The supply chain is an ever-changing beast that always needs a significant investment of time and resources in order to keep operating smoothly. And manufacturers are navigating particularly rough seas right now as they grapple with everything from potential tariffs, new legislations and sustainability bills, to rising inflation costs and geopolitical conflicts. But toy sourcing’s next evolution is already upon us, and it doesn’t care about any of that.

Where’s the weakest link?

One of the most prevalent issues manufacturers are facing right now is pressure from retailers and partners to reevaluate how they use their network in China and/or to look at moving their supply chains to other countries. Tech giant Apple accelerated this trend in June 2022 by investing more than US$300 million into building new factories in Vietnam, and competitors Samsung and LG quickly followed suit by ramping up operations in India.

This shift began to affect the toy industry as early as 2020, when then-President Donald Trump implemented tariffs on categories that hit toycos hard, says Steve Reece, CEO of UK-based toy consulting firm Kids Brand Insight. “My phone wouldn’t stop ringing when container shipping prices went up, and clients continued to call afterward in search of new manufacturing sources, which just increased the risk perception of the territory exponentially.”

According to a member survey published in 2022 by the US-China Business Council, the greatest risk to business relations between the two countries over the past four years has been China’s stringent COVID-19 policies, which are still in effect and can quickly halt production for weeks at a time. The 117 companies surveyed also noted an unpredictable trade environment, new data security and privacy laws, and next to no progress made on improving IP protection as ongoing challenges to overcome.

Reece’s company introduces toy and gaming manufacturers to best-in-class factories and product development partners in different countries. To date, more than 4,700 toycos have used his services and connected network of factories, and each one has saved upwards of US$4 million in annual manufacturing costs as a result.

Reece notes that while tariffs and geopolitical tensions are some of the elements at play affecting China’s position in the toy business, the driving factor is actually its evolved economy.

“It’s not like China is suddenly terrible at making toys—it’s still by far the most efficient hub,” says Reece. But he is seeing that costs are starting to spiral out of control for toycos trying to keep the books in check.

Amid rising freight and labor costs, China’s toy industry is dealing with a lack of automation. Unlike car factories that can use robots and software to produce vehicles quickly, toys require a line of human workers to handle each step of the molding-to-tooling process because more than three-quarters of the SKUs that are manufactured each year feature completely new designs.

According to Reece, China will still shoulder the bulk of toy production work for the next 10 years because it’s equipped with more than 15,000 factories. But he expects its role to change over time as it becomes a hub for sourcing specifc components (transistors, plastics, springs) and electronics.

Chain reaction

Reece tells his clients that toy manufacturing needs to move away from a single-hub approach towards a diversifed ecosystem of multiple factories and channels. This helps companies avoid falling into any potential pitfalls if one link in the supply chain breaks.

Toy industry titans including Hasbro and Ravensburger have already adopted a multihub sourcing model in recent years. “As we produce toys and games for our fans around the world, Hasbro relies on a global supply network in a diverse set of countries,” says Shane Azzi, the toyco’s chief global supply chain officer.

In 2012, nearly 90% of Hasbro’s total toy production came out of China. This volume had decreased to 50% by the end of 2020 (in the wake of trade disputes that started in 2019), and it’s expected to drop further to about one-third by the end of this year.

According to the toyco’s third-party factories list for 2022, it was working with 26 factories in China, 11 in India, 10 in Vietnam and eight across the US.

A similar story is playing out at puzzle and board game manufacturer Ravensburger, which had to rebuild its supply channels in response to issues related to the pandemic. The German toyco has since diversifed its production across China, Germany, the Czech Republic and North America. One added benefit of adding new supply chain links is that it now has fulfillment hubs conveniently placed near its largest clients, says Stephane Madi, CEO of Ravensburger North America.

Ravensburger is tapping factories across North America, Germany, Asia Pacific and the Czech Republic to improve the worldwide distribution of its board games and puzzles

According to Madi, “2020 was a train crash for everyone’s supply chains. I think what the industry learned during those years is that you need diversification, but you also need to maintain your standards. In 2023, many companies found themselves dealing with incredibly high amounts of inefficiency because they spread out too quickly. I think most are really in the middle right now, trying to figure out what their healthy balance is.”

In the case of Mattel, that balance manifested in the toyco closing two of its factories in China and one in Canada in 2022. While consolidating parts of its supply chain, Mattel simultaneously refocused its efforts on making Mexico its largest production hub by investing more than US$47 million to expand its Nuevo Leon facility. The now-complete expansion doubled the plant’s workforce to 3,500 workers who are handling production for Barbie, MEGA Bloks, Power Wheels and Fisher-Price products.

The investment to move its supply chain closer to home not only increased Mattel’s manufacturing capacity and productivity in the Americas, but its new 200,000-square-meter “super-plant” is also located within reach of its second-largest distribution center in Texas. This facility exports toys to more than 30 countries worldwide and keeps stateside shipping costs significantly lower, including to key accounts like Walmart and Target.

New delivery in New Delhi

When he’s evaluating alternative markets for production, Reece looks at three key factors: export toy value, workforce population and the number of toy factories a country has at the export level.

Drawing on internal research from Kids Brand Insight, industry top dog China exports US$33.5 billion in toys annually, operating out of 10,000 factories with a workforce of 784 million people. By comparison, runner-up region Vietnam only exports US$2.92 billion in toys from just over 160 factories with a workforce of 56 million.

Despite Vietnam now having a larger position in toy exports than it’s had in the past, Reece is betting on India as the next big toy hub since it has 521 million workers already in the toy-making business. “The only place that has the chance to rival China’s capacity is India; because it has a large population of 1.4 billion people, it has an abundant local labor force ready in place,” he says. “This gives India a key advantage over other neighboring countries in the market. It’s the only one in the world with the eventual capacity and ambition to handle all parts of the supply chain, including building and sourcing components.”

This is most evident in India’s bustling car manufacturing sector, which produces more than 25 million vehicles a year. With most of the components made from plastic, Reece says these facilities are armed with the same tools necessary for mass-scale toy production, including injection, blow and roto molding techniques. The factories are just waiting on that new contract for the next big figure or doll range to hit the table.

This story originally appeared in Kidscreen‘s February/March 2024 magazine issue.