VZCZCXYZ0000
RR RUEHWEB

DE RUEHGZ #0696/01 3310921
ZNR UUUUU ZZH
R 260921Z NOV 08
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 0025
INFO RUEHGZ/CHINA POSTS COLLECTIVE 0010
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC 0008
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0006
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEAIIA/CIA WASHDC 0010
RUEKJCS/DIA WASHDC 0010

UNCLAS GUANGZHOU 000696 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM 
STATE PASS USTR CHINA OFFICE 
 
 
E.O. 12958: N/A 
TAGS: ETRD EIND ELAB KIPR ECON PGOV CH
SUBJECT: Guangdong Toy Association 20th Anniversary -Celebration or 
Crisis? 
 
REF: GUANGZHOU 618 
 
(U) This document is sensitive but unclassified.  Please protect 
accordingly. Not for release outside U.S. government channels. Not 
for internet publication. 
 
¶1. (SBU) Summary: The Guangdong Toy Association's recent Twentieth 
Anniversary Banquet was both a celebration of the organization's 
milestone, but also a rallying cry for manufacturers facing economic 
challenges unprecedented in the organization's history.  Concerns 
about declining overseas orders, tight credit conditions and lasting 
effects of the 2007 toy safety crisis all make the industry outlook 
more grim than at previous annual banquets.  Migrant workers, the 
fuel that drives this labor-intensive industry, are proving volatile 
if not handled properly, as demonstrated in another round of PRD toy 
factory layoffs and disturbances this week.  Local officials 
throughout south China's manufacturing communities have stepped up 
efforts to monitor changes and prevent factory closures, and 
especially, labor unrest.  End summary. 
 
Happy Twentieth, But Hang On For A Bumpy Ride 
--------------------------------------------- 
 
¶2. (U) Speech after speech at the Guangdong Toy Association's 
twentieth anniversary dinner all cheered the industry's amazing 
growth from USD 1.7 billion in 1988 to USD 121.9 billion today, an 
increase of 87 times.  However, no conversation ended without 
expressions of concern over the current economic conditions facing 
toy makers and many of south China's other labor-intensive 
industries.  Members affirmed recent announcements that China's VAT 
rebates would be reinstated for many products at the same time that 
previously scheduled minimum wage increases would be postponed to 
relieve cost pressures on the manufacturing sector.  On the other 
hand, association leaders and company representatives decried sudden 
and unexpected cancellations and postponements of overseas toy 
orders and complained about the inability to raise capital from 
banks and other sources. 
 
Toy Factory Layoffs Spark Unrest 
-------------------------------- 
 
¶3. (U) As if another reminder of the challenges the industry faces 
were needed, south China newspapers and websites today showed the 
results of a riot by 500 laid-off workers and their sympathizers who 
overturned a police car and vandalized toy factory offices for Hong 
Kong-owned Kader Toys in Dongguan on November 25.  Local officials 
were quick to announce that the factory had not closed and that any 
dispute is between a small number of laid-off employees and the 
managers of the model train and plush toys producer.  According to 
press reports, approximately 80 laid off workers objected that the 
size of their severance payments was as much as 50 per cent too low. 
 The reports estimated that a total of 380 Kader employees had been 
laid off this month as the company worked to cuts expenses.  In 
addition to the 500 reported rioters, as many as 2000 onlookers 
reportedly arrived at the scene to observe the situation after word 
spread of the disturbance.  Officials later announced that the order 
had been restored, although the wage dispute was not fully resolved. 
 
 
Local Officials Increase Market Surveillance 
-------------------------------------------- 
 
¶4. (SBU) Since the high-profile failure of Smart Union Toys and 
subsequent labor unrest (reftel), local officials throughout the 
Pearl River Delta (PRD) have stepped up efforts to monitor factory 
conditions and help prevent further closures that might lead to 
social instability, according to local toy company executives. 
Executives from one toy manufacturer told us a vice mayor and the 
local labor bureau director called on their factory within days of 
the Smart Union closure to inquire about orders and seek assurances 
that the factory would not close unexpectedly or leave unpaid 
workers to fend for themselves.  The executives found this courtesy 
call particularly unusual because the factory in question was a 
wholly-owned subsidiary of a major overseas toy maker, had been 
among the most stable of all local employers for more than a decade, 
and is located in a completely different city from the closed Smart 
Union factories.  Widespread local and international media coverage 
of toy industry woes, especially on the volatile situations that 
erupt when unemployed workers demand back wages after unexpected 
factory closures, means that increased government scrutiny will 
continue for the foreseeable future, according to executives. 
 
 
Economic Woes - Costs Increase, Orders Decline 
--------------------------------------------- - 
 
¶5. (SBU) Mike Hou of Innomega Baby Products said Hallmark, one of 
his firm's largest clients, recently estimated that expenses for 
product safety testing in the next year would increase 30 fold.  He 
blamed the higher costs on new testing requirements from the United 
States and other developed countries and said buyers would initially 
absorb the higher fees.  Hou said that even if buyers initially paid 
for new, more extensive toy testing, in fact his clients' total 
orders would likely be reduced to help offset these additional 
costs.  In the long term, general toy price increases will be 
unavoidable, according to Hou, even if oil and other commodity 
prices remain low and China's government slows down or suspends some 
of its previously announced minimum wage increases and other costly 
regulations. 
 
¶6. (SBU) New orders are declining in every segment of south China's 
toy industry, with many citing the global economic downturn as the 
most important cause.  When pressed, executives admit that orders 
for the current holiday season finished shipping months ago, and new 
orders for 2009 appear weak so far.  Industry contacts and media 
reports indicate that toy orders at the most recent Canton Fair fell 
approximately 30 percent, further impacting the struggling toy 
factories in coming months.  Many believe the true test will come in 
February and March of 2009 as factories and workers decide how to 
proceed after breaking for Chinese New Year at the end of January. 
 
 
JACOBSEN