The great game by the Pearl River

Building Brics: China's Guangdong is the toy factory to the world but its dominance is threatened at home by other provinces and abroad by Cambodia and Vietnam.

Workers assemble toy robots at the factory of Lung Cheong Toys Limited, owned by Hong Kong-based Lung Cheong International Holdings Limited, in Dongguan, China. Imaginechina

Children love them, so does China's big business. In the of space 20 years, the globe's new economic powerhouse has become the toy factory to the world.

While once Hong Kong was a major toy manufacturing centre, production has long since shifted to the nearby mainland province of Guangdong, attracted by low wages and government sweeteners.

Indeed, Guangdong has about two-thirds of toy production in China, which has about a 70 per cent global market share, despite many scare stories over safety.

From teddy bears to toy cars, from board games to dolls' houses, China makes them all.

The factories of the Pearl River delta are working overtime. This is the peak season for production ahead of the Christmas rush for an industry that was worth US$83.3 billion (Dh305.9bn) globally last year, up 4.7 per cent on 2009.

The export value to China of toys last year was $10.1bn, a 29.4 per cent increase, according to the Global and China Toy Industry Report 2010-11 published by Research and Markets. Demand picked up last year after the global slump hit revenues in 2010.

Yet with wages spiralling, many question whether China can retain its pre-eminence.

In May, the Boston Consulting Group (BCG) released a study that said considerable amounts of manufacturing would return to the US because increases in labour costs in China would "erase most savings from [moving] offshore".

The appreciation of the yuan and wage growth estimated at 17 per cent annually by BCG, a result of labour shortages, mean manufacturing in China is only 10 to 15 per cent cheaper than in the US after other factors such as worker productivity are taken into account. That is before transport costs are added.

Manufacturers in China have also been voicing concerns about European directives that increase the list of harmful substances banned from toys imported into the EU.

A mass exodus from Guangdong and other centres, such as Yiwu near Shanghai, which has more than 3,200 toy-related companies, is unlikely for now, however.

Hong Kong is home to many toy companies, even if actual production has shifted across the border, and for them there are several advantages in using manufacturers in Guangdong, according to Tak Chen, a sourcing and sales manager with Benjamin Toys, a brand sold mostly in the UK, but also in other markets including the UAE.

Mr Chen says rising wages could pose a challenge in the long term, but for now the company is not considering changing its supplier base.

"[Guangdong is] easy for contact, it's easy to source, easy to find manufacturers, easy to be in touch with them," he says.

"It's easier for us to be there, to go there and see a production line, to see finishing, to see samples and do the deals."

While some countries in South East Asia, notably Vietnam and Cambodia, are securing some low value-added manufacturing that once would have gone to China, language problems meant Hong Kong-based toy companies were unlikely to send production abroad.

"We do have deals with them [Chinese manufacturers] regularly … About quality, we do not really [have to] worry about it," says Mr Chen.

As well as facing competition from neighbouring countries, and even developed nations if the BCG's predictions prove accurate, Guangdong and the other toy manufacturing heartlands have to cope with threats from other parts of China.

Relocating to the interior provinces has become an increasingly attractive option because of lower wages. But just as toy brands are keen continue to source from Guangdong, the manufacturers themselves have reasons to stay put because of the benefits of being part of a cluster with its well-developed supply chain.

The concentration in Guangdong of workers with the requisite skills makes setting up in a new area a less attractive option, according to George Huang, a professor at the University of Hong Kong's industrial and engineering department.

"If a company moves to Cambodia or the interior [of China], it takes some time to build up the labour supply with the appropriate skills. This is one of the major factors for companies to stay in Guangdong," he says.

Inland China is also further from the seaports from which most of China's toy output is sent.

Although China has moved up the rankings to become the world's third-largest market for toys behind the US and Japan and ahead of the UK and France, the vast majority of goods are still shipped abroad.

Of immediate concern to toy brands and manufacturers is the economic climate in the US and Europe and whether this will lead to a slump in demand, not long after sales recovered after a decline in 2009. Brands are trying to stay optimistic despite the challenges.

"Hopefully it will be steady growth or just about the same as last year," says Mr Chen.