• On the right track COMPANY PROFILE
Transferring manufacturing operations to China was one of the best moves Hornby, the model car and train maker, ever did, the company’s chief executive, Frank Martin, told the Review’s Humphrey Keenlyside.

In the late 1970s Hornby, the model train manufacturer, employed some 2,000 people on its extensive site in Margate, on the east coast of Kent. The company had been through a number of changes of ownership (see box) but remained a quintessentially British company, based in the UK and selling most of its products to the UK market.

Through the next decade, the children’s toy market underwent some dramatic change, with the introduction of video games, other toys of a more high-tech nature and then, after that, the arrival of the PC on a mass scale. Such change had an inevitable downward effect on Hornby’s sales.

But what happened next is a remarkable illustration of the benefits of moving production to China. It is true that there are now fewer jobs in Margate, but overall the company is bigger, certainly measured in turnover and profits, and has now made huge inroads into overseas markets. Sales have all but doubled since 2001, to reach £45m, and profits are about £8m.

China or bust
It was about 10 years ago that the company’s then executive chairman, Peter Newey, noted with concern that Hornby’s competitors had moved manufacturing in China. They were gaining market share, seemingly as a consequence of this step, and his analysis was that Hornby needed to follow suit.

As it happened, Hornby already had a China connection, through a Hong Kong company, called Sanda Kan Industrial, which had produced parts for the model trains and associated train set equipment. Sanda had indicated that it was keen to develop the relationship further, and would be able to identify a manufacturer across the border in Guangdong, to help make the the complete model trains.

Sanda Kan’s facility was in Dongguan (which is half-way between Shenzhen and Guangzhou). Because the making of model trains is such a specialised business, involving unique tools, it was decided to ship the tools out to China, in effect transferring manufacturing wholesale.

The process of transferring tools and equipment begun in 1997. At that point, in 1997, Hornby was then employing some 750 people in Margate, of whom about 600 were involved in manufacturing. The initial thought was that the manufacturing of Scalextric model cars (which Hornby also did) would remain in the UK and the model trains be made in China. But Scalextric, too, was moved to China.

In all, some 1,500 tools were shipped to China over a period of five years. A second manufacturer was found, also in Dongguan.

In January 2001 Frank Martin took over as chief executive, having built a career working for companies in the toys and consumer products manufacturing business, including Hasbro. Hornby’s profits were oscillating up and down, a trend picked up by investors (Hornby having gone public in 1986) and so Frank Martin was brought in, “to try to chart a steadier course”, as he puts it.

Advantages of China production
The China end of the business was certainly going to plan. Interestingly, the main reason for moving to China was not to cut costs, although that was an incentive, but rather to use the cost advantages to improve the quality of the products. As Frank Martin explains: “Our business is driven by innovation. We need to deliver new products that people want, especially locomotives. However, each new product we introduce to the market has high investment costs, in terms of design and development of the prototype.

“What we found in China was that the tooling costs were about half what they were in the UK.” In figures, to tool a new locomotive in the year 2000 would cost around £200.000, but when done in China it was about £100,000.

In short, the China business offered the scope for devising more new products. Rather than bringing one new model to the market every four years, as had happened up until that point, it then became possible to launch two or even three new models a year. That has knock-on effects for revenues, because each new model generates related sales in models associated with the locomotive (for instance, carriages, track side buildings, and so on) as collectors develop their collections.

China has also provided Hornby with the advantage of higher specification, allowing for greater intricacy and detail in the model trains and cars. Scalextric cars are a particular case in point, where the transfers and logos are sometimes so small that it is only possible to read what is written on them with a magnifying glass. The vehicles’ model co-drivers are holding clipboards, also with microscopic text.

The sophistication is helping the company to produce and sell some remarkable products, including a locomotive that is actually steam-driven, using electricity drawn from the track to heat up water.

Moving up a gear
The models have moved up a gear, literally, with the introduction of digital controls, so that, for example, with Scalextric, the controls operate an individual car, rather than simply increasing or decreasing power to the track. That means that cars can race one another on the same track. The technology for this was developed by a Cambridge company, Scientific Generics (see box).

Again, this seems to go against the prevailing wisdom, that China can manufacture cheaply but is not geared up to manufacture to top quality. Frank Martin says Hornby’s experience is quite the reverse: “If it is technically possible, our manufacturing partners will find a way to do it.”

Why not, then, move all processes, from design and engineering as well as manufacturing to China? The answer is because Hornby needs to maintain a “connection to the home market, and to keep engineers close to the products which they are engineering”. Some three-quarters of Hornby and Scalextric sales are in the UK.

Frank Martin also highlights the importance of the good relationships that have been established, both with the Hong Kong partner and with the manufacturing operations. “Our Chinese partners recognise that if our business grows, then their business will grow. They are not looking to go it alone, because they know that together we can both benefit.”

By the same token, he is sure that there is little, if no scope for theft of the Hornby intellectual property (even if the Chinese manufacturers were minded to do so) because Hornby owns the tooling, the brands and has the distribution expertise. “Anyone who tried to steal our designs, and manufacture them, and then sell them to our core markets, could never succeed. In that respect, we are in a much different position from, say, soap makers selling in the Chinese market.”

Another interesting facet of the China business is that the manufacturers operate to international health, safety, environmental and ethical standards set by the International Council of Toy Industries. Altogether, some 600 toy factories in China have been audited, according to the British Toy and Hobby Industry, which is a member of the ICTI.

Production is increasing at Hornby’s Chinese manufacturing operations, and there are now four separate factories turning out Hornby model cars and trains. A steady stream of containers leaves China for the UK, with Hornby train sets (all pre-packaged and wrapped) and Scalextric cars (which are packaged in the Kent factory). Each year, the company takes delivery of some 300 40 ft containers, each container holding goods worth some £150,000. Hornby currently employs about 130 people in the UK, all based at its Margate factory.

The market steams up
Meanwhile, on the demand side, a highly significant development in the Hornby business was the securing of the exclusive licence to make the Harry Potter Hogwarts Express, in 2001. Even though that particular model only ever accounted for around 5 per cent of sales, it generated huge publicity and helped revive the brand, as Frank Martin knew it would. “It woke people up again to the joys of model trains and cars, and helped us with our major retailers.” Among these are Toys R Us and Argos.

With the Chinese manufacturing secure – and with an all-important competitive advantage - the company contemplated a big push into new markets, particularly in Europe and the US (which has just under half the world market). Germany has by far the biggest market for model railways in Europe.

Hornby embarked on a series of acquisitions. In 2004, the company bought a company in Spain and, following that, the entire assets of the Italian model manufacturer, Lima Spa, which had gone into liquidation. Through that, Hornby acquired some 10,000 tools which were shipped over to the UK and are gradually making their way to China.

Additionally, they discovered some priceless models which had been stored in unmarked boxes, among which were some items that would have any collector drooling. These may eventually be put in a Hornby museum. The following year Hornby acquired a distributor in France.

The company now says that it has built up the broadest brand portfolio in the world, including Lima, Rivarossi, Jouef and Arnold, as well as Hornby. It is not all thanks to moving to China, but the company reckons that it was one of the best moves it has ever made.

From Meccano to Hornby: a hundred years of model-making
Hornby as a business dates back to the turn of the 20th century when Frank Hornby invented Meccano, the children’s construction toy that has kept millions of children occupied down the years. The inventor branched out into toy trains in 1920, using a ‘0’ gauge for the track. This size was halved to become the celebrated ‘00’ gauge by 1938, a size of track still used to this day

In the post-war years, Hornby was challenged in the market by rival company Tri-ang Railways, which had started manufacturing at a purpose-built factory in Margate. In 1964, Lines Brothers (the parent company of Tri-ang Railways) bought out Meccano and the two companies were merged in 1965 to become Tri-ang Hornby. Earlier, Tri-ang had itself bought Scalextric model cars.

The Tri-ang Group was disbanded and sold in 1971 and the Tri-ang Hornby model railway system renamed Hornby Railways. Even though the name changed, production continued at the Margate factory.

In 1981 the company, now known as Hornby Hobbies, became an independent company after a management buyout and on 29th October 1986 was floated as a public company.