Trouble in Toyland: U.S. recession jolts China

Chinese workers get a good dose of capitalism more poisonous than the lead Mattel sells for children eat.


Trouble in Toyland: U.S. recession jolts China

Dwindling demand hastens closure of at least 3,600 factories, stirs unrest

http://www.msnbc.msn.com/id/28037960/


By Kari Huus and Adrienne Mong

msnbc.com and NBC News

Fri., Dec. 12, 2008


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.


“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.


Others found ways to cut corners, which is cited as one reason that the
problem of Chinese toy safety came to a head last year. Among other things,
some Chinese factories started using lead-based paint on their products
because it dries faster and thereby speeds production time.


“They were either closing their eyes or closing their doors,” said
Michael Zakkour, managing director of China BrightStar, a manufacturing and
sourcing consultancy.


To be sure, some of the factories that were shuttered were small shops that
employed only a few dozen workers. And the contraction is to some degree a
natural consolidation process in an industry that is overbuilt. But big
players have clearly been affected as well.


One of the most publicized cases was the abrupt closure of the Smart Union
toy company in October in the city of Dongguan, the center of the toy
industry. When the factory managers disappeared overnight, leaving 7,000
workers without paychecks or severance, protests erupted, targeting both
the government and the publicly traded Hong Kong company. The Dongguan
government finally doled out 24 million yuan ($3.5 million) to pay what was
owed to the workers and settle the conflict.


“All local officials recognize that they are judged on the basis of their
ability to control social unrest,” said Nicholas Lardy, a China expert
and senior fellow at the Peterson Institute for International Economics.
“It’s in their interest to make sure factories don’t leave town and
abscond with back wages.”


In November, toy workers rioted after the Hong Kong-based Kaida
Manufacturing Co. laid off 600 employees from its factories in Dongguan and
tried to avoid paying compensation required by the new contract law. Local
media reported that approximately 1,000 police and security guards were
called in to disperse the angry crowd, but company offices were ransacked,
cars overturned and at least five people were injured before order was
restored. Kaida ultimately agreed to renew contracts with senior employees
and offered compensation packages to others.


Reverse migration
The closures have left many migrants with no work, including 23-year-old Wu
Yang, who worked at a Taiwanese-owned factory in Dongguan for three years
before being laid off four months ago when the operation was shut down. Wu
is considering returning to his home in central Henan province, but for now
he’s killing time in local bookshops and hoping the situation will turn
around.


"Maybe I will go home, but it’s boring there,” Wu said. “And I’ll
just gamble all my money away."


Each day, thousands of other migrants in Guangdong and other coastal
provinces board trains and buses for their home villages, leaving earlier
than normal for the Chinese New Year, which begins Jan. 26. When and if
they will return is anyone’s guess.


In the short term, the exodus of unemployed workers eases pressure in
Guangdong and other manufacturing centers. Longer term, however, it hurts
families living in the poorest parts of China, who receive money from
migrant workers. That raises the prospect that the protests and violence in
the manufacturing regions could spread to the interior, many China experts
say.


“It’s a potentially scary scenario,” said Lawrence Delson, who
teaches China business courses at New York University. “If many of these
migrant workers go home, what happens to the flow of money back to the
inland provinces? … There is a deepening division between the haves and
the have-nots … raising the specter of social unrest.”


Mixed message
The Chinese government appears well aware of the threat and has taken
action aimed at stimulating its sagging economy.


In November, Beijing announced a massive $586 billion stimulus package.
Economists and world leaders praised China for putting together the most
ambitious rescue package in the world, worth about 3 percent of its GDP.


Chinese leaders did not provide many details of the package, but indicated
that it would include spending on infrastructure, health and education. The
central purpose of the package, they said, was to spur consumption in China
rather than rely so heavily on exports for growth. At a G20 meeting later
that month, China also agreed with other major economies that in grappling
with the crisis, all nations should avoid protectionism.


But with pressure mounting to protect jobs in its export sector, Beijing
also has instituted policy that is contrary to the spirit of the G20
meeting by increasing tax rebates on thousands of export products — from
toys to toasters. The rebates, and an artificially low valuation of
China’s currency, essentially give its exports a competitive edge in the
world marketplace, threatening to increase trade imbalances that have long
caused tension.


Even Chinese officials have expressed concern that the rebate policy, which
experts say covers at least 50 percent of China’s exports, could spark
retaliation from trade partners, including the United States. Some trade
experts warn that could spark a trade war, similar to what happened when
the United States put in place high protectionist tariffs in 1930, thereby
fueling the Great Depression.


“At the moment, China is the gold standard on the stimulus,” said
Lardy, of the Peterson Institute of International Economics. “But I would
give them very low marks for this (tax policy.) They are … basically
promoting exports at the expense of the rest of the world.”