A Question of Chinese Toy Factory Closures

Monday, November 17, 2008 9:31

About a half hour ago I got off the phone with a reporter who was interested in the recent factory shutdowns, specifically in the toy sector. It is an industry that has been under the microscope lately as up to half of toy manufacturer have reportedly shutdown as a result of the global slowdown.

Prior to speaking with the reporter, I decided to do a little homework.  To be honest, I do not deny that factories have shut down, nor do I deny the fact that many are loosing their jobs, but I am having a tough time working out the root causes… and that is what bothers me.

So, with that in mind.  Let’s look at a few of the relevant facts:

1) There is a Global financial crisis that has impacted the global economy at many levels (consumer to country level
2) Toy factories in the Guangdong region are being shut down, proven by the numerous reports available online.
3) Primary victims are smaller factories, but several large factories have also closed

At this point, I would like to take the plane to 50,000 to highlight a few other relevant macroeconomic points

1) On November 11, trade figures were released showing:

Exports in October rose 19.2 percent from a year ago to 128.3 billion dollars, compared with 21.5 percent growth in September,

2) On November 13, economic data was released showing:

Production rose 8.2 percent from a year earlier, the smallest gain in seven years, the statistics bureau said today

Output grew 11.4 percent in September

So, while the GROWTH RATE for each statistic is declining, there is still GROWTH in each of the measurements.  thus, China is still GROWING, but as a percentage of the year before, it is not growing as fast as it did.

Question 1:  If a country grew11% lat year, and 9% this year, does that indicate a problem?  Should we be looking at growth rate, or should we be looking at the total figure?

Question 2: Should we be considering the costs of growth?  i.e. how much spread did China enjoy last year vs. this yera regardless of the revenue side?  Maybe last year China (if you look at the organization) actually lost money, and this year they gained efficiencies that allowed for more real gains to occur at a lower growth rate.

Back to my original question though, there was initially something that made me hesitant when looking at toys as the indicator….The first stories of toy factory closures began in mid October, the earliest I can find is October 10 – well AFTER the traditional Christmas product shipments.

Which lead me to ask a few questions
1) How many of these factories existed 6 months ago vs. which ones were brought online to cope with the Christmas rush
2)  How many of these factories closed due to the fact that many brands have been reducing the number of suppliers they use.
3) How many of these factories were really viable entities that competed in the market vs. those that simply were producing low end commodities that were uncompetitive
4) How many of these factories were simply “shacks out back” vs. well capitalized

In asking these questions, I am not by any means trying to dismiss the mess that it the banking industry. I do believe that this situation has impacted China in ways that are not being reported, are not visible, but my problem is that what seems to be the only industry highlighted as “the litmus test” for China’s exports is an industry that is past its annual peak, was ripe for closures anyway, and has seen only a handful of large manufacturers (1000+ employees) fail in an environment where supposedly the bottom is dropping out from underneath it.

Is there an industry that would be a better guide, and if so, what has been occurring in that market?

For myself, given all the housing problems in the states, I would have expected to see building material producers off significantly, furniture, cabinets, tools, etc… is that happening?

What about those raw materials?   Are the volumes off, or is it simply that the investment banking community is now unable to push their money into this asset class?  Given all the building going on in China (Nothing has stopped), and that China was 50% or more of many markets… this is another sector I cannot seem to find the supporting data, nor the logic, in a full scale meltdown.

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8 Responses to “A Question of Chinese Toy Factory Closures”

  1. Dan says:

    November 18th, 2008 at 10:19 pm


    Good questions, and good to see them asked. I keep hearing about factories closing in China, and yet about once a day I ask a client with a factory in China or a supplier(s) in China whether factory closings in China have had any impact on their business and, without a single exception, they all say they have not experienced any closings directly. They then talk about the other issues they are facing, but factory closings is not one of them. So really, what is up?

  2. Rich says:

    November 18th, 2008 at 10:55 pm


    Spoke to a friend last night who has a friend in toy industry. Firm laid off 2000 workers last month, but this is industry practice. He did say that the numbers were hiring that average, but that in general everyone typically downsized after the Christmas rush… and that a lot of factories broght online to get order out the door were then taken back down…..


  3. Andrew says:

    November 19th, 2008 at 4:13 am

    Great article. It appears the the factory base is consolidating while the volume of goods traded remains the same. This is good news for strong trading companies, and bad news for weak ones. But there’s also a bigger picture here which is the volatile environment for consumer goods manufacturers in China instigated by mega-retailers and their purchasing habits.

    By the way, do you know of any good sources to find data such as raw material purchases in China or by Chinese companies?


  4. Why Factories are closing in China | Quality Wars says:

    November 19th, 2008 at 6:33 am

    […] recent post on the blog All Roads Lead to China examines the recent media in regard to factory closures in China and its root causes. The two main […]

  5. Duncan says:

    November 20th, 2008 at 1:02 am

    As always, Caijing hits it on the nail: “Cai Zhangsheng, director of the province’s SMEs Bureau, noted that a lot of enterprises open and close daily. Even during the best economic times in 2005, an average 240 enterprises were formed and 160 closed in Zhejiang every day”

  6. Etienne C says:

    November 26th, 2008 at 8:16 am

    This is a really important topic. I am looking for any data on this, as I believe that many of these factoru closures are only accelerated by the current global economic difficulties but were somehow already “programmed” when the central government started pushing for an industrial policy based on “Smart Low Cost” instead of “Low Cost”. When you look at the last 4 to 5 years, you can see an insistant set of incentives toward innovation, high value added products, at the expense of low end low cost products: VAT export rebate, new labor law . . .

    Of course, many in the West would love to believe that there were right and the China will be heart in the same way as they are. Unfortunately, there is a risk that the current gloomy economic environment actually goves a boost to good Chinese companies which tend to be increasingly good at gaining market share in price pressured markets.

  7. Peter says:

    December 15th, 2008 at 9:23 pm

    Great questions. Some additional areas that are impacting factories:

    a) Retailers are reducing the size/frequency of their upcoming orders (YoY export growth is a lagging indicator of orders placed 6 to 12 months ago and may not reflect the relatively more recent changes in orders booked)
    b) Manufacturers are not able to get bank loans to finance their current working capital requirements, sometimes because they have fewer orders and sometimes because banks are not lending
    c) Owners have been burned in the markets – stock, real estate, and accumulators – and with comingling their assests and funds – are now bankrupt
    d) Manufacturers are going bankrupt because their counterparties went bankrupt – they’re not going to get the money they’re owed. Just like a GM bankruptcy would ripple through and cause many other bankruptcies in the supply chain

  8. Rich says:

    December 16th, 2008 at 5:47 am

    Peter – thanks for the insights. I was asked earlier in the week by a friend in China whereby we realized that there are a lot of Chinese firms who have produced branded items but have not been paid. they are now looking for a way to make some money back, but are in a real quandary…. how would you sell Bose headphones when Bose won’t pay you, and what are the IP considerations… interesting.