Zhang Shunlin, a 47-year-old businessman from China's southern province of Guangdong, talks about Christmas and Thanksgiving year round but has no idea of their origins. He thinks Thanksgiving is a religious holiday when "Westerners thank the blessings of God" and Christmas is just like the Chinese New Year.
But he knows their commercial significance all too well. Zhang operates a toy factory and a wholesale store with his sister and brother-in-law in Guangdong province, where 60% of China's exported toys are made. He says this holiday season has not brought much joy. Orders from his U.S. clients have plummeted 25% from last year. For the first time, he had to decline several long-term orders because of the soaring cost of raw materials and implementing what he calls America's "unreasonable" laws. His sister and brother-in-law are planning to leave the business next year.
Zhang isn't alone. The Guangzhou Daily recently called this Christmas "the worst" for Chinese toymakers. In the third quarter, the official government statistics show that gifts and toys exported to the U.S. and Europe, which normally make up more than half of the total export volume, fell 20% from last year. At the recent Canton Fair 2011, the largest trade fair in China and a bellwether for China's export volumes, transaction orders in toys from the U.S. decreased by 24% from last year.
Weak demand from global economic uncertainty and rising prices of raw materials like cotton certainly contributed to a sluggish third quarter. But government officials and manufacturers blame a stronger Chinese currency and the high cost of complying with stringent safety standards imposed by the U.S. and EU for compounding the problems and forcing them out of business.
Profit margin squeeze
The majority of Chinese toy producers are original equipment manufacturers (OEMs), which make products that are sold abroad under a foreign company's label. In order to stay competitive, they make profit margins as low as 2% to 3%, says Yang Chunmei, a toy manufacturer in the southeast Jiangxu province. "The currency appreciation and any additional costs that have gone into regulatory compliance have the potential to completely wipe out our profits," she says.
Yang specializes in 12 kinds of plush toys and mini-cars. She says the steady stream of orders from large-volume orders from big U.S. retailers have put her in a slightly better position than Zhang. However, compared with last year, her profits have decreased more than 15% partially because the yuan has gained another 2.5% this year. Since 2005, under pressure from Washington, the yuan has risen about 30%.
Adding to their troubles are regulations passed by Congress in August 2008, after several recalls of China-made toys containing excessive levels of lead paint. The law requires toy manufacturers and suppliers to reduce in three phases the amount of lead contained in the surface coatings of children's toys (ages 12 and under) and have their products tested and certified in independent, accredited laboratories.
