#9 IS INDIA 'THE NEXT CHINA' FOR TOY MANUFACTURING?

#9 IS INDIA 'THE NEXT CHINA' FOR TOY MANUFACTURING?

Before we get started on the 9th instalment of this Newsletter, here’s just a quick reminder of where you can read the previous 8 instalments:?https://www.dhirubhai.net/newsletters/toy-industry-journal-6910540635838013441/

This could be the shortest article in this series, because the answer to the question: Is India The Next China For Toy Manufacturing is quite obviously NO! – it is unlikely that we will ever see again a single toy manufacturing hub become as dominant as China became between the 1990s up until a few years ago.

However, India is set to become a very important toy manufacturing hub due to some fundamental underlying strengths which we will go into below…

MANUFACTURING CAPACITY FROM CERTIFIED & COMPLIANT FACTORIES IS THE FIRST PRIORITY FOR TOY COMPANIES

I have worked with toy companies and their factories for more than 2 decades now, throughout which time the primary manufacturing hub for toys has been China. Over time, toy companies became so well connected in Hong Kong & China, that the only way for a Sourcing agent to persuade a toy company to move factories within China was to offer cost savings of 5-10% on quotes in order to win the business.

This focus on cost savings as the primary reason to move factories took completely for granted the more fundamental need for compliant production capacity first and foremost. Capacity & capability became so broadly available in China that they were taken completely for granted. However, China’s role in the world of toys has changed significantly over the last few years. Going forward China is set to still be significant in the realm of toy manufacturing, but far less so – the drivers behind this change were outlined in detail in a previous instalment of this newsletter, just click here if you missed that one, as that will supply the context to explain all that follows below on India’s toy manufacturing sector: https://www.dhirubhai.net/pulse/biggest-threats-facing-toy-industry-part-1-lack-risk-our-steve-reece/?trackingId=yzzhFhiEQx683%2B60RwGGJQ%3D%3D

Looking beyond China, I’m going to start with the conclusion here - the bottom line is as follows: if the global toy business found itself in a situation where it had to quickly ramp up production capacity outside of China, there is only one country which has the latent industrial capacity and workforce available to respond en masse – and that country is India.

To be completely frank, if China suddenly became unviable as a toy sourcing hub, things would not be pretty – in fact, it would be a real mess, because China has such a high share of available toy production capacity today, and to be clear, while production is ebbing away from China, the majority of the world’s toys still come from Asia’s largest economic powerhouse.

To move production quickly en masse would not be a smooth business as usual scenario, it would be a frantic emergency and toy companies would inevitably have to rely on less proven factories to secure sufficient capacity. Nevertheless, if this situation did occur, India would be the only place where available labour force, plastic domain knowledge and entrepreneurial factory owners would be able to ramp up to any significant level in a comparatively short space of time. There are other countries that would have to play a part of course, but India would have by far the largest quickly accessible production capacity, even versus the more established and currently larger toy manufacturing hub of Vietnam.

AVAILABILITY OF LOW COST LABOUR IS A MAJOR DRIVER OF TOY MANUFACTURING LOCATION: INDIA HAS CHEAP ABUNDANT LABOUR

The golden rule of toy sourcing is that toy production is most viable at the intersection of component supply chain, capacity, labour availability and low labour cost.

To take a step back, we need to understand why toy manufacturing migrated en masse to China, the answer can be shown in the following images/charts:

CHINA 40 YEARS AGO

CHINA TODAY!

China originally had huge available labour, with an under-educated agrarian workforce which was so poverty stricken that starvation was not uncommon. Fast forward to today and China is now a modern economy, with low poverty, high real estate costs and much higher worker expectations of pay. If you just look at the two images above showing China's then peasant population cycling as their only viable means of production, compare that with an article I read this week suggesting that cycling is making a comeback in China as a leisure pursuit! So in the space of a few decades, China's population has gone from abject poverty to a degree of affluence and leisure driven lifestyles.

India on the other hand today is in some ways more like China was when toy production started to consolidate. India’s total estimated population of 1.4billion have an average salary of just over $5,000USD p.a., with factory production line labour available for somewhere in the region of c. $2 usd per hour, which is less than half of what is normal in China these days.

Also, just to put a personal flavour on India’s abundant labour pool, I have visited more than a dozen cities in India, and in every single one the overwhelming feeling was of people everywhere! It was a major shock to me to find places I had never previously even heard of before visiting had millions of people living in the locale. For example, Pune, which I had not heard of before visiting is India’s 7th most populous city with more than 7million people in residence. Mumbai, the capital of the wealthiest Indian state of Maharashtra, has more than 20 million people in residence, and Bengaluru (commonly still referred to by its colonial name of Bangalore) which hosts some of the most advanced toy manufacturing in India has more than 8 million inhabitants.

India has one of the youngest populations in the world - more than 67% of the population is between the ages of 15-64 years of age. Also, to put workforce in a comparative context, India has more than 500 million workers, with a few more hundreds of million potentially available to work but without opportunity. Vietnam, as the primary toy manufacturing hub today outside China has a mere 56m people in the workforce.

So, India is the only country with a similar population size as China, but with much more potential labour availability for production labour line work on low-cost products like toys. India’s economy and workforce are crying out for more employment opportunities, and as such, it’s hard to see how there could be anything other than an abundance of labour for the next decade at least, and looking at the population and demographic projections, probably for considerably further into the future.

EXISTING INDUSTRIAL CAPACITY – ESPECIALLY PLASTIC & MECHATRONICS

India is an advanced automotive manufacturing hub, with around 23m cars produced every year, making India the 4th biggest toy manufacturing country in the world, with automotive making up 8% of India’s total exports.

In case you haven’t paid that much attention to the interior of your car, the majority of the inside of a car is plastic in some form or another, and as such there is huge plastic domain expertise in India both in terms of production techniques and in engineering, with a strong supply chain for plastic raw materials and components. While the toy specific supply chain is less established (although deepening and broadening all the time), the basic elements of plastic production are certainly in place.

Based on my own travels and experiences visiting factories and speaking to factory owners, the fundamental difference between India & places such as Vietnam, is that India aspires to produce all the component elements of toy production locally, and seems very likely to do so eventually, whereas Vietnam is more reliant on supply chain from China and looks set to remain more dependent on China versus India.

INDIAN TOY MANUFACTURING: CURRENT STATUS

I get a couple of enquiries every week from manufacturing companies looking to set up new toy manufacturing plants in India, suggesting that manufacturing businesses in India are keen to enter the toy business. There is also some significant impetus in terms of government support for increased toy manufacturing capacity and capability in India.

The reality in India though at this point is that there are only a handful of export level, certified factories with significant experience of OEM/contract manufacturing for toys which ship to major western retailers. The service levels and consistency of production standards do take some management and oversight via inspections, but genuine cost savings are available on many products due to the lower labour cost in India. These cost savings are far more viable for Indian factories to deliver versus factories in China who cannot be making money when offering similar or lower pricing to hat on offer in countries with lower labour such as India & Vietnam.

Those Toy items needing a lot of labour - typically those products which have multiple components & therefore significant production line assembly requirements offer the greatest cost savings out of India generally. Realistic cost savings of 5-10% are possible on many products (although not all types of products). Some of our clients have saved $millions by switching some production to India, but it needs to be the right type of product – for instance small figurines with limited production line labour are less likely to be cheaper versus a preschool/infant toy with mechanical parts and multiple components needing assembly and a lot of people on the production line.

Injection moulded plastics are the most prevalent types of toy products being manufactured by India’s OEM/contract manufacturing factories, although blow moulding and even roto moulding are now available with a few factories.

Plush production is available in India with relatively good quality, the challenge though thus far is that quite a few of the standard fabrics for Plush toys are not available locally and have to be imported from China which seems to erode the opportunity for cost savings. There is work underway to address these local fabric sources, and so I believe that India will eventually offer much more cost-effective production on Plush, even if we aren’t there yet!

One final point on India’s toy factories – this is a different culture and India is a different business environment and business culture versus China. India has not had 40 years to become as slick as China has become over time. Communication styles and working practises are different. This is both good and bad. I have seen toy companies have relatively minor issues with an Indian factory and be dismissive of that factory from then on, when their strengths far outweigh their drawbacks versus producing in China.

By way of example, China’s toy factories rely on a vast migration of population from the interior of China to the coastal manufacturing hubs, as a result this tends to encourage infractions in terms of allowable overtime working and other working conditions. Workers who are resident in a factory have little else to do but work as many hours as possible to earn as much money as they can for their families. It is very common to experience ethical and social audit infractions in China. This can become a major waste of time and energy for toy companies as they seek to find ways to get a factory to comply to the degree which is acceptable to a major retailer or brand licensor.

This issue of dorm culture & living in the factory is unheard of in India, because the local employment laws tend to offer much more protection to workers than in China, and the factory workers in India come from the local urban population, so there is no dorm culture in India’s toy factories – at least not in any I have visited, and to my knowledge I have visited most export-oriented factory in India supplying mass market retail with toys.

On the other hand, because India’s supporting supply chain for toy specific components is not as established, there can be delays caused by needing to import components from China. So, there are pros and cons of working in India versus China.???????????????

FACTORY PROFILE: - ?Micro Plastics Pvt Ltd

Normally this type of article would just give a general introduction to the sector, but I wanted to be a bit more specific than that and to use a real example to evidence what type of facilities are available in India today.

I work as a non-Exec Director & board adviser for India’s biggest toy factory group – Micro Plastics Private Limited. Founded by Mr. Vijendra Babu in 2005, the company now supplies 4 out of 5 of the world’s biggest toy companies.

I remember visiting Plant 3 back in 2018, and it was largely empty, 4 years later that facility is completely full.

MICRO PLASTICS PLANT 3 - EMPTY IN 2018

MICRO PLASTICS PLANT 3 - FULL IN 2022 (Image blurred to protect customer confidentiality)

MICRO PLASTICS PLANT 6 – NEW CAPACITY!

Micro Plastics recently opened Plant 6, a gigantic 600,000 square foot facility with more advanced capabilities than I have seen previously in India’s toy manufacturing sector. I’m greatly looking forward to visiting this plant in a couple of years & seeing it completely full like I experienced with Plant 3!

Just to put the technical capabilities on offer in India into a comparative context with what is already existing in China, Micro Plastics offers: injection, blow and roto moulding; spray painting & tampo printing; manual painting; sewing machines & embroidery for dolls clothes (and soon to be full Plush toys production); ultrasonic welding; hair rooting & grooming for dolls; in house PCBA capability; in-house tool room with capacity to produce 300 tools per annum. The company also has all the following compliances/certifications: Walmart FCCA; Walmart GSCS; Disney FAMA; RBA CoC audited; Sedex; GSV; ISO 9001-2015; CTPAT; ICTI Class A.

In April 2021, ADV Partners & Premji Invest acquired a majority stake in Micro Plastics, with plans to grow aggressively over the next few years as toy production continues to migrate away from China. The story of Micro Plastics then is one of a company riding the wave of production migration and growing in capability and capacity all the time.

For more information on Micro Plastics Private Ltd., just check out the company website here: https://microplasticsindia.com/ You can also see on the website a number of products manufactured for leading toy companies from around the world.

Or if you would like an introduction to the company’s management team to find out more/get quotes for production of your items, please just send me a Linked In message & I can put you in touch with the key people…

IN SUMMARY: INDIA’S FUTURE ROLE IN THE TOY BUSINESS

Looking forward, it seems clear and obvious that India is going to grow in importance and relevance for toy production, even if it is NOT going to be 'The Next China'. While work certainly still needs to be done on building up local supply chain and inspection capabilities the reality is that the toy industry is on the cusp of needing a substantial increase in toy manufacturing capacity outside of China. India is going to be an inevitable part of the story going forward therefore in my view. It's not just my opinion however, both Hasbro & Spin Master have publicly stated on the investor earnings calls that they are already nearly at 50% of manufacturing outside of China. Multiple major toy companies have local sourcing offices in India. This is not my personal fantasy (despite the occasional comment to that extent!). India is up and coming as per the major toy companies who have to take a more strategic view of Toy Sourcing.

Looking forward the challenge for toy companies in this area is that the Sourcing function has traditionally received the least investment of resources and management time, as companies have gotten into the long-term habit of placing orders with the same old vendors they have been working with for a decade or more.

Going forward a multi-hub sourcing approach with less mature and less advanced sourcing hubs is going to require more time, effort, resources and also patience. Those customers heading to India for production will not find it quite as smooth as they have been used to in China, things work differently – there are contrasting strengths & weaknesses between the two countries when it comes to toy manufacturing – BUT above all else, India offers by far the most substantial production capacity of any alternative hub, and it could just be critical if there is any acceleration of production needing to move out of China.

If you would like more information/to have a frank conversation about alternative toy manufacturing hubs, please feel free to drop me a line, or to check out our company websites for more info: www.ToyTeamAsia.com??www.ToyTeamIndia.com

For general enquiries about how our company helps toy companies to profitably grow, just click here: www.KidsBrandinsight.com/services