China's toymakers accept profits of as little as 3 percent to stay competitive. Such low margins, coupled with payment periods of three months or more, mean companies are particularly vulnerable to currency fluctuations, says Lin Songli, an analyst with Guosen Securities in Beijing. The yuan has gained 6.4 percent against the euro and 2.5 percent against the dollar so far this year. "If the yuan rises to 6 to the dollar, we're doomed," says Simon Pan, general manager of Zhejiang Huangyan Hongfan Toys Factory. The company is raising prices by 3 percent to 5 percent to offset the Chinese currency's gains, but further increases would mean losing customers, he said in an interview at his booth, which was filled with educational toys and brain-teasers destined for the U.S.
The pricing pressure could hurt in the U.S. "The prospect of a stronger yuan means American consumers will have to pay more for their Christmas trees and probably everything that is made in China starting 2011," Guosen's Lin said. Agrees Ben Cavender, an analyst at China Market Research Group: "If toymakers are forced to raise prices in order to compensate for a falling U.S. dollar—and to stay in business they will probably have to—it means higher prices for U.S. consumers in the coming holiday season."
China has held the yuan's rise to about 2 percent since a June pledge to introduce more flexibility, sparking criticism that China gives an unfair advantage to its exporters. Premier Wen Jiabao has said a rapid climb for the yuan would cause social and economic turmoil.
Some companies say they've already been pinched by the yuan's gains as clients from the U.S., Europe, and Japan continue to expect cheap prices when buying in China. "Since the government revalued the yuan, we have been declining long-term orders—anything beyond six months—because we might even lose money by then," says Lin Ying, a sales manager at Guangdong-based Shantou Meichang Plastic Factory, which makes plastic blocks and beach toys. "If the yuan keeps rising, life would certainly be even harder for us," she says.
Customers expect the same prices as last year, says Susie Ying, general manager for Shanghai Master Plastic Products. The maker of pools and beach toys had to raise prices 15 percent, even as "most of our customers can only accept a 7 percent to 8 percent rise," Ying says. Her company is focusing on more expensive items because margins tend to be higher. "From the purchase orders we received, high-value toys have taken the lead on demand," says Karson Choi, executive director of Early Light International, a Hong Kong-based toymaker whose clients include Mattel (MAT).
Dalian Ponytoy, which sells rideable toy horses and zebras for $200, wholesale, says it's also hurt by gains in the Chinese currency. "Two months ago the dollar-yuan exchange rate was 6.8, now it's 6.65," says General Manager Tony Nie. "This has a huge impact on us. A few years ago the exchange rate was 8 yuan to the dollar."
Almost 70 percent of exporters project a decrease in orders if the yuan strengthens by an additional 2 percent against the U.S. dollar, according to a survey of 239 Chinese suppliers by Global Sources (GSOL), which matches buyers and sellers of manufactured goods. "Many companies, particularly those in labor-intensive industries [like contract toymaking], are running on paper-thin margins and have no room to absorb currency-exchange losses," says Craig Pepples, Global Sources' chief operating officer. In contrast, Mattel, the world's largest toy company, posted a profit margin of 9.7 percent last year, while No. 2 Hasbro (HAS) had 9.2 percent, according to data compiled by Bloomberg.
Zhejiang Sunny Import & Export, which sells wooden blocks that can be rearranged to resemble vehicles and robots, has tried to hedge against currency losses. It billed in euros, then lost money when the currency dropped against the yuan, says manager Liam Zhu. "We changed back to the U.S. dollar, but now the U.S. dollar is fluctuating and the renminbi [another term for yuan] is still appreciating," says Zhu.
The bottom line: The appreciation of China's currency is squeezing its small toy manufacturers, which already operate on tight profit margins.
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