In the News

Location issues - offshoring out of China?

Penny Brooks

31st May 2018

Toys could become a victim of the US-China trade war. China is the world biggest toy-exporting nation. The US is the world's biggest importer of toys, and 82% of them came from China last year. That added up to more than $25bn of toys, games and sports equipment from China.

If the US decides to add import tariffs to the price of toys from China, what will happen? Will the manufacture of toys be shifted to the US instead, providing jobs in American factories instead of in China?It's not really that simple. The FT reports that the toy manufacturers say no - most toy production is too labour-intensive to be profitable in the US. Emily Cheung, who runs Tsuen Lee, a Hong Kong-based toy maker with factories in China, says the US does not have the skills or the supply chain to make toys. Automation is not practical because of the complicated assembly required for many toys, especially since a growing number contain electronic components. 

So, prices will rise for American consumers in order to cover the cost of import tariffs charged by the US government. As that is likely to mean fewer toys are bought, toy manufacturers in China are now worried that they will have to move their manufacturing base outside of China in order to protect their profits. 

Another reason is rising wages in China. While they are still much lower than wages in the US, demographics in China mean that as the workforce is ageing, fewer workers are available and so employers are having to pay higher wages. As those costs rise, the breakeven level of output rises and profits fall. 

A few years ago, manufacturers looking for low wages through offshoring moved their factories to China. Now, the rising wages there mean that a growing number of Chinese manufacturers have been offshoring themselves, opening facilities to make simple toys and products in Vietnam and other countries with cheaper labour including Bangladesh, Cambodia and Indonesia. If they now fear that the US will impose tariffs on goods imported from China, they are even more likely to do that. 

On the other hand, those countries don't yet have the infrastructure or the same depth of supporting industries, from electronic components to mould-making machines, that the manufacturers need. Dominic Tam is chief executive of Combine Will, another Hong Kong-listed manufacturer, and president of the Toy Manufacturers Association of Hong Kong. “China is so convenient,” he says. “Not many existing toy manufacturers are willing to go overseas [outside China] because it’s a very big investment, with a lot of uncertainty, and requires a lot of funding.”

Penny Brooks

Formerly Head of Business and Economics and now Economics teacher, Business and Economics blogger and presenter for Tutor2u, and private tutor

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