent employees from taking

advantage of the manufacturing process since the toy business is a labor intensive assembled

product.

Technical Trade barriers & Supply Chain

The toy manufacturing sector in Guangdong has been heavily scrutinized for not being under

the EU and US standards due to the usage of poor materials, low quality control, taking

advantage of cheap labor and providing cheap working conditions for workers. As a

consequence, the cost to export toys from China increased since the toy manufacturing sector

in Guangdong had to meet these new expectations. To compensate the rising cost of toy

manufacturing, Guangdong toy companies should invest in Research and Development to

decrease production materials like plastic, rubber and coloring agents. Companies should also

improve the supply chain network by aligning better SC strategies. Instead of having individual

objectives assigned to each department of the toys network, companies should maximize

efficiencies and savings by following an integrative approach by forming a network of

relationships among trading partners. Toys sales should be directly linked to customers'

needs, the logistic department should raise any concerns related to delivery time to avoid

delays and the production department should focus on the products conformity with its

clients' specifications. This approach will ultimately result in a reduction of costs if managed

properly.

Disruptive workforce

Toy manufacturing requires a highly labor intensive workforce, the Chinese government has

little protection for workers due to the lack of communication between companies and the

32

government. Collaborations should be emphasized to address and set common goals for all

the issues related to the workforce and set priorities for the state of the worker. Most workers

in Guangdong complain about the mistreatment by their superiors in the workplace forcing

them to work overtime, delaying payments and employing underage individuals. The policies

and regulations to address these issues are not strictly implemented in the companies due to

a lack of supervision from the state hurting the image of the factories and ultimately the

country. As a result, it is crucial for the government to take decisive steps in publicizing

government intervention in workforce related matters. Setting the example by attracting

foreign companies that have higher employee standards will allow Guangdong workers to

easily improve their situation by shifting to them and encourage the other companies to adopt

similar practices. If we are able to improve the workforce situation in Guangdong we can avoid

the shortage of workers that are leaving the city to find better opportunities.

Consumer preference change

The shift from physical toys to digital gaming has influenced the toy manufacturing cluster in

China, particularly Guangdong. Traditional toy manufacturers in China lost their market share

due to the rise of electronic gaming and the usage of tablets and mobile phones as substitutes.

To address this change, companies should engage in developing new products that combine

both elements of traditional toy making and technology. Investment in technology is a must

to stay ahead of multinational brands and regain competitive advantage. The new toys should

incorporate connectivity features, internet access and usage flexibility to adapt to the new

market.

33

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