Global Economics

Bottlenecks in Toyland


New inspections are slowing shipments and clipping profits for Chinese suppliers

As Beijing cracks down on unsafe toy exports and demands more testing, many small toy producers in China are feeling a financial squeeze. The increased testing "has created real havoc for some...manufacturers" in China, says Ron Rycek, vice-president of toy sales at Hilco Corp., which sells toys such as Sonic Skillball to Toys R' Us and Amazon.com (AMZN).

Late summer and early fall are typically the peak season for China's toy factories. But in August, the government ordered more spot inspections and required toymakers to provide detailed information on the paints they use. In the past, exporters were able to ship their goods as soon as they rolled off production lines, but now they're forced to keep toys in warehouses while authorities test samples for safety before they can be certified for export. "Our products were held for 15, 20 days before they were released," grouses He Shiming, CEO of Yunhe Lixin Arts & Craft Factory, which makes wooden xylophones, blocks, and cars for KB Toys Inc. and others.

Some smaller manufacturers, especially makers of wooden toys, are getting hit hard. Under the old policy, toys made of wood didn't need a certificate to be exported. But that changed after lead paint was discovered on shipments of Thomas the Tank Engine. The change has been devastating for the likes of Zhejiang Yunhe Xinfeng Art & Craft Factory. Last year, it booked sales of $400,000, with half of the orders for its 3D wood puzzles coming in September and October. The company had expected this year to be even better, but customers now worry that Xinfeng won't get an export certificate, so no new orders have come in since the summer. The company has since laid off about 90 of its 100 workers. "We've stopped production until we get the certificate," says manager Chen Shaoping.

Despite such troubles, most toys intended for this year's holiday season will likely arrive in plenty of time to be wrapped and placed under the tree. The new policy exempts orders placed before Aug. 10 from the certificate requirement. By August, "probably 80% of the toys for Christmas are already on the water," says Peter Fishel, who ran a Hong Kong trading company specializing in low-cost toys for more than three decades before retiring in 2004. Still, many companies report that toys ordered now will likely reach U.S. ports about five or six months after they're ordered, up from a three- to four-month lag before the crackdown. The rules "will affect [manufacturers] next year, for sure, because they're going to have to change testing systems, timing, and so on," says Fishel.

But even some companies that are able to keep operating feel the pinch. Manufacturers generally don't get paid until they ship their products, and they usually take out loans to buy materials, pay wages, and cover other expenses until customers transfer funds. With toys now sitting in warehouses while samples are sent to labs, producers can't repay those loans as quickly as they had expected. The testing "is holding up our capital and our warehouse space," says Leona Lam, CEO of Leconcepts Holdings, a Hong Kong-based subcontractor that supplies parts to factories making plastic toys for the likes of Mattel Inc. (MAT) and Fisher-Price (MAT). Kwok Nam Po, managing director of Herald Metal & Plastic Works, which produces G.I. Joe and Star Wars action figures for Hasbro Inc. (HAS), says his company is facing a credit crunch from the delays. "It's a burden," he says. "A lot of pressure."

The increased testing is also expensive. AMWH.K. Ltd., which makes doll dresses and other toys for Mattel, has seen its costs for testing jump by more than 10%, and is now building an in-house lab to meet Mattel's new standards. Still, the increased scrutiny may not be such a bad thing for stronger players. "Cheap vendors aren't going to be in the market anymore," says AMW boss Katherine Geicke. "They can't afford it. It's going to weed out the ones who compromise safety for a quick buck."

Chi-Chu Tschang contributed this article to BusinessWeek Online from Beijing .

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