Trouble in Toyland: U.S. recession jolts China

For American parents, bargain prices for toys this holiday season qualify as good news: A Barbie fan who rose before dawn for Wal-Mart’s Black Friday sale could secure the coquettish “Barbie Diamond Castle Princess Liana Doll” for $5 — royally marked down from its regular retail price. At Target, a 10-pack of die-cast Hot Wheels cars also went for just $5, while a radio-controlled helicopter cost a mere $15. The price wars were enough to draw consumers out of their bunkers for their first shopping spree in months.

But wrapped up with those cheap toys are ominous economic omens for both sides of the Pacific. The rock-bottom prices show how desperate U.S. retailers are to plump up weak consumer demand — a symptom of the ailing U.S. economy and a serious problem for China, which makes nine of every 10 toys sold in American stores.

Declining U.S. orders already have contributed to the closure of at least 3,600 toy factories since the beginning of 2008, according to the Chinese government, leaving hundreds of thousands of Chinese workers suddenly out of work in this sector alone. Some of the shutdowns have triggered violent protests, a situation that could worsen if the Western recession drags on through 2009, as many economists are predicting.

“Unemployment in China could deprive a lot of people of their lifeline,” says Hu Xindou, an economics professor at the Beijing Institute of Technology. “So it could trigger social instability or even shake the rule of the Communist party.”

Millions of jobs at stake
The toy industry has played a major role in China’s economic surge over the past 30 years. Exports account for as much as 40 percent of China’s gross domestic product, and labor-intensive industries making things like toys, shoes and clothing generate millions of jobs for its rapidly growing workforce.

But Chinese toy makers began feeling the economic squeeze well before the U.S. recession was made official in late November.

U.S. retailers trimmed orders after suffering weak sales in the 2007 holiday season — made worse by recalls of dangerous toys.

The volume of Chinese toys passing through eight major U.S. ports was down 5.9 percent in the first nine months of this year, compared to the same period in 2007,  according to economic forecaster IHS Global Insight, which tracks the information for the National Federation of Retailers. Toy traffic through the ports of Los Angeles and Long Beach, Calif., which typically handle more than half of Santa’s incoming booty, declined 10.2 percent, as measured by tonnage.

The draw-down isn’t readily apparent at U.S. shopping malls, where toy shelves appear as packed as ever. And the limited inventories on hand likely won’t become obvious unless a toy emerges as a must-have item — like the Tickle-me-Elmo and Cabbage Patch dolls of past shopping seasons.

Slowdown makes tough time tougher
Behind the scenes, though, the decreased orders are sending shock waves through the Chinese economy.

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“A lot of what is happening in China, particularly with respect to toys, is demand driven,” says Erik Autor, international trade counsel for the retailers federation. “Toy (buyers) are ratcheting back orders, reflecting a drop in consumer demand.”

Slowing orders have added to other pressures on China’s toy makers.

China’s new labor contract law, which imposed stricter conditions and compensation for layoffs of temporary workers, took effect in 2007, increasing costs for manufacturers that rely heavily on migrants on production lines, including toy makers and other labor-intensive manufacturers based mainly in southern Guangdong province. The province has become the core of China’s manufacturing sector based on the flow of cheap and abundant labor temporary workers from the country's poor interior. By some estimates there are 150 million migrant workers in Guangdong alone.

Toy makers also were hard hit by the rising price of oil, which surged to more than $140 a barrel in June, and in turn sharply increased the price of plastic.

Industry sources say the toy makers saw profits squeezed to the point where many tried to renegotiate contracts with buyers — especially major U.S. players, such as Wal-Mart and Toys "R" Us. When they discovered the buyers wouldn’t budge on the purchase agreements, many simply decided to close their factories. Some locked the gates and vanished in the dead of night, leaving workers to discover they had no job when they arrived in the morning.

“Over half (of the factories) that have closed had negotiated a price, then when they couldn’t get the retailer to move (on the price), they wouldn’t make it at a loss and closed down,” said Britt Beemer, a retail strategist and founder of Charleston-based America’s Research Group.

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