LEGO Group to build factory in China

[Fugazi]

An interesting -- and perhaps heavy of consequences -- press release has been published by the LEGO Group today:

LEGO Group to build factory in China

By 2017 a new LEGO factory in Jiaxing, China is expected to be fully operational and have approximately 2000 employees

• The LEGO Group has announced plans to build and operate its own LEGO factory in China. The factory will supply products for the growing Asian market. Construction is expected to begin in 2014.
  

“It is our strategy to have production close to our core markets in order to secure short lead-time and world class service to our customers and consumers, and it has proven a successful strategy. Asia – including China – is a future core market for the LEGO Group and therefore I am excited to share our plans for the new factory. Having full control of the production process is essential to deliver products of a consistent high quality and safety and in harmony with our values” says Bali Padda, COO and adds:

“In addition by placing a manufacturing site in the region we reduce our environmental impact as we will reduce the need for transporting products from Europe to be sold in Asia.”

State-of the art factory

The factory will be built in the city Jiaxing, right in the middle of the Yangtze River Delta and located approximately 100 km from Shanghai where the LEGO Group is planning to locate a regional distribution centre for Asia.

“The new factory will be built and run with the same technology, automation and standards for employee safety and product quality as our LEGO factories in Denmark, Hungary, Czech Republic and Mexico, and it will have a distinct LEGO look and feel.” says Michael McNulty, Senior Vice President, Procurement.

Producing for Asia only

The LEGO Group currently does not operate its own manufacturing facility in China, but with the new production site including moulding, decoration and packaging facilities it will have a supply base for future growth in Asia. LEGO Group sales in the region have grown by more than 50 percent annually in recent years.

“Based on our current expectations for growth in Asia, the factory should be able to supply approximately 70-80 percent of all the LEGO products sold in the region in 2017. All products made in the new factory will be sold in Asia,” says Michael McNulty.

Location with focus on employees

The location of the new factory, Jiaxing, has a population of 5 million and it has been chosen for several reasons, says Michael McNulty:

“It is close to our regional distribution centre and the city has all the facilities and infrastructure needed. But in addition, we believe the location is perfect in regards to securing the best environment for future LEGO employees. The city is the strongest possible match with core LEGO values, and the plans for a sustainable city development is well organized”

Jiaxing has been named “National Health City”, “National Model City for Greening”, “National Garden City”.

For further information, please contact:

Roar Rude Trangbaek, LEGO Group Press Officer

Ph: +45 7950 4348

Cell: +45 3065 3164

RRT@LEGO.com

 

Facts

• By 2017 the factory is planned to have an area of approximately 120.000 square meters

• In 2015 the factory is planned to have approximately 200 - 400 employees

• By 2017 the factory will be fully operational and is planned to have approximately 2000 employees

• These numbers depend on the growth and demand for LEGO products in Asia and can be adjusted.

• The investment will amount to a 3 digit million Euro figure

Time plan:

• Construction of the factory is planned to begin in early 2014

• By 2017 the factory is planned to be fully operational

Jiaxing:

• Jiaxing has a population of 5 million and a catchment area of approximately 15 million.

• There are two universities and numerous technical colleges located in the city.

• Jiaxing is ranked 25th in the city ranking of “100 best cities for foreign investment” and has earned the titles of ‘National Civilized City’, ‘Chinas outstanding Tourist City’, ‘National Health City’, ‘National model city for greening’, ‘National garden city’ and national innovation pilot city.

• Jiaxing is right in the middle of the Yangtze River Delta There are numerous multinational companies located within Jiaxing Economic and Technological Development Zone

• Jiaxing is located approximately 100 km (1.5 hours) from Shanghai

[CMP]

"Asia – including China – is a future core market for the LEGO Group and therefore I am excited to share our plans for the new factory. Having full control of the production process is essential to deliver products of a consistent high quality and safety and in harmony with our values” says Bali Padda, COO.

This caught my eye. It looks like to me like the clone brands are in trouble.

I don't think the quality in sets that are being sold today will be affected, assuming this:

“All products made in the new factory will be sold in Asia,” says Michael McNulty.

is adhered to.

I'm glad to see LEGO expanding.

[Faefrost]

It makes sense. China is an expanding market for their product, and placing a factory there avoids some of the import restrictions that they currently deal with. It's probably also good news for our Australan friends as it will give a much shorter distribution chain for them. By building heir own factory rather than "partnering" with a local vendor they may also cut back on some of the more egregious IP theft and risk to their tooling.

As for those fearful of primary production being moved there. I don't think so. The Window of China's artificial over competitiveness in manufacturing is fast closing. Outside of local Asian markets TLG will probably get a better return on costs from some of their Easter European and Mexican plants these days.

[Rolf]

Wow yeah. Probably good news.

[1974]

China is not 'a new great market', unless TLG drop their prices way below what LEGO costs in the US (which is allready 50% of EU retail). So who is this pressrelease for then?

Many companies have been caught in the 'china frenzy' only to have their 'partnerships' with local factories (actually goverment owned, on terms that would NEVER be accepted in the EU/US) selling products (or worse IP) out the backdoor

I guess, this is what TLG is trying to avoid with thier own factory. IP don't mean shit in China

Just as Jørgen Vig Knudstorp (someone quite important at TLG) said here :

(In danish sorry, run it trough Google translate)

http://www.business.dk/oekonomi/lego-tvivler-paa-kina

As for those fearful of primary production being moved there. I don't think so. The Window of China's artificial over competitiveness in manufacturing is fast closing. Outside of local Asian markets TLG will probably get a better return on costs from some of their Easter European and Mexican plants these days.

Yes, China is in fact getting too expensive for quality products. But since TLG cannot even do proper quality in Denmark - and do not seem to care all that much - would outsourcing to a very difficult (economic/cultural) part of the world imrove that?

I fear not

[Grimmbeard]

Yes, China is in fact getting too expensive for quality products. But since TLG cannot even do proper quality in Denmark - and do not seem to care all that much - would outsourcing to a very difficult (economic/cultural) part of the world imrove that?

I agree. It's no doubt the quality has gone down. But luckily this is being used only for the Chinese/Asian region.

Though I definitely believe it could influence the quality everywhere they produce.

[WhiteFang]

This news come to me as a mixed reaction... I really hope the new factory will not separate the same set of 2 production lines... Ending up having something 'different'...

[Kristel]

This news come to me as a mixed reaction... I really hope the new factory will not separate the same set of 2 production lines... Ending up having something 'different'...

Ditto.

I'm wondering whether Australia is considered part of Asia and, if so, does this mean we finally start seeing more reasonable prices and a greater range of LEGO products (e.g. more polybags?), but at the cost of getting something different (e.g. quality)?

[Faefrost]

Ditto.

I'm wondering whether Australia is considered part of Asia and, if so, does this mean we finally start seeing more reasonable prices and a greater range of LEGO products (e.g. more polybags?), but at the cost of getting something different (e.g. quality)?

Australia would almost deffinately switch to being supplied by the far eastern supply chain. Which may or may not have an effect on pricing, but will almost certainly be a huge help in availability. If nothing else it will probably mean you wont have to wait months for new set releases.

[Hey Joe]

Hmmm...I feel really conflicted about this particularly as I live here in China. I don't know what to think.

How can they make entire sets from the substandard ABS plastic that they're forced to use here? Is that the plan?

Ok, so the sets will only be sold in this region but that stuff is going to enter the secondary market supply chain (as has been pointed out by others). Hopefully the parts will be marked a little differently?

Perhaps my first reaction upon hearing the news is the most appropriate; time to find another hobby.

[bacem]

Hmmm...I feel really conflicted about this particularly as I live here in China. I don't know what to think.

How can they make entire sets from the substandard ABS plastic that they're forced to use here? Is that the plan?

Ok, so the sets will only be sold in this region but that stuff is going to enter the secondary market supply chain (as has been pointed out by others). Hopefully the parts will be marked a little differently?

Perhaps my first reaction upon hearing the news is the most appropriate; time to find another hobby.

well, they did mention about making the product have the same quality as the one from factory in Hungary and Denmark. we still don't know if this is true or not. but at the very least, as an AFOL in asia, i'm happy with this news. this could mean that we don't have to wait for months anymore for new LEGO products and probably, the price will become cheaper. also this news indicate that TLG are putting more attension to asia market. this could mean that in the near future, TLG will build LEGO shops in seferal parts of asia.

[Hey Joe]

well, they did mention about making the product have the same quality as the one from factory in Hungary and Denmark. we still don't know if this is true or not. but at the very least, as an AFOL in asia, i'm happy with this news. this could mean that we don't have to wait for months anymore for new LEGO products and probably, the price will become cheaper. also this news indicate that TLG are putting more attension to asia market. this could mean that in the near future, TLG will build LEGO shops in seferal parts of asia.

Ok, that's a very good point. I guess they've made some kind of deal to get the good ABS (another proprietary formula surrendered to the Middle Kingdom?). If so then it's probably a positive move as they'll now have control over their own factory rather than contracting it out.

The press release said that none of the products made in China will be sold in the west (didn't it?) so does that mean that the CMFs will still be made with crappy plastic by contractors?

There are lots of places to buy Lego here in Beijing but the problem is that it's so d@mned expensive only the rich can afford it. There's a new mall right down the street from my home that has a Toys R Us and a Lego Shop (a JV with Kidsland, not a 'real' Lego shop). I can only drool over the products as my wife would kill me if I actually bought one more than occasionally. Most of the Lego I buy is from Amazon US and is piling up unopened at my parents home there. I otherwise have to make do with the local brands which are very much hit-and-miss (mostly miss).

Anyway, it's a huge market here with lots of potential. Lego needs a factory in China for lots of reasons. Having a place to print the boxes in Chinese is one simple no-brainer reason.

Joe

[Vindicare]

China is not 'a new great market', unless TLG drop their prices way below what LEGO costs in the US (which is allready 50% of EU retail). So who is this pressrelease for then?

Many companies have been caught in the 'china frenzy' only to have their 'partnerships' with local factories (actually goverment owned, on terms that would NEVER be accepted in the EU/US) selling products (or worse IP) out the backdoor

On a somewhat related note to this comment. On the tv show Shark Tank, this exact thing happened to a woman and her product. She had something like 70% of her business swiped from these bootleggers. The manufacturer was even behind it all.

[A2L]

Very interesting discussion here. I do not know whether to be happy or distressed. I see no win-win situation here. Lets think about these points (some have been mentioned above). Till we get clear answers to them, I do not know how to react.

1. The quality of ABS used.

2. Why only serve the Asian market?

a. Only because of proximity and hence cutting down delivery miles? For TLG cost does not depend on deliverymiles. Look at prices in Denmark, Netherlands and surrounding ones vs USA.

b. LEGO never mentioned the sets are going to be cheaper, but if I assume so, will the quality remain the same?

If many of you enthusiasts say an emphatic Yes, then my response is: Some LEGO fans will get same (high) quality at lower cost, while others will be left out.

If your answer is No, then will we have 2 versions of the same sets, one at lesser quality and others at better? Will they have country of origin mark to differentiate?

3. What about safety standards? As it is some companies like Playmobil mentions testing by independent body, I do not see any such thing in LEGO toys other than the voluntary CE mark. (Can aomeone confirm if the US sets carry ASTM mark?). Quality issues have been repeatedly noticed in products manufactured in some Asian countries by global MNCs some of which are worldwide case studies in quality control. Creeping high levels of lead, cadmium etc being the most common in case of toys. Before some of you say it happens across the world, please take some time off to check the publicly available detail of recalls (including toys) in the last 5 years along with the country of manufature, you will get the picture.

4. It is also mentioned in many public documents how suddenly companies in such spring up with similar technologies and *quality* challenging the original companies in their own arena. But that is a business decision of TLG after due diligence, so as an AFOL its not my concern. Poor IP protection in some countries has been discussed by so many of you here on EB.

5. If cost is the sole issue, and if reports of 70% margin are to be believed, TLG can easily penetrate the lower cost markets by reducing their margin substantially and yet make up by sheer volume growth.

So to sum it up, most of my arguments will become invalid if TLG manufactures parts in China to distribute across all product lines across the globe. But Made in China only for Asia is a cause for confusion if not concern. Anyway TLG knows that a few AFOLs that they may lose, if at all these concerns ever turn to reality, it will be more than made up by addition of 1000s of new fans there. And whatever said and done the **lowest** quality offered by TLG will be the **among the best, if not the best ever** that consumers in such countries will have access to!

Edited March 20, 2013 by A2L

[paanjang16]

I think TLG is doing something wrong here. I mean, few days ago we had the news TLG boast about record profits and even beating Mattel. Now TLG announced they want to have a factory in China to cater for the Asian market. As an AFOL which has quite a substantial amount of Lego collected in the past few years I am quite upset with the news. The point that hit me is the fact that factory is to cater for the Asian Market.

I live in Malaysia which is located in Southeast Asia, so I guess we are the target customers for this factory. Our friends in Singapore, Thailand and Indonesia are also in the same camp. The thing that I like about Lego is that it is one of the very very few products on the shelf that DOES NOT COME from China. Seriously. look in the toy store, see how many products that does not come from China? Hasbro's TFs come from China. Hasbro's My Little Pony.. same thing. Mattel? While some of the hot wheels come from Malaysia I see most come from China. Tomica? It used to come from China but now Vietnam; during the transition period the quality was horrible. To see Lego, yes, THE Lego joining this "China" club makes Lego no different than Megablocks and all the knock-offs Lego out there. I wonder if Kre-O comes from China too? Or from South Korea? To me it does not add value to the Lego brand at all.

If Lego is made in China it is no different that the KOs I show below. For the dragon the KO is on the right.

Maybe it is due to the pricing? I think it is untrue. We are closer to Denmark than Taiwan, South Korea and Hong Kong, yet our Lego is more expensive than in those countries. Not only that, they get stuff FASTER than us. I remember last year I was in Korea in January and they already had the first wave of Friends set and the Destiny's Bounty on sale. In Malaysia? We had to wait a few months later and it was more expensive! We are closer to Denmark than South Korea, then why did South Korea get it faster and cheaper than us?!?!? If I sail from Denmark to South Korea I will pass by Singapore and Malaysia first.

So now not only do we have to pay a premium for Lego, at prices higher than the US and the EU, but now we do not get any bricks from Denmark? It is like paying premium to buy a Volkswagen or Mercedes only to find it is made in India or China. It's like buying LV only to find it is not made in Italy. I really do hope it does not reach the stage where the Lego that is sold in Legoland Billund is made in China.

I think Lego is doing something very very wrong. It is frustrating enough to source the sets through official means, have to pay a huge premium to buy Lego and with this news of Lego saying since I am in Asia I am only entitle to China Lego I think maybe I should move to another hobby. FYI I have already bought the Palace Cinema and Maersk Train through some online sellers because god knows when those 2 sets will come and at what price. Both sets came from the States. Do I need to buy from online get Denmark's bricks?

Edited March 20, 2013 by paanjang16

[Hey Joe]

You make some excellent points paanjang16.

Here are a few thoughts off the top of my head:

- I've read where 40% of the costs of things here in China are due to inefficent transportation (which really seems excessive to me so I suspect it may include under-the-table expenses as well if you know what I mean). If the factory is located in your area it should reduce those costs?

- Perhaps South Korea is the distribution point so they get it faster? I imagine it's Hong Kong for China but it could be anywhere, I have no idea.

- Lego says the quality will be the same. Time will tell on that one, let's keep our fingers crossed.

- There is a cachet to foreign goods here in China, Lego may lose a little of that by opening a factory here but I imagine that what they hope to gain would be far greater. Also, Lego's overall product is so superior to the local brands, if they can maintain quality it shouldn't be an issue. I mean, just look at Apple's products. Designed in the west, built here; sells like hotcakes.

[kibosh]

I think this is a terrible move, and one that will forever harm the image and reputation LEGO has worked so hard to build.

[dr_spock]

I think Lego sees Asia as an emerging growth market. Their current factories may not have the capacity to service their expected demand. Having a factory in the region means they'll spend less on shipping and quicker to market.

[Front]

I think Lego sees Asia as an emerging growth market. Their current factories may not have the capacity to service their expected demand. Having a factory in the region means they'll spend less on shipping and quicker to market.

Spot on !

[A2L]

I think Lego sees Asia as an emerging growth market. Their current factories may not have the capacity to service their expected demand. Having a factory in the region means they'll spend less on shipping and quicker to market.

By the same logic Mexico should supply "only" to the US and Canadian market, especially when in the US, the sets are priced 10-20% less due to whatever reasons (competition?).

The critical question is why only the Asian market? As of now TLG does include the parts made in China in all the sets sold across the globe. So why suddenly stop using those parts elsewhere and use only in Asia? If I believe TLG's release "Having full control of the production process is essential to deliver products of a consistent high quality and safety and in harmony with our values", then why not let such products of a consistent high quality and safety be in all the sets all across the world? And what about shipping them to Australia? Isn't it nearer from a Chinese production facility? Why isn't that included? Chinese factory parts solely for APAC (Asia Pacific) will still be understandable provided TLG says Denmark, Hungary, Czech Republic for EU and Middle East (if LEGO is sold there) and Mexico for US and Canada, South America. That is strictly going by geography.

Or is it because the company may face difficulties in EU/US with such quality/safety standards of Chinese made parts in future? Are AFOLs and parents in EU/US displeased with Chinese made parts (in most forums there are several complaints regarding them)? Is it because inconsistent quality stuff can be put in the Asian markets easily due to lax/non-existent regulations and consumer protection? These are just my speculations, and I am NOT accusing TLG explicitly or implicitly. But these questions will keep on coming (as they have here and in other forums) till we get a clear picture.

I think this is a terrible move, and one that will forever harm the image and reputation LEGO has worked so hard to build.

Till then for me this is spot on. Edited March 22, 2013 by A2L

[TheRedGuy]

Sounds like good news, just hope they don't do anything crazy like use cheaper plastic. I've gotta stay a long time here in Korea so I hope this means they make stores and stuff, though the price here is already good enough. But the online shop prices are ridiculous, and I fear that if they do make Lego stores here they'll have that markup...

[kibosh]

By the same logic Mexico should supply "only" to the US and Canadian market, especially when in the US, the sets are priced 10-20% less due to whatever reasons (competition?).

The critical question is why only the Asian market? As of now TLG does include the parts made in China in all the sets sold across the globe. So why suddenly stop using those parts elsewhere and use only in Asia? If I believe TLG's release "Having full control of the production process is essential to deliver products of a consistent high quality and safety and in harmony with our values", then why not let such products of a consistent high quality and safety be in all the sets all across the world? And what about shipping them to Australia? Isn't it nearer from a Chinese production facility? Why isn't that included? Chinese factory parts solely for APAC (Asia Pacific) will still be understandable provided TLG says Denmark, Hungary, Czech Republic for EU and Middle East (if LEGO is sold there) and Mexico for US and Canada, South America. That is strictly going by geography.

Or is it because the company may face difficulties in EU/US with such quality/safety standards of Chinese made parts in future? Are AFOLs and parents in EU/US displeased with Chinese made parts (in most forums there are several complaints regarding them)? Is it because inconsistent quality stuff can be put in the Asian markets easily due to lax/non-existent regulations and consumer protection? These are just my speculations, and I am NOT accusing TLG explicitly or implicitly. But these questions will keep on coming (as they have here and in other forums) till we get a clear picture.

Till then for me this is spot on.

"Are AFOLs and parents in EU/US displeased with Chinese made parts".

This sums it up for me perfectly. Speaking for myself, I fear anything made in China, and am very displeased with it. The reason factories move to China is because of the absolute lowest price to produce in the world. It is NOT because of superior quality. How can it be so cheap? Because of worker exploitation, extremely lax safety standards, etc. None of this contributes to quality; only the bottom line.

If LEGO made in China starts ending up in other markets, I will strongly consider buying old LEGO in the second hand market instead of new LEGO. LEGO can say all they want about strict quality control. I don't believe you will ever see that in China. And get ready for an absolute explosion in the bootleg market, LEGO.

[GregoryBrick]

The critical question is why only the Asian market? As of now TLG does include the parts made in China in all the sets sold across the globe. So why suddenly stop using those parts elsewhere and use only in Asia? If I believe TLG's release "Having full control of the production process is essential to deliver products of a consistent high quality and safety and in harmony with our values", then why not let such products of a consistent high quality and safety be in all the sets all across the world? And what about shipping them to Australia? Isn't it nearer from a Chinese production facility? Why isn't that included? Chinese factory parts solely for APAC (Asia Pacific) will still be understandable provided TLG says Denmark, Hungary, Czech Republic for EU and Middle East (if LEGO is sold there) and Mexico for US and Canada, South America. That is strictly going by geography.

They say this production is 'for Asia only' and that 'all products made in the new factory will be sold in Asia'. I take this to mean that the demand in the region is sufficiently large to justify a dedicated production facility and that LEGO is expanding to meet that demand. This is good news for TLG and thus why they would issue a press release.

You seem to fear that LEGO is setting up an 'ABS curtain' around the region and that they will produce two tiers of product. Nowhere in the press release did it say 'No LEGO product made in China will be sold globally', they said that 'product from this facility is for the Asian market'. There are good and obvious reasons for this in the press release itself, none of which require speculation about selective quality control. Furthermore, the press release says clearly that by 2017 this facility will be supplying 70-80% of product sold in the region, so other products will still be shipped to the region.

You assume that the sets are going to be cheaper, and then wonder how this will intersect with quality - I don't know why you think the sets will be cheaper. I would assume they will be priced according to LEGO's position in the market, like they are everywhere else in the world.

Furthermore, global supply and distribution for TLG is complex. It is not enough to measure the distance from a production facility to a country (such as Mexico to Canada and the US) to determine distribution costs. Also, the presence of one factory dedicated to this region doesn't mean that it makes sense to limit production from every factory to a relevant region.

[antp]

Is there a lot of manual work in these Lego factories anyway? Isn't most of the automatised?

Factories put in China for cheap workforce are those who require much manual work. The gain in price in China is maybe smaller for TLG than for other kind of factories. They may have chosen China over other Asian countries to avoid importation taxes there.

[A2L]

First of all I'll be extremely happy if your assumptions are correct. As I have said that I have asked questions and speculated based on the Press Release. You also have done exactly the same, taking the opposite views. Both our views are based on interpretations and reading between the lines.

Now lets come to some of your points.

You seem to fear that LEGO is setting up an 'ABS curtain' around the region and that they will produce two tiers of product. Nowhere in the press release did it say 'No LEGO product made in China will be sold globally', they said that 'product from this facility is for the Asian market'.

1. I am not aware of the future of TLG's existing arrangements in China. Neither are you. Nor has TLG said anything about its existing arrangements and their future. There are two possibilities.

i. TLG will have its own factory for supplying to Asia and continue its partnering/outsourcing (whatever structure it has) to produce parts for the rest of the world including Asia (like CMFs etc).

Or

ii. TLG will operate only its own factory in China.

In the first scenario, there won't just be 2 tier production from different parts of the world, but also 2-tier production from China itself.

In the second case, till TLG opens one more facility in China for rest of the world, parts made in "this" facility will be for Asia only. So there will be no China made parts for rest of the world.

Take your pick.

Now lets look at some simple numbers. Let us say TLG releases 100 sets per year. 70 of them come to Asia from "this" facility. And since "this facility" supplies only to Asia, where do the rest of the world get those 70 sets? Don't need to see through ABS curtain that there will be 2 tier production. Now till we get a clarity on the ABS used in "this facility" and its source, paint used, safety tests performed etc my point remains highly valid and my concern remains top priority.

You assume that the sets are going to be cheaper, and then wonder how this will intersect with quality - I don't know why you think the sets will be cheaper. I would assume they will be priced according to LEGO's position in the market, like they are everywhere else in the world.

You are right, it is my assumption. Some of it is first hand knowledge by speaking to retailers, store managers, looking at many available competing products in the market, their pricing and sales pattern. Some of it is by looking at business practices of other MNCs manufacturing products in China for the Aian markets, and going through volumes of publicly available literature and research reports. If you are aware of any businesses that have set up manufacturing facilities in China, Vietnam, India or other Asian countries, please find out the reason. There is no doubt whatsoever that cost of production in China is cheaper than in Europe or US, but yes it is my assumption that such benefits will be passed on to the consumer to some extent to generate volume or penetrate market. I have

not looked into the tax or other benefits if any (lower taxes, tax holidays if any, Economic and Technological Development Zone tax incentives for FDI, reduction or elimination of import duties, lower duties in ASEAN region, countries with MFN status etc) that may result in further cost reduction and will not comment on that.

This is the end of my discussion on this topic. TLG will do whatever is best for it. At the end of it I love LEGO products over many other similar ones (clone or competirors) because of excellent quality and safety. If I see a dip in either of these I'll stop buying it. That's all there is to it.

Edited March 22, 2013 by A2L