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DE RUEHGZ #0528/01 2470802
ZNR UUUUU ZZH
R 040802Z SEP 09
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 0900
INFO RUEHGZ/CHINA POSTS COLLECTIVE 0249
RUEHBJ/AMEMBASSY BEIJING 0701
RUEHCN/AMCONSUL CHENGDU 0190
RUEHHK/AMCONSUL HONG KONG 0260
RUEHGH/AMCONSUL SHANGHAI 0190
RUEHSH/AMCONSUL SHENYANG 0200
RUEAUSA/DEPT OF HHS WASHINGTON DC 0023
RHMFIUU/DEPT OF HOMELAND SECURITY WASHINGTON DC 0028
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RUEATRS/DEPT OF TREASURY WASHINGTON DC 0144
RUEHC/DEPT OF LABOR WASHINGTON DC 0029
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UNCLAS SECTION 01 OF 03 GUANGZHOU 000528
SENSITIVE
SIPDIS
STATE FOR EAP/CM, EAP/EP, EEB/TPP, S/P, INR/EAP, DRL
STATE PASS CONSUMER PRODUCTS SAFETY COMMISSION RICH O'BRIEN/INTL
PROGRAMS
STATE PASS USTR CHINA OFFICE
STATE PASS HOMELAND SECURITY COUNCIL
STATE PASS IMPORT SAFETY WORKING GROUP
STATE PASS USTR FOR KARESH, MCCOY, RAGLAND, WEISS
LABOR FOR ILAB - LI
E.O. 12958: N/A
TAGS: ETRD EIND ELAB PGOV ECON CH HK
SUBJECT: South China Exports and Labor: Toy Industry Registers Some
Improvement Despite Continued Weakness
REF: A) GUANGZHOU 315; B) HONG KONG 649; C) GUANGZHOU 163; D)
GUANGZHOU 47; E) HONG KONG 91; F) 2008 GUANGZHOU 618
(U) This document is sensitive but unclassified. Please protect
accordingly. Not for release outside U.S. government channels. Not
for internet publication.
1. (SBU) Summary and comment: Good news for one oQ south Qhina's
beProfits are expected to decline by an average of 20% for the year,
pick up in May and June, according to Guangdong-based contacts.
Profits are expected to decline by an average of 20% for the year,
mostly because higher unit costs have impacted firms' bottom lines.
South China's labor shortage might best be described as a tight
labor market in which skilled migrant workers appear unwilling to
accept lower compensation caused by factories reducing overtime
opportunities, and bosses are unable or unwilling to increase
salaries to meet worker expectations. At the same time, industry
contacts do not see Chinese domestic demand as a panacea for
relieving pressure on toy export manufacturers. Export-oriented toy
makers hoping to shift sales toward China's domestic market would
need a well-executed market strategy implemented over 2-3 years if
starting from scratch, according to contacts. There are no simple
solutions to the manufacturing industry's challenges, but company
owners are not waiting on luck either, instead they are actively
working to improve their situation through mergers and acquisitions
and additional cost cutting. End summary and comment.
Overseas Toy Orders Now Flooding In...
--------------------------------------
2. (SBU) The year started slowly for Pearl River Delta toy
manufacturers, but things started picking up in the summer.
Top-tier south China toy makers should have received order forecasts
in February and March if this were a "normal year", according to
Eddie Wong of Silverlit Toys. However, this year skipped over the
forecasting process entirely, going from almost no orders in the
winter and spring to full order books in May and June. Wong said
buyers this year waited until existing product inventories declined
before placing new orders, unlike previous years when customers more
aggressively projected overseas retail sales throughout the year,
culminating with the all-important Christmas season. He also said
major customers have "under-ordered" this year and some new toys
have already sold out in Japan because buyers who might have
purchased 20,000 pieces of a new toy in 2008 only ordered 8,000 for
2009.
...But Profits Trending Downward
--------------------------------
3. (SBU) Executives from self-proclaimed market leader Jetta Toys
also complained about late orders in a meeting with Econoffs last
week. They said the company's total 2009 orders are projected to
increase over 2008 numbers, but smaller batches in each order will
mean higher unit costs and lower annual profits. Executive Vice
President Li Zhuoming of the Guangdong Toy Association reinforced
the individual companies' anecdotal reports, saying that Guangdong's
gross toy exports dropped 15.8% year-on-year to US$ 5.326 billion,
of which the United States accounted for US$ 1.717 billion in direct
exports. When asked about costs, individual toy makers and industry
representatives repeated frequently cited complaints about higher
regulatory and testing costs, unfavorable exchange rate
fluctuations, increasing labor costs, and pricing pressure from
overseas buyers.
Labor Shortage in South China?
------------------------------
4. (SBU) When asked about recent news reports of a labor shortage in
south China, toy company executives all said they have had trouble
GUANGZHOU 00000528 002 OF 003
recruiting enough skilled workers since orders picked up in May and
June. Silverlit executives blamed the situation on poor timing and
the lack of overtime pay for workers. They said many "early bird"
returnee workers had been turned away during and after Chinese New
Year due to depressed overseas orders (ref D). Hiring did not
resume until order books started to fill in late spring and early
summer, by which time many migrant workers, including skilled
workers, had either found other jobs, resolved to return home until
economic conditions improved, or left the area to search for work in
other parts of China.
5. (SBU) Reduced overtime pay for workers was another key factor
making it harder for manufacturers to recruit skilled workers.
Executives from both Silverlit and Jetta said workers had come to
expect overtime in recent years as a way to significantly boost
income, but they were less willing to return to assembly line jobs
once factories cut overtime opportunities to save money during the
economic downturn (ref C). Additionally, Jetta executives claimed
that increased perks for China's rural population, including low or
no taxes for farmers and a variety of other subsidies, caused many
migrant workers to view low-paying manufacturing jobs as less
alluring.
6. (SBU) For all of these reasons, and despite total toy orders
matching or exceeding 2008 numbers, Jetta executives said their
current workforce of 30,000 was down 25% from the group's full
capacity of 40,000. On the other hand, executives at Silverlit's
single medium-sized factory of 5,000 said they were operating at
almost full capacity and could not hire and train workers fast
enough when the orders picked up in June and July. Silverlit
requires new employees to attend almost three full days of quality
and safety training before starting workers on assembly lines, but
turnover had been higher than normal this summer, further increasing
production costs and making it harder to optimize staffing patterns,
according to executives.
Can Domestic Demand Save the Day?
---------------------------------
7. (SBU) Li Zhuoming from Guangdong Toy Association said China's
domestic consumer market is simply not big enough to digest billions
of dollars in toy products that are exported to overseas markets
each year, even if overseas sales declined and toy prices dropped to
better coincide with Chinese consumers' expectations. Li estimated
that it could take an export-oriented toy manufacturer 2-3 years to
begin successfully competing in China's domestic market, with
certain structural differences like longer settlement periods for
domestic buyers making it even harder for smaller producers to shift
from export-only sales to a combined approach.
8. (SBU) Silverlit executives separately offered similar doubts
about seeing a sudden surge in domestic orders, despite recent
increased market share of their radio-controlled product lines at
major Mainland department stores. Silverlit said China's market was
just as complex as any other major retail market, requiring
successful establishment and ongoing management of logistics and
supply lines, sales and marketing networks, and retail contracts.
Jetta executives said the end result for them was a long-term
strategic decision that the company would not compete in China's
domestic market, and continue to focus on the U.S., Europe and Japan
for most sales.
Present and Future Outlook: Business Goes On
--------------------------------------------
9. (SBU) Guangdong toy industry contacts said cost cutting would
remain key to their strategies and predicted that market conditions
would gradually improve for the second half of 2009 and first half
of 2010. Profits were predicted to decline by an average of 20%, as
GUANGZHOU 00000528 003 OF 003
would total toy exports, which would mean continued challenges for
manufacturers, although strong firms would also find opportunities
amid the market turmoil. Executives at both Silverlit and Jetta
said their companies had acquired smaller firms in the last nine
months, but that mergers and acquisitions (M) in the industry were
not happening at a fast pace. They said that because China's laws
and financial system are not yet as developed as those in Hong Kong,
Europe or the United States, the easiest way to acquire another firm
was to complete the transaction overseas but consolidate the
manufacturing operations in Guangdong once ownership had been
transferred.
10. (SBU) Li Zhuoming of Guangdong Toy Association also voiced
cautious optimism for the industry, pointing out that even during
its darkest winter, a record number of Guangdong-based toy
manufacturers exhibited at the Hong Kong International Toy Fair in
January 2009 (ref E). Li said the strong showing by local firms
meant the industry was weathering a stormy economy and anticipating
a stronger outlook. Jetta executives also said that although they
could not predict next year's economic situation, their company's
charity/corporate social responsibility (CSR) funding remained
steady in 2009. Jetta maintains a RMB 1 billion fund (US$147
million) that supports hundreds of local schools in rural
communities that are factory workers' hometowns.
GOLDBECK