China crisis…it’s the Friday Blog!

Published on: 11th June 2021

Worry not, the Friday Blog hasn’t taken a leftfield turn into covering obscure 80s bands for which even Barry Hughes or Phil Ratcliffe would struggle to name more than one song they recorded. No, this week’s headline is far more literal – as any suppliers and retailers dealing directly with China will know only too well, this year has seen a steady stream of challenges, which have gradually turned from being a short-term inconvenience into something potentially far more problematic.

For anyone who has been asleep (or on furlough) since the turn of the year, a very rough summary goes thus: major fuel and raw material price increases, along with increased lead times exacerbated by severe container shortages and rising shipping costs, have put huge pressure on suppliers to increase prices to mitigate their spiralling costs. This week has seen further complications thrown into the mix, in the form of power shortages and rumours of fresh Covid outbreaks in China. First, let’s look at the power situation: several cities in Guangdong (where many toy factories are located) have apparently asked factories to curb power usage by suspending operations for hours or even days at a time, as a combination of high factory activity and hot weather have placed considerable strain on the region’s power system. Apparently, a combination of strong global demand and extra air conditioning required in sweltering heat has pushed the local grid to its limits, not only resulting in power shortages, but also causing short-term electricity prices to surge.

According to well-placed sources, the situation has been compounded by local outbreaks of Covid, which have resulted in some factories being forced to shut down entirely. I have this on relatively good authority – both from people on the ground and also people in the UK and US talking to local factory owners. However, officially, there are no Covid outbreaks – at least, not according to Chinese media or government sources, who are maintaining their stance that China has the Covid situation firmly under control. Indeed, it doesn’t even want to open the local borders and let people from Hong Kong into China, lest they bring the disease with them (allegedly). This column would be filled with eye-roll emojis if the formatting allowed it…

All of these seemingly endless complications are certainly not helping to bring the shipping situation under control – one supplier was complaining to me this week that he had been forced to pay $16,000 for a container, while there are online reports of auction rates for short-term container slots exceeding $20,000. And for those people who had hoped this was just going to be a short-term issue lasting only a couple of months, that hope is perhaps looking a tad optimistic…

Someone even went so far as to post on my LinkedIn feed: “Trump was right – time to move production back to the US & Europe.” Indeed, at first glance, there may be some logic to ‘reshoring’, or at very least looking at alternative production options closer to home, such as Turkey or other European facilities. That said, there would also be many potential challenges in pursuing that strategy – not least the question of whether the manufacturing capacity / infrastructure is quite there if everyone looked to move away from China simultaneously. However, the whole question of supply chain diversification definitely justifies further investigation. I just have difficulty with the phrase ‘Trump was right’ – albeit even a broken watch is right twice a day.

To be fair, with all the challenges China is currently facing, there is little doubt that the surge in global demand for consumer goods is a major factor behind many of them, making it a better class of problem in many respects. NPD released the sales data for the US toy market between January – April this week: I thought the UK was doing well, but driven by generous stimulus cheques, the US market has absolutely exploded in Q1. Sales increased by 27%, equating to a whopping $1.5b additional sales. With further handouts – in the form of child tax credits – due to put extra cash into parents’ hands every month from July to December, it would appear that the US toy market’s stellar performance is set to continue throughout 2021.

We’re seeing evidence that the UK market is well on the road to recovery too: in addition to Hornby’s strong set of results, stories this week have included new marketing campaigns being launched, new funding secured, and new distribution and licensing deals being signed. I also know of a couple of senior people taking on new roles that we will be able to announce shortly, while our recruitment section has literally never looked so healthy – we had to find a way to extend it this week, in order to fit on all the companies who wanted to advertise new vacancies.

Of course, it’s not all plain sailing: I heard of a certain online retailer (go on, take a guess…. yes, that’s the one) which placed a large order with a UK toy supplier for a line which the company has never stocked. Naturally, the company didn’t – couldn’t – deliver it. So, the online platform deducted a hefty sum from the company’s account for non-delivery… of an item it physically couldn’t supply. Despite subsequently admitting fault, the online platform still hasn’t recompensed the supplier, despite this unfortunate error occurring quite a while back. As they say, at least Dick Turpin wore a mask…

Thankfully, the toy company in question is large enough for this unfortunate incident not to have crippled its cash flow, but there is no doubt it could have completely pole-axed a smaller supplier. And yet, if the ‘revolutionary’ G7 global minimum tax initiative does actually go ahead as planned, it appears that the online retailer in question is unlikely to be affected, because the new regulations will only apply to companies which have a 10%+ profit margin – which this company insists it does not. No, sorry, I’m all out of eye-roll emojis.

Finally, as the Toy Trust’s Around the World in 80 Hours event starts today, we wish the participating companies all the best – and I just hope they find it a whole lot easier to get ‘around the world’ than their containers are at the moment.