[Doug]

Most of this is old info, but it is interesting reading nonetheless.

From Issue 28 of the Croner Digest (UK Trade industry rag), titled "Quality has improved since we started shifting tooling and manufacturing to China"
................................................................................
.........................................

Few readers will not have fond childhood memories of Hornby plc's Scalextric slot racing cars and Hornby scale model trains, writes Antony Shepherd. Once languishing, those brands now make a strong export story.

After a difficult period in the 1990s, sales in the UK today have reached £31m and profits are up 33% since 2001. Exports at £8m (2004) have tripled since 1996 and are achieved through distributors in over 30 markets.

Between 1997 and 2002 Hornby moved UK manufacturing to China, shedding 350 jobs but safeguarding the company's future for the remaining 150 employed in the UK. Imports of UK-designed models amount to HK$160m or HK$20m annually. They are assembled in the main by Hornby's partner, the hobby model giant Sanda Kan in China.

So Hornby moved manufacturing to China but 75% of the added value stays in the UK, according to Hornby. Vital R&D is retained in UK, as is export marketing, licensing and development.

Pre-tax profits for FYE 2004 were around £6.5m, and during this calendar year Hornby was able to purchase its competitors Electrotren in Spain and Italy's Lima. Lima did not source from China and therefore became an acquisition target when it became uncompetitive, says finance director John Stansfield.

The future looks bright now for Hornby, which has signed a new Ferrari Scalextric licence. This permits various Ferrari models to be marketed with global appeal, but at the cost of royalties.

Add to this a successful launch of the new Scalextric Digital Track System and readers will be wondering why they failed to buy Hornby shares up from £1.50 to around £14.00 late in 2004.

UK in-store concessions have grown from 70 to 121, giving UK sales growth of 60%. How was this achieved?

1995 strategy change brought Hornby back to health

Up until 1995 the company was struggling with a business trading dolls, plush toys, radio-controlled models, toy figures, etc and was competing poorly with big US players like Hasbro and Mattel. The UK market was too small to win critical mass. Acting as distributor consumed 80% of executive time but earned only 20% of profit. The Hornby and Scalextric core manufacturing business earned 80% of sales but was neglected.

During the period 1996-1998, the company gradually ditched the non-core trading and began to re-focus on developing Scalextric and Hornby, whilst moving manufacturing to China. This was much disapproved of by the toy model trade press. Meanwhile Hornby sensibly targeted quality improvements rather than exploiting cost advantages. Previous UK R&D costs had meant a punitive £120k tooling for just one Scalextric car and £200k for one Hornby train. In China, corresponding tooling costs are slashed by 60% whilst customers benefit from 100% improvements in model intricacies, quality of moving parts, and detail faithful to life scale. Hornby spent £2m on tooling in 2004 and can afford to launch three new locomotives each year, beginning in 2005.

Marketing the brands overseas - managing distributors with just two staff

TV advertising in the UK is funded 100% by Hornby who also contributes to retailers' catalogues. In France, New Zealand and Australia, distributors plan and fund TV exposure with some contribution from Hornby. Attractive annual catalogues have been a Hornby marketing hallmark since 1954. Their painstakingly designed literature is now itself collectible.

"We start the annual show cycle in January with Hong Kong, then Paris, Nürnberg, and finally the New York Toy Fair. Most distributors are visited 4-6 times per year and are selected or retained if they position our brands in their top five lines."

Just two export sales specialists manage the £8m exports. The profitability of doubling the sales force is untested. "We are coping well" says export director Frits Passet. Passet is Dutch, and industryhardened, being ex-Mattel toys and ex- Hasbro. He speaks four languages and travels constantly. Market visits are divided with export manager Jackie Fisher who covers parts of the EU, Germany, Scandinavia and the USA.

He says, "Our 40 or so distributors are treated like a family. We spend £10k on our annual distributor conference. 2004 was in Paris, and previous years have been Amsterdam, Brussels, and Valencia. We have ditched using formal contracts, which we found added little value. We change distributors if their performance proves poor and expect initial orders to be a third or half of annual targets, which distributors themselves elect to meet. We do not impose targets, but trust our dealers to know their own markets."

Passet always ensures he cultivates two other replacement distributors for each market for commercial reasons, but maintains that "partnership" with local distributors is a key strategy.

In Spain, the world's largest slot car racing market, the Hornby brand is Superslot because the Scalextric brand belongs to a competitor for quirky historical reasons. The Spanish are very keen on the sport, supporting other indigenous competitors: Tecni-Toys Scalextric, Fly and Ninco. Fly and Ninco still retain manufacturing in Europe.

Intellectual property, licensing and design stay British but all manufacturing shifted to China from UK

Hornby pays £1m annually in royalties to car manufacturers like Ferrari and Renault for the rights to model driver Alfonso, the first Spanish F1 driver for fifty years. Important sources of competitive advantage for Hornby come from licences such as Thomas the Tank Engine, Batman and Ferrari. These make products relevant and compelling to younger customers, and, most importantly, across borders. According to financial director Stansfield, "We secure brands worldwide, but not product patents, they are too easily broken".

The newly launched digital multi-car lane changing system relies on technology from Cambridge-based UK supplier, Scientific Generics Ltd.

Sanda Kan hosts a factory within a factory for Hornby's activity, which represents 20% of its total capacity. Again this relationship is contract-free, based on trust. Tooling and moulds remain the property of Hornby, which in the event of default could switch to an alternative Chinese manufacturer.

Three UK Hornby staff work from its Hong Kong offices and a further three Chinese Hornby QC staff are based at Sanda Kan's manufacturing units in China. Here, monthly wages are around US$50 but Hornby ensures conditions protect labour, and child workers are not used.

What next - the China market?

Russia is an untapped market. Chilean, Argentinian and Brazilian distributors are active and surprisingly China and the Far East are tipped to be the next growth market. Hornby knows that Ferraris are now more common on wealthy Shanghai streets.

Frank Martin, chief executive of Hornby, must be content with results since Passet would not admit to any corporate mishaps. When pressed, he did mention a 1980s Hornby model development of the APT tilting train that, unlike the BR version, did actually tilt. Although this was before his time, Hornby models continue faithfully to mirror the real thing.

Hornby plc world sales 2004 -
£ millions
UK 31.0
USA 3.0
France 1.0
Germany 0.9
Australia 0.8
Spain (biggest slot car market) 0.5
Scandinavia 0.7
Rest of world 1.1

--------------------------------------------------------------------

 

[Ben Manicom]

QUOTE toy model
Whats all that about?

 

[Lancashire Fusilier]

Thanks for that very imformative article Doug.

 

[spongebob]

Hmm no wonder there are quality control issues if the entire range is handled by 3 people at the Chinese end. You'd think it might make sense to implement some form of random sample pesting at the UK end to see how things stand up to the long journey and to act as a second line of quality control.

 

[Gofer]

Also, looking at the world sales figures, it's hard to believe that Hornby is likely to start a process of change from OO to HO in the foreseeable future as has been suggested in another forum. This opinion was apparently formed, not so much because of the number of older British locomotives working abroad, as these are on relatively short term contracts but, because EWS are now using the latest Class 66 on a long term business initiatve. The theory being that Hornby will now want to exploit the potentially much larger foreign market and it would not make economic sense to produce the same model in two different gauges.

 

[Scooter]

I have to ask this.

If they saved so much money by moving production to China, then why was this saving not immediately passed on to the Customers by an immediate drop in prices?

Why are there annual price increases?

Why are these savings which are partly gained from staff salaries of $50 per month, not being passed on to their Customers?

I dont want to start an argument about Political Correctness, but my daughter gets more for delivering Newspapers.

 

[Doug]

From what I understand, Hornby used to employ a large number of staff at it's factory in Margate. With the cost of labour as it is here in Europe and the decline in demand (80's and 90's), the future of Hornby looked bleak.

Moving production to China has brought the cost of production down; it has allowed the company to continue; and it has allowed the quality of the models to improve whilst maintaining roughly the same retail price as before.

It is not a market where price wars are often seen. Model railway enthusiasts spend millions on trains. Just think of all those guys buying brass static models and garden railway locos going right up to Pete Waterman and his 1:1 toys. Because of this, Hornby has kept prices as they are, grown profits and has used profits for acquisitions and to keep their shareholders happy.

Interesting to note that some of Hornby's major shareholders include Standard Life, Scottish Widows and Lloyds TSB - these life insurance firms are in it for the long haul and expect to se a return on their investment.

I sound like an evangelist... promise I'm not

 

[Gary]

QUOTE Moving production to China has brought the cost of production down

That is not strictly accurate. The cost of product supply has gone up.

The production cost of a loco in China is similar to the production cost of a loco in the UK.

However, the production time per loco is now many times more than it was and Hornby are now able to produce models with massive detail that would be impossible to produce in the UK and retail at the type of prices that the UK market will stand.

And then there are shipping costs and currency fluctuations to consider.

By all means argue the case for Hornby to adopt the Marklin model and bring production back to the UK. But be prepared to accept a £175 minimum price tag though for mainline tender locomotives with "Made in Britain" on.

All American manufacturers produce in China. Bachmann have always produced in China. The only way that Hornby could move from being a toy company to a model company and compete with Bachmann was to do what Bachmann were already doing at that time.

The fact of the matter is that several years on and with the progress that Hornby have made many would say that Hornby have now overtaken Bachmann in many areas such as running quality and finish.

QUOTE It is not a market where price wars are often seen.

Hornby have traditionally produced models that represent value for money. Ever since the early days of Rovex and then Triang and Triang Hornby the models have been seen as being terrific value for money when compared with their European conterparts and this is still the case today.

Taking inflation into account and spending power you actually get a lot more for your money now than you did 30 years ago. Hornby models represent remarkable value today by comparison and the average modeller in the UK is now having to work less hard than the average modeller 30 years ago before he is able to have enough money in his pocket to purchase a Hornby model.

OK, the Hornby prices are higher, however average wages are higher again so model railway spending power is higher.

Happy modelling
Gary

 

[spongebob]

As a British company manufacturing in China are hornby still governed by import restrictions as to how much stuff they can bring into the UK?
If China continues to become a major player in the world economy despite the dictatorship in power will the costs of production drive hornby to consider other countries instead such as the former Eastern Bloc or India and Africa?
Quote"
Those sales figures make for interesting reading and would suggest that they are hardly setting the rest of the world on fire.Russia is an untapped market. Chilean, Argentinian and Brazilian distributors are active and surprisingly China and the Far East are tipped to be the next growth market. Hornby knows that Ferraris are now more common on wealthy Shanghai streets."
Perhaps hornby should expand their ranges and interests in the developed world before moving into the uncharted waters of Russia and Latin America.

 

[Doug]

Gary, moving to China has brought the cost of prod down. Sure cost of supply might have gone up, but I think the labour cost savings outweigh the increase in cost that shipping them here incurs.

spongebob, where in the world is the train and slotcar racing hobby active. I'm not sure the guys in developing countries are thinking too much about modeling hobbies. I put the Russians and Chinese in the same basket.

 

[spongebob]

Sorry the Russia is an untapped market bit should've had a Quote before it as it was lifted from the original post. I agree that the developing world is probably more tied up with more important issues than playing trains. But then again what do we know sat in our centrally heated (air conditioned?) all mod-cons homes?

 

[neil_s_wood]

I would have thought that Hornbys main areas to expand in would have been in America, Germany and France due to the purchase of Lima, Rivarossi etc. They have a basic range to start with and if they implement there what they did here with their British range there would be a lot of scope for expansion. If they could knock out German locos at the same price as their British ones they would easily undercut Marklin, Fleischmann etc.

 

[Doug]

Something I found today. This will apply to Hornby Digital systems if made in China:

Extract from Times Online - Focus: China April 14, 2006

International companies often complain that the Chinese government protects local businesses from competition and that there is little respect for intellectual property (IP) rights.

Dr Tim Moore, the chief executive of SGAI, a Cambridge-based technology consultancy says his company has to produce the parts for Hornby's new digital Scalextric at four different sites in China to avoid the entire product being copied.

"Design and development costs are ten times cheaper in China than in the UK but you have to be very careful or you might find a counterfeit product out there before you know it," he says.

 

[spongebob]

Well lets face it thats how the Japs started out. Copy the good bits ditch the rubbish and make it ten times better.

 

[Doug]

QUOTE (spongebob @ 14 Apr 2006, 16:33) <{POST_SNAPBACK}>Well lets face it thats how the Japs started out. Copy the good bits ditch the rubbish and make it ten times better.

And ten times smaller...