Brick by brick, Lego is building a new manufacturing and distribution facility in China, whose growing middle class could help the company expand beyond maturing markets in Europe and North America. But the world’s second-largest toy maker is also facing a daunting challenge on par with building a full-scale Lego X-Wing: China is also where a slew of Lego knock-offs and imitations are made and sold.
The privately held Danish toymaker said in March that it plans to break ground next year on its first Asian manufacturing and distribution center in the Chinese city Jiaxing, investing a “three-digit million euro figure” in a facility that will employ 2000 employees by the time it starts churning out the company’s iconic plastic bricks in 2017.
More than 400 billion Lego bricks have been manufactured since the company was founded in 1932—that’s about 62 for every person on Earth. But the massive Chinese market remains relatively untapped. All of Asia contributed only 10% of the company’s revenues, which totaled $1.9 billion in the first half of 2013, although the region did provide the biggest boost in terms of percentage growth.
“Asia is not a supply base, it’s a market and a growing market,” CEO Joergen Vig Knudstorp told Bloomberg on Tuesday. “The urbanization where 500 million people are going to become members of a middle class that will look to great schools, great infrastructure but also play as an important part of childhood.”
China in particular could be a Lego hotbed. The company’s famed ability to help kids express their creativity could strike a chord with newly-affluent parents seeking every possible advantage for their kids. The company-affiliated Lego Foundation is already working with Chinese students—a group from Tsinghua University built a low-cost atomic force microscope using Legos, 3D-printed parts and off-the-shelf electronics earlier this month, and the foundation is also working with migrant children to “develop their creative talents through hands-on learning.”
However, the more popular Lego becomes in China, the more pressure it will face from competing manufacturers who build identical-looking bricks, widely known as “Lego clones.” The company is currently embroiled in a legal fight with Hong Kong-based Best-Lock Construction Toys, which Lego has accused of ripping off its signature “mini-figures,” the latest in a long line of Lego court battles. Way back in 2003, shortly after China joined the World Trade Organization, the company won a landmark decision when the Beijing High People’s Court ruled that Chinese toymaker Coko Toy had infringed on Lego’s copyrights.
But there are still dozens of copies and clones on the market that either fraudulently claim to be Lego or merely state they are “compatible with leading building bricks.” Blocks from Chinese companies like Ligao and Banbao are often direct copies of Lego designs.
Lego’s best strategy may be to tout its high manufacturing standards as most Chinese toy factories are focused on exporting low-cost products, often tainted with heavy metals, rather than higher-quality toys for domestic consumption. Lego, which has expanded into a huge range of branded products in recent years, may also want to create customized products for Asian markets (assuming the company’s product developers can come up something more culturally appropriate than its now-defunct “Orient Expedition” set) that will keep it one step ahead of the copycats—and assure that the only Lego pirates are the ones with holes in their heads.