Hong Kong toymakers bank on Santa

Hong Kong: Hong Kong-based toy manufacturer Harbour Ring Crown Ace, which counts Mattel and Hasbro among its clients, is bracing itself for a tough Christmas season and an even worse outlook in 2009 which will be worse than a recession.

"Everyone is just holding their breath to see how the Christmas season goes. The signs so far are not very encouraging, people are talking about more than a serious recession," Richard Ellert, Harbour Ring's chief executive officer, said on Sunday.

The company, one of the world's biggest toymakers on an original equipment manufacturing basis, has cut output and is currently employing only 3,500 staff at its factory in Dongguan in Guangdong province, southern China's manufacturing belt, compared with 4,400 this time last year.

In peak season in June to September, it employed 8,000.

It shipped most of its Christmas goods by the end of September but fears retailers could end up with leftover stock if Christmas demand is weak, prompting them to slash orders early next year.

"If there is a downturn in the toy industry it will become very evident the day after Thanksgiving," Ellert said, referring to the day after the US Thanksgiving holiday late this month, which traditionally marks the start of the Christmas shopping season.

"What discretionary spending is available after Christmas [and in 2009], we just don't know."

In a sign that Christmas demand could disappoint, air cargo out of Hong Kong, a trading hub for the shipment of Chinese goods to the rest of the world, fell 9.8 per cent in October from a year ago, according to data from Hong Kong Air Cargo Terminals Ltd.

Ellert says business is not being helped by indications that consumers in China - the biggest untapped market for Western toy makers that could in theory help offset weakening demand in the United States and Europe - are starting to rein in spending.

Ellert says capacity in the global toy industry, most of it in China, has shrunk 20-40 per cent since mid-2007. In southern China, tens of thousands of toy factories have closed this year.

"The numbers are staggering," he said.

Hurdles

Sudden changes in regulations in China, including the repeal of VAT rebates to exporters last year, and the government's push to shift low-end manufacturing up the value chain or move it to less-developed parts of the country inland, have posed big problems for toy makers all over China.

The minimum wage in Guangdong province has risen 11.5 per cent this year while raw material prices have surged 20 per cent, and the introduction of a new labour law in January, which makes it harder to employ temporary staff, has added another eight per cent to Harbour Ring's labour costs.