PERSPECTIVES: Toy Companies Move Production from China to Brazil and India – A New Beginning for All

Utku Tansel, head of toys and games research at Euromonitor International, explores the movement of toy production facilities from the world’s manufacturing hub of China to Brazil and India.

April 22, 2013 | China is the biggest exporter of toys in the world; around 80% of world's toys are originating there. Low labor costs and economic growth have allowed China to become the destination of choice for global toy businesses looking to offshore manufacturing while consumers have also benefitted from the resulting competition for production costs. However, toy companies are shifting some of their production facilities from the world’s manufacturing hub to Brazil and India.

These were the very two countries investigated as potential and viable alternatives to China a year ago. Back in March 2012, Euromonitor International had explored the key parameters attached to China's global manufacturing output, analyzed the main challenges and likely scenarios while studying the alternative hub destinations in emerging countries for toys production extensively in a series of three articles.

Average Salaries in Toys and Games Manufacturing per annum in US$: 2006-2011

Source: Euromonitor International

China – still attractive but no longer the only choice

Relatively low labor costs, a large workforce (some 452,000 employed in toys and games manufacturing in 2011) and strong economies of scale attract major international toy brands to Chinese manufacturers. For example, Mattel Group manufactures 74% of its products in China and the remainder scattered across Indonesia, Malaysia, Mexico and Thailand.

Consumers worldwide have also benefited from the manufacturing shift to China, as savings made by international companies are reflected in the prices of goods. However, China is losing its competitive advantage as a low cost environment for labor. The country's one-child policy is resulting in shortages of labor, permitting workers the leverage to demand better wages. Rapid population aging is narrowing the labor pool, while high inflation is increasing export and transportation costs. The average salary of an employee in toys and games manufacturing increased by 47% over 2007-2012. These factors are beginning to erode the country's manufacturing edge, with businesses increasingly looking into cheaper producers.

Brazil and India as alternative toy manufacturing hubs

Brazil is one of the fastest growing countries globally and overtook the UK as the world's 6th biggest economy in 2012. However, its manufacturing industry is a relative black spot for the country. The sector declined as a percentage of GDP from 14.6% to 11.2% between 2007 and 2012. High interest rates, a low skilled work force, a strong currency and significant competition from Asia have stymied the sector's development. As a response, Brazil's government launched the “Bigger Brazil” plan in August 2011, which is set to enhance the business environment for manufacturing businesses through subsidies and tax cuts. In April 2012, a further US$35 billion was pumped into the stimulus package.  

With almost 194 million in 2012 and still growing, Brazil has the largest population in Latin America. As well as being a very dynamic market itself, Brazil could also serve as a great gateway to Latin America, which is projected to be one of the more dynamic regions in traditional toys and games sales and is expected to record over 5% compound annual growth rate compared to a 3.5% world average from 2011-2016. In addition, its proximity to North America makes it an ideal spot, thus reducing the shipping costs considerably. However, one big setback could offset all of its advantages: labor costs. In 2011, average salary per annum in toys and games manufacturing stood at US$13,612 – 8 times and 34 times more than China and India, respectively.

In India, the average salary in toys and games manufacturing per annum is just US$397 dropping by 61% over the last five years; whereas it was doubled in China, to stand at US$3,657 in 2011. So, could India, the second most populous country in the world with very low labor costs, be another option?  

As manufacturing shifts eastwards so does demand, as more Western producers rely on large Asia Pacific markets for sales, whether to consumers or retailers. In terms of traditional toys and games sales, India is forecast to be the third most dynamic country in the world with around 9% CAGR over 2011-2016. However, very low per cap toys spend somewhat undermines this growth. The major concerns are poor infrastructure and lack of fully operational logistics which could cause serious problems to manufacturing.

Number of Employees in Toys and Games Manufacturing

Source: Euromonitor International

No one expects Brazil or India to replace China’s number one status in global toys manufacturing any time soon.  While rising inflation and tightening of liquidity provision by the country's central bank remain constraints on production, China still offers the most cost-effective manufacturing solutions for toys. However, there are certainly more concerns and more questions are asked about the possible scenarios as well as their prospective impacts on the overall industry. Sources indicate that several companies within the toy industry are exploring these.