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China's ailing factories need a little Christmas cheer

Bloomberg8/28/2020 06:31 AM GMT+08  • 6 min read
China's ailing factories need a little Christmas cheer
How the holiday season plays out will reveal a lot about how consumers worldwide are recovering from the pandemic shock.
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In January, toymaker Dave Cave was feeling good about the year ahead. Orders were coming in for Mighty Megasaur, and he was readying a racing game to coincide with the release of the latest installment in the Fast & Furious franchise. Then the coronavirus shut down the world economy, and Vin Diesel announced the flick would be pushed back a year. Cave saw demand collapse. His Hong Kong-based company, Dragon-I Toys, which makes its goods in China and sells them to 240 retailers in 53 countries, including Walmart Inc., was forced to cut costs as it waited for the crisis to pass.

Now, as global retailers start to stock up before the crucial year-end holiday-shopping season, a hopeful Cave says Dragon-I Toys’ order book is at its best level in years.

“Nobody has cancelled any orders in the last six to eight weeks, so everybody is being very optimistic that Christmas will happen,” says Cave, whose company is one of the world’s biggest manufacturers of toy dinosaurs and the maker of the popular Chatimal the Talking Hamster. “The only worry that everybody has now is if this pandemic does get worse, and we get into a situation where the governments in these countries really go back to a phase where everything is closed down.”

How the holiday season plays out will reveal a lot about how consumers worldwide are recovering from the pandemic shock. Exports are a declining share of China’s overall economic growth, and not all industries benefit from Christmas demand, but shipments of consumer goods are still a crucial indicator of confidence globally.

China’s exports rose 7.2% in dollar terms in July vs. a year earlier, mostly on the back of strong demand for electronics, but they were also helped by purchases of anti-coronavirus products and orders for furniture and toys. Exports to the US rose 12.5% in July from a year ago, the fastest rise since 2018 despite tensions between the two nations.

Other gauges are also improving. The Port of Los Angeles, the busiest in the US, said July was its strongest month of the year so far—and the second-best July in its history—helped by factors including retailers stocking up on inventory. While US retail sales growth slowed in July, sales have already made up the ground lost in the spring.

Justin Yu, a sales manager at Zhejiang-based Pinghu Mijia Child Product, which makes toy scooters and electronic vehicles sold by US retailers, has already seen orders rebound to pre-pandemic levels. Since early July the factory has been running at capacity, and it’s fully booked until mid-October. Traditionally, July to mid-October is its busiest period, as the holiday season accounts for 60% to 70% of the company’s full-year sales.

“Our factory is running overtime,” says Yu, adding that even his office workers are going onto the factory floor to help. “We are very busy, as much as we were the past years at this time.” Still, he estimates that sales in the first half were down 20% to 30% and that second-half sales will be flat, resulting in a full-year drop of 10% to 20%.

While China remains the only major economy forecast to grow this year, unemployment is still high, and the recovery is patchy. Producer prices fell 2.4% in July from a year earlier, with knock-on effects for profits, hiring, and investment. That’s why many are looking closely at holiday demand.

“Although the pandemic is very serious, people still look forward to Christmas,” Yu says. “It’s a kind of revenge spending after a long depression of sentiment. The difference could be fewer parties this year, but those who celebrate Christmas will go ahead celebrating it, and those who shop for Christmas will go ahead shopping for it.”

Other Chinese executives caution that the easy gains from an initial reopening phase are over and say further growth will depend on the virus being contained. Large holiday gatherings, for example, may not be on the agenda this year, says Andi Feng, whose company, Bigger Tang, based in Dongyang city in Zhejiang province, makes festive decorations including snowflakes and neon lights.

“Even looking ahead to Christmas, many people still don’t feel comfortable enough to attend large events or parties,” she says. “That could be the reason why gifts are selling well, while a company like us that makes decorations is still struggling.”

Feng says that before the pandemic, about 70% of her company’s revenue came from exports, with Europe accounting for the biggest share. The crisis has forced her to focus more on domestic demand. She’s cut staff from 100 to fewer than 30 and has needed government loans to stay afloat. “Our clients are afraid of ordering too many goods because everyone is afraid the products will end up stuck in their hands,” she says.

Mark Ma, who owns Seabay International Freight Forwarding in Shenzhen, is seeing catch-up demand in the US and Europe that’s driving orders for goods, particularly bicycles as consumers look to avoid public transportation. About a third of the goods his company handles are sold on Amazon.com, he says. “Traditionally our peak season starts in May and June,” he says. “This year our peak season was delayed by the pandemic disruptions, but we’re seeing it here now.”

Willie Tan, chief executive officer of family-owned Topchoice in Hong Kong, which uses Chinese manufacturers to produce ceramic tableware, hopes he can see a similar later-than-normal sales bump this year. To make up for lost revenue from the pandemic-plagued spring, his employees are multitasking to keep costs down, with sales agents pitching in to pack their own boxes of samples. While Tan has seen strengthening demand from around Asia, the picture is more subdued in his other key markets including Europe, the Middle East, and South America.

“We are hoping that during September and October people need immediate deliveries, and we will have an opportunity to fill spaces on their shelves for Christmas,” he says. If those orders don’t transpire “it will be a big problem.”

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