By staff reporter Fu Yanyan

Distress is mounting among China’s toymakers, as slumping exports and rising costs have pushed companies to the brink of bankruptcy – or out of business altogether.

Failures of major toymakers including Smart Union Group have stirred panic among toymakers in south China’s export-heavy Guangdong Province.

Media reports quoted the Toy Industry Association in the province’s export hub Dongguan as predicting large-scale shutdowns over the next two years, on top of the more than 3,600 toy exporters that China Customs said closed in the past year.

One industry insider said one-third of China’s remaining toymakers could face bankruptcy unless conditions improve.

A major blow came October 16, when Hong Kong-listed Smart Union Group (HKSE: 02700), a supplier to U.S. toy brands Mattel and Disney, filed for liquidation in a Hong Kong court. The company also closed its Dongguan factories, leaving up to 7,000 jobless.

Chinese media reported a few days later that toymaker Zhongshan Sewco Toys and Novelty Ltd., a subsidiary of Sewco International Holdings Ltd. (HKSE: 00209), had trimmed two-thirds of its staff and was lobbying for government support. Bankruptcy fears had simmered ever since Sewco posted a HK$ 31.04 million loss for the first half of this year.

Speaking with Caijing, the toy association denied a report that it had forecast more than 1,800 toymaker closures over the next two years. But an association staff member, who asked not to be named,   said many toymakers have started cutting production and retrenching workforces due to mounting pressure. Meanwhile, some longtime exporters have switched to the domestic market.

Profit margins for toy manufacturers have been squeezed by rising production costs and increasingly fierce competition in the past two years. Statistics show production cost for toymakers since 2007 have increased around 60 percent, even though revenues from international orders have remained unchanged.

Higher export barriers for the U.S. and European markets, as well as rising labor costs, also crimped Chinese toymakers this year.

Smart Union last year reported HK$ 953 million in revenue but only HK$ 5.4 million in profit, compared with annual profits of around HK$ 20 million in previous years.

In a bid to help toy exporters, the Chinese government October 21 said it would increase export rebates for various products including toys and textile goods.

But an analyst in Dongguan told Caijing that declining overseas demand, fueled by the U.S. financial crisis, would affect Chinese exports for awhile. In the long term, however, China’s manufacturing sector is expected to remain internationally competitive.

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