VZCZCXRO7176
PP RUEHCN RUEHGH RUEHVC
DE RUEHHK #0834/01 1280905
ZNR UUUUU ZZH
P 070905Z MAY 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC PRIORITY 4815
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHHI/AMEMBASSY HANOI 3741
RUEHPF/AMEMBASSY PHNOM PENH 0813
RUCPDOC/USDOC WASHDC
RUEHIN/AIT TAIPEI 4928
RUEAWJA/DEPT OF JUSTICE WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAUSA/DEPT OF HHS WASHINGTON DC
RHMFIUU/DEPT OF HOMELAND SECURITY WASHINGTON DC
RHEHNSC/NSC WASHDC
RUEAEPA/HQ EPA WASHDC

UNCLAS SECTION 01 OF 04 HONG KONG 000834 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, EAP/PD 
STATE PASS TO USTR CHINA OFFICE/TIM WINELAND 
STATE PASS TO CPSC RICH OBRIEN/INTL PROGRAMS 
STATE PASS TO DOT FOR NHTSA ABRAHAM/KRATZKE 
STATE PASS TO OMB/INTL AFFAIRS 
STATE PASS TO HOMELAND SECURITY COUNCIL 
STATE PASS IMPORT SAFETY WORKING GROUP 
HHS FOR OGHA//STEIGER AND FDA/LUMPKIN 
USDOC FOR 4420 MAC/OCEA/ACINO 
USDOC FOR 6300 MAS/HIJIKATA 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EIND BEXP HK CH
SUBJECT: TOY SAFETY VIEWED FROM HONG KONG: IMPROVED, BUT 
STILL AT RISK 
 
REF: A. HONG KONG 2217 
     ¶B. HONG KONG 2414 
     ¶C. BEIJING 1492 
     ¶D. GUANGZHOU 225 
 
¶1. (SBU) Summary: Chinese-manufactured toys are much safer 
than they were a year ago, but new price pressures threaten 
to compell even responsible manufacturers to try to cut 
corners.  Toy manufacturers, business and association 
leaders, and laboratory testers universally claim that the 
industry has responded positively to the "wake-up call" of 
August 2007's series of high-profile recalls and adverse 
media attention.  Toys "Made in China" are safer in May 2008, 
as brands are demanding increased accountability, 
manufacturers are testing more product more often, and the 
PRC government is enforcing export quality control at an 
unprecedented level.  Things are tough in the toy business 
though -- Mainland China's new labor law, environmental 
regulation enforcement and appreciation of the RMB are 
driving less sophisticated manufacturers out of the market 
entirely, while survivors face unremitting downward price 
pressure from U.S. brands and retailers.  The Hong Kong-owned 
toy industry is acutely aware of the forthcoming U.S. product 
safety law, with many companies already investing in 
necessary infrastructure and operational changes. 
Manufacturers believe global harmonization of toy standards 
is the most efficient and effective method for product 
safety, but understand such harmonization is unlikely given 
the current diversity of national and voluntary standards. 
Substantial testing and analysis capacity, through investment 
in personnel and equipment, is essential to respond to the 
enactment of the U.S. law, say Hong Kong business leaders. 
End Summary. 
 
¶2. (SBU) Background: Since the August 2007 toy recalls, Post 
has been working with the Hong Kong toy manufacturing 
associations (owners of the majority of toy manufacturing 
plants in Southern China) to analyze developments in the toy 
industry and consumer product safety.  Conversations with the 
senior leaders of the Hong Kong Toy Manufacturers' 
Association, the Hong Kong Toys Council, Modern Testing 
Services (MTS) and SGS global testing laboratories, and a 
representative of the International Council of Toy Industries 
(ICTI) contributed to this report on the state of the toy 
safety industry in May 2008. 
 
 
Toys Are Safer Than in August 2007 
---------------------------------- 
 
¶3. (SBU) Toy manufacturers, business and association leaders, 
and laboratory testers universally claim that the industry 
has responded positively to the "wake-up call" of August 
2007's series of high profile recalls and adverse media 
attention.  Lawrence Chan, Chairman of the Hong Kong Toy 
Manufacturers Association, described the movement's defining 
moment: the visit by PRC central government leader Madame Wu 
Yi to Southern China in November 2007.  He explained that 
Madame Wu's visit to nine toy manufacturing plants had a 
"real impact" on the owners, managers, and employees in 
conveying the seriousness of the issue.  The combined result 
of industry's response is that in May 2008, brands are 
demanding increased accountability, manufacturers are testing 
more product more often, and the PRC government is enforcing 
export quality control at an unprecedented level.  In short, 
"U.S. toy imports 'Made in China' are safer now than last 
year", confirmed Ian Anderson, a toy safety consultant with 
SGS and ICTI. 
 
HONG KONG 00000834  002 OF 004 
 
 
 
¶4. (SBU) Action from within the supply chain is not the only 
contributing factor, however.  As noted in reftels from 
Guangzhou and Beijing, key developments in mainland China, 
including the labor law, environmental regulation 
enforcement, and appreciation of the renminbi (a predicted 12 
percent for this year), are leaving a wake of closed 
manufacturing companies.  Hong Kong toy company owners noted 
the departure of many Korean business owners "in the dark of 
night" as the labor law took effect, to avoid back payments 
of overtime, and the move of numerous Taiwan-owned companies 
to cheaper environments in Southeast Asia.  Rising prices for 
raw materials, fuel and food are tightening profit margins 
even further.  As in most mainland China industries, company 
owners provide housing and food in addition to wages, and 
many companies are still operating their own diesel 
generators three days per week, as electricity supplies have 
not recovered since last winter's infrastructure-destroying 
storms.  (Note: Hong Kong toy manufacturers expect to add ten 
percent to their manufacturing cost as they renegotiate 
contracts in May, on top of ten to fifteen percent for 2008 
due to enhanced safety measures, announced earlier.  End 
Note.)  Any company operating on the edge of profitability in 
2007, including those cutting quality corners to make toys, 
is no longer in business, say many observers. 
 
 
But A Risk Remains 
------------------ 
 
¶5. (SBU) Less sophisticated manufacturing companies are being 
driven out of the market, but higher costs, and smaller 
margins throughout the entire supply chain, and continued 
intense downward price pressure from buyers may compel some 
manufacturers to continue to cut corners.  In this economic- 
and safety-focused environment, both buyer and seller are 
choosing products, timing and terms more carefully, all as 
pressure for the lowest price remains acute.  Edmond Young, 
Managing Director of Perfekta Industries, explained that some 
manufacturers are walking away from high-risk contracts, for 
instance, fabrication of a toy with extensive paint.  The 
more paint, the more testing needed, and the higher the 
production cost, he said.  The majority of toymakers are 
original equipment manufacturers (OEM) without their own 
product lines, so they must rely on these global brands and 
retailers as customers.  Smaller, less established companies 
are less able to turn away business and more likely to make 
up the cost in some other area of the production.  Planning 
for a profitable year is further clouded as "buyers are also 
holding back on orders so far this year -- they are waiting 
to see what will happen with the downturn in the U.S. 
economy", said C.K. Yeung, of the Hong Kong Toys Council. 
 
¶6. (SBU) Risk to toy safety remain: some companies are still 
"shipping out the back door" without testing, or exploiting 
loopholes such as shipping cheap toys as "party favors" or 
"gifts," not subject to the same safety standards as toys, 
said Yeung.  Industry expert Anderson noted that Hong 
Kong-owned manufacturing companies are among the most 
price-conscious in the world.  Many operate with dual sets of 
books and pay far less than China's minimum wage to maximize 
profits.  With margins so tight, business owners may take 
chances in the supply chain that impact product safety, he 
said. 
 
 
New U.S. Regulations Can Help, But Need Time 
-------------------------------------------- 
 
HONG KONG 00000834  003 OF 004 
 
 
 
¶7. (SBU) Awareness of the forthcoming U.S. product safety law 
is high across the Hong Kong-owned toy industry, and many 
here are proactively planning for its enactment.  Primary 
concern focuses on implementation timetables and lead content 
level and testing methodology.  All parties agreed that three 
to six months is the bare minimum needed to implement the new 
standards and to avoid a "major recall" tied to the U.S.'s 
new, more strict standards.  Based on the EU's RoHS standard 
implementation for electronic products, a full three years is 
needed for complete effectiveness and absorption into all 
levels of the supply chain, said ICTI's Anderson.  Local 
industry, despite advocacy efforts by the U.S. Toy Industry 
Association, does not fully agree that risk-based testing of 
all product content (rather than just the hazard-based 
accessible parts and surface coating test used by the EU) is 
the most effective or necessary standard.  However, they are 
investing in infrastructure and altering operations to 
accommodate the new U.S. rules. 
 
 
Harmonization as the Ideal 
-------------------------- 
 
¶8. (SBU) Consistent with the message heard in mainland China, 
the United States, and in Europe, toy manufacturers point to 
the harmonization of standards as the most efficient and 
effective method to improve product safety.  Even laboratory 
testing companies who stand to lose testing business agree 
that a global standard, voluntary or not, would aid 
manufacturers in producing toys for a wider market, more 
safely and with greater profitability.  Business, 
association, and testing leaders acknowledge that the 
possibility of reaching such global harmonization is 
unlikely, however, citing the current diversity of national 
and voluntary standards.  In the United States, for instance, 
numerous state-level initiatives now supersede federal law on 
lead levels alone, not to mention other toy standard 
categories, as detailed on the Intertek testing laboratory's 
website: www.intertek.com/consumergoods.  Anderson went so 
far to say that the new U.S. law will actually delay 
harmonization further as it adds new complexities across 
standards, and once enacted, United States regulatory 
momentum on the issue will slow. 
 
 
Testing Capacity is Key 
----------------------- 
 
¶9. (SBU) Greater testing and analysis capacity is needed to 
respond to the enactment of the U.S. law.  Management at MTS 
testing laboratory estimates that 10,000 people, and millions 
of USD in investment in equipment and facilities are needed 
to respond to the expected demand.  Many of these personnel 
must have expertise in chemistry, and the equipment must be 
capable of analyzing to the new 90 parts per million lead 
standard.  Mr. Yeung explained that prior to August 2007, one 
batch of 100,000 pieces (toys) would be tested just once 
before being exported.  Today, that batch will be broken into 
five batches of 20,000, with each group tested four times 
throughout the supply chain.  In some instances, the 
certification of a single product requires hundreds of 
individual tests on each paint and part, requiring five days 
or more for processing.  Some areas are already seeing 
shipping delays as existing laboratory capacity responds to 
the rising curve of accountability since last year.  Hong 
Kong toy industry leaders see lack of testing capacity as a 
potential choke-point to the smooth implementation of the new 
 
HONG KONG 00000834  004 OF 004 
 
 
U.S. law. 
Cunningham