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UNCLAS SECTION 01 OF 03 GUANGZHOU 000528 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, EAP/EP, EEB/TPP, S/P, INR/EAP, DRL 
STATE PASS CONSUMER PRODUCTS SAFETY COMMISSION RICH O'BRIEN/INTL 
PROGRAMS 
STATE PASS USTR CHINA OFFICE 
STATE PASS HOMELAND SECURITY COUNCIL 
STATE PASS IMPORT SAFETY WORKING GROUP 
STATE PASS USTR FOR KARESH, MCCOY, RAGLAND, WEISS 
LABOR FOR ILAB - LI 
 
E.O. 12958: N/A 
TAGS: ETRD EIND ELAB PGOV ECON CH HK
SUBJECT: South China Exports and Labor: Toy Industry Registers Some 
Improvement Despite Continued Weakness 
 
REF: A) GUANGZHOU 315; B) HONG KONG 649; C) GUANGZHOU 163; D) 
GUANGZHOU 47; E) HONG KONG 91; F) 2008 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 and comment:  Good news for one oQ south Qhina's 
beProfits are expected to decline by an average of 20% for the year, 
pick up in May and June, according to Guangdong-based contacts. 
Profits are expected to decline by an average of 20% for the year, 
mostly because higher unit costs have impacted firms' bottom lines. 
South China's labor shortage might best be described as a tight 
labor market in which skilled migrant workers appear unwilling to 
accept lower compensation caused by factories reducing overtime 
opportunities, and bosses are unable or unwilling to increase 
salaries to meet worker expectations.  At the same time, industry 
contacts do not see Chinese domestic demand as a panacea for 
relieving pressure on toy export manufacturers.  Export-oriented toy 
makers hoping to shift sales toward China's domestic market would 
need a well-executed market strategy implemented over 2-3 years if 
starting from scratch, according to contacts.  There are no simple 
solutions to the manufacturing industry's challenges, but company 
owners are not waiting on luck either, instead they are actively 
working to improve their situation through mergers and acquisitions 
and additional cost cutting.  End summary and comment. 
 
Overseas Toy Orders Now Flooding In... 
-------------------------------------- 
 
¶2. (SBU) The year started slowly for Pearl River Delta toy 
manufacturers, but things started picking up in the summer. 
Top-tier south China toy makers should have received order forecasts 
in February and March if this were a "normal year", according to 
Eddie Wong of Silverlit Toys.  However, this year skipped over the 
forecasting process entirely, going from almost no orders in the 
winter and spring to full order books in May and June.  Wong said 
buyers this year waited until existing product inventories declined 
before placing new orders, unlike previous years when customers more 
aggressively projected overseas retail sales throughout the year, 
culminating with the all-important Christmas season.  He also said 
major customers have "under-ordered" this year and some new toys 
have already sold out in Japan because buyers who might have 
purchased 20,000 pieces of a new toy in 2008 only ordered 8,000 for 
¶2009. 
 
...But Profits Trending Downward 
-------------------------------- 
 
¶3. (SBU) Executives from self-proclaimed market leader Jetta Toys 
also complained about late orders in a meeting with Econoffs last 
week.  They said the company's total 2009 orders are projected to 
increase over 2008 numbers, but smaller batches in each order will 
mean higher unit costs and lower annual profits.  Executive Vice 
President Li Zhuoming of the Guangdong Toy Association reinforced 
the individual companies' anecdotal reports, saying that Guangdong's 
gross toy exports dropped 15.8% year-on-year to US$ 5.326 billion, 
of which the United States accounted for US$ 1.717 billion in direct 
exports.  When asked about costs, individual toy makers and industry 
representatives repeated frequently cited complaints about higher 
regulatory and testing costs, unfavorable exchange rate 
fluctuations, increasing labor costs, and pricing pressure from 
overseas buyers. 
 
Labor Shortage in South China? 
------------------------------ 
 
¶4. (SBU) When asked about recent news reports of a labor shortage in 
south China, toy company executives all said they have had trouble 
 
GUANGZHOU 00000528  002 OF 003 
 
 
recruiting enough skilled workers since orders picked up in May and 
June.  Silverlit executives blamed the situation on poor timing and 
the lack of overtime pay for workers.  They said many "early bird" 
returnee workers had been turned away during and after Chinese New 
Year due to depressed overseas orders (ref D).  Hiring did not 
resume until order books started to fill in late spring and early 
summer, by which time many migrant workers, including skilled 
workers, had either found other jobs, resolved to return home until 
economic conditions improved, or left the area to search for work in 
other parts of China. 
 
¶5. (SBU) Reduced overtime pay for workers was another key factor 
making it harder for manufacturers to recruit skilled workers. 
Executives from both Silverlit and Jetta said workers had come to 
expect overtime in recent years as a way to significantly boost 
income, but they were less willing to return to assembly line jobs 
once factories cut overtime opportunities to save money during the 
economic downturn (ref C).  Additionally, Jetta executives claimed 
that increased perks for China's rural population, including low or 
no taxes for farmers and a variety of other subsidies, caused many 
migrant workers to view low-paying manufacturing jobs as less 
alluring. 
 
¶6. (SBU) For all of these reasons, and despite total toy orders 
matching or exceeding 2008 numbers, Jetta executives said their 
current workforce of 30,000 was down 25% from the group's full 
capacity of 40,000.  On the other hand, executives at Silverlit's 
single medium-sized factory of 5,000 said they were operating at 
almost full capacity and could not hire and train workers fast 
enough when the orders picked up in June and July.  Silverlit 
requires new employees to attend almost three full days of quality 
and safety training before starting workers on assembly lines, but 
turnover had been higher than normal this summer, further increasing 
production costs and making it harder to optimize staffing patterns, 
according to executives. 
 
Can Domestic Demand Save the Day? 
--------------------------------- 
 
¶7. (SBU) Li Zhuoming from Guangdong Toy Association said China's 
domestic consumer market is simply not big enough to digest billions 
of dollars in toy products that are exported to overseas markets 
each year, even if overseas sales declined and toy prices dropped to 
better coincide with Chinese consumers' expectations.  Li estimated 
that it could take an export-oriented toy manufacturer 2-3 years to 
begin successfully competing in China's domestic market, with 
certain structural differences like longer settlement periods for 
domestic buyers making it even harder for smaller producers to shift 
from export-only sales to a combined approach. 
 
¶8. (SBU) Silverlit executives separately offered similar doubts 
about seeing a sudden surge in domestic orders, despite recent 
increased market share of their radio-controlled product lines at 
major Mainland department stores.  Silverlit said China's market was 
just as complex as any other major retail market, requiring 
successful establishment and ongoing management of logistics and 
supply lines, sales and marketing networks, and retail contracts. 
Jetta executives said the end result for them was a long-term 
strategic decision that the company would not compete in China's 
domestic market, and continue to focus on the U.S., Europe and Japan 
for most sales. 
 
Present and Future Outlook: Business Goes On 
-------------------------------------------- 
 
¶9. (SBU) Guangdong toy industry contacts said cost cutting would 
remain key to their strategies and predicted that market conditions 
would gradually improve for the second half of 2009 and first half 
of 2010.  Profits were predicted to decline by an average of 20%, as 
 
GUANGZHOU 00000528  003 OF 003 
 
 
would total toy exports, which would mean continued challenges for 
manufacturers, although strong firms would also find opportunities 
amid the market turmoil.  Executives at both Silverlit and Jetta 
said their companies had acquired smaller firms in the last nine 
months, but that mergers and acquisitions (M&A) in the industry were 
not happening at a fast pace.  They said that because China's laws 
and financial system are not yet as developed as those in Hong Kong, 
Europe or the United States, the easiest way to acquire another firm 
was to complete the transaction overseas but consolidate the 
manufacturing operations in Guangdong once ownership had been 
transferred. 
 
¶10. (SBU) Li Zhuoming of Guangdong Toy Association also voiced 
cautious optimism for the industry, pointing out that even during 
its darkest winter, a record number of Guangdong-based toy 
manufacturers exhibited at the Hong Kong International Toy Fair in 
January 2009 (ref E).  Li said the strong showing by local firms 
meant the industry was weathering a stormy economy and anticipating 
a stronger outlook.  Jetta executives also said that although they 
could not predict next year's economic situation, their company's 
charity/corporate social responsibility (CSR) funding remained 
steady in 2009.  Jetta maintains a RMB 1 billion fund (US$147 
million) that supports hundreds of local schools in rural 
communities that are factory workers' hometowns. 
 
GOLDBECK