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08GUANGZHOU696 2008-11-26 09:21:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Consulate Guangzhou
Cable title:  

Guangdong Toy Association 20th Anniversary -Celebration or

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1. (SBU) Summary: The Guangdong Toy Association's recent Twentieth
Anniversary Banquet was both a celebration of the organization's
milestone, but also a rallying cry for manufacturers facing economic
challenges unprecedented in the organization's history. Concerns
about declining overseas orders, tight credit conditions and lasting
effects of the 2007 toy safety crisis all make the industry outlook
more grim than at previous annual banquets. Migrant workers, the
fuel that drives this labor-intensive industry, are proving volatile
if not handled properly, as demonstrated in another round of PRD toy
factory layoffs and disturbances this week. Local officials
throughout south China's manufacturing communities have stepped up
efforts to monitor changes and prevent factory closures, and
especially, labor unrest. End summary.

Happy Twentieth, But Hang On For A Bumpy Ride


2. (U) Speech after speech at the Guangdong Toy Association's
twentieth anniversary dinner all cheered the industry's amazing
growth from USD 1.7 billion in 1988 to USD 121.9 billion today, an
increase of 87 times. However, no conversation ended without
expressions of concern over the current economic conditions facing
toy makers and many of south China's other labor-intensive
industries. Members affirmed recent announcements that China's VAT
rebates would be reinstated for many products at the same time that
previously scheduled minimum wage increases would be postponed to
relieve cost pressures on the manufacturing sector. On the other
hand, association leaders and company representatives decried sudden
and unexpected cancellations and postponements of overseas toy
orders and complained about the inability to raise capital from
banks and other sources.

Toy Factory Layoffs Spark Unrest


3. (U) As if another reminder of the challenges the industry faces
were needed, south China newspapers and websites today showed the
results of a riot by 500 laid-off workers and their sympathizers who
overturned a police car and vandalized toy factory offices for Hong
Kong-owned Kader Toys in Dongguan on November 25. Local officials
were quick to announce that the factory had not closed and that any
dispute is between a small number of laid-off employees and the
managers of the model train and plush toys producer. According to
press reports, approximately 80 laid off workers objected that the
size of their severance payments was as much as 50 per cent too low.
The reports estimated that a total of 380 Kader employees had been
laid off this month as the company worked to cuts expenses. In
addition to the 500 reported rioters, as many as 2000 onlookers
reportedly arrived at the scene to observe the situation after word
spread of the disturbance. Officials later announced that the order
had been restored, although the wage dispute was not fully resolved.

Local Officials Increase Market Surveillance


4. (SBU) Since the high-profile failure of Smart Union Toys and
subsequent labor unrest (reftel), local officials throughout the
Pearl River Delta (PRD) have stepped up efforts to monitor factory
conditions and help prevent further closures that might lead to
social instability, according to local toy company executives.
Executives from one toy manufacturer told us a vice mayor and the
local labor bureau director called on their factory within days of
the Smart Union closure to inquire about orders and seek assurances
that the factory would not close unexpectedly or leave unpaid
workers to fend for themselves. The executives found this courtesy
call particularly unusual because the factory in question was a
wholly-owned subsidiary of a major overseas toy maker, had been
among the most stable of all local employers for more than a decade,
and is located in a completely different city from the closed Smart
Union factories. Widespread local and international media coverage
of toy industry woes, especially on the volatile situations that
erupt when unemployed workers demand back wages after unexpected
factory closures, means that increased government scrutiny will
continue for the foreseeable future, according to executives.

Economic Woes - Costs Increase, Orders Decline



5. (SBU) Mike Hou of Innomega Baby Products said Hallmark, one of
his firm's largest clients, recently estimated that expenses for
product safety testing in the next year would increase 30 fold. He
blamed the higher costs on new testing requirements from the United
States and other developed countries and said buyers would initially
absorb the higher fees. Hou said that even if buyers initially paid
for new, more extensive toy testing, in fact his clients' total
orders would likely be reduced to help offset these additional
costs. In the long term, general toy price increases will be
unavoidable, according to Hou, even if oil and other commodity
prices remain low and China's government slows down or suspends some
of its previously announced minimum wage increases and other costly

6. (SBU) New orders are declining in every segment of south China's
toy industry, with many citing the global economic downturn as the
most important cause. When pressed, executives admit that orders
for the current holiday season finished shipping months ago, and new
orders for 2009 appear weak so far. Industry contacts and media
reports indicate that toy orders at the most recent Canton Fair fell
approximately 30 percent, further impacting the struggling toy
factories in coming months. Many believe the true test will come in
February and March of 2009 as factories and workers decide how to
proceed after breaking for Chinese New Year at the end of January.