It can be a difficult enough business predicting what your own children might want for Christmas, but multiply this by a million times and you'll have some idea of what it takes to run a toy company in today's mega-competitive world of children's entertainment.

Hong Kong-listed toy maker, Lung Cheong International Holdings, has been involved in toys for over 40 years. Starting as a subcontractor for simple plastic products, the company is now worth over HK$600 million on the stock market and is a major player in the world of radio-controlled, wireless toys. Sales in radio-controlled cars, boats, planes and trains - selling from as little as US$9.90 to US$150 - form the backbone of the company. But it also boasts established and growing interests in its own brands in key markets worldwide.

Lung Cheong's recent annual results for 2003/4 show that turnover and profit increased by 4 and 18 per cent to HK$744 million and HK$37 million respectively. But the transition from subcontractor to industry leader in a niche market has not always been smooth. One year after listing, Lung Cheung saw its profits drop from 10 per cent to 4 per cent when the Asian financial crisis decimated the industry.

European and US companies, taking advantage of the unfavourable circumstances, pushed prices down, forcing the company into a rethink on direction.

"We had to change our strategy and take control of our destiny," says Andy Wong, Lung Cheong's executive director. "We needed product ideas, not just to wait for customers to bring in the moulds. So we started our own ODM (Original Design Manufacturing) business."

The idea was sound enough: if a company produces its own designs it can take them to the highest bidder, rather than having to get involved in the war of attrition that is contract bidding. This led to Lung Cheong investing HK$18 million in a Taiwanese company called Standard Tool-ing & Products Company.

"From that moment, we saw our margin improving. We were able to dictate terms; we could offer our designs to different customers for the best price."

Lung Cheong has also developed its own brands, particularly in the US market which accounted for 50 per cent of sales in 2003/4 - up 41 per cent from the year before.

The strategic acquisition of US firm Kid Galaxy in December 2002 also gave the company ownership of the Bendos brand and a strategic foothold in the all-important US market. March 2004 also saw Bendos launched in Beijing which, although boasting huge potential, is still a market beset by the problems posed by counterfeiters, says Wong.

Lung Cheong has also looked at ways of tackling unused capacity through increasing business on the mainland. "The toy industry is cyclical," says Wong. "We are not busy all the year as a major delivery is at Christmas time. We were only utilizing our capacity between April and November. We made all our money in the peak season, but we had to hand part of it back during the slow season," he says.

"At first we started using what we called the 10 per cent method, where whatever our customer ordered, we would add 10 per cent to it at our own risk and hopefully we would sell it. It was slow for two years as the product was expensive due to VAT - duty on materials. Many products would lie behind counters in department stores gathering dust."

This led the company to try a different route to cracking the mainland market through a TV and merchandising tie-in. First trail-blazed by George Lucas and his Star Wars trilogy, merchandising of toys is now part and parcel of big budget blockbusters. Producers will approach toy manufacturers such as Hasbro or Mattel as a means of getting hard cash up front.

Over recent years, some of the best-selling toys have been spin-offs of big budget movies such as Star Wars, Spider-man and even Scooby Doo merchandise.

In 1999 Lung Cheung applied this technique to the mainland market, but this time teaming up with a popular Japanese anime series for TV, called Hikari. "I went to Japan myself and we bought the broadcast animation rights for (the programme).

"We bought it, translated it into Mandarin, obtained approval and put it on Chinese TV."

Bidding for rights for such films as Star Wars or Spider-man can be an expensive business running into hundreds of millions of US dollars. Neither are there any guarantees of success - witness the success of the films Shrek and its sequel even while the toys flopped.

But with most of Lung Cheong's business centred on the radio-controlled toy market, the company has not gone to the extreme and focused too heavily on licensed products, says Wong.

"Radio controlled, wireless is still the major source of revenue - it accounts for 60 per cent of our business."

Nevertheless, toy companies do keep a watch out for popular TV or film releases as they do provide an insight as to what will be the next hot item in the toy market. "If a Star Wars movie is coming out, then space-related toys will be a big hit so as a toy company you can prepare yourself. You produce something that looks like it, acts like it, but might be US$20 cheaper because there is no licensing fee," he says.

But success in one market by no means guarantees success in another. Tastes vary. Customers in US markets seem to want big expensive toys, whereas in Japan, the preference appears to be for detail. And even the ubiquitous Star Wars toys made markedly less of an impact in Japan than in Europe and America.

"In fact, Asian brands have probably done better than American brands in this regard because of their link with animation," says Wong.

"But the most successful brands in terms of crossing international boundaries are Disney and Warner Bros. They are almost everywhere."

(HK Edition 08/25/2004 page18)