VZCZCXRO7176
PP RUEHCN RUEHGH RUEHVC
DE RUEHHK #0834/01 1280905
ZNR UUUUU ZZH
P 070905Z MAY 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC PRIORITY 4815
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHHI/AMEMBASSY HANOI 3741
RUEHPF/AMEMBASSY PHNOM PENH 0813
RUCPDOC/USDOC WASHDC
RUEHIN/AIT TAIPEI 4928
RUEAWJA/DEPT OF JUSTICE WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAUSA/DEPT OF HHS WASHINGTON DC
RHMFIUU/DEPT OF HOMELAND SECURITY WASHINGTON DC
RHEHNSC/NSC WASHDC
RUEAEPA/HQ EPA WASHDC
UNCLAS SECTION 01 OF 04 HONG KONG 000834
SENSITIVE
SIPDIS
STATE FOR EAP/CM, EAP/PD
STATE PASS TO USTR CHINA OFFICE/TIM WINELAND
STATE PASS TO CPSC RICH OBRIEN/INTL PROGRAMS
STATE PASS TO DOT FOR NHTSA ABRAHAM/KRATZKE
STATE PASS TO OMB/INTL AFFAIRS
STATE PASS TO HOMELAND SECURITY COUNCIL
STATE PASS IMPORT SAFETY WORKING GROUP
HHS FOR OGHA//STEIGER AND FDA/LUMPKIN
USDOC FOR 4420 MAC/OCEA/ACINO
USDOC FOR 6300 MAS/HIJIKATA
E.O. 12958: N/A
TAGS: ECON ETRD EIND BEXP HK CH
SUBJECT: TOY SAFETY VIEWED FROM HONG KONG: IMPROVED, BUT
STILL AT RISK
REF: A. HONG KONG 2217
B. HONG KONG 2414
C. BEIJING 1492
D. GUANGZHOU 225
1. (SBU) Summary: Chinese-manufactured toys are much safer
than they were a year ago, but new price pressures threaten
to compell even responsible manufacturers to try to cut
corners. Toy manufacturers, business and association
leaders, and laboratory testers universally claim that the
industry has responded positively to the "wake-up call" of
August 2007's series of high-profile recalls and adverse
media attention. Toys "Made in China" are safer in May 2008,
as brands are demanding increased accountability,
manufacturers are testing more product more often, and the
PRC government is enforcing export quality control at an
unprecedented level. Things are tough in the toy business
though -- Mainland China's new labor law, environmental
regulation enforcement and appreciation of the RMB are
driving less sophisticated manufacturers out of the market
entirely, while survivors face unremitting downward price
pressure from U.S. brands and retailers. The Hong Kong-owned
toy industry is acutely aware of the forthcoming U.S. product
safety law, with many companies already investing in
necessary infrastructure and operational changes.
Manufacturers believe global harmonization of toy standards
is the most efficient and effective method for product
safety, but understand such harmonization is unlikely given
the current diversity of national and voluntary standards.
Substantial testing and analysis capacity, through investment
in personnel and equipment, is essential to respond to the
enactment of the U.S. law, say Hong Kong business leaders.
End Summary.
2. (SBU) Background: Since the August 2007 toy recalls, Post
has been working with the Hong Kong toy manufacturing
associations (owners of the majority of toy manufacturing
plants in Southern China) to analyze developments in the toy
industry and consumer product safety. Conversations with the
senior leaders of the Hong Kong Toy Manufacturers'
Association, the Hong Kong Toys Council, Modern Testing
Services (MTS) and SGS global testing laboratories, and a
representative of the International Council of Toy Industries
(ICTI) contributed to this report on the state of the toy
safety industry in May 2008.
Toys Are Safer Than in August 2007
----------------------------------
3. (SBU) Toy manufacturers, business and association leaders,
and laboratory testers universally claim that the industry
has responded positively to the "wake-up call" of August
2007's series of high profile recalls and adverse media
attention. Lawrence Chan, Chairman of the Hong Kong Toy
Manufacturers Association, described the movement's defining
moment: the visit by PRC central government leader Madame Wu
Yi to Southern China in November 2007. He explained that
Madame Wu's visit to nine toy manufacturing plants had a
"real impact" on the owners, managers, and employees in
conveying the seriousness of the issue. The combined result
of industry's response is that in May 2008, brands are
demanding increased accountability, manufacturers are testing
more product more often, and the PRC government is enforcing
export quality control at an unprecedented level. In short,
"U.S. toy imports 'Made in China' are safer now than last
year", confirmed Ian Anderson, a toy safety consultant with
SGS and ICTI.
HONG KONG 00000834 002 OF 004
4. (SBU) Action from within the supply chain is not the only
contributing factor, however. As noted in reftels from
Guangzhou and Beijing, key developments in mainland China,
including the labor law, environmental regulation
enforcement, and appreciation of the renminbi (a predicted 12
percent for this year), are leaving a wake of closed
manufacturing companies. Hong Kong toy company owners noted
the departure of many Korean business owners "in the dark of
night" as the labor law took effect, to avoid back payments
of overtime, and the move of numerous Taiwan-owned companies
to cheaper environments in Southeast Asia. Rising prices for
raw materials, fuel and food are tightening profit margins
even further. As in most mainland China industries, company
owners provide housing and food in addition to wages, and
many companies are still operating their own diesel
generators three days per week, as electricity supplies have
not recovered since last winter's infrastructure-destroying
storms. (Note: Hong Kong toy manufacturers expect to add ten
percent to their manufacturing cost as they renegotiate
contracts in May, on top of ten to fifteen percent for 2008
due to enhanced safety measures, announced earlier. End
Note.) Any company operating on the edge of profitability in
2007, including those cutting quality corners to make toys,
is no longer in business, say many observers.
But A Risk Remains
------------------
5. (SBU) Less sophisticated manufacturing companies are being
driven out of the market, but higher costs, and smaller
margins throughout the entire supply chain, and continued
intense downward price pressure from buyers may compel some
manufacturers to continue to cut corners. In this economic-
and safety-focused environment, both buyer and seller are
choosing products, timing and terms more carefully, all as
pressure for the lowest price remains acute. Edmond Young,
Managing Director of Perfekta Industries, explained that some
manufacturers are walking away from high-risk contracts, for
instance, fabrication of a toy with extensive paint. The
more paint, the more testing needed, and the higher the
production cost, he said. The majority of toymakers are
original equipment manufacturers (OEM) without their own
product lines, so they must rely on these global brands and
retailers as customers. Smaller, less established companies
are less able to turn away business and more likely to make
up the cost in some other area of the production. Planning
for a profitable year is further clouded as "buyers are also
holding back on orders so far this year -- they are waiting
to see what will happen with the downturn in the U.S.
economy", said C.K. Yeung, of the Hong Kong Toys Council.
6. (SBU) Risk to toy safety remain: some companies are still
"shipping out the back door" without testing, or exploiting
loopholes such as shipping cheap toys as "party favors" or
"gifts," not subject to the same safety standards as toys,
said Yeung. Industry expert Anderson noted that Hong
Kong-owned manufacturing companies are among the most
price-conscious in the world. Many operate with dual sets of
books and pay far less than China's minimum wage to maximize
profits. With margins so tight, business owners may take
chances in the supply chain that impact product safety, he
said.
New U.S. Regulations Can Help, But Need Time
--------------------------------------------
HONG KONG 00000834 003 OF 004
7. (SBU) Awareness of the forthcoming U.S. product safety law
is high across the Hong Kong-owned toy industry, and many
here are proactively planning for its enactment. Primary
concern focuses on implementation timetables and lead content
level and testing methodology. All parties agreed that three
to six months is the bare minimum needed to implement the new
standards and to avoid a "major recall" tied to the U.S.'s
new, more strict standards. Based on the EU's RoHS standard
implementation for electronic products, a full three years is
needed for complete effectiveness and absorption into all
levels of the supply chain, said ICTI's Anderson. Local
industry, despite advocacy efforts by the U.S. Toy Industry
Association, does not fully agree that risk-based testing of
all product content (rather than just the hazard-based
accessible parts and surface coating test used by the EU) is
the most effective or necessary standard. However, they are
investing in infrastructure and altering operations to
accommodate the new U.S. rules.
Harmonization as the Ideal
--------------------------
8. (SBU) Consistent with the message heard in mainland China,
the United States, and in Europe, toy manufacturers point to
the harmonization of standards as the most efficient and
effective method to improve product safety. Even laboratory
testing companies who stand to lose testing business agree
that a global standard, voluntary or not, would aid
manufacturers in producing toys for a wider market, more
safely and with greater profitability. Business,
association, and testing leaders acknowledge that the
possibility of reaching such global harmonization is
unlikely, however, citing the current diversity of national
and voluntary standards. In the United States, for instance,
numerous state-level initiatives now supersede federal law on
lead levels alone, not to mention other toy standard
categories, as detailed on the Intertek testing laboratory's
website: www.intertek.com/consumergoods. Anderson went so
far to say that the new U.S. law will actually delay
harmonization further as it adds new complexities across
standards, and once enacted, United States regulatory
momentum on the issue will slow.
Testing Capacity is Key
-----------------------
9. (SBU) Greater testing and analysis capacity is needed to
respond to the enactment of the U.S. law. Management at MTS
testing laboratory estimates that 10,000 people, and millions
of USD in investment in equipment and facilities are needed
to respond to the expected demand. Many of these personnel
must have expertise in chemistry, and the equipment must be
capable of analyzing to the new 90 parts per million lead
standard. Mr. Yeung explained that prior to August 2007, one
batch of 100,000 pieces (toys) would be tested just once
before being exported. Today, that batch will be broken into
five batches of 20,000, with each group tested four times
throughout the supply chain. In some instances, the
certification of a single product requires hundreds of
individual tests on each paint and part, requiring five days
or more for processing. Some areas are already seeing
shipping delays as existing laboratory capacity responds to
the rising curve of accountability since last year. Hong
Kong toy industry leaders see lack of testing capacity as a
potential choke-point to the smooth implementation of the new
HONG KONG 00000834 004 OF 004
U.S. law.
Cunningham