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Troubled Times for the

Chinese Toy Industry


The history of modern Chinese toy industry dates back to the early 1900s. By the early
1980s, the Chinese toy industry was developed enough to compete in the international
market. By 2006, benefiting from economies of scale and cheap labor, the Chinese toy
industry had come to dominate the global market for toys, accounting for around 75%
of the world's output. However, in 2006-07, the Chinese toy industry faced a series of
product recalls, adversely affecting its global image.
The case discusses the development of Chinese toy industry over the years.
It discusses the problems facing the toy industry in China, with specific emphasis on
the issue of recalls in 2007 and the reason behind the recalls.
The case examines some of the other challenges that the Chinese toy industry faces
such as increasing labor costs, technological inferiority of Chinese toys and the
growing demand for high tech toys, and the Chinese toy manufacturers' lack of brand
power. The case ends with a discussion on the actions taken in response to the series
of recalls and the possible impact of these recalls on the Chinese toy industry.

Troubled Times for the


Chinese Toy Industry
If this flood of dangerous products continues and retailers are forced to pull toy
after toy from their shelves, China will become the Grinch that steals Christmas this
year.1
- Richard J. Durbin, Democrat Senator from Illinois, commenting on the
recalls of Made in China toys, in August 2007
This is the last warning. If there is an unsatisfactory report in October [2007] we
will [impose] the next layer of measures. Among them is a ban on products. 2
- Meglena Kuneva, the EU commissioner responsible for consumer
protection, in response to recalls of Chinese toys
Its quite urgent that we re-construct the Chinese toy industry. Otherwise, we will
not only lose the domestic market, but also the global market in the long term. 3
- Shi Xiaoguang, president of the China Toy Association4, in 2002.

Introduction
On October 4, 2007, the Consumer Product Safety Commission (CPSC) 5 in the US
recalled more than half a million toys made in China as they contained dangerous
levels of lead. The CPSC announced that the recalled toys included Pirates of the
Caribbean, Baby Einstein, and Totally Me! Funky Room Decor Set decorating
kits, imported and sold by Toys R Us Inc. 6, and a variety of wooden toys imported
and sold by KB Toys Inc. 7 A lot of what is being recalled is because it violates the
law, not that there is an imminent health risk, said CPSC spokeswoman Julie Vallese
(Refer Exhibit I for more information on toy recalls in October 2007).
The October 2007 recall was the latest in a series of Chinese toy recalls by toy
companies and retailers in developed countries. Among the reasons given for the
recalls were excessive levels of lead paint, loose magnets that could be swallowed by
children, or other potentially serious problems.

3
4

Louise Story, Toy Makers Brace for a Chill in Sales, www.nytimes.com, August 16,
2007.
Elitsa Vucheva, EU could Ban Unsafe Chinese Products, www.businessweek.com,
September 14, 2007.
Toying with the Future, http://app1.chinadaily.com.cn, 2002.
The China Toy Association is an industry association, with Chinese toy companies as its
members. It has four committees for each toy category wooden toys, plush toys, plastic
and mechanical toys, and prams.
The United States Consumer Product Safety Commission (CPSC) is an independent agency
of the United States federal government. CPSC was created in 1972 through the Consumer
Product Safety Act that was framed to protect the public from unreasonable risks of serious
injury or death from more than 15,000 types of consumer products that come under the
agencys jurisdiction. (Source: www.cpsc.org)
Toys R Us Inc., headquartered in New Jersey, USA, is one of the largest retailers of toys
and baby products in the world. A public limited company between 1978 and 2005, Toys R
Us was acquired by an investment group. As of 2007, it had around 1,500 stores, with 830
stores in the US.
Founded in 1922 by Kaufman brothers, KB Toys Inc. is a large mall-based retailer of toys.
As of 2007, this privately-owned Massachusetts company operated around 600 stores in the
US.

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Troubled Times for the Chinese Toy Industry

Exhibit I
Products Recalled in the US in October 2007
i.

About 35,000 Baby Einstein Discover & Play Color Blocks, distributed by Kids II Inc.
The blocks were sold around the country between June and September.

ii. About 79,000 Pirates of the Caribbean medallion squeeze lights, imported by the
Eveready Battery Co., a brand of Energizer Holdings, Inc. The flashlights were sold
nationwide and online between September 2006 and October 2007.
iii. About 15,000 Totally Me! Funky Room Decor Sets, manufactured by Hong Kong-based
CKI Toys and imported by Toys R Us Inc. The kits were sold at Toys R Us stores
around the country and on the companys website between May and September 2007.
iv. About 10,000 wooden Pull-Along Alphabet & Math Blocks wagons, Pull-Along
Learning Blocks wagons, 10-in-1 Activity Learning Carts and Flip-Flop alphabet
blocks, imported by KB Toys Inc. The toys were sold at KB Toys stores around the
country between August 2005 and September 2007.
v.

About 63,000 green plastic cups shaped like Frankensteins head, imported by Dollar
General Merchandising Inc. The cups were sold at Dollar general stores around the
country in September.

vi. About 192,000 key chains imported by Dollar General Merchandising Inc. The key
chains featured a metal charm engraved with wisdom, truth, believe, love,
hope or dream. They were sold at Dollar general stores around the country between
June 2005 and August 2007.
vii. About 150,000 bookmarks and journals, imported by Antioch Publishing. The products
featured a variety of decorations including Winnie the Pooh. The bookmarks and
journals were sold at book, card, and gift stores around the country between March 2005
and October 2007. Some of the bookmarks were sold with bracelets.

Source: Another Huge Recall of Chinese made Toys, www.cbsnews.com, October


4, 2007.
The recalls had a limited impact on toy sales in the US and the EU but they severely
dented the Chinese toy industrys image in international markets.
The possible long-term impact on its reputation, however, was only one of the many issues
confronting the toy industry in China. With costs of raw materials and labor increasing, the
toy companies were seeing an erosion in margins. Also, the growing popularity of high-tech
electronic toys was a challenge to Chinese toy companies as they were not very strong in this
field. Furthermore, even in the traditional toy markets, Vietnam and Thailand were beginning
to pose a threat.

Background Note
Toys have had a prime place in Chinese society since ancient times. Folk toys made of
wood, clay, and paper have always been very popular with Chinese children. Masks
and clay figurines in the shape of animals have been found in the ruins of ancient
Chinese habitations. The history of modern Chinese toys, however, dates back to the
early 1900s. Around 1910, the first factories that made toys from tin were set up. Toy
making in China started gaining momentum after the May Fourth movement 8 in 1919.
Several toy factories came up in the region around Shanghai. These factories made
clockwork, tin-plate warships, tram toys, simple tin containers, plates, and other
objects. With the demand for tin increasing (for making cans for paints, cosmetics,
8

The May Fourth Movement in China began on May 4, 1919. The movement promoted
Marxism in China and resulted in the birth of the Communist Party of China.

477

International Business
biscuits, and sweets), tin sheet manufacturing units started to be established around
Shanghai in the 1920s and the 1930s. This gave a boost to the local toy industry.
However, in this period, Germany dominated the worlds toy markets with its high
quality tin toys. Though the Chinese tin toys were no match for the German ones as
far as quality was concerned, they scored on the price front. By 1935, Chinese
companies which had earlier been producing tin cans, started making tin-plate toys
including toy planes, wind-up tin monkeys, and other toys.
During the Second World War, war related toys like fighter planes, tanks, and soldiers
constituted a major percentage of toy production in China. The war adversely affected
the German toy industry, with most toy factories there being used for making
ammunition.
In the 1950s, Japanese tin toys started gaining popularity for their novel designs and
good quality. In this period, Japanese toy companies also began producing plastic
toys, which were very inexpensive. In China, toys began to be made with Chinese
designs, as opposed to the western designs being used earlier. According to Marvin
Chan,9 a Hong Kong-born graphic designer,10 Before the 1950s, the toy designs are
very influenced by Europeans, but after, the toys have a more Oriental feel to their
patterns and design.
In the mid-1960s, most Japanese toy companies stopped making tin toys and shifted to
making toys out of plastic and superalloys11. China then became the manufacturing
center for tin toys. Though the tin toys from China were of poor quality initially, the
quality improved over time.
During the Cultural Revolution, 12 toys were used as a propaganda tool in China. Dolls
dressed up in Mao-suits, cars with political slogans, and building block cubes with
propaganda scenes on them were some of the popular toys during this period. 13

The Growth
Chinese toy companies, like other companies in the manufacturing sector, benefited
from the reforms initiated in China in 1979. With the opening up of the Chinese
economy, toy makers from Hong Kong, which by then had become a major global
center for good quality toys, started setting up production facilities in mainland China
in order to take advantage of the lower operational costs. However, most of the valueadded work such as product design, production planning, quality control,
management, and marketing continued to be done from Hong Kong.
Over the years, Chinese entrepreneurs and multinational companies too started setting
up toy factories in China. As several cities of the Guangdong province were allowed
to adopt a more open industrial policy than the cities in the rest of China, most of the
toy factories came up in the Pearl River Delta region of Guangdong Province. The
9

10

11

12

13

Marvin Chan opened the Museum of Shanghai Toys in Singapore. The museum was
dedicated to high quality Shanghai toys made in the period between 1910s and 1970s.
Sonia Kolesnikov-Jessop, A Trip into Chinas Past, through its Toys, www.iht.com,
March 27, 2007.
Superalloys are metallic alloys that exhibit excellent mechanical strength even at high
temperature, and are resistant to oxidation, corrosion, and deformation. Most superalloys are
based on iron, nickel, or cobalt.
The Great Proletarian Cultural Revolution in China was a struggle for power within the
Communist Party of China. The Cultural Revolution started in October 1966 and ended in
October 1976.
Sonia Kolesnikov-Jessop, A Trip into Chinas Past, through its Toys, www.iht.com,
March 27, 2007.

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Troubled Times for the Chinese Toy Industry


special economic zones, especially in Shenzhen, attracted several international toy
makers.
Several of these factories were very large. Scale economies, together with cheap labor,
helped the Chinese toy-making firms to compete with toy producers from other
countries, who were mostly small or medium-sized.
Besides cheap labor, China was able to attract international toy companies also
because of an efficient network of supporting industries such as component industries
and services such as logistics, communication, etc. This helped international toy
makers to strengthen their competitiveness in terms of productivity, reliability, and
delivery.
In 1987, the countrys first toy design institute was set up at Tianjin Science and
Technology University. Around this period, toy makers in China started incorporating
modern technology like battery-operated controls, magnetic controls, and sound and
light controls in their products.
Chinas accession into the World Trade Organization (WTO)14 strengthened the
domestic toy industry, with a sharp rise in exports.
China organized its first international toy exposition in October 2002. Held between
October 8 and 11 in Guangzhou, the capital of Guangdong province, the expo was
hosted by China Toy Association (CTA) in cooperation with its counterparts in Hong
Kong and Taiwan and Spielwarenmesse, a Germany-based toy exhibition company
that hosts the International Toy Fair. 15 Toy producers and dealers form Germany,
Britain, Russia, Spain, Mexico, the Republic of Korea, and other countries attended
the expo.
As of 2006, there were about 7,000 toy factories in and around the cities of Shenzhen,
Dongguan, and Guangzhou (Refer Exhibit II for information on some toy
manufacturing centers in China). In 2006, China exported 22 billion units of toys
worth more than $7.5 billion (Refer Exhibit III for statistics on Chinese toy exports
and imports). According to the China Chamber of Commerce for Import and Export
of Light Industrial Products and Arts-Crafts (CCCLA),16 as of end 2006, Chinese toys
constituted 75% of world toy output. 17

The Problems
Though the Chinese toy industry had several strengths, it was also up against several
problems that had the potential to significantly impact future growth. To start with,
Chinese toy companies were faced with the dual pressures of rising costs and
declining prices. On the one hand, buyers demanded lower prices. There is so much
pressure on prices from foreign companies, said Chen Huangman, Secretary General
14

15

16

17

The World Trade Organization (WTO) is an international organization that deals with rules
for international trade through negotiations among its member governments. It also helps
settle disputes between members based on an agreed legal foundation.
The International Toy Fair, organized annually on a one million sq. m. exhibition space at
Nuremberg, Germany, is the worlds leading fair for toys, and hobby and leisure-time
articles. The fair reportedly attracts around 2,750 exhibitors from 60 countries and 80,000
trade visitors from 120 countries.
The China Chamber of Commerce for Import and Export of Light Industrial Products and
Arts-Crafts (CCCLA) was founded in 1988. It coordinates the trade in light industrial
products and arts-crafts, and provides service for its member enterprises. (Source:
www.cccla.org.cn)
Guangdong is a province on the south coast of China.

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International Business
of the Guangdong Toy Association. Wal-Mart18 in particular, puts a lot of pressure
on prices, and as they order so much from China, it has a large influence, said Li
Zhuoming (Zhuoming), Vice Chairman of the Guangdong Toy Association. 19 And on
the other hand, raw material and labor costs were increasing. Toy factory executives
across the country admitted that they were forced to raise wages, sometimes by double
digit rates, in order to attract and retain young workers.

Exhibit II
Major Toy Manufacturing Centers in China
Yunhe, Zhejiang
Yunhe, a picturesque county in Lishui, a prefecture-level city is a major center for wooden
toys. Around 500 toy factories that manufacture wooden toys have sprung up in the 2000s.
The annual output of the region crosses Yuan 1.5 billion. Yunhe is considered the largest
center for wooden toys in China. The city was given the title Wooden Toy City by the
China Light Industry Association.
Pinghu, Zhejiang
Pinghu, a major city on the Pearl River delta region and one of Chinas largest garment
export hubs, is also a major center for prams. It accounts for around 25% of the prams
manufactured in China. According to 2006 estimates, exports of prams from Pinghu were
valued at $ 4 million. Chenghai, Guangdong
Chenghai district in the city of Shantou is a major toy manufacturing center with more than
2,500 enterprises engaged in the toy business and over 100,000 employed in the industry.
The annual output of toys and gift articles is worth around Yuan 8.8 billion
Yangzhou & Yizheng, Jiangsu
Yangzhou, a prefecture-level city in China, and especially Yizheng city, are famous for their
plush toys (or stuffed toys). There are around 100 large-scale factories in this region, with an
annual output of around Yuan 3 billion.

Compiled from various sources


In addition to rising costs, and demands from foreign clients to keep prices low, there
was increasing pressure on Chinas toy companies from clients in the US and the EU
to meet their high labor standards. Chinese toy factories had long been branded as
sweatshops20 and toy factory owners had been accused of denying workers their legal
rights. Violations allegedly included forced overtime, wage payment below the
minimum standard, failure to provide social insurance, restriction of workers
personal freedoms, etc. However, Chinese toy manufacturers shifted the blame onto
Western retailers and toy companies, saying they were squeezing their margins,
leaving them with little money to improve working conditions. Liu Kaiming,
Executive Director of the Institute of Contemporary Observation (ICO), 21 said, There
are more serious problems in the [Chinese] toy industry than any other sector as the
prices are too low.22 Bama Athreya, Director, International Labor Rights Forum, also
18

19

20

21

22

Wal-Mart Stores, Inc. was founded in 1962. It is the worlds largest retailer and one of the
worlds largest corporations by revenues.
Calum MacLeod, Chinas Toy Industry Feels Growing Pains, www.usatoday.com,
December 21, 2006.
A sweatshop is a shop or factory in which employees work long hours at low wages under
poor conditions.
The Institute of Contemporary Observation (ICO), founded on March 18, 2001, is a civil society
organization dedicated to labor development and corporate social responsibility. (Source: www.icochina.org)
Calum MacLeod, Chinas Toy Industry Feels Growing Pains, www.usatoday.com,
December 21, 2006.

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Troubled Times for the Chinese Toy Industry


shared the same view. In her testimony23 to the Congress, she said, Wal-Mart bears a
lion share of responsibility for pushing the [Chinese] toy industry to a place where
worker health and safety are basically nonexistent.24

Exhibit III
Chinese Toy Import and Export Statistics
Category

2005
Exports ($)

2006
Imports ($)

Exports ($)

Imports ($)

16, 18 or 20
Cross-country
bicycles

275,358,952

8,021

260,999,221

17,122

Bicycles not larger


than
16,
not
elsewhere specified
or included

174,573,263

44,643

214,011,194

64,672

Baby carriages and


parts

565,990,037

9,146,881

663,350,087

9,806,131

19,037,697

541,223

21,731,462

172,980

for

5,791,566

1,292,657

6,958,622

1,277,389

Wheeled
toys
designed to be
ridden by children,
dolls carriages

270,006,643

635,640

355,774,372

943,052

Dolls, whether or
not dressed

318,705,789

11,449,860

389,714,240

13,382,616

Dolls garments and


accessories,
footwear,
and
headgear

66,734,251

9,980,431

72,254,540

3,436,787

Other dolls parts


and accessories

35,376,056

9,778,648

37,706,999

13,195,698

Electric
trains,
including
tracks,
signals, and other
accessories

40,557,441

1,816,729

39,582,741

1,066,407

Reduced-size model
assembly
kits,
working models

38,805,107

3,869,446

45,886,660

3,871,976

Other construction
sets and
constructional toys

5,342,864

180,716

12,243,909

255,553

Musical boxes
Mechanisms
musical boxes

23

24

Bama Athreya was testifying to a Senate panel which was considering passing a law that
would make it illegal to import or sell goods in the US that were made abroad in sweatshops
or by prisoners.
Byron Wolf, Sweatshop Toys? Chinas Goods Finds US Homes, www.abcnews.com, October
25, 2007.

481

International Business
Stuffed
toys
representing
animals or nonhuman creatures

1,570,834,234

6,344,984

1,605,111,623

6,407,679

Other
toys
representing
animals or nonhuman creatures

124,539,699

1,692,589

136,856,016

2,263,466

68,014,801

805,718

75,767,193

704,982

Puzzles

355,525,300

8,133,680

397,326,556

10,541,972

Other toys, put up


in sets or outfits

226,013,097

3,111,896

307,838,064

4,501,503

Other toys and


models,
incorporating a
motor

716,962,733

5,406,644

724,520,854

11,116,661

Other toys

2,724,867,112

51,348,669

2,855,080,436

51,001,271

Video games used


with a television
receiver

3,888,966,084

46,635,371

5,077,008,358

189,892,142

Other video games

2,472,537,295

136,149,393

3,146,348,401

100,254,202

Articles
Christmas

for

1,073,407,609

1,431,126

1,151,238,737

2,592,939

Other festival and


entertainment
articles, including
conjuring tricks

146,917,463

1,814,837

163,916,886

2,729,764

Toy musical
instruments and
apparatus

Source: www.toy-cta.org.
To put things in perspective, the prices of many exported Chinese toys were a fraction
of the prices of similar toys manufactured in developed countries. For example, the
cost of manufacturing a pair of roller-skates in China was 16.8 euros ($21.15) on an
average, compared to 62.3 euros in Japan.25
Also, toy manufacturers claimed that repeated inspections and evaluations of their
factories in China caused lower productivity. Cited often was the case of a toy factory
that was inspected over 50 times in one year.
In 2005, international toy producers such as Mattel 26, Hasbro27, and Leapfrog
Enterprises Inc. (Leapfrog),28 submitting to international pressure, announced that
they would cancel the orders placed with Chinese toy manufacturers unless these
25
26

27

28

April Mei, Playtime is over for Chinas Toy Industry, www.atimes.com, June 21, 2006
Mattel Inc., founded in 1945, is an American toy company. As of 2007, it is the worlds
largest toy company based on revenues.
Hasbro was founded by two brothers Henry and Helal Hassenfeld in 1923 in Providence,
Rhode Island as a company that sold textile remnants. It started selling toys in the 1940s. As
of 2007, it was the second largest toy maker in the world, after Mattel Inc.
LeapFrog Enterprises Inc., founded in 1995, is a toy company based in Emeryville,
California.

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Troubled Times for the Chinese Toy Industry


manufacturers secured the International Council of Toy Industries (ICTI)29 Code of
Business Practices certification by January 1, 2006 (Refer Exhibit IV to know more
about the ICTI code). Alan Hassenfeld, President, CARE Foundation30 at the ICTI,
said What we need to do is to set up unified factory inspection standards before
NGOs make allegations against us.31

Exhibit IV
A Note on the ICTI Code
ICTI released the ICTI Code of Business Practices (ICBP) in 2002. The ICBP is
also called the CARE Process, where CARE stands for caring, awareness,
responsibility, and ethics.
The ICBP bars the use of underage, forced, or prison labor and the denial of a job
on the grounds of gender, ethnic origin, religion, affiliation, or association. Also,
factories have to comply with laws protecting the environment. In all, the code
covers eight aspects: child labor, prison/forced labor, working hours, wages and
compensation, discrimination, working conditions, industrial safety, and EHS
(environment, health, and security).
ICTI delegates the monitoring work to six independent monitoring agencies which
adopt monitoring approaches such as checking local laws, conducting on-site
visit/inspection, interviewing workers, etc. Monitoring involves the inspection of
original documents. Interviews of workers are conducted in a separate room with
no factory representative present, and special efforts are made to protect
confidentiality.
The ICTI certification procedure involves an audit checklist (in the Appendix II
of the Code). A high-ranking official of a factory is required to state whether the
factory has complied with items in the checklist by ticking in the Yes/No box
provided against each item and write how it was implemented in the Comment
box. If the factory has failed to comply with any of the items in the checklist, it
must take measures and then apply to be re-examined, until the certifying agency
approves. After that, it also needs to be inspected by the ICTI Certification
Technical Consulting Committee and confirmed by the ICTI (Asia) Co. Ltd. before
the factory can receive certification. Furthermore, factories need to undergo
evaluation on a yearly basis. Certification will be revoked if factories fail any
evaluation. Toy factories subsidiary factories and subcontracting factories must
also undergo evaluation.
Though only a voluntary code, an increasingly large number of brand name
companies require that their suppliers (of both components and finished goods)
receive the ICTI certification. As per ICTI data, until February 2005, over 150
brand-name companies including Mattel, Hasbro, Leapfrog, Lego, and Toys R
Us, have signed and acknowledged the ICTI certification. These companies
accounted for more than 50% of the global sales of toys.
Source: Liu Songjie, Mainland Toy Companies Facing the ICTI Dilemma,
www.chinalaborwatch.org, February 15, 2006.

29
30

31

ICTI promotes ethical and safe practices in toy factories and looks after the interests of toy
manufacturers in 21 member countries.
The CARE (Caring, Awareness, Responsible, and Ethical) Process is the ICTI program to
promote ethical manufacturing in the form of fair labor treatment, as well as employee
health and safety, in the toy industry supply chain, worldwide. (Source: www.icti-care.org)
Liu Songjie, Mainland Toy Companies Facing the ICTI Dilemma,
www.chinalaborwatch.org, February 15, 2006.

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At the beginning of 2006, the Chinese government in an attempt to improve the
quality of Chinese toys, imposed the China Compulsory Certification (CCC) 32 scheme
on toy makers. Under the scheme, effective from June 1, 2007, only toys that met
CCC standards would be allowed to be exported to foreign markets or sold in the
domestic market.
In April 2006, the Chinese toy industry suffered a blow when a EU report stated that
25% of the problematic imported products recognized by the Unions Rapid Alert
System for Non-Food Products (RAPEX)33 were toy products, and 85% of these were
toys imported from China. 34 The same month, Chinas General Administration of
Quality Supervision, Inspection, and Quarantine and the EUs Health and Consumer
Protection agency signed a draft guide for strengthening the Sino-EU Cooperative
Action for Toy Safety.
In the months preceding June 1, 2006, Childrens Day in China, the Guangdong
quality inspection authority checked toys produced in the province. The authority
found that more than 45 percent of them did not meet state quality and safety
standards.
Despite lingering quality issues, even as late 2006, foreign buyers continued to
express confidence in the Chinese toy industry. Michael Araten (Araten), President of
KNex Industries Inc.,35 said, Theres a comfort level about China now they have
the investment and infrastructure, and meet U.S. and European safety standards.36
Tom Debrowski (Debrowski), Executive Vice President of Mattel, also held the same
view. He said, There are other places in the world where you can get lower labor
costs, but China has a very well-developed infrastructure, well educated engineers,
excellent transport, and a business-friendly government.37

A Spate of Recalls
In mid-December 2006, in what was to be the first in a series of major recalls, the
CPSC in the US issued warnings against Chinese products like BRIO bell rattles,
Lobby Christmas lights, Holiday Time stuffed Christmas beagles, and three other
types of toys. The commission said that as the parts of these products could be easily
separated, there was a choking risk for children. This apart, high lead 38 content,
battery leakage, and inflammable parts were given as other reasons for the warnings.
Several retail outlets in the US too issued warnings, and recalled the China-made toys.
Around this period, the EU too issued safety warnings on a list of 15 made-in-China
32

33

34
35

36

37

38

The CCC is the compulsory Safety and Quality mark for many products sold in the Chinese
market. The CCC Mark became effective on May 1, 2002. It is the result of the recent
integration of Chinas two compulsory inspection systems (one to check contents of
products for import and export, and the other for quality control) into a single procedure.
(Source: www.ccc-mark.com)
RAPEX is the EUs rapid alert system for all dangerous consumer products, with the
exception of food, pharmaceutical, and medical devices. (Source: http://ec.europa.eu)
April Mei, Playtime is Over for Chinas Toy Industry, www.atimes.com, June 21, 2006.
KNex Industries Inc. was founded in 1992. It is a privately held company, with its
headquarters and manufacturing facility located in Hatfield, Pennsylvania, USA. (Source:
www.knex.com)
Calum MacLeod, Chinas Toy Industry Feels Growing Pains, www.usatoday.com,
December 21, 2006.
Calum MacLeod, Chinas Toy Industry Feels Growing Pains, www.usatoday.com,
December 21, 2006.
Lead is a toxic metal that can cause adverse health effects if ingested.

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Troubled Times for the Chinese Toy Industry


toys including indoor Christmas lights, decorative string lights, fruit-shaped erasers,
toy telescopes, toy air guns, and toy rifles. 39
In 2007, the Chinese toy industry faced a series of product recalls and import bans
with importing countries raising numerous consumer safety issues. In fact, the year
recorded a sharp rise in the number of recalls, with some analysts referring to 2007 as
the year of recalls40.
In February 2007, the CPSC and Hasbro recalled about 985,000 China-made EasyBake Ovens41. The stated reason for the recall was that the door of the toy oven could
trap childrens fingers and cause burns. The CPSC said it had received 29 reports of
children getting their hands or fingers caught in the oven door, including five reports
of burns.42
In June 2007, the CPSC and RC2 Corporation43 announced a recall of 1.5 million
Thomas & Friends wooden railway toys manufactured in China. The products were
recalled because the surface paint on these products was found to contain lead. Under
US regulations, childrens products containing more than .06% of lead 44 were subject
to recalls.45
In July 2007, the CPSC and Hasbro again recalled China-made Easy-Bake Ovens
(about 1 million) citing the same reason as they had in February 2007.46 The CPSC
said that it had received 249 fresh reports of children getting their hands or fingers
caught in the ovens opening and getting burnt. Out of the 77 reported cases of burns,
16 cases were reported as second and third-degree burns. It said it had also received
one report of a five-year-old girl suffering a serious burn that required amputating her
fingers.
In August 2007, Mattel recalled China-manufactured toys twice as the paint used on them
contained more than the permissible levels of lead. The first recall of almost one million
toys was on August 1, 2007, and the second on August 14, 2007. Nancy A. Nord, Acting
Chairwoman, CPSC, said, These recalled toys have accessible lead in the paint, and
parents should not hesitate in taking them away from children.47 Mattel also recalled
magnetic toys manufactured in China as they had small but powerful magnets that could
come loose and be swallowed by children. On September 4, 2007, Mattel again recalled
844,000 toys that contained excessive levels of lead paint.
The successive recalls seemed to have seriously eroded the confidence of US companies
in China-based manufacturers. Soon after the August recalls, Jim Walter, Senior Vice
President for worldwide quality assurance, Mattel, reportedly visited Mattels contract
39
40

41

42
43
44

45

46

47

Rough Play for Guangdongs Toy Exports, www.tdctrade.com, March 27, 2007.
The recalls of 2007 on consumer goods manufactured in China also included pet food,
toothpaste, lipstick, and certain types of seafood.
Easy-Bake Ovens were launched by Kenner Products (later purchased by Hasbro) in 1963,
allowing little girls to bake treats by themselves.
Nearly 1 Million Hasbro Toy Ovens Recalled, www.money.cnn.com, February 6, 2007.
RC2 Corporation is a US-based designer, producer and marketer of toys and infant products.
The US Consumer Product Safety Commission had banned paint containing more than
0.06% (600 ppm) lead for residential use in the United States in 1978. The US Government
defines lead-based paint as any paint, surface coating that contains lead equal to or
exceeding one milligram per square centimeter or 0.5% by weight.
RC2 Corp. Recalls Various Thomas & Friends Wooden Railway Toys Due to Lead
Poisoning Hazard, www.cpsc.gov, June 13, 2007.
New Easy-Bake Oven Recall Following Partial Finger Amputation; Consumers Urged to
Return Toy Ovens, www.cpsc.gov, July 19, 2007.
Lead Paint Prompts Mattel to Recall 967,000 Toys, www.nytimes.com, August 2, 2007.

485

International Business
manufacturers in China to reemphasize the companys standards. He later described in
an interview what he had conveyed to Mattels contract manufacturers The message
was very clear. If you cannot do these things [meeting the quality standards], please let
us know. No problem, but you wont be doing business with us.48
Although recalls of made in China toys were not a new development (Refer Exhibit
V for recalls of China-made toys between 1988 and 2007 and the reasons), the fact
that the year witnessed the recall of other made in China items such as pet food,
toothpaste, etc. attracted more attention from the world press, thus denting the
international image of Chinese manufacturing in general and toys in particular.
Chinese officials, however, maintained that the majority of its toy exports were safe
and of high quality. Some international toy industry officials came out in support of
the Chinese toy industry, arguing that made in China toys were largely safe and that
the issue was being blown up out of all proportion. There is something like 30,000
different toy products on sale at any one time. How many items have been recalled
lately? Anyone can have something go awry. Its difficult to stay on top of
everything, said Ian J. Anderson, the Asia Pacific director at SGS, a consumer testing
company that worked with Mattel and other toy makers in China. 49

Exhibit V

Toy Recalls between 1988 and 2007

48

49

Year

Total Number
of recalls

Recalls of toys made


in China

Percent of recalled toys


that were made in
China

1988

29

1989

52

1990

31

14

45

1991

31

26

1992

25

13

52

1993

20

40

1994

29

16

55

1995

35

19

54

1996

26

13

50

1997

22

41

1998

29

12

41

1999

20

20

2000

31

15

48

2001

23

12

52

2002

25

11

44

David Barboza and Louise Story, Mattel Issues New Recall of Toys Made in China,
www.nytimes.com, August 14, 2007.
David Barboza and Louise Story, Mattel Issues New Recall of Toys Made in China,
www.nytimes.com, August 14, 2007.

486

Troubled Times for the Chinese Toy Industry


2003

15

10

67

2004

15

13

87

2005

19

16

84

2006

33

26

79

2007

40

38

95

Toy Recalls by Type of Flaws between 1988 and 2007


Year

Total number of recalls

Recalls due to
Design Flaws

Recalls due to
Mfg. Flaws

1988

29

25

1989

52

42

1990

31

25

1991

31

29

1992

25

16

1993

20

15

1994

29

21

1995

35

32

1996

26

15

1997

22

17

1998

29

23

1999

20

15

2000

31

25

2001

23

15

2002

25

20

2003

15

14

2004

15

2005

19

14

2006

33

23

2007

40

26

10

Source: Hari Bapuji and Paul W. Beamish, Toy Recalls - Is China Really the
Problem? www.asiapacific.ca, September, 2007.
In what could be seen as a positive development for the Chinese toy industry, on
September 21, 2007, the Mattel management apologized to Chinese officials, toy
manufacturers and the country as a whole for the loss of image and said that the
company would take the blame. Debrowski said that the majority of these toys had
been recalled because of loose magnets (around 17.4 million units), which were the
result of design flaws. He apologized personally to Li Changjiang, Director of the
State Administration of Quality Supervision, Inspection and Quarantine, China.
487

International Business
Debrowski said, Mattel takes full responsibility for those recalls [of magnetic toys]
and I would like to apologize personally to you, the Chinese people, and all of the
customers who received toys that have been manufactured.50 Mattels press release
stated, Mattel does not require Chinese manufacturers to be responsible for the
magnets-related recalls due to design problems. The magnet-related recalls do not
involve lead paint or manufacturing failures by Mattel or its vendors, including
vendors in China.51 However, regarding the lead related recalls, Mattel stated they
were the result of a minority of manufacturers [in China] not following the companys
guidelines; though even in the case of lead-related recalls, the company said that they
were overly inclusive.52 Mattels follow-up inspections also seem to have confirmed
that some of the recalled toys complied with US standards.
However, after repeated recalls of China-made toys, more consumers in the US were
reportedly looking for alternatives to Chinese toys. Sales of US-made toys apparently
increased and US-based manufacturers found it difficult to meet the sudden increase
in demand. Some of them were forced to hire more people and lease more warehouses
to stock their produce. Every time thered be a new recall this summer, wed get a
huge new order, said Deborah Evanoff, owner of Arrowcopter Inc., a private toy
manufacturing company based in the US. 53 Earlier US producers had been unable to
compete against low-cost Chinese toys, but now they were able to successfully lure
customers using made in USA labels. Some of these manufacturers brought photos
of their manufacturing facilities to toy fairs, and placed advertisements in industry
publications to drive home the point that their quality standards were much higher
than those of Chinese manufacturers.
According to some analysts, the increase in the demand for US-made toys was
unlikely to last. They were of the view that claims by US-based toy manufacturers of
superior quality were not entirely true as the quality of US-made toys varied from
factory to factory and some Chinese toys were of higher quality and yet cheaper.
In 2007, the EU, the second largest export market for the Chinese toy industry,
introduced new environmental safety rules including those that banned the sale of toys
containing over 1% of phthalate54 and five other chemicals. As phthalates were widely
used in the manufacture of plastic toys in China, the new rules were expected to
significantly impact the Chinese toy industry.

Other Issues
Meanwhile, the Chinese toy industry was facing problems on the home front as well. With
labor costs in China increasing rapidly, the industry was beginning to lose competitiveness
in the export market. A survey by the Guangdong Toy Association indicated that Vietnam
and Eastern Europe with their low prices posed a threat to Chinese toy exports. Bryan
Ellis, Chairman of the Toy Industries of Europe, also held the same view. He said,
Production is going to develop elsewhere, in Thailand, Indonesia, India, and Eastern
50

51
52

53

54

Mattel Apologizes to China, Pledging to Take Responsibility for Defective Toys,


http://news.xinhuanet.com, September 21, 2007.
Media Statement September 21, 2007, www.shareholder.com.
Mattel Apologizes to China, Pledging to Take Responsibility for Defective Toys,
http://news.xinhuanet.com, September 21, 2007.
Rachel Konrad, Chinese Toy Recalls Benefit U.S. Firms, www.courierpostonline.com, October
15, 2007.
Phthalates or phthalate esters are a group of chemical compounds that are mainly used as
additives to plastics to increase their flexibility. Some researchers believe that phthalates
pose no health risks while others believe that significant exposure to some kinds of
phthalates cause allergies, asthma, cancer, etc.

488

Troubled Times for the Chinese Toy Industry


Europe.55 The appreciation of the yuan56 against the dollar, though gradual, was further
reducing the already thin margins of Chinese toy manufacturers.
In an attempt to cut costs, some toy companies shifted operations to lower-cost areas
within China. The [stringent labor] standards and rising labor costs are forcing an
exodus of downstream manufacturing out of Shenzhen57 to second border locations
and even the hinterland of China said Apo Leung, Director of the Asia Monitor
Resource Center (AMRC)58 in Hong Kong.59 The Chinese Ministry of Commerce
further predicted that the toy industry would restructure, with larger and more
organized companies eventually acquiring smaller and sub-standard factories.
A major challenge for the Chinese toy industry, despite its dominance in the global
market, was that it lacked brand power. The Chinese companies acted merely as
original equipment manufacturers (OEMs) who manufactured products for foreign
companies. These products were then sold under foreign brands. In addition, Chinese
toy factories were weak in market knowledge and product promotion. Apart from
marketing, design was another weak area. There was moreover a severe shortage of
international quality designers. China needs lots of talented toy designers to turn
itself from a big toy maker into a powerful one, 60 said Liang Mei, secretary-general
of the China Toy Association. Though China had established some design institutes,
the demand for designers often outstripped supply. I really dont know how to
distribute this small number of graduates for such a big demand, said Jin Guifang,
director of the design institute at Tianjin Science and Technology University.
Another challenge was technology. Though many China-made traditional toy products
such as stuffed toys and dolls had taken a substantial share of markets in the EU as
well as in the US, Chinese toymakers were unable take advantage of the growing
demand for high-tech toys including electronic games and educational toys (Refer
Exhibit VI for trends in the toy industry). This was because the business model of a
large majority of China-based toy companies was one of cheap labor and a low level
of technology. Most toy factories are small or middle-sized, with limited staff and
budgets for toy innovation. Besides, developing new products requires a large
investment and long-term payback, said Mei Meng, general manager of the Nantong
Eurofield Arts Toy Company. Among toys China exported to the EU in 2006, more
than 80% were traditional toys; high-tech toys were less than 5%.
By competing on price, the Chinese toy industry also faced the danger of losing orders
to other emerging manufacturing hubs. However, the authorities were aware of the
downside to following a processing model. Shi Xiaoguang, president of the China
Toy Association, said, The toy processing model is highly risky for the Chinese toy
industry. About 60 to 70 per cent of exported toys are produced in Guangdong
Province (in South China). If they lose overseas orders, they could lose their whole
market.61
55

56
57
58

59

60

61

Chinas Lockhold on Global Toy Industry Set to Ease, www.taipeitimes.com, February


12, 2006.
As on October 26, 2007, US$ 1 was equal to 7.4976 yuan.
Shenzhen is a city in the Guangdong province in southern China.
The Asia Monitor Resource Center (AMRC) was founded in 1976. It is an independent nongovernment organization which focuses on Asian labor concerns. (Source:
www.amrc.org.hk)
Calum MacLeod, Chinas Toy Industry Feels Growing Pains, www.usatoday.com,
December 21, 2006.
Barbie Doll Poses a Challenge to Mammoth Chinese Toy Industry,
http://english.peopledaily.com.cn, January 06, 2003.
Toying with the Future, http://app1.chinadaily.com.cn, 2002.

489

International Business

Exhibit VI
Trends in the Toy Industry as of 2007
Continued popularity of smart toys: Toys with electronics and new technology
integrated into them continue to see increased demand. Some companies have
recreated their very successful toys with new electronic features. For example,
wooden trains by BRIO are now equipped with modern infrared remote control and
electronic sounds. Some newly introduced dolls and toy robots communicate
interactively with other toys in the same product line, such as Hasbros Furreal
Friends.
Sustained interest in licensing: Licensed products continue to be successful in the
market. In the case of video games, companies are now constantly inventing new
characters even as sales of games featuring licensed characters remain satisfactory.
Strong and clear focus on educational, creative, and developmental toys: With
more parents looking at toys as aids to develop their childs listening, creative, and
inter-personal skills, the market for educational toys is growing in size. Hasbro has
launched a product called T.J. Bearytales, an animated bear that encourages
children to read with it. Another company Toy Quest has video books, which
encourage families to learn together through reading and sharing stories.
Trend of shorter product life cycles and a wider variety of novelty designs:
The product life cycle of toys has shortened over the past decade. In order to
achieve higher sales for products in their maturity phase, companies are using
fancy designs and gimmicks. Even for classic toys such as LEGO construction sets
and Barbie dolls, new features are regularly being added or improved to spur new
sales.
Wide interest in multi-media and web-compatible toys: The rising popularity of
the Internet is making companies assimilate real and virtual toys together. New
toys that are capable of linking with the Internet are being introduced. For example,
Bandai, a large Japan-based toy maker, has introduced toy robots that allow buyers
to play games with animated versions of their robots over the Internet.
Youth electronics: Youth electronic toys are kid-size versions of adult products.
As most parents are not very keen on buying their younger children expensive
electronic products, the popularity of youth electronic toys is growing. Kid-sized
and affordably priced MP3 players and digital cameras are some examples of youth
electronics.
Sports-like toys: As concerns about health and child obesity rise, sales of sportslike toys such as aquatic toys and equipment, are growing.
Growing demand for collectibles: Collectors articles have a loyal clientele even
among adults, particularly in the US, Germany, and Japan. The most popular
collectibles are soft toys and dolls, model railways, and parlor games. In response
to the growing demand, more and more companies are introducing two lines for the
same product, one for kids and the other for collectors. For example, besides its
childrens line, Mattel sells collectors lines of Barbie dolls, Matchbox die-cast
cars, and the Hot Wheels racing system.
Adapted from Profiles of Major Hong Kong Manufacturing Industries,
www.tdctrade.com.
490

Troubled Times for the Chinese Toy Industry

Outlook
In an attempt to improve the quality of toys, the Chinese government sponsored a twoday training session on October 11 and 12, 2007, on quality control for more than
1,000 people from the Chinese toy industry. At these sessions, Chinese government
officials and executives from multinational companies lectured on European and US
quality and safety standards, Chinas toy licensing system, toy certificate systems,
export test regulations, etc. Participants were also taught how to deal with high lead
levels or design flaws in their products. Officials from the Ministry of Commerce
advised toy companies to specify their obligations with respect to quality in the
contracts so that they could protect themselves from potential losses. 62 According to
Liang Mei, Secretary General of the China Toy Association63, the recalls presented
both a challenge and an opportunity for the Chinese toy industry. 64
In late October 2007, the provincial government of Guangdong announced that it had
suspended or revoked the export licenses of 764 toy factories because of various
quality problems. Another 690 toy factories were ordered to renovate their plants and
improve product quality. According to sources, the provincial government had, by late
October 2007, finished inspecting 85 percent of Guangdongs toy factories and
expected to complete the process soon.
Though the majority view within China was that the toy recalls, especially those of toys
containing high levels of lead, were due to lapses on the part of Chinese toy makers, there
were some who believed that the recalls were part of a conspiracy to sully the image of
Chinas toy industry. Chinas product safety chief, Li Changjiang, was of the view that
some importing countries had orchestrated the recalls so as to protect their domestic toy
industries and slow down Chinas toy exports.
On customer response to Chinese toys post-recalls, Ron Boire, president of Toys R
Us Inc.s North American division, said, Consumers are still confused. However, he
added that he did not see a sea change.65 Chris Byrne, a New York-based toy
consultant,66 talking about toy sales in the Christmas season, said, Its a blip. In the
fourth quarter, a lot of purchases are made based on supplications to the North Pole
and the phrase country of origin isnt in the vocabulary of children writing to Santa.
In late 2007, a weak dollar and US economy that appeared to be slipping into
recession seemed to have impacted exports from China, especially of toys and tiles.
The dollar has depreciated so much that American goods are more competitive. On
the other hand, the import decline tells you about what retailers are thinking about the
holiday shopping season. Theyve cut back orders, said Sung Won Sohn, chief
executive of Hanmi Bank in Los Angeles. 67 In an attempt to encourage toy sales, WalMart, USs largest retailer of toys, slashed prices by 10 percent to 50 percent in
October, several weeks ahead of the usual shopping season. However, analysts feared
that sales in the all-important Christmas season would be disappointing.
62

63

64

65

66

67

China Gives Toy Industry Crash Course in Quality, www.chinapost.com, tw, October 15,
2007.
The China Toy Association, founded in 1986, is an industry organization with more than
1,000 members. It acts as an interface between the toy industry and the Chinese
government. (Source: http://www.shanghai-toy-expo.com)
Tim Johnson, Chinese Toy Factories Retool after Recalls, www.mcclatchydc.com,
October 23, 2007.
Anne Dinnocenzio, Despite Recalls, Chinese Toys Still Sell, www.theledger.com,
October 2, 2007.
Rachel Konrad, Chinese Toy Recalls Benefit U.S. Firms, www.courierpostonline.com, October
15, 2007.
Cargo Decline Portends Consumer Weakness,
http://globaleconomicanalysis.blogspot.com, October 10, 2007.

491

International Business
Meanwhile, the price of crude oil crossed an all-time high of $93 a barrel. This was
expected to increase the cost of plastics, of which the majority of toys were made,
creating further problems for Chinese toy makers.
Despite the problems, some toy industry experts were of the view that the 2007 recalls
would not affect future demand for Chinese toys. Next year at this time when an
awesome new battery-operated toy comes out and its made in China
will people
say no way? It just depends on the mood of the consumer, said Mary Jo Meister,
sales manager for Lauri Toys Inc., a US-based toy manufacturing company. While it
was anyones guess whether Chinese toy exports would contract or not, China-based
toy makers were increasingly hopeful of the booming domestic market. In 2006, Toys
R Us opened its first store in China signaling the huge potential of the domestic toy
market in China. Frank Clarke of Strategy XXI Ltd., 68 the communications agency of
Toy Industry Association Inc. (TIA)69 in New York, said. All our members are
looking at China as a retail opportunity, not just an export base. In the U.S., there are
50 million children in the 0-8 age group. China has 300 million in that age group. 70
According to some estimates, Chinas toy market would grow 40 percent annually in
the next few years to be worth $12.5 billion by 2010.

68

69

70

Strategy XXI Ltd. is a member of the Kreab Group, a communications consultancy. Strategy
XXI solves public relations and public affairs problems for corporations, governments, trade
associations, and non-governmental organizations. (Source: www.strategy-xxi.com)
Toy Industry Association Inc. (TIA) is a non-profit trade association for producers and
importers of toys and youth entertainment products sold in North America. (Source:
www.toyassociation.org)
Calum MacLeod, Chinas Toy Industry Feels Growing Pains, www.usatoday.com,
December 21, 2006.

492

Troubled Times for the Chinese Toy Industry

References and Suggested Readings:


1.

Tim Johnson, Chinese Toy Factories Retool after Recalls, www.mcclatchydc.com,


October 23, 2007.

2.

Rachel
Konrad,
Chinese
Toy
Recalls
www.courierpostonline.com, October 15, 2007.

3.

China Gives Toy Industry Crash Course in Quality, www.chinapost.com.tw, October 15,
2007.

4.

Anne Dinnocenzio, Despite Recalls, Chinese Toys Still Sell, www.theledger.com,


October 2, 2007.

5.

Media Statement-September 21, 2007, www.shareholder.com.

6.

Mattel Apologizes to China, Pledging to Take Responsibility for Defective Toys,


http://news.xinhuanet.com, September 21, 2007.

7.

Kelly Marshall and Rob Kelley, Mattel Announces Third Toy Recall, www.money.
cnn.com, September 5, 2007.

8.

Hari Bapuji and Paul W. Beamish, Toy Recalls


www.asiapacific.ca, September, 2007.

9.

Consumers: Mattel Expands Recall of Chinese Toys, http://europa.eu. August 16,


2007.

10.

Anne DInnocenzio, Toy Industry Challenged by Disposal Plan, www.boston.com,


August 15, 2007.

11.

David Barboza and Louise Story, Mattel Issues New Recall of Toys Made in China,
www.nytimes.com, August 14, 2007.

12.

Mattel Issues New Massive China Toy Recall, www.msnbc.msn.com, August 14,
2007

13.

Lead Paint Prompts Mattel to Recall 967,000 Toys, www.nytimes.com, August2,


2007.

14.

New Easy-Bake Oven Recall Following Partial Finger Amputation; Consumers Urged
to Return Toy Ovens, www.cpsc.gov, July 19, 2007.

15.

RC2 Corp. Recalls Various Thomas & Friends Wooden Railway Toys due to Lead
Poisoning Hazard, www.cpsc.gov, June 13, 2007.

16.

Rough Play for Guangdongs Toy Exports, www.tdctrade.com, March 27, 2007.

17.

Sonia Kolesnikov-Jessop, A Trip into Chinas Past, through its Toys, www.iht.com,
March 27, 2007.

18.

Nearly 1 Million Hasbro Toy Ovens Recalled, www.money.cnn.com, February 6,


2007.

19.

Calum MacLeod, China's Toy Industry Feels Growing Pains, www.usatoday.com,


December 21, 2006.

20.

April Mei, Playtime is over for Chinas Toy Industry, www.atimes.com, June 21,
2006.

21.

Toy Industry Gets Improved Regulation, http://english.peopledaily.com.cn, April 1,


2006.

22.

Liu Songjie, Mainland Toy Companies


www.chinalaborwatch. org, February 15, 2006.

23.

Chinas Lockhold on Global Toy Industry Set to ease, www.taipeitimes.com, February 12,
2006.

Benefit

U.S.

Firms,

Is China Really the Problem?

Facing

the

ICTI

Dilemma,

493

International Business
24.

Tin Toys Tradition Lives On, www.tinmantintoys.com.

25.

Conquering Chinas Consumer Market Example: Toy Industry, www.fiduciachina.com.

26.

Keith Bradsher, Wages Up in China as Young Workers Grow Scarce,


www.nytimes.com, August 29, 2007.

27.

www.toyassociation.org.

28.

www.strategy-xxi.com.

29.

www.chinalaborwatch.org.

30.

www.amrc.org.hk.

31.

www.cpsc.org.

32.

www.icti-care.org.

33.

http://ec.europa.eu.

34.

www.ccc-mark.com.

494