Lego Builds China Toybox 乐高在华建厂
China has long been a favorite production base for toy makers like global leader Mattel (NYSE: MAT), which typically use the country to make products like Barbie dolls that they then export to their main western markets. But those same toy makers have traditionally ignored China as a market for their products, mostly because an older generation of Chinese parents saw no reason to pay a premium for such relatively expensive toys for their children.
But that reality is slowly changing as a younger generation grows up and doesn’t mind spending more money for quality toys bearing bigger, recognized brands names. That shifting situation has led a growing number of major global brands to enter the market, with Danish giant Lego becoming the latest with word that it plans to build its first Asia factory in China to support the rapidly growing market. (English article)Lego, a maker of building block-style toys and the world’s third largest toy company, said it would invest hundreds of millions of euros in the plant, which would employ about 2,000 people in the city of Jiaxing near Shanghai. The company said it expects the new plant to begin full-scale production around 2017, and that it will eventually supply 70-80 percent of its products for the Asia market, where sales have been growing about 50 percent annually in recent years.
Lego’s announcement follows a similar one from Hasbro (NYSE: HAS), a leading US toymaker, which said in October it would form a joint venture with local partner Alpha Animation (Shenzhen: 002292) to develop toys for the China market. (previous post) I previously said that joint venture could have a good chance of success, since it was developing toys based on both Alpha’s and Hasbro’s brands, potentially including Hasbro’s popular Transformers toys. The venture also looked well positioned to develop TV shows and movies based on its toys, drawing on Alpha’s connections in the animation industry.
Hasbro and now Lego would follow in the footsteps of Disney (NYSE: DIS), the world’s biggest animation company, which enjoys strong sales in China for toys based on its well-recognized characters like Mickey Mouse and Donald Duck. But the road to the China toy shop isn’t always smooth, as Mattel found out several years ago with the disappointing performance of its massive House of Barbie store in Shanghai.
Mattel ultimately shuttered the store in early 2011 after discovering that China wasn’t quite ready for such a high-end toy experience. Another retail venture featuring toys based on characters from film studio Warner Bros (NYSE: TWX) also did poorly and ended up closing several years ago.
The lesson in this is that Chinese consumers may be ready to pay more money for better quality, famous-brand toys, but perhaps they’re not quite ready to pay a huge premium like the ones typically charged in branded stores like House of Barbie. I do think both the Hasbro and Lego ventures look well conceived as they’re both focused on toy design and manufacturing rather than actual retailing, and can sell their products through a huge array of stores throughout the country. If Chinese consumers are willing to pay a little more for these branded products, which seems likely, look for both Hasbro and Lego to enjoy strong success in the market, with other global toy brands likely to follow in their footsteps in the next couple of years.
Bottom line: Lego’s plans to build a massive new China factory looks like a smart move, tapping a growing willingness among Chinese consumers to pay a premium for big-brand toys.
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