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Survival strategy of OEM Case study of

the Chinese
companies: a case study of the toy industry
Chinese toy industry
Dezhi Chen 1065
Shanghai Jiao Tong University, Shanghai, China Received 10 April 2015
William Wei Revised 18 August 2015
5 October 2015
School of Business, MacEwan University, Edmonton, Canada Accepted 16 October 2015
Daiping Hu
Shanghai Jiao Tong University, Shanghai, China, and
Etayankara Muralidharan
School of Business, MacEwan University, Edmonton, Canada

Abstract
Purpose – Although there have been many discussions on the status and development of original
equipment manufacturers (OEMs), theory on how they survive is minimal. Little is known about how
OEMs survive and upgrade to other business models, such as original design manufacturers (ODMs)
and original brand manufacturers (OBMs), in emerging economies. The purpose of this paper is to
extend the theory on the survival path of OEMs from the perspective of emerging countries by
examining how OEMs survive cost pressures and upgrade to ODMs or OBMs.
Design/methodology/approach – Using a multi-case study method, this study analyzes the
survival path employed by OEMs by examining eight firms in the Chinese toy industry.
Findings – This study shows that OEMs remain weak in the global toy industry chain due to labor
costs. While some OEMs move to low-cost regions, others turn to OBM management, after
transitioning through an ODM model, by investing in research and development and marketing.
Originality/value – This study explores the survival paths of OEM enterprises, showing that OEMs
can first upgrade to ODMs and then to OBMs, or they can directly upgrade to OBMs. Shifting from
OEM to ODM is an important step in the transition process, although the contract that OEMs have
with their foreign partners does not change significantly.
Keywords Outsourcing, Operations strategy, Case study
Paper type Case study

Introduction
The upgrade of low-end enterprises in global value chains constitutes an important
theoretical topic in terms of world’s value chain (Gereffi, 1999; Kaplinsky et al., 2002).
It also represents a strategic development issue with respect to the survival and
long-term development of those original equipment manufacturers (OEMs), which are
positioned at the low end of the global value chain (Hobday, 1995; Zhao and Xu, 2013).
As such, there is a dearth of studies examining the abilities and processes by which
OEMs transform their operations and upgrade to become original design manufacturers
(ODMs) and original brand manufacturers (OBMs) (Eng and Spickett-Jones, 2009).
With the globalization of multinational companies (MNCs), offshore OEMs in
International Journal of Operations
emerging countries have become an important part of the global value chain, and, due & Production Management
Vol. 36 No. 9, 2016
pp. 1065-1088
This paper is supported by Nature Science Foundation of China (Project No. 71172132). An earlier © Emerald Group Publishing Limited
0144-3577
version of this paper was presented at AIBNE 2014. DOI 10.1108/IJOPM-04-2015-0212
IJOPM to its low-cost and abundant labor advantages, China has seized this opportunity to
36,9 establish itself as a major base for offshore OEM production (Li et al., 2010). OEMs in
China receive contracts from MNCs in developed countries to assemble or manufacture
products for them. Also called “vendor plants” (Lyles et al., 2008), these OEM suppliers
manufacture low-end products and earn low margins. Since these OEMs usually do not
pursue any brand-development activities, the Chinese toy industry has realized that
1066 building brands represents a crucial step in gaining a competitive position in the
world’s toy market (Wu, 2010).
China manufactures about 70 percent of the world’s toys (IBISWorld, 2014) and is
home to more than 8,000 toy firms, most of which are located in the Pearl River Delta of
Guangdong Province. The toy industry employs over 600,000 people in China
(IBISWorld, 2014), and thus, the survival and development of OEM factories plays a
significant national role. The world’s leading toy companies usually have a two-tier
strategy for production in China (Lyles et al., 2008). While they own some factories, which
focus on the core tasks, they also outsource some non-core tasks to Chinese suppliers.
OEMs’ survival strategies have generated discussion in the Chinese society as well as
in academic circles (Huang, 2009). Most previous research on OEMs focusses on
offshoring and outsourcing strategies from the perspective of MNCs in developed
countries (Pyndt and Pedersen, 2006), while some examines the dissimilarities in the
outsourcing strategies of manufacturing firms between emerging and developed markets
(Größler et al., 2013). Only a few studies examine OEMs’ survival strategies from the
perspective of emerging countries (Li et al., 2010). Previous studies on the survival and
upgrade path of OEMs in emerging countries have identified relocation as a common
approach (Andreff, 2009), with some studies suggesting that branding represents a
crucial strategy that firms can use to escape the OEM trap (Temporal, 2005). Although
many researchers believe that the transition of OEM development is inevitable, and that
firms need to take initiatives to upgrade to OBMs (Sun, 2015), the question is: how can
they do so in the face of competitive pressures? What is the transition process?
This information gap warrants further exploration and serves as motivation for this
study. Specifically, very little is known about the way some OEMs survive and upgrade
to other business models (e.g. ODM and OBM) in emerging economies. The purpose of
this research is therefore to explore how OEMs survive cost pressures and upgrade to
ODM or OBM model in emerging economies. In doing so, this study attempts to extend
the theory on the survival path of OEMs, specifically from the perspective of emerging
countries. This study also adds to the extant research by exploring the circumstances
in which mixed models may be appropriate (Harland et al., 2005).
The toy industry provides an appropriate setting for this study, partly because it
leads the global outsourcing trends and partly because China is the world’s largest
OEM toy manufacturing center (Lyles et al., 2008). Using a multi-case study method, the
study analyzes the survival path employed by OEMs in the Chinese toy industry. Eight
Chinese and Hong Kong toy manufacturing firms serve as the subjects; all eight are
listed on the Shanghai and Hong Kong Stock Exchanges, and all use an OEM business
model. The key implication of this study is that the survival and upgrade of OEM
companies will substantially affect the Chinese economy by raising the
competitiveness of China’s manufacturing activities (Yeung and Liu, 2008).
The paper is organized as follows. The next section outlines the theories on the
survival path of OEMs, which forms the basis of the conceptual framework in the
study. Thereafter, the methodology and data used are discussed. The final section
presents the results of the case study, followed by discussions and conclusions.
Literature review Case study of
Global value chains the Chinese
Global value chains cover the full range of activities that are required to deliver a
product from its conception and design, through its raw materials and intermediate
toy industry
inputs, to its marketing and distribution, and finally, to the end-consumer (Kogut,
1985). The term global value chain refers to the creation and realization of value at
various stages of all activities, ranging from product design, development, 1067
manufacturing, marketing, sales, consumption, and service (Gereffi et al., 2005).
Under the influence of the global economy, these activities – which scholars have
summarized as R&D, manufacturing and service – are performed by different firms in
various locations worldwide (Gereffi, 1999), through outsourcing and offshoring
strategies. In particular, for many OEM firms in developing economies, globalization
has provided opportunities to participate in global markets, which helps these OEMs to
gain economics of scale and scope and improve their technological capabilities
(Kaplinsky et al., 2009).

Offshoring/outsourcing
Multinational firms have made numerous attempts to explore offshoring/outsourcing
strategies (Quinn and Hilmer, 1994; Mudambi and Venzin, 2010), which can be defined
as “the relocation of business processes from one country to another country”
(Mudambi, 2007). While one stream of literature views offshoring as a cost-
minimization strategy that focusses on core activities (Beaumont and Sohal, 2004) and
relocates certain non-core activities to low-cost regions, other streams regard it as a
location strategy that can be used to integrate cost minimization and knowledge-
seeking initiatives (Mudambi, 2008). Still others have identified political goals and
culture as sources of influence when it comes to outsourcing decisions (Metters, 2008;
Marshall et al., 2015).
While firms outsource domestically in order to increase their capacity flexibility,
they outsource/offshore globally to derive cost advantages (Größler et al., 2013). Quinn
and Hilmer (1994) showed that such activities, which are not core competencies, can
help firms to achieve increased competitiveness by focussing on core competencies.
Firms therefore outsource/offshore their standardized processes only. Specifically,
offshore OEM companies in low-cost regions have become investment recipients of
MNCs that outsource part of their value-creation activities (Andreff, 2009).

Smile curve
The smile curve can provide a framework to explain offshoring/outsourcing strategies
and the OEM’s position along the global value chain. Stan Shih, co-founder of Acer, a
Taiwanese hardware and electronics MNC, pioneered the use of the smile curve to
describe value-creation activities in different sections of industry. This concept was
further developed by Mudambi (2007, 2008), who proposed that activities within a
firm’s value chain could be classified along three categories: the upstream end, the
downstream end, and the middle (Mudambi, 2008). The upstream end includes
activities like research and product design. The downstream end comprises activities
like marketing, brand development, and after-sale service. The middle section includes
manufacturing activities and other activities that can be mass-standardized. The value-
added activities are therefore concentrated in the upstream and downstream ends of
the value chain (see Figure 1).
IJOPM Higher
36,9
Concept /R&D Sales /after service
VALUE-ADDED

Branding Marketing

1068
Design Distribution

Manufacturing Under this model,

manufacturing is the
Lower lowest-value input
Figure 1.
Stan Shih’s PRODUCTION CHAIN
smile curve Time

While high value-added activities are largely performed in both developed and
emerging economies, depending on the factor costs, low value-added activities are
generally performed in the emerging economies (Mudambi, 2007). Hence, the global
value chain appears to be stratified, whereby countries within each strata or fragment
draw upon their own asset endowments and comparative advantages in order to
specialize in a given activity.
As discussed above, offshoring/outsourcing strategies enable firms to disaggregate
activities along the smile curve to different global locations, thereby moving from one
location to another along the smile curve. Mudambi and Venzin (2010) pointed out that
firms must adapt their offshoring/outsourcing strategies when faced with changing
market conditions. For example, the study by Luk et al. (2004) found that Hong Kong
toy manufacturers are “continuously migrating” to low-cost offshore facilities in order
to reduce costs. OEMs in China are located at the middle of the smile curve, signifying
low value-added activities, a phenomenon called the OEM trap (Temporal, 2005).
Some studies have discussed how OEMs in low-cost countries set themselves
free from this trap, arguing that the most viable response of such firms is to upgrade or
catch up, which not only includes upgrading product quality but also moving from
pure production process to new-product development and branding (Mudambi, 2008).
Temporal (2005) pointed out that the long-term survival path for such firms lies
in branding their products in the market or differentiating themselves from
the competition.
These initiatives of new-product development, branding and other related activities
are not standardized activities. Instead, they are knowledge-intensive activities, which
are concentrated at the two ends of the smile curve. Thus, for firms in low-cost
emerging economies – and especially for OEMs that rely on foreign orders to thrive –
the barriers to becoming ODMs or OBMs take the form of a lack of R&D and
marketing/branding skills. For that reason, further exploration is required on the ways
that OEMs from low-cost emerging economies can obtain such skills.
Extant studies on the knowledge-based view of the firm have shown that knowledge
can be transferred between firms through cooperative arrangements, such as
market exchanges and contracting. Such arrangements provide unique opportunities
for local OEM companies in emerging markets to enhance their capabilities
through learning from foreign buyers and contract partners (Lyles et al., 2008). OEM
companies can acquire skills and advance technologies through spillover effects
during the cooperation process with MNCs from developed countries (Child and Case study of
Rodrigues, 2005), all of which enables OEMs to upgrade to a knowledge-based business the Chinese
model such as ODM or OBM.
toy industry
OEMs/ODMs/OBMs
In the early 2000s, in order to improve the competitive position of their products, a
rapidly growing list of global companies began to conduct business in China, a trend 1069
that had the effect of integrating China into the global supply chain ( Jiang et al., 2007).
In China, both local and foreign OEMs successfully upgraded to OBM status, as seen in
the examples of Taiwan’s Acer and China’s TCL and Lenovo (Lin and Hou, 2010).
These firms began operations as OEMs and gradually added post-conceptual design
services to their manufacturing function in order to become ODMs. Thereafter, armed
with design capabilities, they began to manufacture finished products to be marketed
under their own brands (OBMs).
Many large manufacturers in the Asia-Pacific Region now provide OEM services
to world-class MNCs from developed countries, while still producing final goods
(as OBMs) to local markets. Dubbed “dragon multinationals,” these Asia-Pacific
OEMs, start low and gradually evolve into global enterprises in their own right
(Mathews, 2006). As a result of this movement, an ever-increasing number of OEMs in
China have been inspired to exploit the nation’s fast-growing consumer markets
through the process of functional upgrading (Li et al., 2010; Luo and Tung, 2007).
But upgrading from OEM to OBM requires additional capabilities, and such firms
must have superior R&D and marketing capabilities in order to succeed in the
transition process (Hobday, 1995). Some scholars suggest that, in the transition from
OEM to OBM, firms should first convert successfully to an ODM and then to an
OBM (Wang, 2010).
An OEM in China’s toy industry operates in one of the nation’s most important
manufacturing activities. Within the international toy industry, however, Chinese
toymakers sit at the low end of the scale in terms of product portfolio and profitability
(Wu, 2010; He, 2011). Chinese firms have found themselves in a vulnerable situation
since 2005, and many of these OEMs had to close due to the global financial turmoil of
2008 (Fu, 2008; Luo and Tang, 2012). Critics feel that Chinese toy OEMs are moving
toward a dead end (Huang, 2009; Lan, 2012), and the extant research suggests that this
downward trend is the result of inadequate independent R&D and innovation
capabilities and the absence of independent brands (Fan, 2013). Yet, in spite of these
shortcomings within the industry, a few OEM toymakers have succeeded by migrating
to ODM or OBM (Lu, 2014).

Methodology
This study adopts a multi-case-study method to advance discussions. According to Yin
(2002), the case study method is appropriate when the research seeks to address “how”
and “why” questions in a real context. The study explores how some OEMs in
emerging countries survive and upgrade to ODM or OBM, and its design is based on
the procedure suggested by Yin (2002) and Eisenhardt (1989).

Case selection
As a multiple case study, this work uses replication logic (Eisenhardt, 1989). In order to
achieve an effective replication effect, cases were selected that complied with either
IJOPM literal replication (producing the same results) or theoretical replication (producing
36,9 different results due to known reasons). Smart Union was specifically chosen because it
is representative of the OEMs in the Chinese toy industry, thus offering a chance to
study the reasons for closure of such firms.
Similarly, Haixin, Sewco, and Htch Harb Ring were chosen in order to test the results
of the understandings from the Smart Union case. This study also examines Matrix,
1070 Lung Cheong, Dream, and Kin Yat (see Table I for details), which were in the process of
upgrading from OEM to ODM/OBM in low-cost countries like Vietnam and Indonesia.
All of these publicly traded companies started their operations as OEMs before
2000. In view of the difficulty in obtaining financial information on non-publicly
traded firms, the sample set was restricted to publicly traded firms only. Further, the
study analyzes the customers of these firms, including world leaders such as Mattel,
Hasbro, Bandai, and Tomy. Customer data were used as supplementary information
in the analysis.
Data collection. The following sources were used to collect data on the eight firms.
Companies’ basic information and financial data. For all eight firms, data on
financial performance and strategic performance were obtained from annual
performance reports. Firm strategy and operating information was obtained from the
chairman’s messages in the annual reports and from management analysis of
the various departments. For Smart Union, Sewco, Matrix, and Lung Cheong, all of
which are fully engaged in the toy business, financial data were obtained from profit
and loss statements and balance sheets. For Htch Harb Ring and other firms that
are only partially engaged in the toy business, financial data were obtained from
annual reports. Appendix lists the sources from where financial information has been
obtained.
Interviews. Direct and indirect interviews with firm personnel were conducted to
obtain data. Although the selected firms manufacture toys in China, their corporate
offices are located in Hong Kong, and thus, it was difficult to arrange in-person
interviews with the managers of these firms. Further, some of the firms – for example,
Smart Union – closed their factories in Dongguan in June 2008, which made in-person
interviews virtually impossible. As a result, indirect interviews were conducted.
In total, 15 managers who are/have been engaged in the toy industry in Guangdong
Province were interviewed (ten telephone interviews of 30 minutes each; five in-person
interviews of two hours each). Two senior managers engaged in exports were also
interviewed twice for about three hours each time.
Method of analysis. One of the key objectives of this study is to compare each OEM
firm’s ability to survive and to examine their barriers to development. The firms were
divided into three groups: OEM, mixed mode of OEM/ODM/OBM, and OBM. Each
firm’s business model was determined by examining its product structure. Gross profit
rate percent) as a measurement for profitability was used to compare and analyze the
different business models. Similarly, R&D investment expenses and marketing costs
were used to analyze the necessary conditions of ODM and OBM.
The differences between groups were analyzed and generalized into propositions.
The firms’ cost benefits were analyzed by applying statistical and correlation analysis
on the data between 1999 and 2000. Value chain analysis of the data between 1999 and
2000 were performed for global toy companies such as Mattel, Hasbro, Bandai, Tomy,
and Nintendo. The initiatives taken by the firms were correlated with firm performance
over the time period during which the firms were observed.
 Smart Union Sewco Htch Harb Ring Haixin Dream Kin Yat Lung Cheong
(HK 2700) (HK 209) (HK 715) (SH 600851) (HK 1126) Matrix (HK 1005) (HK 638) (HK 348)

Annual
turnover 953,623 774,362 1513,444 206,955 946,328 1218,759 920,944 799,142
Main products Plastic toys Plastic toys Plastic toys Plush toys Plush toys Plastic toys Plastic toys E-toys
Plush toys Plush toys Plastic toys Plush toys E-toys Plastic toys
Manufacture Guangdong, Guangdong, Guangdong, Shanghai, China Shanghai, Guangdong, China, Guangdong, Guangdong, China,
base China China China China, Vietnam 1/2 Vietnam China 1/3 Indonesia
Main clients USA/Europe USA/Europe USA/Europe USA/Europe USA/Europe USA/Europe USA/Europe USA/Europe
Business OEM OEM OEM OEM OEM/ODM OEM/ODM OEM/ODM OEM/ODM
model 10% OBM 10% OBM
Employees 9,100 11,400 10,449 4,000 9,540 17,000 12,000 6,500
Business Bankrupt Deficit Abolished toys Deficit Operating Operating Operating Operating
status in 2008 dismiss Sold factory Close down
3,000 factory in Suzhou
Notes: Unit of annual turnover is 1,000 HKD or 1,000 RMB yuan. Unit of employees is one person. Information comes from corporate annual reports
toy industry

1071
the Chinese

case study of eight

Case study of

corporations in 2007
Basic information for
Table I.
IJOPM Results
36,9 Value chain analysis
The world’s leading toy firms adopt global offshoring/outsourcing strategies, which can
effectively retain core competencies and maintain a competitive advantage at the same time.
The leading companies’ strategic choices for their manufacturing partners generate a wide
geographic dispersion of firms’ activities, resulting in the global value chain (see Figure 2).
1072 These firms retain core tasks, such as the brand design, brand launch, new-product
ideas, prototype design, and product distribution, and thereby take control of both ends
of the value chain (i.e. both ends of the smile curve). All other non-core activities, such
as industrial design, mechanical design, product development, and manufacturing, are
outsourced. OBM businesses are considered as customers, while OEM/ODM businesses
are considered as suppliers. Figure 3 shows the movement of their gross margins,
which are observed to change over time.
The gross margins of Hasbro, Mattel, and Bandai between 2000 and 2007 (an eight-
year period) changed only slightly, while the gross margins of pure OEM businesses, such
as Smart Union, Haixin, Sewco, and Htch Harb Ring, decreased more than 10 percent
(i.e. from 20 to 10 percent or lower). However, companies that gradually upgraded to ODM
or OBM, such as Matrix, Dream, Kin Yat, and Lung Cheong, found their gross margins
reduced only slightly. These results indicate that firms that simply continue with the OEM
model may not add value since they neither differentiate products nor reduce costs
through appropriate sourcing; their role in the value chain is confined to manufacturing
only. Thus, OEMs are located at the bottom of the global value chain – that is, in the
middle of the smile curve. With increased competition and rising labor and material costs,
such OEMs find that their profitability gradually erodes, which threatens their survival.

Labor costs and the survival abilities of OEMs

Business performances are determined by labor costs. This study compared labor costs,
turnover, gross profit, and profit before taxes; the results of the analysis are shown
in Table II. Labor costs of Smart Union, Sewco, and Htch Harb Ring from 2000 to 2009
were significantly correlated with pretax profits. From this correlation, it became clear
that labor costs had a significant impact on the firms’ survival ability.
Cost and benefit analysis per capita. The firms’ operating costs per capita, labor cost
per capita, turnover per capita, net profit per capita, and gross profit per capita were
compared using 2007 data. The results (see Table III) show that firms operating
entirely with an OEM model, such as Smart Union and Htch Harb Ring, had higher
costs but lower profits compared to the companies that adopted ODM/OBM models,
such as Matrix and Kin Yat. The OEM’s profit per capita was 300-400 percent lower
compared with OBM businesses such as Tomy, Bandai, Mattel, and Hasbro.

OEM production and operation status

Production location and operating conditions. Firms that did not change their mode of
operation and production locations were compared with the firms that upgraded to the
ODM/OBM models and moved to lower labor-cost areas like Vietnam and Indonesia;
the results are shown in Table IV. Smart Union, Sewco, Htch Harb Ring, and Haixin
engaged in OEM business only and did not develop ODM/OBM capacities or move
their processing operations to lower labor-cost regions. The results show that the gross
margins of these four companies (Group 1 companies) decreased significantly.
Moreover, the costs of Chinese labor and raw materials increased significantly between
 Brand Design Industry Design Mechanical Technics

Conception Prototype Design Template Mould Production Distribution

Brand Issue Products Components

toy industry

global toy industry

1073
the Chinese

Value chain of the

Case study of

Figure 2.
IJOPM 70%
2000 2001 2002 2003 2004 2005 2006 2007
36,9 60%

50%
Gross profit %

40%

30%

1074 20%

10%
Figure 3.
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Case companies’

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Per capita labor Correlation Correlation Pretax Business
cost(thousand coefficient to coefficient to profit status in Business
HKD/person year) turnover pretax profit rate (%) year 2008 model

Smart 25.57 +0.999a −0.997 0.90 Deficit/ OEM

Union bankrupt
Htch 28.71 −0.436 −0.856a −3.98 Close down OEM
Harb
Ring
Sewco 18.22 +0.976b −0.943b 1.70 Deficit OEM
Kin Yat 11.42 +0.958b +0.350 8.43 Operating OEM/ODM/
OBM and
components
Matrix 17.72 +0.977 −0.568 5.08 Operating OEM (70%)/
ODM (30%)
Lung 23.84 +0.017 −0.589 0.21 Operating OEM (70%)/
Cheong ODM (20%)/
OBM (10%)
Vtech 35.79 +0.947b +0.255 13.77 Operating OEM (20%)/
well ODM (20%)/
OBM (60%)
Goldlok 23.79 +0.961a Operating+0.991b 14.15 OEM (5%)/
well OBM (95%)
Bandai 515.92 +0.793a −0.112 10.00 Operating OBM
well
Nintendo 630.44 +0.838a +0.912b 25.94 Operating OBM
well
Table II. Tomy 439.86 +0.989b −0.133 0.021 Operating OBM
Relationship between well
labor costs and Notes: aSignificant correlation when significance level is 0.05 (double sides); bSignificant correlation
profitability when significance level is 0.01 (double sides)

2007 and 2008, which caused Smart Union to shut down in the midst of the global
financial crisis. Similarly, Sewco’s profit margin dropped to 4 percent, resulting in a
lay-off of 3,000 employees. Haixin’s gross margin decreased to 3.6 percent, resulting in
the closure of one of its plants. Htch Harb Ring exited the toy business.
 Per Per capita Per Per capita Per capita
Case study of
capita business capita gross profit pure profit Business the Chinese
labor cost cost turnover rate rate in 2008 Business model toy industry
Smart 25.57 101.76 104.79 12.52 0.60 Deficit/ OEM
Union bankrupt
Htch 28.71 150.43 144.84 7.77 −5.77 Close OEM
Harb down 1075
Ring factory
Sewco 18.22 72.63 67.93 3.54 −4.89 Deficit OEM
Kin Yat 11.42 69.92 76.75 13.25 5.89 Operating OEM/ODM/OBM
and components
Matrix 17.73 68.05 71.69 21.24 3.51 Operating OEM (70%)/
ODM (30%)
Lung 23.84 118.62 122.94 30.05 0.68 Operating OEM (70%)/
Cheong ODM (20%)/
OBM (10%)
Vtech 35.82 329.61 379.97 140.17 47.48 Operating OEM (20%)/
well ODM (20%)/
OBM (60%)
Goldlok 23.00 371.89 434.08 102.06 54.31 Operating OEM (5%)/OBM
well (95%)
Tomy 439.86 4,168.31 4,279.62 1,117.91 41.69 Operating OBM
well
Bandai 515.92 3,946.08 4254.8 1,516.04 301.96 Operating OBM
well
Mattel – 1,237.32 1,409.71 655.8 141.68 Operating OBM
well
Hasbro – 4,116.83 4,761.17 2,805.09 413.15 Operating OBM
well Table III.
Notes: aUnit for Smart Union, Htch Harb Ring, Sewco, Kin Yat, Matrix and Lung Cheong is thousand Comparison of per
HKD/person year; bUnit for Vtech, Goldlok, Tomy, Bandai, Mattel and Hasbro is thousand RMB yuan/ capita cost and
person year; cValues in the table are for the year 2007 efficiency

An examination of Group 2 companies (see Table IV) revealed that, in 1997, Matrix
started to build factories in Vietnam because of its lower labor costs. During 2006-
2007, a large number of the firm’s production activities were shifted to Vietnam,
which eased the cost pressures on the factories that remained in China. As a result,
Matrix could effectively control its overall operating costs. Matrix also increased its
ODM business and started engaging in OBM business through mergers and
acquisitions. By reducing its labor costs and improving its product and service
capabilities, Matrix expanded its ODM business, which also helped to keep its gross
margin stable at 32 percent. Lung Cheong adopted similar strategies to those of
Matrix, opening a large factory in Indonesia, which effectively eased the cost
pressures on its factory in Guangdong, China. Lung Cheong also upgraded to ODM
and OBM modes and moved into the high-tech toy segment.
In sum, Matrix and Lung Cheong maintained their profitability positions, first, by
reducing costs, and second, by improving their capabilities to design and develop new
products and services.
R&D and marketing. Table V shows a summary of the R&D and marketing
expenses of pure OEM firms and the firms that have already started to upgrade to
 36,9

status
1076
IJOPM

Table IV.

indicators, and
Business models,
Gross profit rate Manufacture Manufacture Finish Gross profit rate Business
in 2000 (%) base transfer product Components ODM/ OBM in 2007 (%) status in 2008

Group 1 Smart 21.00 Guangdong No Finish No No 11.90 Deficit/bankrupt

Union products
Sewco 21.97 Guangdong No Finish No No 5.20 Deficit
products
Htch 10.90 Guangdong No Finish No No 13.90 Close down Factory
Harb products
Ring
Haixin 20.50 Shanghai and No Finish No No 3.6 Deficit/close down
Jiangshu products Suzhou Factory
Group 2 Kin Yat 25.00 Guangdong No Finish 1/5 Toy 1/5 ODM 14.80 Operating
products motor and OBM
Matrix 30.40 Guangdong and 1/3 Vietnam Finish Mould 1/3 ODM 29.30 Operating
Vietnam products
Lung 27.90 Guangdong and 1/4 Indonesia Finish Mould 1/3 ODM 18.80 Operating
Cheong Indonesia products and OBM
Dream 20.3 Shanghai and 1/7 Vietnam Finish No 1/7 ODM 15.6 Operating
Vietnam products
 Htch Harb Lung
Case study of
Smart Union Ring Sewco Matrix Kin Yat Cheung the Chinese
toy industry
R&D
investment (%) 0.05 0.00 0.00 1.82 1.00 3.00
R&D Staff 50 300 150 300
R&D contents Technology Technology Technology Product Product Product
of of of development development development 1077
production production production
quality quality quality
Patents No No No More than 1 More than
300 400
Marketing
investment (%) 0.00 3.97 9.94 2.84 5.39
Distribution No No No Yes Yes Yes
Business model OEM OEM OEM OEM/ ODM OEM/ODM/ OEM/ODM/
OBM OBM Table V.
Notes: R&D and marketing investments are the average value of 2005-2007; patents are the total Business model,
number of patent applications before June 2010 R&D, and marketing

ODM/OBM models by operating under a combination of OEM/ODM/OBM. The results

show that pure OEM firms did not have any R&D investments, and they did only what
customers required them to do in terms of product quality. Matrix, Kin Yat, and Lung
Cheong, which were partially involved in ODM/OBM business, invested 1-3 percent in
R&D and also developed their own patents. These firms engaged in machinery
technology and production development, along with new-product development and
development of intellectual property. While Smart Union and Htch Harb Ring did
invest separately for marketing, Sewco’s sales costs accounted for 3.97 percent of its
turnover. Matrix and Lung Cheong’s marketing expenses were 9.94 and 5.39 percent,
respectively, both greater than that of Sewco.
For further investigation of the relationship between marketing, development
inputs, and operating performance, this study used development and marketing costs
data and operating performance data from OEM, OEM/ODM/OBM, and OBM firms to
conduct a correlation analysis (Table VI). The results show that, for OEM firms, sales

Correlation between amount of ads/ Correlation between amount of R&D

sales and business performance and business performance
Gross Pure profit Gross Pure profit
Turnover profit rate rate Turnover profit rate rate

OEM(Smart Union and Sewco) +0.851b +0.553b +0.095 – – –

OEM/ODM/OBM(Lung Cheung/
Matrix/Vtech) +0.909b +0.933b +0.675b +0.865b +0.842b +0.564b Table VI.
Correlation analysis
OBM(Bandai & three corporations
for the amount of
in Japan) +0.971b +0.977b +0.960b +0.878b +0.884b +0.858b
marketing and R&D
OBM (Mattel and Hasbro in USA) +0.849 b
+0.730 b
+0.692 b
−0.139 +0.171 −0.196 investment, turnover,
Notes: aSignificant correlation when significance level is 0.05 (double sides); bSignificant correlation when gross profit rate, and
significance level is 0.01 (double sides) pure profit rate
IJOPM cost inputs, and turnover were significantly correlated, but not correlated with their
36,9 profits and profit margins. For firms changing to ODM/OBM models and following an
OEM/ODM/OBM model, sales cost inputs, turnover, and profit margin were all
significantly correlated, as were their development inputs, turnover, and profit
margins. For OBM firms, the results were mixed. Bandai’s and the Japanese companies’
marketing costs, development cost inputs, turnover, profit margin, and pure profit were
1078 all significantly correlated. However, for two world-famous toy companies, Mattel and
Hasbro, while their marketing costs, turnover, and profit margin were significantly
correlated, their development inputs, turnover, and profit were not.

Survival path of OEM enterprises

Keeping OEM operations but transferring to a lower-cost area
Since 2000, labor costs in the Chinese coastal area, especially in Guangdong, have been
increasing. Between 2000 and 2003, the cost to employ a worker, including
accommodation, was about 400-600 yuan per month. In 2007, the cost rose to 1,500
yuan per month. The cost for a skilled worker was more than 1,500 yuan per month.
In view of the increasing Chinese labor costs and their predicted increase for the future,
some OEM firms tried to maintain their profit margins by moving their low-end plants
to Vietnam, where labor wages are half that of China. In 2007, for example, labor wages
in Vietnam were about 700 yuan RMB (Dong, 2008). Matrix (which was one of the firms
that established toy factories in Vietnam) was compared with Sewco (which did not
move to low-cost areas), using labor cost-benefit analysis (see Figure 4).
The results show that since Matrix established plants in Vietnam in 2001, it maintained
its labor costs at 7,120 Hong Kong dollars per person until 2004. Sewco paid 9,110 Hong
Kong dollars per person for the same period, a rate that was 28 percent higher.
A comparison of the five-year average profit per capita showed that Sewco (at 4,170
Hong Kong dollars per person) was 140 percent (or 5,850 thousand Hong Kong dollars
per person) lower than Matrix (1,002 Hong Kong dollars per person). Figure 4’s data

120
Per capita operating
cost of SEWCO
100

80
Per capita turnover of
SEWCO

60
HK dollar

Per capita turnover of

Matrix Per capita labour cost
40 of SEWCO

Per capita operating Per capita labour cost

cost of Matrix of Matrix
20

Per capita net profit

of Matrix

Figure 4. 0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Labor cost-benefit
Per capita net profit of
analysis SEWCO
–20
shows that, for pure OEM firms such as Sewco, an increase in labor costs per person Case study of
decreases the net profit per capita, thereby indicating that labor costs determine the the Chinese
survival of OEM enterprises. Hence:
toy industry
P1. When labor costs in the production base of a region are rising faster than
manufacturing costs, for an OEM factory that does not want to change its
business model, transferring to low-cost areas offers a pathway to survival.
1079

Upgrading from OEMs to ODMs and OBMs

Between 2000 and 2008, trends for gross margins of top brands like Mattel and Hasbro,
and also Chinese firms like Matrix and Lung Cheong, which took steps to move from
OEM enterprises into ODM/OBMs, were compared to those of firms like Smart Union
and Sewco, which did not make the change. Results of the comparison (see Figure 5)
show that, in the last ten years, the gross margins of OBM firms have stabilized
between 45 and 60 percent; the gross margins of firms upgrading to ODM/OBM
business models have stabilized at around 30 percent; and the gross margins of pure
OEM firms have declined over time. Specific details of the migration of Matrix and
Lung Cheong are discussed below.

OEM companies’ migration process

While Matrix and Lung Cheong shifted their businesses to Vietnam to take advantage
of lower labor costs, they also upgraded to OBM by gradually transferring to ODM,
pursued in combination with the OBM model.
Matrix’s process: in view of the increasing labor costs in Guangdong, Matrix, which
had a large factory in Guangdong prior to 1997, gradually shifted its toy business to
Vietnam, building its first Vietnamese factory in 1998, followed soon after by a second
and third. By the end of 2004, the Vietnamese OEM operations contributed to 40
percent of Matrix’s total OEM business. This percentage increased to 60 percent by
2008, and a fourth Vietnamese factory was opened in 2010. By 2012, most of the OEM
operations were concentrated in Vietnam, allowing the Guangdong factory to
concentrate on ODM operations.

70%
Hasbro
60%
Mattel OBM
50%

40% OEM/ODM/OBM
Matrix
30%
Gross profit %

Lung Cheong
20%

10% OEM
SEWCO
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
–10%

–20%

–30%
Figure 5.
Smart Union
Gross margins
–40%
IJOPM Matrix started developing its ODM operations in 2000, at which point the firm began to
36,9 recruit technical and R&D personnel to spearhead product development and design
activities. In 2005, Matrix acquired a professional design company through which it
gained professional talent and intellectual property. In the same year, the company set up
its own R&D department and began to drive new-product design in order to expand its
ODM business. In 2007, in order to give a fillip to its ODM business, which contributed to
1080 45 percent of the firm’s total business, Matrix acquired Funrise, a professional design and
selling company. Both the ODM and OEM businesses increased at a constant rate.
During the same period, Matrix also entered the LED lighting business in order to
avoid competition with its toy segment customers. Matrix developed the LED business
line into an independent brand (OBM), with its own R&D and business development
departments. The LED business (OBM) contributed to 2 percent of Matrix’s overall
business in 2011, increasing to 6.4 percent in 2012.
Lung Cheong’s process: established in 1998, Lung Cheong’s OEM business in
Indonesia contributed to 3 percent of the company’s overall OEM business in 2002.
In view of the increasing labor costs in China, Lung Cheong increased its Indonesian
operations, which, by 2009, contributed to 25 percent of its OEM business. In 2013, the
firm decided to transfer all its OEM operations to Indonesia.
In 1999, Lung Cheong’s ODM business produced self-designed products, which
contributed to 15 percent of the overall business. In 2002, the firm acquired companies
specializing in design, production, and distribution of molds. It also set up R&D
departments and expanded its ODM business to international markets such as Japan
and America. These changes led to a jump in the overall contribution of Lung Cheong’s
ODM business, from 20 percent in 2008 to 30 percent between 2010 and 2012.
Similarly, Lung Cheong’s OEM business witnessed a constant increase during the
same period. In order to develop its OBM model, the firm acquired the Kid Galaxy
Company from the USA, through which it also obtained a series of internationally
known brands and more than 200 US distribution channels.
With support from its own R&D department, Lung Cheong developed its OBM
business extensively, setting up the Lung Cheong Digital Technology Co. Ltd. in order
to improve the firm’s capabilities for technological innovation. By 2012, the OBM
business contributed to 20 percent of the overall business.
The above analyses show that, despite increases in labor costs during the global
financial crisis, OEM firms like Matrix and Lung Cheong can maintain stable operations
by gradually changing their business models to ODM/OBM and transferring their
operations to low-labor cost countries like as Vietnam and Indonesia. Therefore, firms
that change or upgrade their business models (to ODM/OBM) may increase their chances
for survival. Haixin, for example, increased its net profit in 2008 from 3.6 to 10.8 percent
by using a permit from the Olympic Games Association to build its own branded
products. On the other hand, firms like Smart Union, Htch Harb Ring, and Sewco, which
did not change their business models, experienced huge losses.
For firms operating as OEM/ODM/OBMs, investment in R&D, advertising and
marketing is therefore significant. Thus, the process of migrating to ODM/OBM business
models will entail increased expenses in R&D and marketing (see Table VI). Hence:
P2. When the costs of labor and raw materials increase significantly, for OEM
companies that do not want to or may not be able to migrate their production base,
and do not want to quickly transfer their plant to other low-cost areas, transition to
a combination of ODM and OBM mode of operation offers a pathway to survival.
 P3. When the costs of labor and raw materials increase significantly, for OEM Case study of
companies that do not want to or may not be able to migrate their production the Chinese
bases to other low-cost areas, they also have the option of shutting down their
plants or changing their product lines; otherwise, there is a risk of bankruptcy.
toy industry

The path of upgrading from OEM to ODMs/OBMs 1081

The smile curve indicates that OEM companies can first upgrade to ODMs and then to
OBMs; firms can also directly upgrade to OBMs. Shifting from OEM to ODM is an
important step in the transition process, although the contract that OEMs have with
their foreign partners does not change significantly. When firms upgrade to OBMs,
their original contract with their foreign partner is terminated (Liu, 2005). Since the
brands of firms from developed countries dominate the global market space, it might be
a challenge for new brands from emerging markets to compete (Hollows and Clegg,
2006). Further, for these firms from emerging markets, transitioning from an OEM/
ODM model to OBM will create conflicts with their foreign partners (or with their
original customers), which represents a key challenge for such firms.
For example, Liu et al. (2008) present two difficulties that OEMs may face during
transitions. First, ODMs or OBMs must establish product development and design
ability (which depends on R&D infrastructure) as core capabilities. The OEM’s original
customer arrangements may limit its opportunities for setting up its own R&D
infrastructure, thereby making it difficult for the OEM to acquire the core capabilities it
needs to become an ODM/OBM. Second, OEMs will experience conflicts with their
original customers when they attempt to develop their own competing brands.
Some of the companies in this case study (i.e. Lung Cheong, Kin Yat, and Matrix)
managed to upgrade to OBMs without developing conflicts with their original
customers. These transitioning companies adopted two strategies to make the
transition as smooth as possible. First, they worked to maintain good relationships
with their original customers, continuing to fulfill orders for them and updating their
own knowledge on market conditions in the process. Second, they adopted a
differentiation strategy on product attributes and product markets. These strategies
involved developing products and services that offered a unique selling proposition to
the consumers. The products could be variants of the parent MNC’s existing products,
or they could be a completely new-product line developed by the OEM itself. These
firms followed a gradual plan to OBM by adopting an OEM/ODM/OBM mixed mode,
while ultimately developing the unique value propositions that helped them to avoid
clashing with their original customers, with whom they partnered while operating as a
pure OEM. Hence:
P4. If existing customers are likely to put pressure on OEM companies that are
changing to OBMs, and the OEM companies cannot resist this pressure, the
OEM business development path to an OBM can be made more gradual through
an ODM route and will likely require a differentiation strategy in order to
develop unique value propositions.

Discussions and conclusions

In China, the issue of OEM business transformation and upgrading has become highly
significant for national economic development. Many scholars have proposed that
OEMs could first transform from OEM to ODM, and then from ODM to OBM
IJOPM (Xu, 2007b). Most of the extant research has pointed out the direction of transition
36,9 but not the process of the transition. This study attempts to address this gap by
examining the process.
An analysis of multiple case studies showed that, in terms of value added, the OEM
business in the Chinese toy industry sits at the lowest end of the global value chain,
where labor costs directly affect business profitability. If an OEM business anchors its
1082 production and processing in one particular product area, its labor costs will gradually
increase alongside the economic development of the region. Erosion of the OEM’s
profit margins threatens the firm’s viability, and ultimately, its survival is at risk.
Since these OEMs engage in simple assembly or low-end manufacturing, as reflected in
the smile curve, their operations lack R&D activities, possess no intellectual property
rights or brands, and have no marketing or technical innovation capabilities. This
lack of capabilities makes it difficult for such OEMs to upgrade (Hobday, 1995).
Based on a cross-case analysis of eight firms, Figure 6 provides a summary of the
proposed framework.

OEM business survival path 1: the world’s low-cost mobile factory

For OEMs that are unable to develop product R&D capabilities when labor and other
production costs increase in their original location, shifting their production locations
to countries or regions, where such costs are lower, offers a way forward. These firms
invest in such low-cost locations and gradually transfer their operations. Both Matrix
Holdings Limited and Lung Cheong, both based in the Guangdong Region in China,
invested in factories in Vietnam and Indonesia, respectively, and gradually transferred
their OEM business to these locations. These firms ensured sustainability of their
operations and expanded them, and in doing so, managed to maintain their position in
the global value chain.
The purpose of gradual transfer of operations is to ward off potential competition and
prevent original brand companies from setting up manufacturing operations in these
low-cost regions (Wang and Hu, 2014). Another reason for gradual transfer relates to the
fact that, in low-cost labor countries like Vietnam and Indonesia, time is required to train
and develop the workforce in order to improve their skills and proficiency.
Timing of the transfer is also important. An attempt at migrating after the OEM
has completely lost its cost advantage may be too late, as the gestation period for
investment and construction activities in the new locations may lead to business
discontinuity and loss of customers. OEMs that want to transform must make
their move when the labor costs in their home countries start to climb significantly
and continuously.

Path 1 P1
Reduce cost of production Global movable OEM factory
and business

P2
Path 2 P4
OEM OEM/ODM OEM/ODM/OBM OBM

Figure 6.
Survival paths of Path 3 P3
Involved in crisis of Close down factory/change line of
OEM enterprises production
Due to the pressures of cost increases, an increasing number of toy OEMs in Dongguan Case study of
are transferring operations to locations like Vietnam, Indonesia, and other inland the Chinese
locations in China where labor costs are low (Wang et al., 2014). Both Matrix Holdings
Limited and Lung Cheong support the above observations. The other firms, which did
toy industry
not transfer, had to close down.

OEM business survival path 2: transition through hybrid operation modes to OBM 1083
For those OEM businesses that are unable or unwilling to become mobile, when labor and
other production costs in their original locations increase, the way forward is to gradually
enter ODM business by investing in R&D facilities and improving product development
capabilities. Additionally, investing in marketing and adopting a differentiation strategy
can avoid competition with the firm’s original OEM customers. A gradual transition to
OBM is observed in the form of a hybrid mode of OEM/ODM/OBM.
The theory of dynamic capabilities (Teece et al., 1997) helps to make sense of the
above transition. The transition process from OEM to OBM enables organizations to
adapt to the changes in the market by reallocating resources and capabilities (Huang
and Wang, 2014). In the OEM stage, firms are required to manufacture in compliance
with the specifications or requirements of the multinational production processes and
to deliver products on time, requiring no new-product development/design, marketing,
or R&D resources and capabilities. However, the transition to an OBM business
requires sustained investment and accumulation of strong independent R&D and
marketing capabilities since transition from OEM to OBM is a functional upgrade in
the value chain, which entails engagement in R&D and brand marketing (Humphrey
and Schmitz, 2002). These operations occupy the two high ends of the smile curve.
In the upgrade of an enterprise from OEM to OBM, if the firm’s products and
markets remained the same, a conflict of interest is bound to arise with the original
OEM business customers (i.e. those members of the global value chain firms or the
multinational firms who own the original technology and brands). OEMs making the
transition will be subject to competitive pressure from such multinational firms
(Hobday, 1995). Therefore, during the transition process, firms should attempt to avoid
direct competition with the original client MNCs by adopting a differentiation strategy
to implement the OBM business through a gradual transformation. Products must be
differentiated from the original offerings of the MNC, either as a variant of the existing
product or as a completely new product.
In the case study, Matrix Holdings Limited produced LED lighting products when
transitioning to OBM. With the help of its former toy-business channel, the firm
managed to develop markets for the LED products without conflicting with plastic and
plush toys consumers and thus made a smooth transition. Similarly, Long Cheong
Company continued to operate in the toy business, targeting the North American
and European markets with electric toys (the OEM products are plush and plastic toys).
Here again, by means of product differentiation, the firm achieved a smooth
transition to OBM.
In the process of upgrading, a firm must maintain the profitability of its existing
operations so the profits can be used to support investments in R&D and market
development for its new OBM operations. Typically, in periods of transition, and
especially when profitability is low (due to stagnant operations), sustainable funding
for the new investments remains a challenge (Luo and Tang, 2012). Therefore, in the
transition process, a hybrid management approach of combining OEM/ODM/OBM
proves to be a robust strategy.
IJOPM OEM business survival path 3: closure or conversion to other industries
36,9 When labor costs and other production costs in the OEM’s home country or region
increase significantly, for those OEMs that are unable or unwilling to move their
manufacturing base or to transfer toward ODM/OBM, the only option is to close their
plant and move their operations to other industries.

1084 Implications
Regarding the transformation and upgrading of OEM businesses that are positioned at
the lower end of the global value chain, the general trajectory proposed by extant
research literature is OEM-ODM-OBM (Wang, 2010). The current study shows that,
during the transition process from OEM to OBM, the upgrading steps may not be
linear; rather, they may be overlapping or hybrid. OBM feature upgrades are
challenging and formidable. In the global industry value chain, since global value chain
powers (or the powerful MNCs) who master technology and international brands push
OEM businesses to a lower position on the curve, upgrades from OEM to ODM can be
achieved only under the control of these MNCs (Humphrey and Schmitz, 2002).
A hybrid transformation strategy, to a certain extent, addresses the above challenge
by combining OEM/ODM/OBM. Breaking the strict value chain governance and
control by employing a hybrid mode of mixing OEM/ODM/OBM offers a robust
strategy for OEMs to transfer to OBM. This study therefore enriches the theoretical
knowledge on industrial upgrading in a global value chain.
Whether it is a manufacturing-base migration or a transition to OBM, both changes
represent long-term strategic corporate behaviors. In many OEMs, managers are
expected to solve everyday urgent problems, but they may be less experienced with
long-term strategic planning. When faced with a situation of increased production costs
and reduced profit margins, more often than not, managers tend to focus on to
maximizing plant production capacity and increasing yield (Tsai, 2012).
In China, due to the absence of long-term strategic planning, many struggling OEM
firms have failed to transition their processes in a timely fashion or to shift their
production bases in the face of rising costs, and as a consequence, these firms have
suffered financial difficulties or closures (Xu, 2007a; Wang, 2015). Thus, for OEM
entrepreneurs, it is essential to not only meet the immediate revenue requirements, but
also to focus on long-term strategic planning. The findings of this study specifically
suggest that firms and their managers must develop transition plans that will allow
them to achieve strategic transformation from OEM to OBM in a timely manner. The
findings of this study may also provide information to governments of countries where
OEMs are located, helping them to guide policies related to OEM business upgrading.

Limitations and future research

This study focusses on the toy industry, using the case study method. Even within the
toy industry, products can be divided into different levels, from extremely general to
hi-tech adult toys. Just as the nature of the toys tends to be different across the industry,
the operations of firms among these product segments tend to be different as well.
For this reason, firms among these groups are bound to differ in the way they transition
from OEM to OBM. This study uses samples of firms that manufacture cashmere hair
toys and plastic toys. Future research may need to extend the propositions of this study
to other product segments within the toy industry, or even examine another industry,
which would generalize the findings on OEM survival strategies in a global value chain.
Conclusion Case study of
OEM firms from emerging markets sit at the bottom of the global value chain. With the the Chinese
development of the Chinese Economy, the profit margins of these OEMs have
narrowed, leading to questions about their survivability. Of particular importance for
toy industry
such OEMs are the region’s labor costs, which directly affect the OEMs’ profitability.
This study suggests that most of the successful toy OEMs in China focus on OEM
operations, but with ODM and OBM operations as supplementary activities. 1085
By examining eight toy companies in the Chinese toy industry, this study identifies
factors related to the existence and development of OEMs and the mechanisms of their
transition to ODM and OBM. The objective of the analysis is to extend theory on the
survival path of OEMs from the perspective of emerging economies by examining how
OEMs survive cost pressures and upgrade to ODMs or OBMs.
For OEMs that do not have the ability to upgrade to other business models, their
proportion of labor or production costs tends to increase over time. For such firms,
the survival path is to move their operations to low-cost locations. For OEM firms
that do not want to move to low-cost areas, and thus, their labor or main production
costs increase over time at the original production location, the only survival path is
to increase their R&D investments and upgrade their product design abilities,
gradually developing into an ODM. Alternatively, firms must build their marketing
capabilities and use a differentiation strategy to avoid pressure from their longtime
customers and to develop into an OBM. In addition, they can first adopt a
combination of OEM/ODM/OBM operating methods, and then gradually transition
into an OBM.

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Appendix. Financial and company information

(A) For the following companies, data are from the annual reports available at Hong Kong
Exchanges and Clearing Limited.
Source: www.hkexnews.hk/listedco/listconews/advancedsearch/search_active_main.aspx
(1) SMART UNION GP (HKEx, Stock Code: 2700)
(2) SEWCO INT'L (HKEx, Stock Code: 209)
(3) HUTCH HARB RING (HKEx, Stock Code: 715)
(4) DREAM INT’L (HKEx, Stock Code: 1126)
(5) MATRIX HOLDINGS (HKEx, Stock Code: 1005)
(6) LUNG CHEONG (HKEx, Stock Code: 348)
(7) KIN YAT HOLD (HKEx, Stock Code: 638)
(8) HUTCH HARB RING (HKEx, Stock Code: 715)
(9) VTECH HOLDINGS (HKEx, Stock Code: 303)
(B) Data of HX (HAIXIN) GROUP (SHSE. Stock Code: 600851) are from annual report
available at Shanghai Stock Exchange.
Source: www.sse.com.cn/disclosure/listedinfo/regular/
(C) Data of GOLDLOK HOLDINGS (SZSE. Stock Code: 2348) are from annual report
available at Shenzhen Stock Exchange.
Source: http://disclosure.szse.cn/m/search0425.jsp
(D) Data of MATTEL Inc. are from company annual report.
Source: http://investor.shareholder.com/mattel/financials.cfm
(E) Data of HASBRO are from company annual report.
Source: http://investor.hasbro.com/annuals.cfm
(F) Data of NAMCO BANDAI Holdings Inc. are from company annual report.
Source: www.bandainamco.co.jp/ir/financial/index.html
(G) Data of NINTENDO Co. Ltd are from company annual report.
Source: www.nintendo.co.jp/ir/index.html
(H) Data of TOMY COMPANY Ltd. are from company annual report.
Source: www.takaratomy.co.jp/english/ir/highlight/index.html

Corresponding author
Daiping Hu can be contacted at: [email protected]

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