Thread del Fin del Mundo

[Bosko]

http://www.msnbc.msn.com/id/28037960

For American parents, bargain prices for toys this holiday season
qualify as good news: A Barbie fan who rose before dawn for Wal-Mart’s
Black Friday sale could secure the coquettish “Barbie Diamond Castle
Princess Liana Doll” for $5 — royally marked down from its regular
retail price. At Target, a 10-pack of die-cast Hot Wheels cars also
went for just $5, while a radio-controlled helicopter cost a mere $15.
The price wars were enough to draw consumers out of their bunkers for
their first shopping spree in months.

But wrapped up with those cheap toys are ominous economic omens for
both sides of the Pacific. The rock-bottom prices show how desperate
U.S. retailers are to plump up weak consumer demand — a symptom of the
ailing U.S. economy and a serious problem for China, which makes nine
of every 10 toys sold in American stores.

Declining U.S. orders already have contributed to the closure of at
least 3,600 toy factories since the beginning of 2008, according to
the Chinese government, leaving hundreds of thousands of Chinese
workers suddenly out of work in this sector alone. Some of the
shutdowns have triggered violent protests, a situation that could
worsen if the Western recession drags on through 2009, as many
economists are predicting.

“Unemployment in China could deprive a lot of people of their
lifeline,” says Hu Xindou, an economics professor at the Beijing
Institute of Technology. “So it could trigger social instability or
even shake the rule of the Communist party.”

Millions of jobs at stake
The toy industry has played a major role in China’s economic surge
over the past 30 years. Exports account for as much as 40 percent of
China’s gross domestic product, and labor-intensive industries making
things like toys, shoes and clothing generate millions of jobs for its
rapidly growing workforce.

But Chinese toy makers began feeling the economic squeeze well before
the U.S. recession was made official in late November.

U.S. retailers trimmed orders after suffering weak sales in the 2007
holiday season — made worse by recalls of dangerous toys.

The volume of Chinese toys passing through eight major U.S. ports was
down 5.9 percent in the first nine months of this year, compared to
the same period in 2007, according to economic forecaster IHS Global
Insight, which tracks the information for the National Federation of
Retailers. Toy traffic through the ports of Los Angeles and Long
Beach, Calif., which typically handle more than half of Santa’s
incoming booty, declined 10.2 percent, as measured by tonnage.

The draw-down isn’t readily apparent at U.S. shopping malls, where toy
shelves appear as packed as ever. And the limited inventories on hand
likely won’t become obvious unless a toy emerges as a must-have item —
like the Tickle-me-Elmo and Cabbage Patch dolls of past shopping
seasons.

Slowdown makes tough time tougher
Behind the scenes, though, the decreased orders are sending shock
waves through the Chinese economy.

“A lot of what is happening in China, particularly with respect to
toys, is demand driven,” says Erik Autor, international trade counsel
for the retailers federation. “Toy (buyers) are ratcheting back
orders, reflecting a drop in consumer demand.”

Slowing orders have added to other pressures on China’s toy makers.

China’s new labor contract law, which imposed stricter conditions and
compensation for layoffs of temporary workers, took effect in 2007,
increasing costs for manufacturers that rely heavily on migrants on
production lines, including toy makers and other labor-intensive
manufacturers based mainly in southern Guangdong province. The
province has become the core of China’s manufacturing sector based on
the flow of cheap and abundant labor temporary workers from the
country's poor interior. By some estimates there are 150 million
migrant workers in Guangdong alone.

Toy makers also were hard hit by the rising price of oil, which surged
to more than $140 a barrel in June, and in turn sharply increased the
price of plastic.

Industry sources say the toy makers saw profits squeezed to the point
where many tried to renegotiate contracts with buyers — especially
major U.S. players, such as Wal-Mart and Toys "R" Us. When they
discovered the buyers wouldn’t budge on the purchase agreements, many
simply decided to close their factories. Some locked the gates and
vanished in the dead of night, leaving workers to discover they had no
job when they arrived in the morning.

“Over half (of the factories) that have closed had negotiated a price,
then when they couldn’t get the retailer to move (on the price), they
wouldn’t make it at a loss and closed down,” said Britt Beemer, a
retail strategist and founder of Charleston-based America’s Research
Group.

Others found ways to cut corners, which is cited as one reason that
the problem of Chinese toy safety came to a head last year. Among
other things, some Chinese factories started using lead-based paint on
their products because it dries faster and thereby speeds production
time.

“They were either closing their eyes or closing their doors,” said
Michael Zakkour, managing director of China BrightStar, a
manufacturing and sourcing consultancy.

To be sure, some of the factories that were shuttered were small shops
that employed only a few dozen workers. And the contraction is to some
degree a natural consolidation process in an industry that is
overbuilt. But big players have clearly been affected as well.

One of the most publicized cases was the abrupt closure of the Smart
Union toy company in October in the city of Dongguan, the center of
the toy industry. When the factory managers disappeared overnight,
leaving 7,000 workers without paychecks or severance, protests
erupted, targeting both the government and the publicly traded Hong
Kong company. The Dongguan government finally doled out 24 million
yuan ($3.5 million) to pay what was owed to the workers and settle the
conflict.

“All local officials recognize that they are judged on the basis of
their ability to control social unrest,” said Nicholas Lardy, a China
expert and senior fellow at the Peterson Institute for International
Economics. “It’s in their interest to make sure factories don’t leave
town and abscond with back wages.”

In November, toy workers rioted after the Hong Kong-based Kaida
Manufacturing Co. laid off 600 employees from its factories in
Dongguan and tried to avoid paying compensation required by the new
contract law. Local media reported that approximately 1,000 police and
security guards were called in to disperse the angry crowd, but
company offices were ransacked, cars overturned and at least five
people were injured before order was restored. Kaida ultimately agreed
to renew contracts with senior employees and offered compensation
packages to others.

Reverse migration
The closures have left many migrants with no work, including 23-year-
old Wu Yang, who worked at a Taiwanese-owned factory in Dongguan for
three years before being laid off four months ago when the operation
was shut down. Wu is considering returning to his home in central
Henan province, but for now he’s killing time in local bookshops and
hoping the situation will turn around.

"Maybe I will go home, but it’s boring there,” Wu said. “And I’ll just
gamble all my money away."

Each day, thousands of other migrants in Guangdong and other coastal
provinces board trains and buses for their home villages, leaving
earlier than normal for the Chinese New Year, which begins Jan. 26.
When and if they will return is anyone’s guess.

In the short term, the exodus of unemployed workers eases pressure in
Guangdong and other manufacturing centers. Longer term, however, it
hurts families living in the poorest parts of China, who receive money
from migrant workers. That raises the prospect that the protests and
violence in the manufacturing regions could spread to the interior,
many China experts say.

“It’s a potentially scary scenario,” said Lawrence Delson, who teaches
China business courses at New York University. “If many of these
migrant workers go home, what happens to the flow of money back to the
inland provinces? … There is a deepening division between the haves
and the have-nots … raising the specter of social unrest.”

Mixed message
The Chinese government appears well aware of the threat and has taken
action aimed at stimulating its sagging economy.

In November, Beijing announced a massive $586 billion stimulus
package. Economists and world leaders praised China for putting
together the most ambitious rescue package in the world, worth about 3
percent of its GDP.

Chinese leaders did not provide many details of the package, but
indicated that it would include spending on infrastructure, health and
education. The central purpose of the package, they said, was to spur
consumption in China rather than rely so heavily on exports for
growth. At a G20 meeting later that month, China also agreed with
other major economies that in grappling with the crisis, all nations
should avoid protectionism.

But with pressure mounting to protect jobs in its export sector,
Beijing also has instituted policy that is contrary to the spirit of
the G20 meeting by increasing tax rebates on thousands of export
products — from toys to toasters. The rebates, and an artificially low
valuation of China’s currency, essentially give its exports a
competitive edge in the world marketplace, threatening to increase
trade imbalances that have long caused tension.

Even Chinese officials have expressed concern that the rebate policy,
which experts say covers at least 50 percent of China’s exports, could
spark retaliation from trade partners, including the United States.
Some trade experts warn that could spark a trade war, similar to what
happened when the United States put in place high protectionist
tariffs in 1930, thereby fueling the Great Depression.

“At the moment, China is the gold standard on the stimulus,” said
Lardy, of the Peterson Institute of International Economics. “But I
would give them very low marks for this (tax policy.) They are …
basically promoting exports at the expense of the rest of the world.”