China to remain worlds toymaker despite costs

Toy companies are sticking with China as their factory of choice, saying its workmanship and infrastructure are enough to offset rising costs that are forcing some Western fashion brands to seek cheaper locations.

The chief executive officers of Hasbro Inc (HAS.O), LeapFrog Enterprises (LF.N) and Toys R Us Inc TOY.UL all told the Reuters Global Consumer and Retail Summit this week that China's considerable advantages as a manufacturing mecca mean it will remain toymaking's main hub.

"Costs would have to go up for many, many years" for China to lose its edge, Hasbro CEO Brian Goldner said.

With Chinese wages rising at 15 percent to 20 percent per year, the labor costs of manufacturing there could pull even with U.S. levels by 2015, Boston Consulting Group forecast in May.

But wages make up only 7 percent to 9 percent of Hasbro's manufacturing costs, Goldner said, and the company, which does not own its factories in China, is making greater use of automation.

China, particularly Hong Kong, is a nexus of toy suppliers, manufacturers, and shippers, making it hard for emerging Asian manufacturing centers like Vietnam, India and Sri Lanka to knock the country off its perch.

"Just like you think about Silicon Valley with technology, Hong Kong is the analogous location for toys," Toys R Us CEO Jerry Storch said.

To be sure, the production of simpler items like plastic buckets, toy furniture, and some stuffed animals that only need some stitching has moved to places like Vietnam. But as games and toys get more sophisticated and include more electronics, China remains attractive.

"China has built an unbeatable infrastructure for effective manufacturing," said LeapFrog CEO John Harbour. "It is still the world's factory."

CLOTHIERS LOOKING AT VIETNAM, OTHERS

Some companies with more labor-intensive manufacturing are moving some production out of China. Jarden Corp (JAH.N), for instance, now makes items like baseball bats and life jackets in North America.

Clothing store chains also are trying to protect margins that are under growing pressure from rising Chinese wages and oil prices, and many of them say workers elsewhere in Southeast Asia are up to the task.

Lululemon Athletica Inc (LLL.TO)(LULU.O) is finding that to be particularly true for simple garments.

"Taking some of our more basic product and having that produced elsewhere makes a lot of sense," said Chief Product Officer Sheree Waterson.

Lululemon, which is known for yoga pants that cost around $100, eventually would like China to account for 50 percent of its manufacturing, down from 60 percent currently. Rather than moving production from there, it plans to add capacity in places like Vietnam, Cambodia and Central America as its needs increase.

Those countries, and others, are closing the skills gap.

Only 40 percent of the clothes sold at Children's Place Retail Stores Inc (PLCE.O) are made in China, and CEO Jane Elfers expects that percentage to drop as the moderately priced clothing chain moves production to other countries.

"We're not feeling that that is going to cause quality issues," Elfers said.

Jeans and woven clothing can easily be made elsewhere, she said, but the dressiest, most elaborate clothing still needs to be made in China.

But China's increasingly affluent workers are losing interest in the grind of production lines.

"Nobody particularly wants to work in a textile factory in China anymore," said Dean Moore, finance director of British home shopping company N Brown (BWNG.L). "They want to be in a merchant bank; they want to be in a McDonald's."

Reuters