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Booming China Shakes World Economy; Aftershocks Hit U.S. Amusement Industry

Posted On: 9/23/2006

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U.S.A. -- Mainland China represents a $1.6 trillion powerhouse that is quickly accelerating toward becoming the world's largest economy -- a status it is expected to achieve by 2039. Today, the explosive growth of this Asian giant is reshaping the world.

Around the planet, floods of low-cost Chinese exports are driving down the prices of manufactured goods in countless industries. Meanwhile, China's growing thirst for oil and electricity is sharply driving up global energy costs.

Here in the U.S., the music and games industry is already experiencing the impact of China's world-shaking emergence as a dominant economic player.

Several leading American game makers are taking advantage of cost-saving Chinese components and manufacturing or sub-manufacturing capabilities, or have done so in the past. These include Benchmark Games, Bromley Inc., Coast to Coast Entertainment, Happ Controls, Innovative Concepts in Entertainment, Skee-Ball and Valley-Dynamo. Savings obtained by outsourcing to China are sometimes passed along to U.S. operators, but in other cases, they add to the U.S. manufacturer's bottom line.

American operators have been attracted by the low prices of legitimate Chinese-made games and supplies, yet manufacturers and operators alike have at times been appalled by the low quality of some Chinese-made goods. According to those in the U.S. industry that are familiar with Chinese production, over the past five years the average level of quality of Chinese-made goods for amusements has improved dramatically. These U.S. trade members predict the range, availability and quality of such Chinese-made goods in the U.S. amusements market will continue to increase in the coming years.

Many coin-operated video games already include Chinese-made PCBs, monitors, power supplies and other components. This is especially true of gray-area games. "The use of Chinese components has helped keep certain video game prices way down," said one former president of an industry trade group. "They are practically throw-away machines."

American operators of redemption centers and street-located merchandising machines know that today's prize merchandise is overwhelmingly marked "Made In China." The availability of these cheaper goods has sparked strong competition between rival prize suppliers, resulting in significantly lower prices for the operator.

In sum, China has impacted the American amusement machine industry in a significant and broad way. Manufacturers, operators, law enforcement experts and trade association leaders who spoke to VT say that in the coming years, China's impact on the industry is only likely to grow.

BIG OPPORTUNITY, SMALL THREAT

Mike Rudowicz, president of the American Amusement Machine Association, voiced a mixed view of China. He said China represents both a "fantastic opportunity" of historic proportions, yet also a small but potential threat to domestic sales of American-made products within the U.S. "As much as China represents a little bit of a threat," said Rudowicz, "it is also true that China can offer a wide opportunity of growth potential for our members."

As Rudowicz sees it, the China opportunity includes both the lower costs of subcontract manufacturing on the Mainland, and the potential for China's future domestic amusements market to absorb vast numbers of games designed in the U.S. Such games would probably be built in China, under U.S. corporate leadership but in partnership with Chinese companies.

Regarding America's domestic market, Rudowicz is cautious about describing Chinese-designed and built games as becoming successful competitive imports. "There is potential for games built in China to become important in the U.S.," he said. "That being said, Korea tried to penetrate the U.S. market, but they were not able to maintain any stability or grow their market share."

Last year, Korea's leading amusements trade show featured only four amusement video manufacturers among its exhibitors, Rudowicz advised. "If that's any indication, I don't know I'd have major concern about China," he said. At the same time, the AAMA president went on to acknowledge there is considerable potential for China to overcome the skeptics (see sidebar).

"As far as China's impact on amusements here in the States, I think it's still several years away. But the development of a strong amusements industry in China itself may help bring the next level of technology that we all need. Technology has been the key to our success. No matter what country it develops in, we'll all benefit," said Rudowicz.

SCOPE AND AMBITION

Some U.S. game manufacturers take a different view of China's potential to infiltrate the American market. Richard Oltmann of Family Fun Co. estimates that the percentage of cranes designed in the U.S., but in China, "will be a serious percentage very soon," and could reach 30% in a couple of years.

Regardless of whether Chinese imports are a significant factor in the U.S. market, it is clear that Chinese manufacturers are aggressively entering the amusements industry, if only for domestic or Asia-wide distribution. A cursory check of the Internet turns up Shanghai-based manufacturers of coin-operated table games, cranes, upright video games, basketball toss games, kiddie rides, slot machines and components ranging from coin doors to acceptors.

Online advertising for these products may hold a clue to the ultimate ambitions of Shanghai-based manufacturers. Descriptions of these coin-op amusement machines and components boast that they provide printed instructions and audio tracks in English.

When the perspective on China is expanded to include the quasi-independent island of Taiwan, the possible impact on U.S. amusements becomes larger and more obvious. The Taiwanese presence is visible online and at American trade shows, particularly the IAAPA show (International Association of Amusement Parks and Attractions).

Entropy USA (Lombard, IL), is the American subsidiary of a Taiwan-based subcontractor. Among its partners, Entropy USA lists Skee Ball, Innovative Concepts in Entertainment and Happ Controls. Entropy says it has facilities located in Taipei, Taiwan, and the Shanghai and DongGuan areas of Mainland China.

One U.S. manufacturer, who did not wish to be identified, told VT that Taiwan represents a serious future player in the U.S. market. "When I visited Taiwan and saw all the beautiful equipment, the high quality and the pricing...it was impressive," he said. "There is a bit of gap in understanding what is allowed here versus there, but that will change. They will learn."

POOL IN THE MIDDLE KINGDOM

Experts say the actual Chinese characters that make up the word "China," literally translate to "The Middle Kingdom." Western observers believe that this phrase is an excellent representation of China, because for many centuries the country did not depend on foreign markets or encourage foreign interaction.

Today the "Middle Kingdom" moniker is fitting, but in a different way. Chinese manufacturers are in the middle of overseas markets, from the U.S. to Latin America, Europe and Asia. In America, it's not just redemption games and merchandise that have been impacted by China. Pool, a quintessentially European and American sport, has also seen a degree of Chinese infiltration.

Valley-Dynamo imports many pool cues from China. Sales and marketing vice-president John Garrido said that Chinese cues can be obtained for as little as $3 each, but goods at this low price are often unacceptable in quality. "Only 75% are good at that price point," he said. Valley pays higher prices for its imported Chinese cues and insists on a strict quality control regime; it also offers a one-year warranty on the imported goods.

Garrido points out that one second-tier U.S. pool company imported pool tables from China for several years, but stopped.  "Transportation is extremely expensive," he explained. Valley-Dynamo executives say they have little concern that imported pool tables will flood the U.S. market.

But some leading Back