The lifting of China’s one-child policy might have been intended to boost the country’s future workforce, but for toymakers Jakks Pacific Inc. and Mattel Inc., it means an opportunity to sell more products.
Both companies have recently announced partnership deals to grow their foothold in the Chinese market.
El Segundo-based Mattel joined forces in February with Chinese e-commerce giant Alibaba Group to develop education-focused products. Jakks renewed a multiyear licensing deal this month with Walt Disney Co. to distribute the entertainment giant’s toys in China.
Jakks’ growing connection to the Chinese market was highlighted last week when the company announced that it would sell an additional 3.7 million shares of common stock to Hong Kong-based Meisheng Culture Co. Ltd. for $19.3 million. Meisheng already held 1.6 million shares, and the latest deal upped its stake to 19.5 percent of the company and made it the largest shareholder, surpassing a 10.8 percent stake held by Patrick Soon-Shiong. Meisheng also gets a seat on the board as part of the deal.
“Jakks has strategically opened offices in Shanghai as well as in other areas of China,” Stephen Berman, chairman and chief executive of Santa Monica-based Jakks, said in a statement. “The expansion has allowed us to open new distribution channels, sell direct to retail, and focus on the rapid expansion of online sales.”
China saw a slight uptick in birth rates last year after lifting a controversial 1979 family planning law, also known as the one-child policy, in 2015. The number of births rose nearly 8 percent to 17.9 million children in 2016, an increase of 1.3 million from a year earlier, according to China’s National Health and Family Planning Commission.
Even before the country changed its stance, China’s toys and games sector was on the rise, growing about 10 percent between 2010 and 2015, compared with a 1.7 percent increase in the United States, according to market research firm Euromonitor. With a potential baby boom on the horizon and a growing middle class, toy companies are positioning themselves to capitalize on the market.
“China is quickly becoming a key demographic for toymakers, especially with the lift of the one-child policy ban,” said Stephanie Wissink, a senior research analyst at Piper Jaffray.
Testing waters
Neither Jakks nor Mattel is new to the Chinese market.
Mattel, maker of Barbie, Hot Wheels, and Fisher-Price, among other products, has been operating in China since 2002 with mixed results. Two years after opening a $30 million, 36,000-square-foot, six-story Barbie store in Shanghai in 2009, the company shuttered the location.
“Toys need to be culturally specific,” said Clayton Dube, director of USC’s US-China Institute. “You can’t go into a market with what has worked elsewhere.”
Sales depend heavily on the value attached to the toys, said analyst Wissink.
For example, Mattel’s arch rival, Hasbro, was successful with its Transformers toys in China because that was one of the earliest cartoons allowed in the country in the late 1980s. There is a high level of awareness for that brand, so it works well even today, she said.
One of the major challenges for U.S. toymakers is that while many produce items in China, rarely do they get a chance to sell products in that market, Wissink said.
The smaller Jakks, which analysts project will report 2016 revenue of around $675 million, has operated in China since its founding in 1995, but the company only started to sell its toys there in 2013, followed by a deal that same year to distribute Disney’s “Frozen” movie products in the Chinese market.
With an estimated population of 235 million people 14 years old or younger, China already presents a massive market for toy sellers, USC’s Dube said. With the lift of the one-child policy, that population is bound to increase.
“Fast-forward almost four decades later and China was staring at a shrinking labor force and a rapidly aging population,” he said.
The one-child policy was fully lifted in 2015 after an earlier partial lifting.
Dube said the timing for toy companies such as Jakks and Mattel is right, but a lot will depend on cultural competency and digital execution.
Wang Feng, a UC Irvine sociologist who studies China’s population policies, said that while the scrapping of the one-child policy is relevant, the move doesn’t necessarily mean a large number of babies being born.
Many women who already have children might not want another one, especially if they live in urban areas where the cost of living is high and there’s uncertainty in the job market, Feng said.
“Even by the most conservative estimates, the projection was that there’d be around 2 million new births in 2016. The results were substantially lower,” he said.
China solution
Jakks and Mattel still might be looking to the market to help their bottom line after recent financial struggles.
On its website, Jakks reported 2016 sales of $706 million, down 5.5 percent from the $745 million it posted the year previously. The company attributed that drop to some key licensed products performing poorly.
Sales in China, however, increased by 256 percent, though that represented only 1 percent of total sales for the year, Jakks told investors last month.
Net income fell a whopping 95 percent to $1.2 million (7 cents a diluted share) last year from $23.2 million (71 cents) in 2015.
A company spokeswoman declined to comment on the fall in net income, referring to a statement on its website that said some “key licensed products performed poorly.”
It was a value proposition that Soon-Shiong brought to Jakks when he took his first big stake in the company in 2012. At the time, Soon-Shiong’s NantWorks formed a partnership with Jakks called DreamPlay Toys to develop and sell toys and other products using NantWorks’ iDream image recognition technology.
Mattel also saw a decline in net sales last year, falling to $5.4 billion, down 4 percent from $5.7 billion in 2015.
Its net income fell 14 percent to $318 million last year (92 cents a diluted share), from $369 million ($1.08) in 2015.
At the end of 2015, the toymaker lost a deal estimated to be worth $300 million to $500 million with Disney, with which Mattel had been working since 1955. Disney handed Hasbro, one its many partners in developing its Princess line, the toy’s production license beginning in January of last year.
Mattel rebounded with an announcement last month that it had partnered with Alibaba, signaling a calculated shift toward online sales and a bigger interest in the Chinese market.
Offering its artificial intelligence lab as part of the deal, Alibaba, often called the Amazon.com of China, will help Mattel develop education-focused products. The company also will help Mattel better market its products by using data Alibaba has collected on Chinese consumers, according to a statement from Mattel.
“Chinese parents hold more value to educational toys,” said Gerrick Johnson, an analyst with BMO Capital Markets Corp. “By using a partner such as Alibaba, it’s great that Mattel has boots on the ground. It’ll know what to market to people.”
