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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
15
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.
17
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
19
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
20
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
21
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
22
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
23
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
24
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.
26
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
27
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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