In my last posting, "Will We See Chinese Toy Corporations Investing in US Toy Companies?" I wrote about my anticipation that Chinese toy companies will directly enter the US toy markets. In this posting I want to talk about the dynamic that is making that happen: Access to capital and a squeeze on profits.
China is an economy on steroids. The amount of capital flowing into the country plus easy access to that capital has allowed toy manufacturers and other industries to grow. The flip side to this economic growth has meant that wages have gone up as have the costs of raw materials and other inputs. That means that despite the good times, Chinese companies are increasingly being squeezed on profits as western retailers are pushing back on price increases at the same time that the cost of business is going up.
One way for Chinese toy companies to improve their position is to cut out the middleman, the American or European toy company, and go directly to market. Actually it’s already happened. Matrix Holdings Limited, a major o.e.m. producer of plastic products (and a supplier of McDonalds Happy Meals) purchased American owned Shelcore in 2005 and Funrise in 2007. Sourcing giant, Li & Fung, just this year purchased the American toy company, Technosource.
Neither Matrix nor Li & Fung attempted to bring original brands to market nor create an infrastructure from scratch. Rather they purchased these companies and kept their management structure and brands in place. Great move for Matrix and Li & Fung and an even better move for Shelcore, Funrise and Technosource who now have access to all the capital they need.
As Chinese manufacturers continue to get squeezed, it’s going to seem likely that we will see similar marriages as American toy companies, which have great management and products but struggle for capital, look east for their survival.