Recruiting in China

Producing more than $453m worth of goods annually, companies in one county are adapting fast to change

Every year, as parents select the Christmas toys that could make them the world's best Mom and Dad, few will realize that the machines that made them, or the workers that packed them, were probably from eastern China.

More than 90 percent of the wooden toys produced in Yunhe county, in eastern Zhejiang province, are exported to the European Union and the United States.

With a toy production history dating back 40 years, the county now accounts for one-third of China's wooden toy exports.

Its 732 toy-making companies manufactured more than 2.77 billion yuan ($453.1 million) worth of toys last year, however, new challenges are mounting, most obviously the rising cost of labor and stagnating global demand.

"The time has passed when wooden toymakers made high and quick profits," said Lin Hongbing, chairman of Zhejiang Hongyuan Toy Co.

"Workers' wages are increasing by 10 percent each year, and it is impossible for us to raise the price of our products by that," he said.

Lin said that other costs, too, are rising, such as transportation and electricity. "Inevitably, as a result profit margins can only go lower and lower."

Statistics from the General Administration of Quality Supervision, Inspection and Quarantine show that China's toy exports were worth $24.73 billion in 2013, down 1.64 percent from 2012, as the global market for their goods stagnated.

"Overseas customers are much more cautious. Previously they would take a fixed number of products every year and often over-order, happy to cover that cost. Now they would place orders only for what they know they can sell," said Lin, whose company managed to maintain its normal export level in 2013, about 30 million yuan.

But many firms have not been so lucky.

The majority of the country's wooden toy-making companies are original equipment manufacturers?those that make parts or products that are used in another's end products?which means low added value, or the difference between the price of their finished products and the cost of making them, said Mao Fengming, secretary-general of the Yunhe toy association.

For a toy that is sold at $8 in the US, for instance, a producer in Yunhe is now likely to make around 20 cents.

"They have to upgrade their facilities and technologies to keep competitive on the international market," Mao said.

To move further up the value chain, many of Yunhe's toy producers have started to realize the importance of building their brands.

A decade ago, the country had just 11 recognized wooden toy brands; now there are more than 240, according to the toy association. But branding can be expensive.

Liao Fuxin, vice-president of the China Toy Association and president of Zhejiang Xinyun Wood Industry Group, Yunhe's largest wooden toy producer, said his company has 70 percent of its products made through OEMs, with 30 percent being its own brands. It is targeting parity in the two categories in the next two years.

Liao said compared with the company's own brands, OEM products bring about much higher margins. It also functions as an original design manufacturer for retailers such as US retail giants Wal-Mart Stores Inc and Costco Wholesale Corp. "We are in charge of the design and manufacturing process. But products have to be rebranded for specific target markets," he said.

Liao concedes that the business model might not be sustainable long term?but "we are trying to pitch our own brands to consumers whenever possible", he said.

Also vexing many of the toymakers are the frequent changes in technical standards of some of their target markets.

"The technical barriers to trade in the developed markets, especially, are adding hefty financial pressure. All the companies here are working hard to keep up, raising the safety standards of products," Liao said.

The EU makes the most frequent changes, according to Yao Ting, an official with the Lishui Entry-Exit Inspection and Quarantine Bureau.

The standards on the sounds produced by toys, for instance, have been revised twice in recent years. But despite the changing standards, the county has maintained a record on product safety, with not one single alert on quality issued from the EU or US for 60 consecutive months.

Yunhe is one of nine national quality and safety demonstration zones now certified by the AQSIQ for industrial export products.

"The changing standards and high requirements actually offer companies the opportunity to improve products quality," Liao said. "Without the technical barriers, Yunhe's toy industry would not have prospered as it has."

The standards expected of this often labor-intensive industry also mean that companies constantly remain under pressure to upgrade their equipment, an issue becoming all the most urgent as labor costs rise, and staff shortages grow.

More than 20,000 people, or one-fifth of the county's population, are employed in the toy industry, but fewer remain willing to do the work due to its often-tedious nature.

"Young people would not do this job. In most cases we can only recruit women in their 30s or 40s," said Lin Hongbing from Zhejiang Hongyuan Toy.

Many toymakers, including Lin's company, have automated some of their production, on painting, for instance.

Mike Sagan, supply chain director for the US-based toymaker KidKraft, which buys more than 2 million sets of toys from the county annually, believes Yunhe's competitive edge remains in the skill of its workers. But he also warns that its competitiveness could be lost without adequate investment in machinery and technology.