How Toy Factories Can Move From OEM to ODM Business Model
OEM toy manufacturing is a tough business. Customers shop products around so much & screw down the prices so far that an OEM toy factory making more than 5% margin is doing really well. When you add to this that many companies who have been OEM toy factories for a long time are often in China where labor costs and other expenses keep rising all the time, and it becomes a really tough game.
It is only natural then for long established toy factories who have so much skill, expertise and experience in manufacturing toys to want to move up the value chain and to become ODM manufacturers, producing toys to their own designs and at least in theory making greater margins.
There are difficult challenges though with the move from OEM to ODM toy manufacturing:
1. Competition is fierce – there are literally thousands of other toy factories trying to do the same thing. The best visual example of this is to take a look at Hong Kong toy fair where around 2,000 ODM exhibitors line up to sell their products. So many of the products are similar that it can become a mind-numbing exercise to walk around the show. There are some companies who have more of an innovative approach, but there are many more who are churning out ‘me too’ product, and that type of business is really tough, because when products are similar, then pricing becomes the remaining point of differentiation, which makes it a commodity business, and that’s an extremely hard game to be in.
2. Company/management understanding of what is required to step up the value chain successfully is often lacking – if you create a company doing one thing and spend most of your career/life managing your company to do that thing you may not have the requisite skills or mindset to understand and to embrace the next level up. Marketing does not matter very much in OEM toy manufacturing, it is primarily a sales, relationship & customer service business. But if you want to create & sell your own toys then marketing very much does matter – both trade marketing AND consumer marketing unless you just want to sell commodity type low priced products along with thousands of other factories. Product origination requires different organisational and management competencies and capabilities. To develop products which are innovative, different and better than the vast competition out there takes strong concept creation skills. Packaging becomes critically important – the one guaranteed marketing opportunity every toy gets is the packaging, so the packaging needs to be contemporary, global and compelling with clear communication. We could go on & on, but the bottom line is this – so many factory owners and management teams want to step up the value chain, but don’t step up their thinking to the next level, and as a result they normally don’t achieve the success they want.
3. OEM production mindset continues – the OEM toy factory mindset works like this: tell me what to manufacture & I will manufacture it for you at a competitive price. Things are harder than that with ODM business. You may find a customer who will tell you what they want, and then if you make it for then then they might buy it from you, but that’s not normally how it works. You typically have to develop products based on your own initiative as a leap of faith, and so you have to decide what products to develop. Established toy companies reach these decisions based on market knowledge, consumer insights and the experience from delivering many successful products to market before. Those competencies are different to what is required to be a successful OEM manufacturer. Those companies with management and owners who understand that they need to change their business & management model, and who are willing to bring in the required expertise to help are far more likely to succeed!
4. Unwillingness to seek outside help – the cheapest and quickest way to transition from OEM to ODM business model for toy manufacturing is to bring in the capabilities the company is lacking from outside. The product designers who can take a customer’s rough concept and turn it into a real product ready for manufacturer is not always the same as the product designer who can originate a new and compelling toy. But there is no shortage of freelance toy design expertise out there. On the commercial side, if the company lacks the knowledge of business models or how to get the product to market, and if they lack any idea of how trade and consumer marketing should work they can easily find that kind of expertise.
In summary, there is potentially more margin to make with the transition from making toys for other people i.e. OEM toy factory model to ODM where you create your own toy designs and produce them to sell. The challenge though is that success is not easy, risks of failure increase and any toy factory wanting to increase their chances of success should seek to grow their knowledge first before developing products at risk which may not sell.
We work with factories of all kinds and all sizes to help them step up the value chain to create their own toy products and brands. We have worked across all toy & game product categories and have helped our clients sell $hundreds of millions of toys, create long term viable businesses and create brands which sold for $tens of millions. For more information on our company or to see how you can work with us, just click here: www.KidsBrandInsight.com/services