Conquering China’s Consumer Market – Example: Toy Industry

Conquering China’s Consumer Market – Example: Toy Industry

Toys count among the world’s oldest consumer goods and have a long tradition in China ranging back thousands of years. However, the modern Chinese toy history only starts in the 1960s, when Hong Kong’s infamous sweatshops attracted international toy companies for cheap manufacturing. Hundreds of small traders linked the Hong Kong manufacturers with the big Western buyers who controlled the toy brands.

Since the 1980s, Hong Kong’s toy industry has hollowed out, with virtually all manufacturing now being done in neighboring Guangdong. Today there are about 4,000 toy factories scattered throughout Southern China and 6,000 in China as a whole.

Nonetheless, Hong Kong remains to be the world’s main designer, product developer, packager, and marketer of toys, thus resembling a global service station for the toy industry.

While most international toy companies already source their toys from China, until now very few successfully entered the Chinese toy market itself. The Chinese market for toys is often portrayed as the potentially largest in the world. No other country has more children living in its boundaries. More than 300 million Chinese are children under 14, accounting for more than a quarter of the total population in China.

But one should not be misled by this “China Dream”. Per capita toy consumption in China is still at very low levels, especially with regard to high-quality toys. Still, the prospects for sales are improving and some international toy companies already derive considerable profits from their Chinese consumers.

Many international toy companies with their high-quality toys have a potential to tap into this market. Key for any toy venture in China will be to fully grasp both legal possibilities as well as legal constraints. What are the activity models that international toy companies employ in the Chinese market?

Due to the still highly restrictive regulations on distribution in China, foreign companies interested in selling their toys to the Chinese market use one of the following five options. While all the examples have been taken from the toy industry, the options also hold true for most other consumer products.

1. Going it alone
Toy companies deciding on going it alone in China are very rare. Currently there exist two major possibilities for a company to sell its toys directly on the Chinese market. One is to sell to Chinese importers with the help of a foreign-seller’s representative office. The second possibility is to sell and distribute via a bonded-zone trading company.

The world’s largest toy companies Mattel and Hasbro were examples of this model. But both companies were forced to back off because their prices were too high and they did not have an appropriate distribution network in place. Now both work through partners in China.

2. Selling via established distribution networks of domestic companies
The Japanese toy company Tomy is an example for this activity model. Back in the 1970s, Tomy established the subsidiary Tomy HK as a production sourcing company.

Later Tomy HK also became the sales company for Asian markets through local distributors, which handle all the sales as well as customer services independently and locally. Tomy’s local distributor in Mainland China is the Shanghai-based toy manufacturer Kailite. By working through a partner, Tomy has access to the established sales channels of Kailite in China.

3. Licensing
Most foreign companies enter China by direct investment or joint ventures rather than licensing. This situation is gradually changing, with some of the biggest brand names in the world positioning themselves in HK for new licensing opportunities in the Chinese Mainland.

Other than in China, companies are confident that their intellectual properties will be protected in Hong Kong and they also consider HK’s considerably strong consumption power. An example for this model is Japan-based Sanrio (“Hello Kitty”), which is managed by the HK-based brand management and licensing agency Asian Licensing Partners.

4. Selling via specialized retailers or major retail chains
Only very recently, toy specialty shops have been emerging, often in cooperation with large toy vendors in HK, Shenzhen, and some other places in Guangdong. Kids Land is the exclusive distributor of four major international toy brands in China: Lego, Chicco, Maerklin and Schleich. The Guangzhou-based retailer Toonsland also offers sales management for foreign toy companies as a service. Toonsland is the representative of Mattel toys in China.

5. Selling via trading companies
A possible activity model involving trading companies would be a HK trading company that takes title to the toys in HK, arranges for their transportation into China, and manages extensive networks of local dealers and resellers.

Hasbro, for example, works with the Hong Kong trading company Li & Fung, which manages the whole supply chain of Hasbro in China and also functions as the exclusive distributor of Hasbro’s toys in China. Hasbro toys are sourced from Mainland China, exported to HK (at least on paper), and then re-imported into Mainland China. Finally, Hasbro’s toys are sold via the various partnering retail outlets of Li & Fung, especially in the major department stores in China (e.g., Isetan and New World) and in the increasing number of hypermarkets.

Conclusion
It is difficult to argue which of these options is the most promising for selling toys in the Chinese marketplace. It depends very much on the commitment to the market as well as risk preferences.

Having learned from the mistakes of the world leaders Hasbro and Mattel, it seems that most toy companies want to be on the safe side and work through partners that are willing to take over most of their risks in China.

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