Designed here, made in China
Danawares grew by marketing licensed tents, dolls and games

Outsourcing is this month's business buzzword. Everyone from presidential economists to union activists seems perplexed at the implications of subcontracting increasing numbers of white-collar jobs to India and other emerging nations.

To get an inkling how things might look in the future, it pays to look at the toy industry, which has been outsourcing blue-collar jobs for more than 20 years.

"There used to be many medium-sized toy manufacturers in North America," Raymond Cheng, sourcing director at Danawares Corporation said. "Today you can't find any."

But the Canadian toy industry didn't die off. It adapted. Today companies like Danawares, which markets licensed toys such as plush dolls, childproof tents and puzzles, are thriving by using the best of both worlds.

Danawares' 30 Canadian employees handle value-added functions like product design, marketing and North American distribution. The company then farms out the relatively low-skill manufacturing to a slew of factories spread throughout southwest China.

"It's a great place to do business," Cheng said. "They have a very eager workforce at attractive rates. When you put that together with the entrepreneurial skills brought over from Hong Kong, you have a powerful combination."

But according to Eddy Abecassis, Danawares' vice-president (sales), and co-owner, getting high quality products is only half the battle. The real challenge is determining what consumers are going to buy.

"Licensing is a tricky game," Abecassis said. "There are certain evergreen brands like Mickey Mouse and Winnie the Pooh that retain their value for decades, but others are more like shining stars."

For example a few years ago, Abecassis acquired a license to produce South Park merchandise, and managed to sell 2.5 million branded key chains within a short period of time. But demand bottomed out just as fast as is appeared.

Today Danawares derives the bulk of its $8 million in annual sales from products tied to children's television shows such as Cailloux, Sponge Bob and Dora the Explorer.

The programming provides visibility to the brands, a practice that works particularly well in the Quebec market, where businesses are not allowed to advertise to children. But judging what's hot is tough.

"You've always got to be on the look-out for the next great things." Abecassis said.

And even when a business lands a license, the battle is not over.

Licensors such as Disney, Fox Kids and Nickelodeon supply detailed style guides that specify how their characters and brands must be displayed.

Any product design, be it a pillow, a dinnerware piece or puzzle, that deviates even slightly from style guide specifications is likely to be rejected. It's not uncommon for a manufacturer to supply a dozen samples before one is finally accepted.

And the fees can be stiff. Manufactures pay licensors a royalty of between 10 and 19 per cent of wholesale revenues.

But according to one customer. Danawares has been doing a pretty good job.

"They have excellent licenses," said Ginette Brière, one of three purchasing agents at Hart Stores, a big Danawares client. "They are very tied into the pre-school market, and seem to know what these kids want."

One of Danawares biggest strengths is its diversified customer base, which includes big chains such as Sears and Wal-Mart, pharmacies and a slew of independent stores, with no client accounting for more than 20 per cent of revenues.

Abecassis also prices his products aggressively. When import costs began to drop due to the recent strength of the Canadian dollar, he passed almost all of the savings immediately to his customers.

Another way he keeps costs down is by providing retailers a chance to buy large quantities directly from the manufacturer. The retailers avoid the middleman's mark-up and instead compensate Danawares by paying a small fee.

The white-collar outsourcing boom is still in its infancy stages, and it's by no means clear how things will evolve.

But it's a good bet that over the medium term, more and more white collar organizations are going to be structured like toy companies, with routine, repetitive work out-sourced to emerging nations, and creative, value added functions, remaining in North America.




Sidebar: The challenges of doing business in China

Although entrepreneurs who do business in China never cease lauding its advantages, there numerous potential pitfalls that they need to look out for.

"You've got to be careful when doing business with a company that is 8,000 miles away," Raymond Cheng, sourcing manager at Danawares said. "As a practical matter, you can't visit them every time a small problem comes up, which means you have to spell out every detail in advance."

According to Cheng, potential problems such as delays, cost over-runs or quality disputes, which are a routine part of doing business, can be magnified as a result of the vast distances.

"You have to develop a good relationship and treat the supplier fairly," Cheng said. "Manufacturers are often very anxious to do business. But you cannot squeeze them too much or waste their time by asking them to make you free samples for orders they have little chance of getting."

Bu most important, Cheng advises to potential outsourcers to minimize potential communication breakdowns by hiring buyers or agents who speak the local language and understand the customs.

"Many Chinese businessmen appear to speak good English, but you have to be careful," Cheng said. "If they understand 95 per cent of the language, and you assume that they understand 100 per cent, then you are in big trouble."

Photo caption: According to Eddy Abecassis. vice-president (sales) and co-owner of Danawares Inc., the company gets the best of both worlds by doing value added design work in Canada and contracting manufacturing to China.

Fact Box:
Company Name: Danawares Corporation
Owners: Eddy Abecassis, Peter Lewis
Products: Licensed products including dolls, tents and games
Production facilities: Contractors in China
Sales: $8 million
Phone #: 514-342-5555


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