UKtoy maker Hornby had paid £0.5m to end its problematic relationship with its key Chinese supplier, according to its annual report released in Junelast year.
The exit came after Hornby had in recent years repeatedly suffered supply disruption from its main Chinese manufacturer, Sanda Kan.
The disruption was so bad that during 2013 to 2014, Hornby reported that its product delivery to order ratio was about 60 per cent, meaning Hornby received only about half of the products it wanted and many orders were delayed.
Roger Canham, Chairman of Hornby, said: “This year has once again been one dominated by the continued supply chain disruption. We eventually agreed the basis for a managed exit from our principal manufacturer in China.”
He said the negotiation for an orderly exit agreement with the Chinese supplier was “lengthy and complex”, resulting in “delays in releasing tools and moulds that were needed for production”.
Despite ending itsdependence on one Chinese supplier and hinting the start of moving some of the company’s production back to the UK, CEO Richard Ames said Hornby’s model trains and most of its products will still be manufactured in China for now.
He said: “The Group sources all of its model railway products from China. Although labour rates in China are increasing, the Group continues to operate at a cost advantageous to competitors producing in higher cost regions such as Europe.
“Some other product lines are developed outside China where cost effective, such as Airfix in India and we will continue to seek other opportunities to diversify production capacity including bringing it back to the UK.”
The principal suppliers to Hornby now are: Refined, Talent, Zindart and Micro Plastics (India). Together, they supplied 70 per cent of Hornby’sgoods last year.
Hornby’s finance director, Nick Stone, said the impact of relying on foreign manufacturers is that Hornby “does not have exclusive arrangements with its suppliers and there is a risk that competition for manufacturing capacity could lead to delays in introducing new products or servicing existing demands.”
To mitigate this risk, Mr Stone said Hornby would continue its efforts to diversify its supplier portfolio and appoint more locally-basedemployees to monitor production.
Hornby, the company that made Airfix kits and Scalextric cars in addition to ready-to-run model trains, had outsourced its toy manufacturing from the UK to China in the 1990s. It had worked with Sanda Kan, awell known Chinesetoy manufacturer, for over 20 years.
In 2009, Kader HoldingsCompanyLtd,the Chineseparent company of Bachmann, which is the dominant rival of Hornby in the plastic toy trainindustry, acquired 100 per cent ownership of Sanda Kanfor US$8.5m (£5.7m). (Update in September 2020: The link has been updated.)
Recallingpast events at a model exhibition in London last year, Simon Kohler, former market manager of Hornby, said Sanda Kan was then an “excellent partner” of Hornby with a good reputation for producing exquisite models.
He said the root cause of the enormous delay problem for Hornby was it had put all eggs in one basket when it moved its manufacturing to China.
*The graph only represents an approximation of the data available
*It is made on the assumption that 1 Pound is equivalent to 9.22 RMB
*China and the UK track wages in manufacturing differently. China publishes data yearly whereas the UK tracks wages weekly. The graph is made on the assumption that there are 36 working weeks in the UK
*The data showed that while a Chinese factory worker has his yearly salary increased by nearlyfive-foldin the last decade, he still earns four times less than a British factory worker at the moment
*Source of data: Trading Economics.com
Hornby’s former market manager,Simon Kohler, spoke about China and Hornby’s problematic relationship with Sanda Kan at the 2014 London Festival of Railway Modelling exhibition at Alexandra Palace:
In 2012, Jason Shron, President of Rapido Trains Ltd, a small independent model train manufacturer based in Canada, spoke out on the Internet about the Chinese supply chain problem, which is still very much shrouded in mystery and exactly what happened is not clear.
In the following newsletter, Mr Shron gave a rare insider insight on what happened, which appeared to have not only affected Hornby but also other model train manufacturers around the world. He offered an explanation which Hornby has never quite given. In all its trading updates in recent years, Hornby did not name its Chinese supplier. While the reports did go into details of what measures the company would take to overcome supply disruption, they only briefly discussed the existing supply issues.
Mr Shron:
If there is a common theme throughout this newsletter it is that “stuff has been delayed.” We are not the only ones. Most model train manufacturers have experienced production delays, and here is why.
In January, I broke the news on CanModelTrains forum that another large model train factory in China had shut down, forcing 3000 people out of work….This was just the latest event in the ongoing saga of manufacturing model trains in China.
A couple of years ago, Sanda Kan was purchased by Kader Holdings (the Chinese company that owns Bachmann Trains). Sanda Kan was the largest supplier of model trains in the world, and most of the trains made by North American and European manufacturers came out of Sanda Kan’s many factories in Guangdong province, China.
After initially telling their clients that nothing would change, Kader decided to dump the vast majority of their customers. Suddenly, about 50 model train companies around the world had no factory to produce their models. As you can expect, a form of panic ensued as everyone was scrambling to find a supplier.
Our industry is what you could call “cash poor.” We manufacturers make money, and then invest it in new tooling. That means that for all but the biggest manufacturers, a delay in production can cause serious cash flow problems as we don’t have piles of cash lying around.
The result of Sanda Kan booting out their customers is that the existing model train factories found themselves with an onslaught of new clients desperate to get their models back into production. These clients also needed to start new projects to ensure that they don’t run out of cash in the long term. No model train factory was, or is, anywhere near the size of Sanda Kan. The demand outstripped the supply – by a huge margin.
The industry is still recovering from the eviction of Sanda Kan’s clients. The January closure of one of the largest remaining suppliers in the industry will only add to our collective problems. This closure was caused in large part by the fact that model railroad price increases (averaging 10%-25%) have not kept pace with cost increases in China, and it is often difficult for the Chinese suppliers to stay in business while meeting the demanded price point from their major North American clients.
Our industry is currently tied to Chinese production, as southern China has developed the special skill set required to produce model trains. Bringing the manufacturing back to North America would cost even more due to very high start up costs and higher overhead, and there are no reliable model train factories set up yet in places like India. So I think we’re looking at tough times ahead in our industry: more delays and even larger price increases.
Rapido has largely been insulated against these major price increases. But, as you can see from this newsletter, we have not been insulated from the major production delays in China. Rest assured that we are not taking these challenges lying down. We are working on a plan to significantly speed up our production in 2013, and I will be able to tell you more about these ventures later this year. Stay tuned.
The above newsletter is found onhttp://www.rapidotrains.com/rapidonews36.html (Update in September 2020: The link no longer works. A new link can be found online.)
Who is Kader Holdings Company Ltd?
- Kader is a Chinese investment holding company based in Hong Kong with alonghistory of manufacturing plastic toys for major foreign brand names
- It is listed on the Main Board of Hong Kong Stock Exchange
- In the1980s, itacquiredthe popular model train brand called Bachmann, which was founded by a US company in 1833 and one of Hornby’s main rivals
- This ishowKaderdescribes itself inits website:
From the 1990s to the present, while continuing to manufacture for major foreign brands, Kader started to pursue opportunities in the model railroading industry as well.
The Company acquired Bachmann Brothers, Inc. in 1981, Liliput in 1994 and Williams Reproductions in 2007, as well as launching the Bachmann Branchline and Bachmann China brands in 1989 and 1999 respectively.
A major milestone in the Company’s development was the acquisition, in 2009, of model railroad and road race manufacturer Sanda Kan. Operating independently under its own management, Sanda Kan added ten factories and an 8,000 strong workforce with 25 years of R&D and manufacturing experience to Kader’s already extensive operations.
Through these acquisitions, Kader was able to transfer the technical know-how of manufacturing sophisticated models to vastly enhance moulds and products across all manufacturing divisions.
Between 1996 and 2009, Kader’s products won more than 30 “Model of the Year”, “Manufacturer of the Year” and many other awards sponsored by Model Railroader, BahnProfil, Eisenbahnand other various magazines and industry organisations.
- Kader’s share price in Hong Kong Stock Exchange from 2005-2015:
(Update in September 2020: The original embedded code to view the share price chart no longer works. Readers may try other available tools online.)
- Hornby’s share price in London Stock Exchange from 2005-2015:
(Update in September 2020: The original embedded code to view the share price chart no longer works. Readers may try other available tools online.)
As a result, from all of the above, it appears Hornby’s challenge is more than justgetting the kids in the UK to go back into modelling. On the business side, the threat now may come from a Chinese company called Kader, which makes clear its intention to enter the international model railways market. Without stating the obvious, thisessentially means chipping away Hornby’s market share.
Kader has longacquired the well-known model train brand called Bachmann, which has been afierce competitorof Hornby.Then, in 2009, Kader acquired Sanda Kan, which was Hornby’s main supply of model trains then.
This appeared not to be a coincidence but a calculated move by Kader and Sanda Kan. After Kader’s acquisition, Hornby’s relationship with Sanda Kan turned sour. Hornby started to experience well documented supply disruption from Sanda Kan, which ended its supply contract with Hornby altogether last year. While Hornbyhas beencaught unprepared for the supply disruption from Sanda Kanand busy dealing with the aftermath in the last five years, Kader is proudly promoting the acquisition of Sanda Kanas a milestone for itself.
This was no doubt a big blow toHornby. Besides all the supply disruption, not only did Hornby have to pay £0.5m todivorce Sanda Kan, it also had to divert time and resources to look for new supplying partners. Moreover, as reported in the above, Hornby said the exit was not clean and Sanda Kan had delayed in releasing the tools and moulds that Hornby needed for production elsewhere.
Finally, as its subsidiary, Sanda Kan, was once the primary manufacturer for Hornby, Kader now inevitably gains some vital knowledge of Hornby products, be it intentional or unintentional. In fact, Kader is very upfront with what it is capable to do now with Sanda Kan under its wings:
Established in 1973, Sanda Kan is a highly recognized developer and manufacturer of precision models. It produces a full range of model train locomotives, from the very small 1:220 scale to the large 1:22 scale products.
Other hobby items include electronic slot racing cars, sophisticated digital controls as well as accessories such as scenery, promotional cars and trucks.
Its production facilities are located in Songgang, Shenzhen and Wanjiang, Dongguan. Each location is outfitted with mould shops providing full service on-site mould construction and maintenance.
Both locations are also sub-divided into individual factories capable of manufacturing complete products, which are comprehensively equipped with injection moulding machines, tempo printing and spraying facilities, and dedicated assembly lines.
This arrangement provides our clients with the dedicated capacity, service and privacy levels that they may require.
Together with Sanda Kan and their expertise in the models industry, Kader further reaffirms our commitment to manufacture quality products.
While not a word about Hornbyis mentioned by Kader, a person familiar with the hobby trade can see all the above arepretty much Hornby’s operation areas.
So, how will this trade battlebetween Kader and Hornby play out? By ending its relationship with Sanda Kan, can Hornby move on and revive after the massive overhaul last year? Only time will tell.
Industrial dispute in Sanda Kan’s Dongguan factory in April 2014
As if this Chinesesupplier story would never end, the harsh truth is there is even more in this story.When one digs deeper into themanufacturing history of Hornby, Bachmann, Kader and Sanda Kan, one would see this story, just like a well-built model layout, is actually extremely complicated.
In fact, one did not have to wait long for a new development in this story. InApril 2014, a group of workers in Sanda Kan’s factory in Dongguan, China went on strike. According toChineseinternet bloggers,it wasa compensation dispute.The industrial action becameso bad thatthe local government was reported to send in 1000police officersto maintain order.
(Sanda Kan has a rather peculiar Chinese name and its workers in China wear light green uniforms)
This news of the strike made no headlines in China or abroad. Both Hornby and Kader hardly ever discussed manufacturing issuesin details in public. The true scale of the labour dispute and itsimpact may neverbe known because the topic is both politically and financially sensitive.
However, for the model trade, this has implications and manufacturing in China has always been a topical issue in the modelling community. Last year, Hornby finally decided to end its long working relationship with Sanda Kan. This year, Bachmann announced it had to raise prices onsome of its model railway products, blaming risingmanufacturingcosts in China.
The Rocket and the Flying Scotsman may have nothing to do with China historically. But, like it or not, the hobby and trade are tied to China and the manufacturing aspect has a less appealing side.
To learn more about Sanda Kan, read The Unassuming Man Who Built a Model Railroad Empire. (Update in September 2020: The link to the original post no longer works. An archived version can be found on Internet Archive )
