Toy Production in China Ravensburger

Abstract

This report addresses the concerns Ravensburger management may have in investing in China. We will explain the advantages China has over Hungary and Malta. (advantages from pie chart) We will also address the potential reservations Ravensburger may have (list topics like quality issues, trade costs).

The Cluster Effect

The Chinese Toy Association lists many toy production clusters in the coastal regions of China. The following is a brief description of such a cluster in the city of Chenghai, Guangdong. “The toy and gift industry has always been the feature and backbone industry for Chenghai. At present, Chenghai has more than 2,800 enterprises dealing with toys and gifts, with a total working staff of over 100,000. The toy and gift industry last year alone generated occupied over 40% of total industry output in the region. Enterprises in Chenghai divide the work naturally, and have formed a complex system mixed with printing, coating and packing.” Each cluster is like a production city within itself, “complete with raw materials supply, mould process, assembling, packing, marketing and transportation”.

The cluster effect contributes greatly to China’s advantage for the following reasons. Firstly, the raw material suppliers are nearby, thereby cutting down on transport costs. The suppliers are also competing for business, therefore Ravensburger can choose quality suppliers at a reduced cost. Secondly, the labour market within these clusters will be composed primarily of workers with experience in toy and puzzle manufacturing. This is beneficial to Ravensburger because skilled workers of the industry are abundant and readily available. Thirdly, since toy manufacturing is such an important part of the local economy, there are many industry events and product conventions. These events are beneficial because Ravensburger can learn from its competitors and promote its brand. And lastly, the clusters are established business networks familiar with doing business among foreign enterprises. Therefore, the clusters break down relational separation and makes doing business much easier.

Trade Costs

Since Ravensburger’s main market is in Europe, particularly Germany, we have assumed export from the port of Hong Kong to Hamburg, Germany. The freight shipping cost for a 40-feet container is about 1800USD. The local surcharge is approximately 200USD. Considering the distance of 9995 nautical miles between the ports and the transportation time of about 21 days, the distance cost and time cost are higher than Hungary and Malta. However, we feel that these costs are immaterial.

The EU also does not impose any tariffs on puzzles (code 95030061). The export transport cost is potentially higher than Hungary and Malta, but this increased cost will not cancel out the other savings and gains of investing in China. Container shipping by sea is deemed safe and reliable, thereby minimizing risks associated with travel, such as damaged goods. The effect of the time delay is also immaterial because puzzles are a non-perishable and universal good.

Foreign Direct Investment (FDI) Policies

The Chinese government’s FDI policies create a favourable foreign investment environment. Since the late 1970’s, China has continually aimed to attract and retain FDI as part of its economic reform process.

Some of the favourable provisions are as follows. In 1986, the State Council promulgated the so-called .22 Article Provisions, which provided foreign ventures with preferential tax treatment, the freedom to import inputs such as materials and equipment, the right to retain and swap foreign exchange with each other, and simpler licensing procedures. Additional